Referee home bias

Referees are supposed to be impartial. In academics, this is most of the time helped by the fact that they are anonymous. In sports, referees are public and meeting participants, including spectators, try to influence them. This becomes particularly relevant when the referee has to take a decision against the home team than leaves spectators irate. They could retaliate against him. Does this influence referees?


Andrés Picazo-Tadeo, Francisco Gónzalez-Gómez and Jorge Guardiola Wanden-Berghe look at first division football in Spain, carefully taking into account stadium capacity, how full it is, how far spectators are from the pitch, and referee experience. They find that awarding a free kick does not have a home bias, which is consistent with the fact that this is a split-second decision. The ensuing decision to give the offending player a caution is, however, affected by home bias. This decision is not instantaneous, and social pressure can be exerted on the referee, especially when the stadium is full. The presence of a running track that separates the local supporters form the action does not seem to matter, though. I wonder whether some teams have a larger home bias than others, as the fans' reputation could also influence referees.

Spain: how to mess with the labor market

Spain has long been a puzzle because of its abnormally high employment rate, in particular among the young. But things seem to have rectified themselves somewhat since Spain got more integrated into the European market, which unemployment rates comparable to France. But the last recession turned out to be a disaster, with the unemployment rate increasing by 11% points, compared to 2% points in France. What is wrong with Spain? For one, there was a spectacular drop in activity in th construction sector, which initially accounted for a sixth of GDP and was basically divided by six.

Samuel Bentolila, Pierre Cahuc, Juan Dolado and Thomas Le Barbanchon claim that there is also a serious issue with labor market institutions. While both France and Spain have extensive employment protection legislation, and severance pay is formally higher in France, Spain requires, for example, administrative approval for collective dismissals of over 10% of the workforce. Such approval can only be obtained by collective bargaining and much higher severance pay. While severance pay is usually not problematic (it is accounted for in wages), it is the red-tape associated with this and the hoops firms that firms need to go through to dismiss that become economically relevant, because these are transfers that captured by a third party: administration. This makes it then very costly to hire someone, given expected firing costs, and especially so in uncertain times.

Using a search and matching model, Bentolila, Cahuc, Dolado and Le Barbanchon find that the unemployment gap between France and Spain would have been reduced by 45% had Spain adopted French labor market institutions. And I surmise it would be much more with other laws, as France has quite high employment protection in international comparison. No wonder that Spain recently scrapped much of its employment protection regulation in the midst of a deep recession, which may sound counter-intuitive at first. But if you want firms to hire in a recession, they should not have to commit for long-term employment.

The falling college premium in Spain

The college premium, the difference between the wage of a worker with a college degree and one without, has been steadily increasing in the United States despite a large increase in the proportion of college graduates in the population. And the US college premium is substantial, more than 70% nowadays. The standard explanation is that this is due to an even larger increase in the demand for college graduates on the labor market. It appears that this experience cannot be generalized.

Florentino Felgueroso, Manuel Hidalgo and Sergi Jiménez-Martín show that the college premium in Spain has actually been decreasing, especially for males, and is at about 70% to 95%, depending on the definition. Why is this evolution so different from the United States? First, there seems to be a much more prevalent mismatch between skills and occupations. Higher education in Spain is much more specialized, which is a disadvantage when you cannot find a job in your specialization. This would indicate the drop in the college premium is a composition effect. But the premium also decreased for well-matched workers. Second, job rotation has increased and temporary jobs have become more prevalent. Shorter experience in a sector depresses wages, and this evolution seems to have been particularly strong for educated workers.

Interestingly, it appears that this trend started with the last major labor market reform in Spain, when employment subsidies were introduced along with employment promotion contracts that are supposed to reduce unemployment among the young but came with the cost of a surge in temporary contracts. Shorter tenures are not necessarily bad, especially when firing costs are too high, and a neither is a decline in the college premium. But one would have expected the US story to be even more true in Spain, as industry adapts faster than workers and its fast modernization would have outpaced the supply of skills from the workforce. Apparently not with those particular labor market reforms.

Lending to the borrower from hell

As usual, there were quite a few good papers (and some bad ones) at the ASSA meetings in San Francisco. Over the next days, I will write about some of them. Note that if you presented a paper and do not have some version up on the web, I will not write about it.

People puzzle these days why banks could have been so stupid to lend so much to risky borrowers. This is not the first time this happens, witness how Argentina could quickly borrow again after each of its numerous defaults. But the risk taking by banks seems much larger than previous seen. Not so. Mauricio Drelichman and Hans-Joachim Voth report on the proverbial borrower from hell, Phillip II of Spain, who accumulated debt up to 50% of his country's GDP and defaulted several times. Why was he still getting loans?

The obvious answer is that he is the king and can offer non-monetary rewards to lenders, such as not getting killed. Or that bankers were irrational, or that the king effectively used his monopoly situation to play the bankers against each other. Not so claim Drelichman and Voth after looking carefully at a large number of lending contracts. In particular, the bankers appear to have formed a very effective coalition through joint lending, cross-posting of collateral and inter-marriage. Whenever the king stopped to pay, he was unable to get any additional funds, as no bank was willing to break ranks. And this had a severe impact on the king as he typically faced large revenue and expense shocks. So he eventually had to settle with the banks, the latter essentially dictating the conditions.

Does this relate to the current situation? Not really, as the Spanish case illustrates a bilateral monopoly game with a weak player (the king). Today, we have a very competitive environment, where banks have been trying to undercut each other and may have overstretched themselves. But one lesson I learned from this paper is that aggregate data may be quite misleading, there is virtue in looking at the detail, the lending contracts in this case.