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Working Paper Series

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Working papers disseminate economic research relevant not only to the tasks and functions of the Bank of Lithuania and of the European System of Central Banks but also appealing more broadly to the academic community in economics and finance. They present, discuss and analyse the results of original and academically rigorous theoretical and/or empirical research. Working papers constitute the basis for publications in leading academic journals, making contributions to the existing literature in the fields of economics and finance. They encourage collaboration between the researchers of the Bank of Lithuania and other central banks, Lithuanian and foreign universities and research institutes.

Papers are only available in English.

No 116

Overconfidence and Correlated Information Structures

  • Abstract

    This paper analyzes a model of multiple overconfident traders submitting market orders where traders’ private information is subject to correlated errors, as well as its extension to endogenous information. We consider two standard types of overconfidence: overconfidence in own signals and underconfidence in others’ signals. The analyses on the effects of overconfidence on traders’ behavior and the equilibrium price suggest that these effects are richer than our typical understanding of overconfidence focusing on its positive effect on trading volume as follows: First, trading volume may increase or decrease with overconfidence depending on its type. Second, these different types of overconfidence may differ radically on the patterns of trading volume and price informativeness with respect to the number of traders. Third, overconfidence can cause equilibrium multiplicity in information acquisition.

    JEL Classification: G11, G14, G4
    Keywords: Overconfidence; Disagreement; Strategic trading; Information aggregation; Efficient market hypothesis

No 115

Carbon Intensity, Productivity, and Growth

  • Abstract

    The carbon intensity of U.S. output has experienced a secular decline in recent decades. Using an agnostic identification approach we show that news about future total factor productivity explain the bulk of longrun variation in emission intensity. News about green technologies give rise to similar dynamics. Both innovations precede a persistent increase of output and TFP. Yet, they are associated with only a temporary decline of emissions, followed by a hump-shaped rebound. New technologies have thus been a key driver of growth in recent decades but have not permanently reduced emissions. We discuss the Economic underpinnings of this rebound effect.

    Keywords: carbon emissions, carbon intensity, news shocks, structural vector autoregressions.

    JEL Classification: C32, O47, Q43, Q55.

No 114

How Do Firms Adjust When Trade Stops?

  • Abstract

    We investigate how firms adjust to the introduction of sudden, unanticipated and eventually long-lasting economic sanctions. In 2014, Russia introduced sanctions on imports from Europe, which caused an abrupt negative shock to the food production sector in Lithuania. We find that part-time employment is used as the first shock absorber, followed by investment and full-time employment. At the same time, firms dampen shock effects by expanding to other export markets. To rationalize this firm behavior, we provide a theoretical mechanism where forward-looking firms face nonconvexities in the labor market along with heterogeneous variable trade costs.

    Keywords: economic sanctions, firm adjustment margins, part-time employment, new export markets.

    JEL Classification: D22, D25, F14, F16, F51

No 113

Employee-Owned Firms and the Careers of Young Workers

  • Abstract

    Using detailed administrative data from Spain, we investigate the impact of having an initial work experience in an employee-owned firm (EOF) versus a conventional business on subsequent earnings. We find that young workers’ exposure to EOFs at the time of labour market entry reduces earnings by about 8% during the first 15 years in the labour market. The selection of individuals with low initial ability in EOFs does not appear to be a relevant channel. Our results seem to be rather related to differences in job mobility and wage returns to experience. On the one hand, we document lower wage returns to experience acquired in EOFs, although no differences in subsequent career progression in terms of promotions. On the other hand, we find that workers who had their first job in EOFs show a strong attachment to such a business model and are less likely to voluntarily leave their employers. Taken together, our findings suggest the existence of nonpecuniary job attributes offered by EOFs that might compensate for lower lifetime earnings.

    Keywords: Employee-Owned Firms, Careers, Wages, Job Mobility

    JEL Classification: J31, J50, J62