International trade has many positive effects on economic development. But how does trade liberalization affect the distribution of a country’s income? To get an answer to this question is particularly difficult because it requires very detailed data.

New methodology using tax data

Dina Pomeranz and her team developed an innovative methodology to explore the effects using detailed anonymized data from the Ecuadorian tax authority. This includes data on all transactions between companies (based on VAT declarations) and the imports and exports of these companies (based on customs data). The researchers then linked this information with tax data on wages and firm ownership to understand who is involved in the production process and how.

Increased inequality in Ecuador

How trade affects income distribution depends on the composition of imports and exports. The results show that in Ecuador, international trade is currently increasing inequality. The study also shows the dynamics that lead to this result: Ecuadorian exports, especially commodities and raw materials such as oil, fruit, seafood and flowers, tend to benefit the middle class and the less affluent, while imports, e.g. machinery, chemicals, vehicles, tend to benefit the already affluent —and overall, imports have a greater effect.

Greater inequality does not automatically mean greater poverty

The study analyses relative income inequality. Higher inequality does not mean higher poverty. It is quite possible that trade has increased the income for Ecuadorians, but benefitted the better-off more than the poor and middle classes.

Can these results be transferred to other countries?  "Transferability is limited", says Dina Pomeranz "as the effects depend on the specific mix of imports and exports. How trade affects the distribution is strongly related to which income strata are represented in which sectors. However, we can transfer the new methodology to measure distributional effects in other countries. "

The new methodology can be used to identify winners and losers from changes in international trade. This allows for targeted policies to help those disadvantaged by such changes.

Paper:

Imports, Exports, and Earnings Inequality

Rodrigo Adão, Paul Carrillo, Arnaud Costinot, Dave Donaldson and Dina Pomeranz

Quarterly Journal of Economics, 2022

Every day we take dozens of decisions under uncertainty. Understanding how our brains process such decisions is central to understanding human behavior. Many researchers have tackled the topic, and yet much remains to be unpacked before we fully know how our brains process and weigh probability and magnitude information.

A recent paper co-authored by Prof. Todd A. Hare and Gaia Lombardi, a PhD student from the department, focuses on the differences in mechanistic processing between younger and older adults. To do this, participants are presented with a simple gamble in which they can win a given amount of money with a given probability. Based on previous studies the authors know that their participant’s brains process the attributes of the gamble in the following order: Probability of winning, reward size (magnitude) and accumulated previous wins.

Older people start processing the magnitude attribute later

They found that older people are more likely to accept gambles with a lower expected value. Todd Hare explains: “We saw that older people spent more time processing the probability information, before incorporating magnitude information, and we also found that there is more noise in their valuation”. More noise means that their choices show more variance which cannot be attributed to a specific factor.  “These differences are not enormous but seem to explain the higher number of suboptimal choices made by older people. They are not less good at processing probability; they simply have more unexplained variance in their decisions.”

Highlighting probability information increases quality of decision-making

Highlighting the probability information increases its salience and led to fewer suboptimal choices, bringing the percentage of optimal choices made by older people up to the baseline level for younger people. Highlighting probability information seems to reduce the noise. In younger people too, highlighting increased the quality of their choices. The researchers found no age-related differences based on reward magnitude or accumulated previous rewards.   

Paper:

Older adults process the probability of winning sooner but weigh it less during lottery decisions

Chen, Hsiang-Yu., Lombardi, Gaia., Li, Shu-Chen. Hare, Todd A.

Nature Sci Rep 12, 11381 (2022)

The introduction of maternity leave and the expansion of external childcare are considered key achievements of the last decades. Women are more likely to return to the labor market after the birth of their children and the child penalty - the loss of income due to the birth of a child, is decreasing. Or so we thought.

However, longer maternity leave, more crèches or guaranteed jobs to return back to do not reduce the child penalty, as a recent paper by Josef Zweimüller and co-authors shows. 

The researchers used a data set to analyze the effects of individual measures in a quasi-experimental setting. In 1961, Austria introduced 52 weeks of paid maternity leave, including a job guarantee. This was followed by four major reforms. Today, parents can take parental leave up to 36 months. At the same time, the number of external childcare places for pre-school children was also increased. 

Crèche places substitute other forms of care

Contrary to popular belief, the expansion of external childcare facilities had no effect on the Child Penalty. "More crèche places do not contribute to reducing the child penalty, they simply seem to substitute other forms of caretaking", Josef Zweimüller explains the findings.

The duration of parental leave however does have a short-term effect. Mothers take advantage of the opportunity to extend their maternity leave. However, this does not leave any traces on long-term labor market success. The conclusion of the study: The important instruments of family policy — parental leave and public childcare — have no lasting effect on the careers of mothers. This also means that existing gender inequalities in the labor market cannot be eliminated with family policies.

Paper:

Do Family Policies Reduce Gender Inequality? Evidence from 60 Years of Policy Experimentation

Henrik Kleven, Camille Landais, Johanna Posch, Andreas Steinhauer, Josef Zweimüller

NBER Working Paper, 2020

The European Single Market allows its citizens to choose in which country they want to work. This freedom of movement should lead to a convergence of wages and employment rates across countries. However, despite increasing migration flows within Europe, a full equilibration of wage levels is not in sight.

The Treaty of Rome, which was signed by West Germany, France, Italy and the Benelux countries in 1957, envisioned the creation of a common market with free movement of goods, capital, services, and persons. Today, legal barriers to migration have been dismantled within a European labor market that comprises more than 460 million individuals across 31 countries. Migration within the continent increased substantially following the European Union’s eastern enlargement, as many citizens of the new member states moved to Western Europe. 

In principle, labor market integration could eventually lead to an equilibration of wages across countries. To examine convergence in the European Market, the paper compares the evolution of real wages across countries between 2008 and 2018. While wages in poorer countries such as Romania and Poland increased relative to the German benchmark, wages in richer nations such as Denmark or the Netherlands grew more slowly. As a result, the wage dispersion across European countries declined by a third during this decade, yet sizable wage differences persist. The ability to migrate is particularly valuable for the citizens of Europe’s poorer countries. For instance, the number of Bulgarian workers in other EU countries corresponds to 8 percent of Bulgaria’s domestic population, and the paper computes that their wage gain from migration is as high as 6% of Bulgaria’s GDP.  

There are however many persistent obstacles to migration that slow labor market integration in Europe. The EU has 24 different official languages, and a lack of proficiency with a host country’s language limits immigrants’ ability to find jobs while reducing their productivity in the workplace and inclusion in society. Occupational certificates from one country may not be recognized in another, despite ongoing efforts towards more harmonization. Moreover, there is evidence for discrimination against individuals with foreign nationalities, and skepticism about migration is present in many countries’ political debates. As a result of these factors, we are still far away from a fully integrated European labor market.   

Paper: 

Migration and Labor Market Integration in Europe

David Dorn, Josef Zweimüller

Journal of Economic Perspectives, 2021

While institutions play a significant role for long-term societal and economic development and prosperity, they do come with a price-tag. It would be inefficient to regulate every realm of public and economic life. And it probably isn’t necessary either: There are spill-over effects from institutional to non-institutional contexts as behavioral research from the Department of Economics finds.

The laboratory experiment was an adaption of a public good game in which participants receive an initial endowment and can choose to contribute part (or all) of it to a public pot. This pot is doubled and distributed evenly among the group. The more the players contribute, the higher the payoff for everyone. However, every player risks that the others do not contribute. In this experiment, the game was repeated for 20 rounds.

Reducing global carbon emissions can seem like an uphill battle. Countries struggle to implement policies that do not lead to unintended consequences defying their original aims and economic interests. A change in our understanding of the effects of policies on technological innovation can help overcome this hurdle. The authors propose a green industrial policy that combines emission taxes, trade policy and subsidies. 

Economists agree that technological innovation is endogenous and responds to policies and regulation. However, when it comes to climate change, the literature focuses on models in which technological change is exogenous and policies have no effect on the pace and path of innovation. Conclusions drawn from this exogeneity assumption have serious consequences. These are amplified as technological innovation is path dependent: decisions for a specific approach become self-perpetuating as it becomes harder to switch technology further down the line even if the chosen approach has obvious flaws.

Compared to local economic issues, global challenges have added layers of complexity. Mutual consent on appropriate global action in tackling climate change is hard to achieve and unilateral regulations, such as carbon taxes are often criticized for triggering a relocation of energy intensive production into unregulated markets.

Incorporating effects of climate policy into innovation growth models

David Hémous and co-authors create a new framework incorporating path dependency and the effect of public policies on innovation efforts. Assume an economy that produces one good. It can do this with fossil fuel or a clean energy. If fossil fuel energy is cheaper than clean energy, the economy will rely more on fossil fuels than on clean energy. Since the two inputs are substitutes, the fossil fuel sector will also earn higher revenues. This leads to innovation further improving the fossil fuel technology, e.g. better turbines for natural gas power plants. It also leads to less or nor innovation into clean energy, e.g. better blades for windmills.

Returning to the carbon tax example above: path dependency and the current high share of fossil-fuel energy production in China increases fossil-fuel-based innovations there, while the reduced demand for energy in regulated European countries will reduce green energy innovation here. In extreme cases, unilateral carbon taxes may even backfire and increase total emissions.

An effective unilateral green industrial policy

The paper argues that there it is possible to reduce emissions in both regulated and the unregulated countries in the long run. The unilateral green industrial policy combines clean research subsidies, trade policy and carbon taxes with the goal of supporting clean energy innovation in the regulated country. If research subsidies are maintained sufficiently long so that clean technologies become better than dirty ones, then the same forces which were pushing toward dirty innovation beforehand will favor clean innovation, making future subsidies obsolete.

Further Reading:

Acemoglu, Aghion, Bursztyn and Hémous: The environment and directed technical change. American Economic Review, 2012

Hémous, David: The dynamic impact of unilateral environmental policies, Journal of International Economics, 2016

Risky behaviors such as smoking, alcohol and drug use, speeding or frequently changing sexual partners have significant economic consequences. In the U.S. alone, the annual cost is estimated at 600 billion dollars. In order to define measures that could reduce these costs we need a better understanding of the basis and mechanisms of risk-taking.

To shed some light on risky behavior, an international research team led by the Zurich Center for Neuroeconomics conducted a multi-stage research project. In a first step, they investigated which genetic characteristics correlate with risk-taking behavior. Based on this, the researchers made predictions about risk-taking in a separate sample and investigated whether brains of individuals with a genetic disposition for risk-taking differed from the brains of more risk-averse individuals. Anatomical and functional differences emerged between the brains of these groups of individuals.

Different brain areas involved

The following brain areas showed specific characteristics: The hypothalamus, which releases hormones for the body's vegetative functions; the hippocampus, which is central to remembering; the dorsolateral prefrontal cortex, which is active in self-control and cognitive deliberation; the amygdala, which controls emotional responses to danger; and the ventral striatum, which is active in reward processing.

The study broke new ground in several areas, as it is the first study to examine the basis of risky behavior using a representative sample of 25,000 individuals and to examine the influencing factors - genetic predisposition and differences in the anatomy and function of brain areas - in combination.

Link to paper

Turn off the TV at 11 pm or give in to the cliffhanger and watch just one more episode of your current favorite show? When we think of self-control, we usually mean impulse control and emotion regulation. These processes take place in the prefrontal cortex - the brain area where long-term goals and consequences of actions are processed. However, the ability to overcome one's own selfishness is equally important, as researchers at the Zurich Center for Neuroeconomics have discovered.

To overcome one's own self-centeredness, a person must be able to put themselves into someone else’s situation. This happens in the area in the brain called the temporo-parietal junction. This area is also active in other situations that require self-control, even when no other person is directly involved, such as patience.

The future self is another person

In their studies, the researchers had people choose between an immediate smaller reward and a delayed larger reward (intertemporal decision) and between a selfish reward and a prosocial reward (interpersonal decision). Neurological activity showed that the same brain mechanisms are active in intertemporal and interpersonal decision making.

This research is the first to capture the connection between the neurological mechanisms of patience, self-control, and egocentricity. From a neurological point of view, the brain considers one's future self as another person. Therefore, in a situation requiring patience for a future gain, the same mechanisms are active as in a situation requiring prosocial behavior toward others.

Link to paper

Neuroeconomists, psychologists, and physicians at the University of Zurich show that increased sensitivity in a specific region of the brain contributes to the development of anxiety and depression in response to real-life stress. Their study establishes an objective neurobiological measure for stress resilience in humans.

While stress resilience is a widely discussed concept, it is still very challenging to predict people’s individual response to increased levels of stress. Lab experiments can only go so far in replicating the ongoing and intense stress many people experience in their day-to-day lives. However, a team of researchers from the Zurich Center for Neuroeconomics, together with psychologists and medical researchers at UZH observed a group of medical students who were all about to face real-life stress for an extended period during their six-month internship in the emergency room.

Stress as a response to cognitive conflict and loss of control
Before starting their internship participants were given a task that required them to process conflicting emotional information. This conflict task activates the locus coeruleus-norepinephrine (LC-NE) system, a region of the brain associated with regulating our response to stress and resolving conflict. However, the intensity – often referred to as the “firing rate” – of LC-NE activation varies from one person to the next.

Participants with a higher LC-NE responsivity showed more symptoms of anxiety and depression following their emergency room internships. Thus, the scientists identified an objective neurobiological measure that can predict a person’s stress response. “The more responsive the LC-NE system, the more likely a person will develop symptoms of anxiety and depression when they’re exposed to stress,” Marcus Grüschow summarizes their findings.

This is the first demonstration that in humans, differences in LC-NE responsivity can be used as an indicator for stress resilience. “There might be an even more accessible indicator for stress resilience,” Christian Ruff says. Research with animals suggests that stimulation of the LC-NE system correlates with pupil dilation. “If we could establish the same causal link between pupil dilation and the LC-NE system in humans, it would open up another avenue,” he adds.

Link to paper

During the Great Recession of 2008-09, global GDP declined by about -0.6% (-3.2% in advanced economies). The decline in global GDP due to the Covid-19 recession in 2020 is estimated to be significantly higher at -3.5% (-4.9% in advanced economies)[1]. Remarkably, while merchandise trade fell by around -11% in 2008-09 and took three years to recover, trade volumes dropped by -9.2% in 2020[2] and recovered in less than three months. Mathilde Le Moigne and Ralph Ossa argue that the pandemic led to a recession in which non-tradable services suffer but tradable goods thrived, thus buffering the effect of the recession on global trade volumes.

At the onset of the pandemic, the supply of traded goods was interrupted by lockdowns and plants closures, while the demand for traded goods plummeted due to income uncertainty, rising unemployment, and social distancing. Trade costs skyrocketed due to export restrictions, grounded planes, and closed borders. Hence, the pandemic had an adverse effect on all major determinants of global trade, which explains its initial collapse. As export restrictions were lifted in April 2020 and transportation costs were reduced by record-low fuel prices, global demand for tradable goods rebounded while the demand for non-tradable services remained low.

This explains the decoupling of global trade and GDP dynamics and the surprising resilience of global trade. Trade and GDP dynamics can decouple because GDP has many non-tradable components. For example, non-tradable goods and services represent 65% of U.S. GDP. The shift in consumer expenditure away from predominantly non-traded in-person services (restaurants, hair salons, or cleaning services) towards predominantly traded consumer durables (computers, furniture, and other home appliances) and investment goods (machinery, electronic equipment) supported demand for trade.

An open question is whether this demand for trade is sustainable. Large parts of the economy are currently on “life support”, with government programs and business owners covering huge losses to keep business afloat. Without a comprehensive recovery, these parts of the economy will eventually collapse with uncertain implications for global trade.

Link to paper

Surveys are a central instrument of economic and social science research. However, analyzing the resulting data is not always easy: if life satisfaction is measured on a scale of 1 to 5, a person in category 4 is not "twice as happy" as a person in category 2. Also, the very popular comparison on life satisfaction between population groups is tricky. Even if respondents in group A assign themselves to the higher categories more often than respondents in group B, the statement "Group A is happier" can only be made if all persons within a category are about equally happy. This is rather unlikely: happy, very happy, bursting with happiness – all these levels of happiness end up in category 5. A few years ago, researchers pointed out the problematic nature of these assumptions and questioned a number of findings based on them.

Nick Netzer and alumnus Shuo Liu show how the problematic issues can be remedied by integrating response times into the analysis:

The “chronometric effect” states that we answer questions we find easy very quickly. If you include response times to the answers within a category, a much more heterogeneous picture of a group emerges. A fast response is given more weight, since – in the example above – it points to a happier person. Response times are more decisive for the outer categories than those in the middle. By integrating response times into the analysis, it is possible to make very accurate statements about subjective satisfaction using only two categories.

The researchers also checked how their results relate to results from conventional methods. In the case of surveys on happiness and life satisfaction, the results are largely consistent with the findings using conventional methods. On the other hand, there seems to be greater potential in the study of political orientations. The results indicate that the integration of response times in this area could lead to a considerable improvement in predictions. 

Link to paper

Social preferences have been put forward as a potential explanation for a range of selfless behaviors ranging from cooperating with strangers to donating blood. Although the idea of our behavior being governed by altruistic motives is increasingly acknowledged in modern economic thinking, the empirical evidence on the prevalence of social preferences in the general population, and their relevance for everyday behavior remains relatively scarce.

In a recent research project, Thomas Epper, Ernst Fehr and Julien Senn assess the prevalence of social preferences in a sample of the Swiss population, and investigate their relevance for explaining political support for redistributive policies. They use experimental methods and surveys to elicit respondents’ social preferences and link these preferences with respondents’ support for four concrete redistributive proposals that were put to vote in recent years: capping the salary of CEOs, increasing taxes for high-income individuals, introducing a minimum wage, and introducing a universal basic income.

Inequality aversion and overall welfare

The researchers found that a substantial share of the individuals care about others, i.e. that social preferences are also prevalent in the general population. However, these social preferences come in different manifestations. In their sample, around half of the individuals are genuinely averse to inequality: they are willing to reduce inequality in almost every situation, even if doing so reduces the total economic output.  One third of their sample displays a different form of social preferences: they are willing to reduce inequality, but not at the expense of economic output.  The remaining individuals mostly care about themselves and show very little concern for others, i.e. they correspond to the (stereo)typical selfish individual.

Implications for the design of political initiatives

They then show that social preferences play a key role in explaining political support for redistribution. Voters with social preferences are significantly more likely to support political proposals aimed at reducing inequality, in particular amongst the more affluent individuals. They also provide evidence that policies which primarily aim at reducing the income of the well-off receive support from different individuals than proposals primarily aiming at helping those who are worse off.

On a more general level, their research provides a new piece of evidence that social preferences are prevalent in the general population, and that they are predictive of individual behavior in the real world. Thus, this study makes the case for the external validity of simple measures of inequality aversion elicited via simple experimental techniques.

Link to paper

American society has been experiencing an ideological polarization for several decades. The positions of the two parties on issues such as environmental protection, immigration, the welfare state or the protection of minorities are increasingly diverging, leaving fewer and fewer moderate voters who tend to be more progressive on some issues and more conservative on others. 

What drives this polarization of politics and rise of populist parties? One explanation sees these developments as the result of increasing cultural contrasts within society. The values of the younger and more urban generations are oriented toward personal autonomy and social diversity, while older and more rural segments of the population emphasize traditional values such as family and religion. The increasing loss of the traditional order of values has triggered a cultural backlash, spearheaded by right-wing populist parties in support of the old order and against immigration and cultural mixing. 

This shift in value orientations has been going on for decades, but why is it triggering such a significant backlash now?

Economic reasons for the backlash against changing social values

A recent study by David Dorn published in the American Economic Review shows that the economic decline of some American regions has contributed significantly to the polarization of politics.

Between 2000 and 2010, a dramatic wave of factory closures eradicated one-third of all jobs in the US industrial sector. Regions specializing in industries that could not withstand the growing import competition from China were hit particularly hard.

David Dorn and his co-authors examined the impact of these developments on congressional and presidential elections between 2000 and 2016. They find strong, though not definitive, evidence of an ideological shift in those regions and constituencies that were hit hardest by international trade. In some domains, the authors find an increase in ideological polarization, meaning expanding support for both strong-left and strong-right views, and pure rightward shifts in others.

A political shift to the right can be seen, for example, in the rising market share of the conservative TV channel Fox News, or in the increasing likelihood of electing Republicans to Congress. A polarizing shift can be seen in the campaign contributions as well as the profiles of elected members of Congress. Districts with a majority White population that were particularly affected by the factory closures were more likely to elect a politician from the right fringe of the Republican Party, while affected districts with large populations of Black and Latino voters were more likely to elect a liberal Democrat. In both cases, these polarizing shifts come at the expense of moderate Democrats. In the 2016 presidential election, votes from regions with high numbers of globalization losers shifted in favor of Donald Trump.

Link to paper

Better grades, just because of my fellow students? A new study shows for the first time that not only the grade point average, gender, or origin of the person sitting next to you or your study group in college can have an influence on your own performance, but also their personality. Our personality traits influence many important developments in our lives, such as success in education, income, career, and health. This influence has been widely researched. Less often, however, how our personality also affects our environment has been studied. So-called "peer effects" have already been studied with regard to characteristics such as gender, ethnicity, or school grades, but not with regard to personality traits. In his latest study, Ulf Zölitz examines this question in the context of education and asks: how does the character of my fellow students influence me?

The study follows students at a Dutch business university where all first-year students are divided into study groups at the beginning of their studies. The data collected are particularly suitable because students spend a lot of time in these study groups and all courses and groups are put together randomly by computer system. At the beginning of the study, four personality traits are surveyed from all students: self-confidence, timidity, risk-taking, and perseverance, the latter being understood primarily in the sense of conscientious or diligence – corresponding to the English "grit": someone with a lot of perseverance.

The results show that being surrounded by persistent fellow students has a positive effect on one's own performance. Furthermore, the results show that performance improves not only in the course studied, but also in courses taken later. This suggests that it is not course-specific knowledge that leads to improved performance, but transferable skills that benefit them later.

One explanation for the performance improvement is that students in the groups interact more with persistent fellow students than with others. To do this, all the students were asked about three people in their group with whom they interacted the most. Indeed, most interacted more with the persistent group members, learning that networking with people with a lot of perseverance can improve one's performance. As a result, they maintain more contacts with persistent individuals later on, and thus the positive effect persists over time.

This study shows that not only sociodemographic characteristics such as gender, origin, and grade point average of fellow students can have positive spillover effects, but also socioemotional characteristics such as personality. This finding implies that interventions that focus on mixing different characters can help reduce inequality in college.

Link to paper

Everyone remembers the pictures from 9/11, even if you were not there yourself. Today, the mass media and social networks confront us with an unprecedented abundance of images, be it terrorist attacks or other threatening situations. It is well known that indirect experiences of social threats trigger stress or maladjusted fears in us. Philippe Tobler examined whether and how these perceived social threats also influence our decision-making behavior.
Our reaction to social threats is the result of a learning process: in addition to learning directly, i.e. through our own experiences, we also learn indirectly, by observing others’ experiences. Such indirect observations can also be made via the media. Philippe Tobler examined the influence of observational learning on our decisions. His research shows that observational learning influences our decisions to a similar extent as learning through our own experience. In both cases, the influence on decisions occurs through the classical conditioning process, a well-established and simple form of learning. He also finds that seeing the threat, albeit via the media, has a stronger impact on the classical conditioning process, than only hearing about it, for example if somebody describes the threat to us verbally. These findings may help to better understand both adapted and pathological behavior people display after indirectly experiencing threatening events.

Link to paper

The myth that an employee on maternity leave is an economic burden for a company might be one of the reasons why women are still disadvantaged in their work life. While the effects of maternity leave on the child’s welfare and the mother’s well-being have been intensely studied, the consequences for the employer are less well documented. Anne Brenøe and her co-authors fill this gap with their research.
As smaller companies will presumably be more affected by the loss of a single employee, the researchers used data from Danish companies with less than 30 employees. Their analysis primarily shows that when an employee is absent due to maternity leave, opportunities arise for the other employees: they can temporarily increase their workload and therefore their salary or sometimes have the possibility to take on other tasks. In addition, their job security increases as the probability of being dismissed decreases. But there are also effects that benefit society as a whole, because companies temporarily hire additional employees, which has a positive effect on unemployment. No negative impact on the productivity or profit of the company could be observed, nor on the number of sick days of other employees. Since in Denmark, as in most European countries and also in Switzerland, maternity leave is covered by social security, there are no additional costs, but only opportunities to seize for the other employees and the company.

Link to paper

The WHO estimates that one in 13 children in sub-Saharan Africa will not live to see their fifth birthday. It is particularly frustrating that many of the diseases responsible for this could easily be prevented with modern medicine and technology. It is much less clear, however, how to do it cost-effectively an in a scalable way. Especially in rural areas, which are poorly served by the medical healthcare system, too little is known about cost-effective and scalable protection against malaria, diarrhea, and malnutrition.
Conventional aid programs may often fail because the incentives for health workers and administrators are not sufficiently strong. Two NGOs in Uganda have therefore set up a new program that combines basic health education with an entrepreneurial aspect: local healthcare promoters make home visits within their community and provide information on general hygiene measures, give simple medical advice, and refer more serious cases to the nearest health center.

In addition, they also sell preventive healthcare products such as mosquito nets, water purification tablets, vitamins, malaria medication, and also everyday household items such as solar lamps or water filters. The profit from these sales provides them with a salary and thus acts as an incentive to visit the households regularly, thereby ensuring that families receive regular visits and are supported during crucial times, such as after childbirth.
David Yanagizawa-Drott investigated the efficiency of this type of social entrepreneurship by means of a randomized field study. He was able to show that infant mortality could be reduced by 27% in children under 5 years of age, by 33% in children under 1 year of age and by 28% in newborns. These positive findings prove that social entrepreneurship can improve healthcare and that such programs are efficient.

Link to paper

What causes people to return a found wallet? The preservation of their own self-image, as an international study has shown. "People want to see themselves as an honest person, not as a thief. Keeping a found wallet means having to adapt one’s self-image, which comes with psychological costs," co-author Michel Maréchal explains the findings of the study. And, the more money there is in a lost wallet, the sooner it is returned to its owner. Keeping a more valuable wallet is more likely to be considered theft, and the "cost" of correcting one's self-image increases.

The authors of the study handed in more than 17,000 wallets at the reception desks of various institutions (hotels, banks, museums, post offices, or police stations). They found large differences between the 40 countries examined: In Switzerland, Norway, the Netherlands, Denmark and Sweden, between 70 and 85 percent of wallets were returned to their owners. In China, Peru, Kazakhstan and Kenya, on average only between 8 and 20 percent. But, in almost all countries, wallets with larger sums of money or valuable contents were more likely to be returned.

Link to paper

Although the financial crisis of 2007 was mainly perceived as a "home-grown" US problem, it is presumed that global factors played a role as well. In the years before the crisis, especially in the second half of the 1990s, an increasing number of international investors were looking for safe investment opportunities in the US. In particular, a large part of China's current account surplus was invested in the United States. It has remained unclear what role these capital flows - also known as the global savings glut - played in the creation of the real estate bubble in the US and how important they were compared to other factors, such as banking deregulation.
To examine this, Mathias Hoffmann and Iryna Stewen (Uni Mainz) looked at differences in the openness of local banking markets in the United States. Contrary to popular perception, until the 1980s the United States was far from being an integrated banking market. Californian banks, for example, were not allowed to take over a bank in Nevada or open a branch there.

In the 1980s the individual states started to remove these obstacles. This gradual liberalization process had long-term implications: even more than a decade later – in the mid-1990s – states that had liberalized their banking markets early had a higher share of nationally operating, geographically diversified banks than states that had liberalized relatively late.   
The authors show that the local presence of geographically diversified banks influenced the way capital inflows affected the real estate market. Investments in these banks were considered a very secure investment by global investors and a good alternative to government bonds. Because they were considered safer than their local competitors, these banks were able to absorb a larger share of the capital inflows and expand their mortgage lending more. In regions where the market share of geographically diversified banks was historically high (in states that liberalized early on), the capital glut therefore had a particularly strong impact on the supply of credit and ultimately on property prices.
The study is the first to provide empirical evidence for the role of the global capital glut in the development of the US real estate bubble, the bursting of which led to the global financial crisis. However, the results also show that an interaction between deregulation and the capital glut was necessary to explain the depth of the crisis: the liberalization of the banking markets drilled holes in the dike, but without the "flood" of the global capital glut, the crisis would probably have been much less severe.

Link to paper

Innovation is usually regarded as something positive: it promotes the productivity of a society and stands for renewal, creativity, progress. However, David Hémous’ research has shown that innovation is also one of the main reasons for top income inequality: The one percent of the population that already claims a disproportionally large income share, becomes even richer.
David Hémous uses data from the different US states between 1975 and 2010 to show the causal relationship between innovation in a state and top income inequality, using the number of patents per capita to measure innovation. He showed that the increase in patenting can explain up to a quarter of the rise in the top 1% income share in the US. He was also able to identify several positive effects of innovation: overall income inequality is not affected and the effect of innovation on top income inequality is only temporary. While innovation augments the inventor’s income at first, eventually its benefits diffuse throughout the economy. Furthermore, innovation is also correlated with social mobility, the probability that children will be moving up in social rank compared to their parents, which also has a positive impact on society. Lobbying by established firms may dampen this effect: the efforts of incumbent companies to set the hurdles for innovations as high as possible has a negative influence on social mobility.

Link to paper

According to an article published in the Swiss Newspaper Tagesanzeiger last November, 96 percent of the Swiss public servants are rated as «good» or «very good» in their annual performance appraisal. This may be surprising, but in organizational economic research it is a known fact that superiors tend to rate their subordinates too mildly. This so-called «leniency bias» occurs, when boss and employee interact on a regular basis and thus build up a personal relationship.

The problem of consistently good evaluations is not the costs of the resulting pay raises, but more so the loss of incentive: if you are sure to receive a positive appraisal, regardless of your own performance, you have very few reasons to make an effort. A second problem is the lack of information: If almost all employees are rated as very good, there is no data on which to base decisions about promotions.

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For decades Businesses, NGOs, and governments have been trying to convince farmers in developing countries to insure their crops. To date, with little success. This is mostly due to the fact that the insurance fee has to be paid at the beginning of the season. However, that is exactly the time when the farmers need money for equipment, seeds, machines and for feeding their families until harvest comes. Lorenzo Casaburi and his co-author Jack Willis (Harvard) have found an easy solution to raise the quota of insurances taken. They simply shifted the due date of the payment to harvest time. «By shifting the payment date to harvest time, we could raise the take-up rate of insurances from 5 percent to 72 percent», says Lorenzo Casaburi and adds: «additionally the demand among the poorest farmers increased the most». There is one hurdle left to take: «The farmers have to be able to rely on receiving the insurance benefit. And the insurers have to be sure that the farmers will sell their crop (after having deducted the insurance fee) to them and not to any other buyer».   Link to paper

Over the last decades, the labor market has undergone fundamental change. While the demand for manual labor has decreased significantly, the number of workplaces requiring cognitive skills such as creativity, analysis and problem solving has risen.

This is primarily to the advantage of women. While in 1980 roughly 54% of the women with a college degree in the USA could expect to get a well-paid and highly qualified job, this figure rose to 59% by 2016. For men this percentage fell from 66% to 63%. At the same time the share of well-educated women who do not work decreased from 27% to 21%, while the share of men rose from 8% to 12%.

The main reason for the success of well-educated women is the change in requirements of highly qualified jobs. Social skills, empathy, communication, and the ability to recognize situations and emotions are increasingly in demand. «Psychological and neuroscientific research has shown that in these areas women have comparative advantages» says Nir Jaimovich, co-author of the study, and summarizes «In order to offer an added value in the digital future, the next generation will not only have to be technically skilled, but above all, be socially competent».

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If we compare two people’s DNA, we see that over 99% of it is identical, and less than one percent of their strands vary. These unalike areas are called genetic variants and determine a person's individual characteristics, such as eye color or susceptibility to certain diseases.

An international group of scientists, including Pietro Biroli, Christian Zünd, and Ernst Fehr from the Department of Economics, identified 124 previously unknown genetic variants within 99 areas of the human genome, which are associated with a person’s willingness to take risks. “With this study we shed light on the genetic architecture of risk tolerance and can pinpoint where the propensity to risky behavior is located within our genome”, explains Pietro Biroli, who led the study analyses. "This does not mean, however, that we can say on the basis of DNA what risk a person will take in a particular situation. Whereas the link between the genetic variant and the outcome is very direct in the case of eye-color, it is often also influenced by environmental factors, as in this case.

It is one of the largest genetics studies to date, including information from over one million individuals, and is one of the first studies to link genetic variants with behavioral outcomes, which are relevant to social science research. 

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Imagine your bicycle had been stolen: In Switzerland, you’ll report the loss via ePolice and your insurance claim is recorded through the chatbot of the insurance company – without you having to personally go to a counter or speak to a person. Even in industries that traditionally attach great importance to personal relationships, such as banking or insurance, face-to-face interactions are increasingly being replaced by online forms. But, do we apply the same ethical and moral criteria to our own behavior when we interact with machines, or are we less honest when our counterpart is not human? Michel Maréchal explored this idea in a set of experiments and found that, yes, we are less honest with computers than with people.

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Globalization brings people, places and products closer together.  Long-haul air traffic is a key factor in this process, as David Yanagizawa-Drott and his co-author show in a recent paper. They analyzed the economic development of cities in terms of their flight connections and found that cities paired with at least weekly direct flights show higher economic growth, more capital flow and direct investment. 

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The idea of a matching system for kidney transplants of donor-recipient pairs that are biologically incompatible has already significantly improved kidney transplant rates. Family members or friends who are willing to donate a kidney for a loved one can do so, even if they are not a match with the recipient - a market mechanism allocates all donations to recipients. Now, a voucher system by Marek Pycia and colleagues has further expanded the possibilities.

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Giving small gifts to commercial customers increases the value of the following purchases considerably, as a study conducted by Michel Maréchal and Christian Thöni has shown. The fact that even small gifts have the potential to influence purchasing behavior, and thus could create conflicts of interest, has implications for the discussion about guidelines on the value limits on acceptable gifts.

The line between a small gift as an expression of appreciation of a good business relationship and it being an attempt to bribe the recipient is not always clear. Many industries and companies set guidelines regarding the value of gifts that employees may accept. A box of chocolates – yes, a trip to a Formula 1 race – no. Such thresholds are based on the idea that valuable gifts may influence the recipient’s decisions about whom a contract is awarded to.

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Since the last recession, the discussion about uncertainty and its influence on economic cycles has become increasingly prominent. The innate idea is that more uncertainty means more risk for companies, so they tend to adopt a wait-and-see approach and delay decisions to hire new labor or invest in new machinery or infrastructure, which can lead to a fall in employment and investment. Nir Jaimovich and his coauthors first document that during economic downturns, various uncertainty measures sharply increase, suggesting that when firms face periods of low growth, they also face heightened uncertainty. Given this novel empirical evidence, Jaimovich and his co-authors analyzed the outcomes resulting from changes in the level of uncertainty in a dynamic stochastic general equilibrium model. They found that increases in uncertainty could lead to recessions and make policies such as wage subsidies temporarily less effective. 

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Ostracism within a group is likely to be an unintentional side effect of our tendency to team up with individuals with whom we have had previous good experiences, and not so much a deliberate exclusion of an individual based on their behavior, Björn Lindström and Philippe Tobler from the Econ Department have found. Initiating and mixing up early interactions increases the probability of being part of the gang.

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Standard models of international trade typically assume that the intensity of and gains from trade between two countries is driven by the trading partners' GDP. Recent research by Josef Zweimüller and co-authors shows that looking at the impact of GDP composites (income per capita versus population size) separately goes much further in explaining the probability and volume of bilateral trade. For instance, the probability that a given product is traded increases with a destination’s GDP, but the effect is twice as large when the higher GDP is due to a higher per-capita income rather than a higher population.

Josef Zweimüller and co-authors build a model, which can explain these empirical patterns. Importantly, the model predicts that gains from trade are very asymmetrically distributed between trading partners: while rich countries always gain from a decrease in trade barriers, poor countries gain less or may even lose. The main reason is that consumers with low (per capita) incomes cannot pay high prices for imported goods, so firms abstain from exporting to poor destinations. Simulations show that too low prices in poor countries indeed affect many bilateral trade relations supporting the predictions of the theoretical analysis.

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A study by David Yanagizawa-Drott and co-authors published in the August 2017 edition of The Quarterly Journal of Economics explains why advances in agricultural development in Africa are slow. New agricultural technologies (fertilizer and hybrid seed) are subject to low adoption rates in local markets in Africa, and farmers are unlikely to buy new products. His research looks into the reasons for this reluctance and finds that the quality of the seed is fairly low and, more importantly, varies greatly. In addition, price is not a reliable indicator of quality. Therefore, farmers cannot infer quality based on price. This also reduces the incentive for a high-quality producer to invest in quality and establish a reputation. In combination, all these effects result in low yields for the farmers, although better quality seed is available in their markets.

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Dina Pomeranz et al. recently published a paper in the American Economic Journal: Applied Economics on the limits of countering tax evasion in developing countries. Using third-party data to estimate the revenue of a company, tax authorities in Ecuador found that a quarter of the companies significantly underreport their revenues. Confronted with the mismatch, an amended tax return was requested, with which only a few companies complied. However, the corrected tax returns had not only changed regarding stated revenue - compared to the first submission they also reported higher costs. In combination, these two effects led to a relatively small increase in net tax revenue to the state. Pomeranz and her coauthors conclude that using third-party data can help, but will not suffice to reduce the tax compliance problem, as long as the enforcing infrastructure (capacity to follow up on evasion, poor legal regimes, and corruption) is weak.

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Behavioral experiments have shown that women share a sum of money more generously than men. To gain an in-depth understanding of this effect, Alexander Soutschek, Philippe Tobler et al looked at the areas of the brain that are active when making such decisions. They found that the striatum, located in the middle of the brain and responsible for the assessment of rewards, is more strongly activated in female brains during prosocial decisions than during selfish decisions. In contrast, selfish decisions lead to a stronger activation of the reward system in male brains. Their findings are the first to demonstrate that the brains of men and women respond differently to prosocial and selfish behavior. These physical differences, however, are not necessarily innate or of evolutionary origin, as learning and reward systems work in close cooperation and there are significant cultural differences in the sensitivity of the reward system.

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Although the decline of labor’s share within the GDP of the United States and many other countries in recent decades is well documented, its causes remain uncertain. In an often-cited working paper, David Dorn and his co-authors show how market consolidation across all sectors has led to the top four companies of a sector significantly increasing their market share and profitability, allowing them to reduce unit and workforce costs. Therefore, the aggregate share of labor (and thus wages) decreases. The research offers empirical evidence of national income shifting from employers towards equity owners and shows how the consolidation has effects on innovation incentives as well as income inequality.

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Neurobiological models of self-control usually focus on brain mechanisms involved in impulse control and emotion regulation. Recent research at the University of Zurich shows that the mechanism for overcoming egocentricity also facilitates self-control. This opens up new possibilities for therapeutic interventions.

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Female Genital Cutting (FGC) constitutes a serious health risk for millions of girls and women but remains prevalent in many areas of the world. In a recent paper published in «Nature», researchers from the University of Zurich have found a promising approach to change attitudes within cutting communities. In their study they produced fictional movies including a subplot about a family in the process of discussing whether to have their daughters cut. The results show that the movies had a positive influence on attitudes towards uncut girls and therefore repeated exposure to similar movies could be a discreet but effective intervention to reduce female genital cutting.

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Wealthier individuals have a lower mortality rate than poorer people. The common assumption that this effect has intensified in recent years is rebutted by a current study from the University of Zurich. Instead of examining life expectancy at birth, the study looks at the mortality rates by age group in different counties in the USA. The study finds that the mortality rates of disadvantaged children and young adults are falling and are approaching the mortality rates in wealthy areas, while the differences among older people continue to be pronounced.

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In a recently published study, Björn Bartling, Roberto Weber, and Lan Yao give a mixed response to the titular question. On the one hand, they find positive and stable levels of socially responsible behavior in several experimental market studies, conducted in Switzerland and China. On the other hand, their comparison of behavior in market and non-market contexts reveals that market behavior follows weaker prosocial norms than behavior in other contexts.

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Since time immemorial, parents have struggled with the question of how best to raise their children. Fabrizio Zilibotti and Matthias Doepke argue that the choice of parenting style is driven by incentives.

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The scope and costs of unemployment and unemployment benefits remain in the spotlight of political and societal discussion and will do so for the foreseeable future. To date, the majority of research on the subject focuses on the effects of unemployment benefits on a recipient’s behavior. In a study recently published by the American Economic Review, Josef Zweimüller argues that this only accounts for part of the story. In addition to these behavioral effects the market externalities - changes in the probability of finding a job for a given search intensity - are critical in determining the optimal level of unemployment benefits.

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A midlife crisis or mid-career slump in satisfaction can happen to anyone, even to those who seem to have the most fulfilling jobs. Dissatisfaction, frustration or, more visibly, random acts attempting to regain a sense of youth can be the result. When the crisis hits, it inflicts pain on the individual in question and causes productivity losses for employers. Yet, the phenomenon remains stigmatized and underresearched, leaving crucial questions unanswered. What are the causes? Why does this malaise seem to strike in midlife? And how can those who are stuck in its grips shake themselves loose?

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