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Applied Economics

by: Margarete Anderson

Applied Economics BE 300

Margarete Anderson
GPA 3.83


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This 61 page Class Notes was uploaded by Margarete Anderson on Thursday October 29, 2015. The Class Notes belongs to BE 300 at University of Michigan taught by Staff in Fall. Since its upload, it has received 11 views. For similar materials see /class/231677/be-300-university-of-michigan in Economcs at University of Michigan.


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Date Created: 10/29/15
LSA SURVEY MEI39HODS IN MACROECONOMICS Matthew D Shapiro Department of Economics and Survey Research Center The University of Michigan Lawrence R Klein Collegiate Professorship Inaugural Lecture April 17 2007 LSA Problems that economists have often talked about in theoretical works but never approached empirically for want of data are now investigated with consumer surveys Lawrence R Klein Contrbutons of Survey Methods to Economics 1954 LSA Surveys in Economics o Surveys with objective behavioral data standard employment income wages prices wealth etc official surveys SRC surveys widely used in econometric studies o Subjective surveys meet great skepticism in economics preferences attitudes opinions expectations etc LSA Skepticism about survey subjective responses o Revealed preference not reported preference o Inability to elicit accurate survey responses o No incentive to give correct responses on surveys o Preferred evidence in economics data on market transactions ab experiments field experiments LSA Cartoonbankcom quotA nal question Would you put your money where your mouth is LSA Outline of Lecture Identifying Parameters with Surveys I Surveys about preferences II Surveys about policy responses III Surveys about expectations IV Directions for future work LSA I Surveys to Infer Preference Parameters Surveybased Gedanken Experiments o Hypothetical responses to economic choices o Survey questions structured using economic theory o Responses allow identification of individualspecific preference parameters o Parameters difficult or prohibitively costly to identify experimentally or based on behavioral data LSA Domains for preference parameter questions 1 Labor supply 2 Intertemporal choices about consumption 3 Risk tolerance LSA 1 Labor supply How responsive are hours worked to wage and wealth changes LSA Labor supply survey question o Addresses nearly intractable identification problem with variation in labor in response to changes in wages Higher wages increase labor substitution effect Higher wages decrease labor wealth effect o Survey response gives wealth effect o Use theory to back out substitution effect LSA Labor supply survey question Suppose you won a sweepstakes that will pay you an amount equal to your current family income every year for as long as you live We d like to know what effect the sweepstakes money would have on your life Would you Quit work entirely If not would you work fewer hours If work fewer hours how many fewer hours LSA Would you quit your job if you won the sweepstakes LSA Cartoonbankcom quotIf I won fortyseven million dollars in re lottery I wauldn 139 change a thing Not at rst LSA Labor Supply Responses to Winning the Sweepstakes Percent of Responses Change in labor Total No change 213 Reduce hours 225 By s 10 04 1025 53 2649 93 50 61 gt 5000 14 Quit 563 Source Kimball and Shapiro 2005 Data from Health and Retirement Study experimental module LSA Implications o Labor supply responsive gt75 quit or reduce hours Similar to actual lottery winners o Implies high labor supply elasticity Frisch elasticity about 1 o Econometric evidence from wage changes yields much lower elasticities High elasticity means large response of labor to tax changes productivity shocks etc LSA 2 Intertemporal choices about consumption Hypothetical choice Consume more now versus consume more in retirement Survey design o Change interest rate higher interest rates reward saving o Ask respondents to make choices of consumption paths with different interest rates o Mode is graphical Paper or Internet LSA Economic theory of intertemporal choice consumption growth 2 sr p s elasticity of intertemporal substitution r interest rate discount rate impatience E LSA Identification problem again Substitution effect positive Save moreborrow less when interest rates increase Wealth effect ambiguous Savers consumer more when interest rates increase Borrowers consume less LSA Intertemporal choice question Setup o Lifetime income of 3000 per month o Save or borrow to consume more or less in retirement o Health costs fully insured no inflation o Vary interest rate to change implicitly return to saving o Choices shown graphically LSA Chart 1 9000 39 8000 39 7000 39 6000 39 5000 39 4000 39 2000 1000 39 3000 39 Recall that you can a ord any of the spending patterns shown in Chant 1 below Web pattern of spending do you like most among A B C D and E in Chart 1 Please click rst in the white box of your rst choice pattern and then in the box of your second choice pattern or use the 39choose39 buttons Choose Choose Choose Choose Choose LSA Chart 3 V ch pattern of spending do you like most among A B C D and E in Chart 3 below Please click rst in the white box of your rst choice pattern and then in the box of your second choice pattern or use the 39choose39 buttons 9000 39 8000 7000 39 6000 39 5000 39 4000 39 3000 39 2000 39 1000 39 Choose Choose Choose Choose Choose LSA Result 1 Negative discount rate positive patience Individuals prefer either flat or upward sloped consumption profiles Result 2 Low response to changes in interest rate 502 Individuals respond little to even large increases in interest rates LSA Implications o Consumers resist change in consumption o Saving not very sensitive to interest rates Near zero elasticity of intertemporal substitution 5 LSA 3 Risk tolerance Key parameter for choices eg o Investing in stock o Taking jobs with risky wages o Having insurance 0 Undertaking risk activities smoking immigrating Difficult to identify experimentally because relevant gambles are over lifetime income Survey design gambles over lifetime income LSA Risky Job Question Suppose that you are the only income earner in the family Your doctor recommends that you move because of allergies and you have to choose between two possible jobs o The first would guarantee your current total family income for life o The second is possibly better paying but the income is also less certain There is a 5050 chance the second job would double your total lifetime income and a 5050 chance that it would cut it by a third Which job would you take the first job or the second job LSA Risky Job Question continued If reject risky job ask if would accept a downside risk of a cut in income by 15 If accept risky job ask if would accept a downside risk of 12 LSA Risky Job Question o Developed by Barsky Juster Kimball and Shapiro 1997 o First implemented in the Health and Retirement Study o Now also on Panel Study of Income Dynamics MS Y and other surveys including internationally LSA Compare Qualitative Questions about Risk from Survey of Consumer Finances Which of the statements comes closest to the amount of financial risk that you are willing to take 1 take substantial financial risks expecting to earn substantial returns 2 take above average financial risks expecting to earn above average returns 3 take average financial risks expecting to earn average returns 4 not willing to take any financial risks LSA Risk Tolerance Categories Implied by Risky Job Responses Downside Risk Fraction of Responses Risk Tolerance Accept Reject None to low None 15 65 Low to moderate 15 13 11 Moderate to high 13 12 11 Very high 12 None 13 Source Health and Retirement Study multiple waves Barsky Juster Kimball and Shapiro 1997 Kimball Sahm and Shapiro 2006 LSA Quantitative Analysis of Survey Responses o Estimate preference parameters for individuals from an economic model o Multiple responses allow modeling response errors o Use preference parameters to explain differences in behavior LSA Inferring Preference Parameters from Hypothetical Choices C current consumption 72 downside risk fraction of income 6 coefficient of relative risk tolerance Arrow Pratt UC 6326 utility function Accept risky job if U2CUl 7IC2UC gtChoices in survey bound value of relative risk tolerance 6 LSA Distribution of Risk Preferences across Individuals Risk Tolerance Risk Aversion 6 16 Mean 0206 82 Std Dev 0172 68 Memo Signaltonoise ratio 36 Source Kimball Sahm Shapiro 2006 Update of Barsky et al LSA Application 1 Equity Premium Puzzle o Excess return of stocks over bonds requires very high risk tolerance eg relative risk aversion 16 gtgt 50 o Survey evidence 16 E 8 o Enough risktolerant survey respondents to leave equity premium a puzzle LSA Application 2 Stock portfolios across households 05 share of assets in stocks 6 individual estimate of risk tolerance from survey a2 6Xlsl LSA Application 2 Stock portfolios across households 05 share of assets in stocks 6 individual estimate of risk tolerance from survey 05 0156l78l 006 Source Heam and Retirement Study data Kimball Sahm and Shapiro 2006 LSA Summary Use of hypothetical questions to infer preferences o Identify parameters that are hard to infer from behavioral data o Provide basis for calibrating aggregate models o Control for individual heterogeneity LSA II Survey Measure of Response to Policy Ask about response to an actual policy o Not a hypothetical o Still heterodox ie ask consumers for a ceterl39s parbus response LSA The Policy o Treasury sent checks typically 600 per household during the summer of 2001 o Advance payment of part of 2001 income tax cuts o 600 a substantial fraction of income o Meant to stimulate the economy 2001 a recession year Cartoonbankcom quotMy guess is our tax rebate has arrived LSA Spending question Earlier this year a Federal law was passed cutting income tax rates and expanding certain credits and deductions The tax cuts will be phased in over the next ten years This year many households will receive a tax rebate check in the mail In most cases the tax rebate will be 300 for single individuals and 600 for married couples Thinking about your family39s financial situation this year will the tax rebate lead you mostly to increase spending mostly to increase saving or mostly to pay off debt LSA Spending Rate Survey Results Number of respondents Pay Will Debt Not Don39t Total Spend Save With Get Know Spend Responses Rebate Rebate Rebate Rebate Refused Percentage 1506 267 423 563 204 49 213 Survey of Consumers AugustOctober 2001 Shapiro and Slemrod American Economic Review 2003 LSA Validation of Survey Evidence o Follow up survey o Aggregate saving data o Household spending data LSA Consistency of Survey Responses Across Time Number of Respondents Second Wave Mostly Spend Mostly Not Total Spend First Mostly Spend 47 29 75 Wave Mostly Not Spend 41 183 225 Total 88 212 300 Survey of Consumers First wave AugOct 2001 Second wave MarApr 2002 Shapiro and Slemrod Tax Policy and the Economy2003b SA Consistency of Survey Responses with Aggregate Data Personal Saving Rate Lightly shaded area is portion of saving accounted for by tax changes Percent N all 0 N D JFMAMJJAS JJ 2001 2002 LSA Consistency of Survey Responses with Behavioral Data Data from Consumer Expenditure Survey CEX Special question on size and timing of rebate check A Consumptont Rebaz et ty sit LSA Consistency of Survey Responses with Behavioral Data Results AConsumpton 0239Rebaz e X y8 It 0115 It It It Source Johnson Parker and Souleles American Economic Review 2005 Results for strictly nondurable consumption CEX data on timing and magnitude of rebates gt unusual check on survey results LSA Survey Design Allows for Testing of Hypotheses Little correlation of spending with o Expected income growth liquidity constraints o Expected government spending Ricardian equivalence LSA III Expectations from surveys o Overall outlook for the economy o Outlook for individual economic situation or purchases Consumer Sentiment o Expectations about particular variables Income Unemployment Inflation Stock returns LSA Role of Expectations o Determinant of current decisions Consumption saving and investment Price setting Worklocation o Asset demand Stocks and bonds Housing LSA Stock Return Expectations Percent Chance questions ManskiDominitz Suppose you have 1000 invested in a mutual fund holding a diversified portfolio of stocks What do you think is the percent Chance that this 1000 investment will increase in value in the year ahead so that it is worth more than 1000 one year from now LSA Percent chance questions o Asks for a point in cumulative distribution function CDF not an expectation o Could ask for multiple points in CDF eg percent chance that 1000 is worth more than 1100 is a year o Stock and income expectations questions implemented in Survey of Consumer from May 2002 to present LSA Relation of Expectations to Stock Returns Survey respondents cannot forecast stock returns ogPt Pt108 0030PercentC7ance t8 t 0002 365 LSA What determines expectations Ultimately we may even hope to determine a more fundamental set of variables and relations showing how expectations are formed but this type of study has not yet been made Lawrence R Klein Contrbutons of Survey Methods to Economics 1954 LSA Hypothesis Expectations of future stock market performance change with recent history of the stock market 751LSA Cartoonbankcon His mood is pegged to the dollarquot 60 80 100 I I 40 I Percent Chance of Positive Stock Return 20 O 01 Jan 02 01 Jan 03 01 Jan 04 01 Jan 05 01 Jan 06 01 Jan 07 Percent Chance of Positive Stock Return 0 20 40 60 80 100 I I I I 01 Jan 02 01 Jan 03 01 Jan 04 01 Jan 05 01 Jan 06 01 Jan 07 l 6000 8000 10000 12000 14000 Dow Jones Average LSA Regression analysis Explain percent Chance of a stock market gains with recent stock returns o Daily responses to survey yield powerful test LSA Explaining Percent Chance of a Stock Market Gain 1 2 3 4 Stock return Today 023 012 029 019 Last month 018 014 005 005 Last year 013 012 002 002 Stock level today log 032 031 023 22 002 002 002 002 Regression coefficients Constant not reported Standard errors in parentheses LSA Consumers update probabilities based on recent stock market performance o Increase in stock market of 1 raises reported percent Chance of a gain by about 05 o Expectations poorly anchored o Challenge to standard theories of the stock market o Momentum investors not contrarian investors LSA IV Future work Toward a more complete understanding of portfolio choice o Preferences o Actual portfolio choice and saving behavior o Expectations o Link economic parameters to cognitiveintelligence measurement


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