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In an effort to determine how much entrepreneurs matter, UK economists Sascha Becker and Hans Hvide sifted through data on Norwegian companies (apparently Norway keeps the most detailed records on businesses) and looked at the performance of firms after the death of their founders. They then compared that with the performance of "twin" companies that had not lost their founder. The companies that lost their founders had a 20% lower survival rate. Becker and Hvide share some of the results at Vox : We expected businesses that experienced the death of a founder-entrepreneur to have some kind of a dip in performance immediately after the death owing to the upheaval, but we anticipated there would be a bounce back. However, the results were quite surprising. Even four years after the death, most firms show no sign of recovering and the negative effect on performance appears to continue even further beyond that, as illustrated by the figure. A simple explanation for our findings could be reverse causality: poor firm performance leads to entrepreneurs having a higher probability of dying. To deal with this possibility, we look at whether there are pre-treatment differences between treated and matched controls. We do not find evidence of pre-treatment effects, as illustrated by the figure. This suggests that reverse causality is not a major force behind our findings. For how long in a firm's life does the entrepreneur matter? The very youngest companies suffered most after the founder’s death, but significant effects were still felt by companies that were up to ten years old. The degree of ownership the founder had retained matters. The death of a founder with a 50% stake had about half the impact of losing a founder who had retained a majority shareholding. The level of formal education of the founder also showed a strong correlation with the damage that person’s death could have. Those with the most highly educated founders experienced the largest drops in sales performance after the founder’s death. There was no difference between the results for family and non-family companies, between rural and urban businesses, or when comparisons were made between different sectors. It could simply be that the founder was a fantastic sales person who generated a disproportionately high level of sales. On the other hand, it could be down to a leadership effect, where the founder-entrepreneur inspires the employees to perform as best they can and without the presence, that drive slips away. Possibly, entrepreneur death induces a voluntary shutdown by heirs of unprofitable firms that provided the entrepreneur with private benefits, so that there is no social loss. Using quantile regressions, we find strong negative effects of entrepreneur death on sales and assets also among successful firms. The bankruptcy code in Norway is similar to Chapter 7 in the US bankruptcy code, i.e., bankruptcy is associated with creditors taking control and is not 'voluntary' as in Chapter 11 in the US bankruptcy code. We find that firms where the entrepreneur dies have twice the probability of going bankrupt. This, again, is evidence supporting that entrepreneurs create value. Read Do entrepreneurs matter? here .

At Vox , Peter Termin and David Vines argue that policymakers need to spend a little time on economic history for guidance on how to best manage the global economic challenges they now face. The lessons to take from global economic growth over the last 200 years, they say, are that international cooperation is key, and that it is best to deal with unemployment first and deficits second. But the most important step seems to be to recognize that we are going through a period of transition. In our recent book (Temin and Vines 2013), we argue that the transition from British to American hegemony was not made quickly or easily. Britain was exhausted by the war, Germany was burdened by reparations. Even though the US intervention was critical to Allied success in World War I, the US abandoned its European interests after the war. War debts led to hyperinflations in the early 1920s and this was followed by an interim period of lending to Germany in the mid 1920s and some consequent recovery. But the reparations problem had not been solved. The departure of Germany from the gold standard in the currency crisis of 1931, followed by Britain’s exit, and then by tight policies in the US, ultimately led to the Great Depression in the 1930s. The absence of a hegemon to restore cooperation and prosperity was all too evident. Massive unemployment persisted, only ending with the beginning of World War II. We are now in a similar transition. The US squandered its leadership with two elective wars and massive tax cuts, and with low interest rates and a property boom. Countries normally raise taxes to fight wars, although seldom far enough to avoid inflation. The US went in the opposite direction, under the idea that ‘deficits don’t matter’, at the same time as tolerating a property boom, simply because inflation did not rise. Since the boom collapsed, Americans have been left wondering how to deal with their resulting fiscal debts. Europeans started this century not with new wars, but a new currency. As a result, Germany has squandered its leadership within Europe, because the architecture of the new currency union was flawed. The idea was that international capital flows would become internal capital flows and, because of this, would cease to be an object of worry. We now know that this was wrong. The money which northern European banks lent to southern peripheral countries in Europe led to a boom there, as well as rising costs. And the money was not well used; it supported speculative property booms and consumption, rather than investment in productive tradable good industries. All went well during the ‘Great Moderation’ – the reduction in the volatility of business cycle fluctuations starting in the mid-1980s – but the system broke down during the Global Crisis. The money which banks lent to countries in the European periphery ended up as fiscal debts (once the banks had been rescued), and some of these fiscal debts have since became the obligations of the ECB. It is not clear within the Eurozone which countries will end up being responsible for resolving these fiscal debts. Read The leaderless economy: Can economic history suggest lessons here .

At Vox , Amit Khandelwal , Peter K. Schott , and Shang-Jin Wei argue that the benefits of opening up trade are often greater than expected because the elimination of some institutions may remove "corrupt customs agents, bureaucratic red tape and the withholding of goods in bonded warehouses." In their post, they look at the example of textiles coming from China following the abolishment of quotas in 2005: Figure 1 displays the growth of constrained versus unconstrained Chinese apparel and textile exports from 2000 to 2005. As illustrated in the figure, the removal of quotas in 2005 led to a substantially larger increase in the growth of previously bound products versus products that were exported quota free. Examining the sources of this relative growth can reveal a great deal about whether or not the Chinese government allocated quotas efficiently. In theory, an efficient quota-licensing regime, like an auction, establishes a per-unit fee that equates the supply and demand for quota. This fee induces self-selection based on productivity, as only the most productive firms earn profits in the export market net of the licensing fee. Consequently, removal of efficiently allocated quotas has three observable effects. First, it causes the exports of the most productive incumbents to jump relative to those of less productive incumbents. Second, it allows less productive firms to profitably enter the export market. Finally, entrants and incumbents have opposing effects on export prices. Removal of the licence fee pushes incumbents’ prices down, while entry by relatively less productive exporters pushes prices up. The key prediction is that export growth and price declines are dominated by incumbents. In fact, we find that the post-quota export growth and price declines of quota-bound versus quota-free goods are dominated by entrants rather than incumbents. Furthermore, we show that the entrants behind this trend are primarily privately owned domestic and foreign firms, and that their growth comes at the expense of state-owned enterprises, who are on average nearly a third less productive than their private-sector counterparts. Additional evidence of misallocation comes from the fact that nearly two-thirds of the price decline observed in the year quotas are removed is due to entrants rather than incumbents. These trends provide strong evidence against the hypothesis that quota licences were allocated on the basis of firm efficiency. Based on a coarse measure of productivity differences across ownership types, the observed reallocations of market share in quota-bound exports imply that industry productivity increased 21% when quotas were removed. This productivity increase is a combination of the distortion caused by the quotas and the distortion caused misallocated quota licences. To estimate the relative contribution of removing misallocation versus the actual quota, we compare numerical solutions of the efficient export-licensing model noted above to a counterfactual calibrated to match the importance of entry that we see in the data. We find that 71% of the overall gain in productivity from removing quotas is due to the elimination of quota misallocation versus 29% for the removal of the quota itself. Our estimates suggest that simply replacing the government's actual licensing institution with an auction would raise industry productivity by 15 percentage points. This implies a sizeable drag on aggregate productivity due to misallocation. Read Trade liberalisation and embedded institutional reform: Evidence from Chinese exporters here .

Over the last half century, wealth in the US "fluctuated substantially," as shown by CREI researchers Vasco Carvalho , Alberto Martin , and Jaume Ventura at Vox : Carvalho, Martin, and Ventura were struck by the rapid rise in wealth we see in the mid-1990s and 199-2006. "Unprecedented" bubbles, that then popped. At first sight, the notion that part of wealth is a bubble or a pyramid scheme might seem quite abstract or exotic. But it is easy to find real-world situations that correspond fairly well to this concept. Consider, for instance, the stock of a firm that is traded at a price that exceeds its fundamental, i.e. the net present value of the dividends that this stock will generate. This ‘overvalued’ price might be part of an equilibrium if buyers rationally expect to sell these stocks in the future at a price that also exceeds the fundamental. Consider, alternatively, credit given to a firm in excess of the net present value of the cash flows that this firm will generate. This ‘excessive’ credit might be part of an equilibrium if creditors rationally expect that the firm will be able to raise enough credit in the future to repay them. Overvalued stock prices and excessive credit can be therefore be interpreted as bubbles or pyramid schemes, that is, as voluntary contributions to the firm's financing that give the right to the next voluntary contribution. Once we think in these terms, the concept of a bubble ceases to be abstract or exotic and it becomes quite mundane. Indeed, it seems to capture the type of real-world behaviour that our macroeconomic models should be generating as an equilibrium phenomenon. Still, standard macroeconomic models largely ignore the possibility of bubbles and try to explain all fluctuations in wealth as a result of fluctuations in the fundamental. We show the limitations of this approach by performing a simple calculation of this fundamental. To do this, we measure the cash flows that US productive assets generate as capital income, net of taxes and investment. We then compute the expected present discounted value of these cash-flows by following Robert J Shiller (2005) in making two assumptions: (i) the expected rate of return is constant for all time horizon, and it is well approximated by the average real return on wealth over the 1950-2010 period; and (ii) out-of-sample cash-flows grow at a constant rate - given by the historical average of their real growth rate - and we resort to perfect foresight for within-sample cash-flows. This procedure generates an estimate of the fundamental that is plotted as the circled line in Figure 1. Read Understanding bubbly episodes here .

Some leading European economists are arguing that the euro zone needs a strong banking union in order to bring about a sustained recovery and a "stable financial architecture" throughout the EU. 100+ German, Austrian, and Swiss economists have now released a manifesto stating the case for establishing a unified European banking structure "to break the link between the funding of private banks and the public purse." Here is an excerpt, from VoxEU : In the course of the crisis, fiscal budgets are being tapped to refinance systemically relevant financial institutions. At the same time, financial institutions continue to play a central role in financing national governments, lending money to them and holding their debt. An unavoidable consequence is that bank failures have led to sovereign debt crises and sovereign debt crises have led to banking crises, leading to growing mistrust of both national banking systems and government finance. The situation is aggravated by the fact that international investors, driven by fear of total collapse, have withdrawn funding to struggling countries, both for governments and for banks. This has in turn led to a balkanisation of national financial markets and threatens not only the European monetary union but the European integration project as a whole. Only by breaking the link between the refinancing of banks and the solvency of national governments will it be possible to stabilise the supply of credit in crisis countries. If the refinancing of banks – and the insurance of bank deposits – can be made independent of the financial state of the respective domiciling country, national sovereign crises can be decoupled from the private sector financing. In this way, contractionary demand shocks induced by corrective national fiscal policy can be softened by a broadening of the supply of credit. A European backbone to the refinancing of banks will dampen the impact of the coming fiscal consolidation. An indispensable requirement for this is a set of uniform regulatory banking standards which are implemented by a single European authority. Deeper financial integration and a de-coupling of government and banking finance are essential elements for a more stable financial architecture in Europe. These steps are important for breaking the vicious circle between sovereign debt and banking crises. A monetary union with free capital flows cannot work reasonably without a unified banking framework. For this reason, the decisions of the last EU summit represent a move in the right direction. Now it is crucial to implement these decisions, in order to create a durable solution with uniform European structures. You can read the original manifesto, in German, here . For an English translation, click here .

At VoxEU , economists Christian Hott and Terhi Jokipii have a rather concise analysis of how low interest rates spur housing bubbles. The conclusion is not surprising, but it is useful to have the case laid out so neatly. Hott and Jokipii compare actual housing prices with "fundamental housing prices" across 14 countries. And it is striking just how much the price levels deviate. Take a look at what they found for six countries: Read about the authors' conclusions and methodology here .

At VoxEU , Mathias Hoffmann , of the University of Zurich, and Iryna Stewen , of the University of Mainz, argue that moves to separate banks along national lines could have the opposite effect of that desired by policy-makers. That is, Hoffman and Stewen argue for more integration, not less. They use a simple graph to illustrate the relationship between bank liberalization and uninsured risk. The blue line represents banks that had not been liberalized at the time of the recession. The red line represents banks that had been liberalized. Hoffman and Stewen: Interestingly, the co-movement between interstate risk-sharing and the US-wide business cycle started to weaken during the 1980s, which is the period during which banking liberalisation at the state level got into full swing (in fact, the correlation between the blue line and the red, dashed line in Figure 1 is -0.44 before 1984 and only -0.13 thereafter). We show that it is indeed the liberalisation of state bank branching restrictions that is responsible for this weakening. The role of banking liberalisation for risk-sharing is illustrated in Figure 2, which presents the extent of interstate risk-sharing that a state typically achieves in the years around a typical NBER business cycle trough. In Figure 2, we distinguish between two groups of states: Those that had already liberalised in a given recession (red dashed) and those that had not yet liberalised (blue solid line). The message is clear – for the states that had not liberalised, consumption risk–sharing with other states drops sharply (the fraction of unshared risk goes up in the picture) in a recession, only to recover to 'normal' levels a year after. For the states that have already liberalised during the recession, the extent of risk-sharing with the US as a whole remains stable. In the paper, we then also show that these improvements in risk-sharing overall are actually driven by better access to credit markets (and not some other channel of smoothing or risk-sharing). We believe that these results point towards an important benefit from banking liberalisation: Financial integration facilitates access to finance mainly when it is most urgently needed – during aggregate downturns. Read Recessions and small business access to credit: Lessons for Europe from interstate banking deregulation in the US here .