Theses and Dissertations - Department of Economics, Finance & Legal Studies

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An econometric analysis of cocaine use by methadone
(University of Alabama Libraries, 2013) Nichols, Ezekiel Andrew; Cover, James P.; University of Alabama Tuscaloosa
This dissertation uses proprietary drug screening data, illicit drug prices from the DEA STRIDE database, and national and local macroeconomic variables to measure the price responsiveness and treatment effectiveness of methadone maintenance therapy (MMT) on patients in a voluntary, methadone-treatment program in a rural Alabama county. This is done using conventional, myopic, and rational models of demand. The demand for illicit drugs is found to be sensitive to national drug prices as estimated from the Drug Enforcement Agency's System to Retrieve Drug Evidence (STRIDE), length of time in treatment, previous consumption, and the local unemployment rate. An important innovation in this paper is the use of temperature data from coca-plant-growing regions as an instrument for the cocaine prices taken from the DEA STRIDE database. Use of this instrument yields estimation results more in line with the predictions one obtains from economic theory. The estimation results imply that methadone maintenance therapy is a substitute for all illicit drugs under analysis. The implied price elasticity of cocaine use by MMT patients ranges from -0.0003 to -0.01284 and the unemployment elasticity of cocaine use is -0.00385.
Essays on housing, unemployment and monetary policy
(University of Alabama Libraries, 2014) Ume, Ejindu; Reed, Robert R.; University of Alabama Tuscaloosa
In this dissertation, I study the interconnections between the housing market and labor market, and the link between monetary policy and housing market activity. In the first chapter, I focus on the interplay between the housing and labor market. To do so, I construct a model of search and bargaining across two different markets: the labor market and the housing market. The model highlights that housing prices and frictions in the housing market have a profound impact on labor market activity through the desire of workers to eventually purchase a home, the "American Dream." The model also reveals that labor market frictions can impact housing market activity. I also perform a calibration exercise to evaluate economic activity in general equilibrium. I find that frictions in the housing market generate strong negative external effects on the labor market. More specifically, a tighter housing market is associated with higher unemployment rates and less job creation. Consequently, my findings suggest that policymakers should be very careful in implementing policies targeted towards housing -- housing markets are likely to generate significant external effects to other sectors of the economy, especially the labor market. To study the effects of monetary policy on housing market activity I develop an overlapping generations model in which housing is traded across generations of individuals. Incomplete information leads to a transactions role for money so that monetary policy can be effectively studied. Moreover, individuals face liquidity risk which interferes with their ability to accumulate housing wealth. Contrary to the existing literature, I demonstrate that it is important to disaggregate fixed investment between the residential and non-residential sectors. In particular, I find the effects of monetary policy are asymmetric across the components of the overall capital stock. I conclude this chapter with a policy experiment studying how optimal monetary policy depends on housing market fundamentals. In response to adverse supply conditions in the housing sector, monetary policy should be more aggressive in order to promote residential investment and the housing stock. However, monetary policy should be conservative in order to limit exposure to risk if fundamentals favor housing demand. The third chapter is an empirical look at the relationship between monetary policy and housing market activity. I analyze and quantify the effects of monetary policy on residential investment, housing starts, new private housing permits and new single family houses sold. To conduct the analysis I estimate a vector autoregression model (VAR) where the monetary policy shock is identified using sign restrictions. No restrictions are imposed on the variables of interest, however, in response to a monetary policy shock I impose sign restrictions on the impulse responses of price, output, reserves and the federal funds rate. I find that a contractionary monetary policy shock reduces housing market activity for up to a year after the shock. Interestingly, 2 to 3 years after the economy contracts, activity in the housing sector reverses course. The findings suggest that once the economy contracts the Federal Reserve Bank reverses course by lowering the federal funds rate, and this policy reversal stimulates housing market activity.
Essays on repurchase agreements, bailouts, and the macroeconomics effects of bank failures
(University of Alabama Libraries, 2015) Otto, Daniel Lee; Reed, Robert R.; University of Alabama Tuscaloosa
In this dissertation, I study different aspects of the financial system within times of crisis with special attention paid to money market mutual funds (MMMF) and their use of repurchase agreements ("repos"). Repos play a significant role in global credit market activity. Yet, research regarding the underlying components of repos remains nascent. In the first chapter, I examine the role of risk tolerance on lending and collateral within these agreements. In the second chapter, I study a model in which a risk-pooling intermediary engaging in the repo market, such as a MMMF, is exposed to runs. Inspired by events during the financial crisis, I show that bailouts are part of an efficient social insurance scheme in the event that a run emerges. However, this result does not imply that optimal intervention completely isolates shadow-banking intermediaries from a crisis. In fact, optimal public sector intervention imposes costs on money market funds by requiring them to liquidate some collateral. On the other hand, a commitment to no bailouts contributes to financial instability as the repo market collapses in the wake of a run without a public safety net. Chapter three expands my analysis of financial stress into the realm of traditional depository institutions. This chapter examines the effects of exogenous bank failures in the United States from 1973 - 2006. My results support the previous literature which suggests that real economic activity is lower following a shock. However, in addition to a linear model, I consider the possibility of a threshold value within banking shocks. Upon examination, I find that the effects of exogenous failures become asymmetric around $3 billion. Larger shocks are shown to impact the economy significantly. By comparison, smaller shocks have a completely ambiguous effect.
Essays on unconventional monetary policy
(University of Alabama Libraries, 2015) Medina, Juan; Reed, Robert R.; University of Alabama Tuscaloosa
This dissertation is comprised of three essays in which we provide a theoretical framework to study the transmission mechanism of unconventional monetary policy on real activity and credit markets under differing degrees of banking sector concentration. In particular, the three chapters in this dissertation focus on expansionary balance sheet policies consisting of long-term asset purchases by a central bank. The overall results indicate that such expansionary policies stimulate economic activity in the form of capital formation, increased credit volume and financial easing under low short-term interest rate economies when the financial sector is perfectly competitive. However, when the banking sector is fully concentrated, the transmission mechanism of monetary policy can be distorted and thus the impact of a long-term security purchase program is hampered. Our results also suggest that the fiscal authority as well as the industrial organization of the banking sector play fundamental roles in the transmission mechanism of unconventional monetary policy.
Knowledge spillovers and economic growth
(University of Alabama Libraries, 2015) Cai, Anna Kathryn; Reed, Robert R.; University of Alabama Tuscaloosa
Since the seminal work of Lucas (1988), uncompensated knowledge spillovers have been shown to play a critical role in the process of economic development. However, the standard Lucas model studies human capital accumulation in narrow settings with one industry and a closed-economy. This dissertation attempts to study the development process in richer settings. In particular, various types of spillovers are examined. Our work shows that intra-industry spillovers promote economic growth but inter-industry spillovers are more complex. Specifically, spillovers from human capital across sectors may lead to lower overall growth of consumption. In an open economy setting, the growth rates of human capital critically depend on variation across countries in educational productivity. In particular, if the growth rate of human capital is stronger abroad than domestically, human capital accumulation will decline at home. However, the magnitude of the problem depends on differences in regional external economies. In fact, such differences might actually cause the stock of human capital to decline over time. Our work also demonstrates that external economies from human capital have important implications for international trade, which provides additional linkages for economic activity across countries. Namely, increased spillovers at home will lead to a deterioration in the domestic terms of trade. Consequently, policies designed to affect the diffusion of knowledge will impact regional economic activity.
Studies on behavioral decision making: theory and experimental evidence
(University of Alabama Libraries, 2020) Wu, Fan; Price, Mike; Jindapon, Paan; University of Alabama Tuscaloosa
My dissertation on behavioral decision making contains two independent chapters, both adopting the methodology of developing theoretical model, running parameterized simulations, and testing equilibrium predictions or hypotheses through experimental evidence. Through the independent applications of microeconomics theories in behavioral industrial organization and environmental economics, these two chapters have reached conclusions that inspire policy implications to mitigate real-world problems like holdup and climate change dilemma. Chapter 1 studies the effects of cancellation payment on the hold-up problem through parameterized modelling and lab experiment. Our experiment results conform to equilibrium predictions: setting the cancellation payment too low can lead to agents being held-up, resulting in inefficiently low investment; setting it sufficiently high can enhance the agent’s incentive and solve hold-up problem, but setting it too high could lead to the agent to invest inefficiently high, i.e. the reverse hold-up problem. Our study has policy implications that carefully designed cancellation clauses could be harnessed by policymakers and mechanism designers to achieve outcomes that maximize social welfare; Another takeaway from our experiment is learning effect, implying policymakers could expect a contract regime to become increasingly effective over time. Chapter 2 develops a novel framework and runs parameterized simulations to show how individual decisions, not unlike nations in climate policy-making and international negotiations, are determined in a scenario where the probability of climate catastrophe is ambiguous. Our calibration finds that: when players vary in their effectiveness of contribution and degree of ambiguity aversion, free-riding is predicted to happen. Our study has policy implications that strategic decision-makers need to be better educated about environmental uncertainty to elicit better cooperation, and the gaps between different players’ effectiveness of contributions also need to be closed towards that end. This paper also designs a lab experiment imitating international bargaining scenarios to test our theoretical predictions. The aim of our study is to develop and then test a model on individual’s decision making in their contribution to reduce the degree of ambiguity over a shared loss, just as in the scenario for nations to cut down carbon footprint to reduce the likelihood of catastrophic climate change on global scale.
Three essays on risk and insurance
(University of Alabama Libraries, 2016) Zhuang, Boyi; Cover, James P.; University of Alabama Tuscaloosa
Previous writers have attempted to resolve the equity premium puzzle by employing a utility function that depends on current consumption minus (or relative to) past habit consumption. The first chapter points out that an individual's current utility may also depend upon how well off in the recent past he or she had expected to be today. Hence we add the concept "expectation formation" to the utility modification term in a model with a habit-formation utility function. We apply the model to equity premium puzzle and find that it is able to fit the data with a relatively low coefficient of relative risk aversion. Furthermore we fit the model to 40-year rolling samples and find that the estimated coefficient of risk aversion does not vary much as the sample changes. Hence we conclude that the model is able to resolve the equity premium puzzle. The second chapter presents a two-period model in which an individual can purchase insurance, save and borrow to protect herself against potential risk in the future. A model for insurance without the presence of capital market, and one for saving/borrowing without insurance are also discussed. We show that neither insurance nor precautionary saving/borrowing alone can generate a complete market analog, but both together can. We also show how optimal choices for insurance and saving/borrowing change when key factors in the environment change. The third chapter incorporates the ideas of habit formation and reference-dependent preference with a two-period model for insurance, saving and borrowing. I compare the results with the ones with a standard expected utility, and find that this model helps to explain all the phenomena of over-insured, under-saving and over-borrowing at the same time.
Three essays on risk attitudes and the theory of contests
(University of Alabama Libraries, 2019) Yang, Zhe; Jindapon, Paan; University of Alabama Tuscaloosa
In the first essay, we prove existence and uniqueness of equilibrium in rent-seeking contests in which players are heterogeneous in both risk preferences and production technology. Given identical linear production technology, if the number of risk-loving players is large enough, the aggregate investment in equilibrium will exceed the rent and all risk-neutral and risk-averse players will exit the contest. In simultaneous and sequential contests with two players, we can identify the favorite and underdog based on both players’ preference parameters. Our theoretical results suggest that subjects in some recent contest experiments behaved as if they were risk-loving. In the second essay, we prove existence and uniqueness of equilibrium in a game where heterogeneous risk-averse players contribute to a public good via lottery purchases. Contrasting models with risk neutrality, we show that an equilibrium with a strictly positive amount of the public good may not exist without a sufficient number of less risk-averse participants. We show that more risk-averse players purchase less lotteries and are more likely to free ride in equilibrium. As a result, it is possible for free riders to place a larger value on the public good than those who contribute. We also show that there exists an upper bound for the amount of the public good provided in equilibrium even though the number of players approaches infinity. Furthermore, we derive a lottery prize that maximizes the equilibrium amount of the public good and find that such a prize always results in over-provision of the public good. In the third essay, we examine the formation of class action lawsuits with plaintiffs who have heterogeneous degrees of risk aversion. In this model, each plaintiff can either choose to join the class action or sue the defendant individually. We find that the defendant prefers settling the case regardless of class status. Less risk-averse plaintiffs can receive higher settlement offers than more risk-averse plaintiffs and thus have incentives to opt out. We find that the main role of a self-interested counsel who initiates the class action is to increase the loss that the defendant incurs. Moreover, class action with a self-interested counsel may not be able to form if there are enough less risk-averse plaintiffs in an incomplete information structure. However, the class action can benefit all plaintiffs if they are risk-averse enough and have no incentive to sue the defendant individually when the class action is available.

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Browsing Theses and Dissertations - Department of Economics, Finance & Legal Studies by Subject "Economic theory"

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