"Revisiting the Effect of Bank Deregulation on Income Inequality," with Anna-Leigh Stone and Gary Hoover, Accepted for publication at Empirical Economics
We use recently developed difference-in-differences methodologies and a panel of U.S. states over the period 1960 – 2015 to examine how bank branching deregulation impacted state-level income inequality. Existing research relying on traditional two-way fixed effects (TWFE) estimates and event studies provide mixed results. However, these results potentially suffer from biases due to treatment effect heterogeneity and the failure to account for multiple related treatments. Using bias-corrected difference-in-differences procedures and properly accounting for the timing of treatment, we find evidence that the combined effect of intrastate and interstate banking deregulation increased the income share of the top 10%, 5%, and 1% of income earners, respectively. Conversely, we find no evidence that intrastate branching deregulation in isolation impacted income inequality.
"Partisan Politics and Excise Tax Rates in the United States," Public Finance Review, 2023. DOI: https://doi.org/10.1177/10911421231183395
The literature on excise tax rates has provided mixed evidence concerning how partisan ideology affects tax changes. Using a regression discontinuity design and a panel of U.S. states over the period 1970 - 2019 I find no significant difference in cigarette, distilled spirits, or gasoline excise tax rates between Democratic governors and Republican governors elected by a similar margin. This result is found regardless of whether the governor can run for an additional term or faces a binding term limit. These results are robust to an analysis of the post-southern realignment period, when controlling for southern Democrats, or when analyzing open elections without an incumbent in the running. An implication of this result is that interstate tax competition and the mobility of the tax base dwarfs any ideological differences with respect to excise tax policy.
"The Impact of Uncertainty Shocks on State-Level Employment Growth," (appendix) with Jack Cheng and Anna-Leigh Stone, Journal of Macroeconomics , 73, 2022. DOI: https://doi.org/10.1016/j.jmacro.2022.103426.
Using U.S. data over the period 1961 - 2019 we estimate a structural factor-augmented vector autoregressive model and nd that a one standard deviation shock to macroeconomic uncertainty generates declines in state-level employment growth that range from -0.02 to -0.12 percentage points at their peak negative response. Cross-sectional regressions show that industry mix is an important channel through which uncertainty shocks affect employment growth. In particular, a state with a larger manufacturing sector experiences a larger decline in employment growth.
"Revisiting the Effect of Supermajority Requirements on Fiscal Outcomes" (appendix), Southern Economic Journal, 88(4), 2022. DOI: https://doi.org/10.1002/soej.12569.
I use matching methods on a panel of U.S. states over the period 1960 -- 2008 to test whether the adoption of a supermajority requirement impacts state-level expenditures and tax revenue. While two-way fixed effects (TWFE) models show that general expenditures, welfare expenditures, and total tax revenue per capita are lower following adoption of a supermajority requirement, I also find evidence of heterogeneous treatment effects, and worse, violation of the common trends assumption. Matching estimates fail to support the conclusions of the TWFE models, suggesting that supermajority requirements do not have a robust effect on government expenditures or tax revenue.
"Corporate Decision-Making in the Presence of Political Uncertainty: The Case of Corporate Cash Holdings," with Anna-Leigh Stone, Jack Cheng, and Ching-Wai Chiu The Financial Review, 55(2), 2020: 307-337. DOI: https://doi.org/10.1111/fire.12205
Abstract: Using a quarterly panel of U.S. corporations over the period 1985 – 2014 we show that corporate managers respond to political uncertainty and economic policy uncertainty shocks in different ways. We proxy for political uncertainty using the Partisan Conflict Index and employ a prevalent empirical macroeconomic methodology to construct structural shocks that are orthogonal to shocks captured by the Economic Policy Uncertainty Index. Following a political uncertainty shock, corporations increase cash but do not adjust investment. Alternatively, following an economic policy uncertainty shock, firms appear to draw on cash and reduce capital spending to increase R&D spending.
Finally, Nebraska: A Synthetic Control Analysis of Legislative Structure State Politics and Policy Quarterly, 20(1), 2019: 3 -22. DOI: https://doi.org/10.1177/1532440019868818
Abstract: I estimate the impact of Nebraska's 1937 switch from a bicameral to a unicameral legislature on state-level government spending. Using the synthetic control method I create a counterfactual Nebraska from a weighted-average of other potential control states and compare this ``bicameral Nebraska" to the real Nebraska. Relative to the synthetic control, Nebraska experiences a sharp decrease in expenditures per capita after the switch to a unicameral legislature, a result that is largely upheld by placebo tests. Specifically, if the change in legislative structure were randomly assigned amongst the other control states, the likelihood of obtaining Nebraska's pre- and post-treatment outcomes would be 0.0213. These results lend support to the theory that bicameralism, by requiring more veto players, is associated with higher levels of government spending.
"Do Democratic Governors Lower Economic Freedom? A Regression Discontinuity Approach (appendix)," with Gary Hoover, Journal of Public Finance and Public Choice, 34(2), 2019: 101-126. DOI: https://doi.org/10.1332/251569119X15675896226897
Abstract: Using a panel of U.S. states over the period 1985 – 2010, we examine whether having a Democratic or Republican governor affects a state’s economic freedom. Economic freedom is measured using the Economic Freedom of North America Index (EFNA). Given the emphasis this index places on the importance of smaller government for economic freedom, it would be reasonable to expect that having a Democratic governor would lead to a lower economic freedom score. However, using a regression discontinuity approach, we find no evidence of this effect. An implication of this result is that governors must appeal to the median voter when making policy.
"Partisan Determinants of Federal Highway Grants," with Frank Goetzke and Gary Hoover, The Review of Regional Studies, 49(3) 2019: 389-406.
Abstract: Using data on federal highway grants from the Department of Transportation's Federal Highway Administration, this paper investigates several questions regarding the political economy of highway funding. We investigate the period 1994 -- 2008 and examine whether political alignment and political ideology play a role in determining how much highway funding per capita a state receives. We find evidence that Republican-dominated House of Representatives delegations receive more highway funding per capita compared to Democrats, especially in rural states. We also find that senators in the party of the president are able to secure more highway funding per capita. Overall, the distribution of highway spending over this time period appears to have been determined by political rather than deterministic considerations and in a way that is consistent with how the Interstate Highway System has distributed Republican voters to rural areas.
"Partisan Conflict, Policy Uncertainty, and Aggregate Corporate Cash Holdings," with Jack Cheng, Ching-Wai Chiu, and Anna-Leigh Stone. The Journal of Macroeconomics, 58, 2018: 78 - 90. DOI: https://doi.org/10.1016/j.jmacro.2018.08.010
Abstract: This paper distinguishes political uncertainty from policy uncertainty shocks and uncovers new empirical facts about how each impacts the aggregate cash holdings of US firms. Our baseline structural vector autoregression model shows that an exogenous one standard deviation shock to political and economic policy uncertainty is followed by a 1 and 1.8 percent increase in aggregate corporate cash-to-total assets after five and eight quarters, respectively. The baseline result also shows that policy uncertainty shocks tend to raise financial market volatility while political uncertainty shocks tend to lower financial market volatility. Moreover, we find evidence that political uncertainty exerts asymmetric effects on aggregate corporate cash holdings, with a shock tending to raise cash holdings under normal financial conditions and lower cash holdings under tight financial conditions. Our main results are robust against a wide range of shock identification schemes as well as against parametric and non-parametric model estimations.
"Party Polarization, Political Alignment, and Federal Spending at the State Level," with Gary Hoover and Paul Pecorino. Economics of Governance, 18(4), 2017: 351 -- 389.
Abstract: Research on the distribution of federal expenditures has provided mixed evidence showing that states with more legislators who belong to the president's party and states with more legislators in the chamber majority tend to receive a larger allocation of federal funds. We add to this research by considering how political polarization and political alignment impact these presidential and congressional determinants of how the domestic US budget is distributed to the states. Our results show that states with a larger percentage of senators in the majority can secure a larger share of federal grant expenditures per capita when political polarization is relatively low.
"Does US Partisan Conflict Matter for the Euro Area?," with Jack Cheng and Ching-Wai Chiu, Economics Letters, 138(1), 2016: 64 -- 67.
Abstract: This paper highlights the international transmission of political uncertainty originated from a US partisan conflict shock, a newly identified shock that transmits a type of uncertainty beyond the economic policy uncertainty spillovers identified by Colombo (2013). Using the recently developed US Partisan Conflict Index (USPC) developed by Azzimonti (2014), we find that a one standard deviation USPC shock leads to a 0.2 percent decline in European industrial production. We also show that, compared with US policy uncertainty shocks, a shock to US partisan conflict creates deeper and more persistent spill-over effects to the Euro area.
Government Spending, Shocks, and the Role of Legislature Size: Evidence from the American States (online appendix), Social Science Quarterly, 96(4), 2015: 1059 -- 1070.
Abstract: We examine the relationship between legislature size and several components of government spending using a methodology that allows us to estimate how legislature size influences the fiscal response to shocks that are common to all states. We find little evidence that states with larger than average lower or upper chambers experience a larger change in spending per capita in the presence of a shock. We do find a positive relationship between lower chamber size and the first difference of welfare spending per capita, but this increase is partially of set by a negative relationship between upper chamber size and welfare spending. These results are consistent with the interest group theory of government, which states that larger legislatures can be associated with lobbying and bargaining costs that may have offsetting effects.
"Tacit Collusion in Price-Setting Oligopoly: A Puzzle Redux" with Matt Van Essen, Southern Economic Journal, 79(3), 2013: 703 -- 726.
Abstract: We study tacit collusion in price-setting duopoly games with strategic complements and substitutes. While this problem has been considered by several studies, this article sheds new light on the comparison by focusing on the relationship between dynamic stability of equilibrium and tacit collusion. We find when controlling for the absolute slope of the reaction functions, there are no robust differences in either the convergence properties or tacit collusion between complements and substitutes treatments.
"The Impact of Uncertainty Shocks on Firm Creation Across US States," with Jack Cheng and Anna-Leigh Stone
This paper provides novel empirical evidence on the effects of an aggregate uncertainty shock on firm creation across the US states. Using state-level firm data between 1979 and 2019, we find that on average a one standard deviation financial uncertainty shock is associated with a 0.12 percentage points decline in the aggregate firm entry rate. Cross sectional regressions reveal that heterogeneity in industry composition is an important source of transmission of an aggregate uncertainty shock to the states. In particular, an uncertainty shock is associated with larger declines in the firm entry rate in states with larger manufacturing and mining sectors.
"Partisan Politics and Firm Dynamism at the State Level," with Anna-Leigh Stone
Conventional wisdom in the United States has long held that Republican politicians are more favorable to businesses that Democrats. We examine this conjecture by studying how business dynamism is affected by the party of the governor. Estimates from a regression discontinuity design reveal that the election of a Democratic governor does not lead to different firm entry or exit rates compared to a Republican governor elected by a similar margin.
"Bank Deregulation and Racial Disparities in Income," with Anna-Leigh Stone and Gary Hoover (Permanent Working Paper)
Existing research provides evidence that U.S. state banking deregulation improved real incomes and lowered income inequality. However, less attention has been paid to how the income gains were distributed across different racial groups. We study this question using a difference-in-differences research design and income and demographic data from the Community Population Survey’s Annual Social and Economic Supplement. Our results show that real personal income was higher following intrastate deregulation– allowing banks to expand within a state – and interstate deregulation – allowing banks from other states to expand into the state. However, we are only able to show gains for non-black individuals, not for black individuals. In the case of intrastate deregulation, we find support for an average treatment effect over the entire post-deregulation period, however dynamic treatment effect plots show some evidence of pre-deregulation increases in income. In the case of interstate deregulation, the effect does not become evident until five or more years after deregulation. These findings support existing research showing that minority groups respond differently to financial shocks.
"Does Partisan Conflict Impact the Cash Holdings of Firms?: A Sign and Zero Restriction Approach," with Jack Cheng, Ching-Wai Chiu, and Anna-Leigh Stone. Bank of England Working Paper No. 638. (Permanent Working Paper)
Abstract: This paper explores how US partisan conflict impacts the cash management decisions of US firms. Using a sign restrictions approach to identify structural shocks to partisan conflict, we find that an exogenous 10% rise in the Partisan Conflict Index above trend is associated with a 0.4 percentage point increase in average cash-to-total assets above trend. These baseline results hold for both the mean and median ratio of cash-to-total assets for all firms in our sample, across the total assets distribution, as well as for different classifications of firms. Additionally, we conduct a series of robustness checks, including a firm-level regression analysis, all of which uphold these results. Our findings reinforce the signaling effect that political dysfunction can have on corporate managers.
"The Relationship Between Legislature Size and Fiscal Policy A Cross-Country Examination" (Permanent Working Paper)
Abstract: According to the interest groups theory of government, the offsetting effects of legislature size make the relationship between government spending and legislature size largely an empirical question. In this paper, I test how the size of a country's legislature influences it's fiscal response to common and country-specific shocks. I find evidence that larger than average upper chambers are associated with more government spending as a percentage of GDP. I also find that the effect of bicameral legislature size depends upon whether or not both chambers have the authority to directly affect fiscal policy.
"Constituent Heterogeneity and Corruption"
Creating a virtual Nebraska shows that eliminating a state legislative chamber doesn't help rein in spending, United States Politics and Policy Blog, London School of Economics US Centre.
"Strife Between Democrats and Republicans Curbs Business Spending," by Jeanna Smialek (Bloomberg)
"When U.S. politics, sours, investors stall," by Joseph N. DiStefano (Philly.com)
"Partisan Conflict is High, but the Market Doesn't Care," by Jeff Sommer (The New York Times)