In the News and Journals

A Closer Look at Unemployment

SufiAn unusually high unemployment persists in the United States, economists and policy makers have yet to agree on the reason for the steep job losses. Amir Sufi, professor of finance, along with a colleague at University of California, Berkeley, offered an explantation in their February 2012 paper, "What Explains High Unemployment? The Aggregate Demand Channel," published in the National Bureau of Economic Research working paper series.

Examining data from 2007 to 2009, the authors estimated that 65 percent, or 4 million of the 6.2 million job losses, were due to a decline in aggregate demand because of balance sheet stresses to highly indebted households. A main implication of the aggregate demand hypothesis is that demand shocks in a given location should reduce employment in nontradable sectors such as local restaurants and retail, but would also reduce employment across the United States in industries producing tradable goods.

"For example, when Californians cut back on consumption significantly more than Texans, the nontradable sector in California loses more jobs than the nontradable sector in Texas," the authors wrote. "However, because Californians buy tradable goods produced throughout the country, job losses in the tradable sector will be distributed evenly across all counties, including those in Texas."

The study was cited in an April New York Times article, which also noted that the work of Professor Sufi and his colleagues appeared in the most recent annual Economic Report of the President. - Andrew Daglas

Photo by Jason Smith


It Helps to Have Money to File for Bankruptcy

NotowidigdoThe Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed in 2005 in an effort to reduce the growing number of bankruptcy filings over the past 30 years. The BAPCPA instituted a series of requirements to file bankruptcy, such as "undergoing mandatory credit counseling at [the filer's own] expense." Additionally, the act raised the legal and administrative fees required to declare bankruptcy.

Matthew Notowidigdo, Neubauer Family Assistant Professor of Economics, and colleagues from Columbia University and Washington University in St. Louis, wrote a working paper for the National Bureau of Economic Research studying these barriers to entry. In the paper, "Liquidity Constraints and and Consumer Bankruptcy: Evidence from Tax Rebates," they discuss how these new requirements likely prevented households with lower incomes and fewer assets from filing for bankruptcy. To prove their point, they research what effect a sudden increase in "liquidity," specifically the tax rebates in 2001 and 2008, might have on bankruptcy filings.

Their research found that the 2001 and 2008 tax rebates resulted in a short-term increase in consumer bankruptcies that lasted almost four weeks after the rebate checks were issued: "Total bankruptcies increased by a total of 2 percent after the 2001 rebates, and by 7 percent after the 2008 rebates."

The bankruptcies were almost all Chapter 7 filings consisting of "liquidity constrained" filers. Since Chapter 7 bankruptcy requires legal fees to be paid prior to filing, it's no coincidence the issuance of tax rebates was followed by a sudden increase in the number of bankruptcy filings. - Kalliope Dimitrakopoulos

Photo by Chris Lake


The Power of a Label

PontikesA hard-to-classify business may confound consumers, but it also can attract investors, according to a new study by Elizabeth Pontikes, associate professor of organizations and strategy and Neubauer Family Faculty Fellow. In her paper, "Two Sides of the Same Coin: How Ambiguous Classification Affects Multiple Audiences' Evaluations," published in the March 2012 issue of Administrative Science Quarterly, Pontikes examines how software companies classify themselves in press releases. Some companies use one clear label such as "videoconferencing software." Others categorize themselves with multiple, ill-defined labels ("knowledge management" and "enterprise software").

Pontike finds that companies with ill-defined labels tend to bring in less revenue from consumers, because consumers find ambiguous labels off-putting. On the other hand, such labels tend to attract more funding from venture capitalists, because investors find ambiguous labels enticing. After all, many groundbreaking technologies defy existing categories. The iPad wasn't exactly a computer, a phone, or media device, but it redefined the concept of "tablet computing." As Pontikes writes, "for market makers, defying the existing system is actually appealing." - Dan Kedmey

Last Updated 10/4/12