Showing papers by "National Bureau of Economic Research published in 1994"
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TL;DR: The authors describes the advantages of these studies and suggests how they can be improved and also provides aids in judging the validity of inferences they draw, such as multiple treatment and comparison groups and multiple pre- or post-intervention observations.
Abstract: Using research designs patterned after randomized experiments, many recent economic studies examine outcome measures for treatment groups and comparison groups that are not randomly assigned. By using variation in explanatory variables generated by changes in state laws, government draft mechanisms, or other means, these studies obtain variation that is readily examined and is plausibly exogenous. This paper describes the advantages of these studies and suggests how they can be improved. It also provides aids in judging the validity of inferences they draw. Design complications such as multiple treatment and comparison groups and multiple pre- or post-intervention observations are advocated.
7,222 citations
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TL;DR: In this paper, the authors investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries and find that factors identified by previous studies as important in determining the cross-section of the capital structure in the U.S. affect firm leverage in other countries as well.
Abstract: We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as important in determining the cross- section of capital structure in the U.S. affect firm leverage in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.
5,935 citations
TL;DR: This paper analyzed the relationship between economics and politics and concluded that inequality is conducive to the adoption of growth-retarding policies, and presented cross-country evidence consistent with it. But their analysis focused on how an economy's initial configuration of resources shapes the political struggle for income and wealth distribution, and how that, in turn, affects long run growth.
Abstract: A crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it. In this paper we analyze the relationship between the two. We focus on how an economy's initial configuration of resources shapes the political struggle for income and wealth distribution, and how that, in turn, affects long-run growth. Our main conclusion is that inequality is conducive to the adoption of growth-retarding policies. We derive this result from a simple political-economy model of growth, and present cross-country evidence consistent with it. The key feature of our model is that individuals differ in their relative factor endowments. We distinguish between two types of factors: an accumulated factor (called "capital") and a nonaccumulated factor (called "labor"). Growth is driven by the expansion of the capital stock, which is in turn determined by individual saving decisions. Long-run growth is endogenous, as the aggregate production function is taken to be linearly homogeneous in capital and (productive) government services taken together. The provision of government services is financed by a tax on capital. Because government services are productive, a "small" tax on
3,217 citations
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TL;DR: In this article, the fundamental role played by factor accumulation in explaining the extraordinary postwar growth of Hong Kong, Singapore, South Korea and Taiwan is discussed, and the authors show that participation rates, educational levels and investment rates have risen rapidly in all four economies, with non-agricultural and manufacturing employment growing one and a half to two times as fast as the aggregate working population.
Abstract: This paper documents the fundamental role played by factor accumulation in explaining the extraordinary postwar growth of Hong Kong, Singapore, South Korea and Taiwan. Participation rates, educational levels and (with the exception of Hong Kong) investment rates have risen rapidly in all four economies. In addition, there have been large intersectoral reallocations of labour, with (again, excepting Hong Kong) non-agricultural and manufacturing employment growing one and a half to two times as fast as the aggregate working population. Thus, while the growth of output per capita in these economies has averaged 6% to 7% per annum over the past two and a half decades, the growth of output per effective worker in the non- agricultural sector of these economies has been only 3% to 4% per annum. If one then allows for the doubling, tripling and even quadrupling of the investment to GDP ratio in these economies, one arrives at total factor productivity growth rates, both for the non- agricultural economy and for manufacturing in particular, which are well within the bounds of those experienced by the OECD and Latin American economies over equally long periods of time. While the growth of output and manufacturing exports in the newly industrializing economies of East Asia is virtually unprecedented, the growth of total factor productivity in these economies is not.
2,062 citations
TL;DR: This paper investigated the shift in demand away from unskilled and toward skilled labor in U.S. manufacturing over the 1980s and concluded that increased use of nonproduction workers is strongly correlated with investment in computers and in R&D.
Abstract: This paper investigates the shift in demand away from unskilled and toward skilled labor in U. S. manufacturing over the 1980s. Production labor-saving technological change is the chief explanation for this shift. That conclusion is based on three facts: (1) the shift is due mostly to increased use of skilled workers within the 450 industries in U. S. manufacturing rather than to a reallocation of employment between industries, as would be implied by a shift in product demand due to trade or to a defense buildup; (2) trade- and defense-demand are associated with only small employment reallocation effects; (3) increased use of nonproduction workers is strongly correlated with investment in computers and in R&D.
2,010 citations
TL;DR: This paper found that countries with higher volatility have lower growth and that government spending-induced volatility is negatively associated with growth even after controlling for both time and country-fixed effects, and that the addition of standard control variables strengthened the negative relationship.
Abstract: This paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations. In a sample of 92 countries as well as a sample of OECD countries, we find that countries with higher volatility have lower growth. The addition of standard control variables strengthens the negative relationship. We also find that government spending-induced volatility is negatively associated with growth even after controlling for both time- and country-fixed effects.
1,958 citations
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TL;DR: The advantages of using research designs patterned after randomized experiments and how they can be improved are described and aids in judging the validity of inferences they draw are provided.
Abstract: Using research designs patterned after randomized experiments, many recent economic studies examine outcome measures for treatment groups and comparison groups that are not randomly assigned. By using variation in explanatory variables generated by changes in state laws, government draft mechanisms, or other means, these studies obtain variation that is readily examined and is plausibly exogenous. This paper describes the advantages of these studies and suggests how they can be improved. It also provides aids in judging the validity of inferences they draw. Design complications such as multiple treatment and comparison groups and multiple pre- or post-intervention observations are advocated.
1,899 citations
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TL;DR: In this article, the authors developed asymptotic distribution theory for instrumental variable regression when the partial correlation between the instruments and a single included endogenous variable is weak, here modeled as local to zero.
Abstract: This paper develops asymptotic distribution theory for instrumental variable regression when the partial correlation between the instruments and a single included endogenous variable is weak, here modeled as local to zero. Asymptotic representations are provided for various instrumental variable statistics, including the two-stage least squares (TSLS) and limited information maximum- likelihood (LIML) estimators and their t-statistics. The asymptotic distributions are found to provide good approximations to sampling distributions with just 20 observations per instrument. Even in large samples, TSLS can be badly biased, but LIML is, in many cases, approximately median unbiased. The theory suggests concrete quantitative guidelines for applied work. These guidelines help to interpret Angrist and Krueger's (1991) estimates of the returns to education: whereas TSLS estimates with many instruments approach the OLS estimate of 6%, the more reliable LIML and TSLS estimates with fewer instruments fall between 8% and 10%, with a typical confidence interval of (6%, 14%).
1,739 citations
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TL;DR: This paper examined the investment strategies of 155 mutual funds over the 1975-84 period to determine the extent to which the funds purchased stocks based on their past returns, and determine the relation of this behavior to their observed portfolio performance.
Abstract: We examine the investment strategies of 155 mutual funds over the 1975-84 period to determine the extent to which the funds purchased stocks based on their past returns, and to determine the relation of this behavior to their observed portfolio performance We find that about 77% of these mutual funds were "momentum investors", buying stocks that were past winners; however, they did not systematically sell past losers On average, these "trend-followers" realized significantly better performance than the remaining funds We also find that the mutual funds exhibited herding behavior, and that the tendency of a fund to herd in its trades was strongly correlated with its tendency to buy past winners as well as with its portfolio performance Consistent with the evidence on trend-following, herding into past winners was stronger than herding into past losers
1,685 citations
TL;DR: In this article, the authors demonstrate empirically that the commercialization of this technology is essentially intertwined with the development of the underlying science in a way which illustrates the significance in practice of the localized spillovers concept in the agglomeration literature and of the tacit knowledge concept in information literature.
Abstract: The number of American firms actively using biotechnology grew rapidly from nonexistent to over 700 in less than two decades, transforming the nature of the pharmaceutical industry and significantly impacting food processing, brewing, and agriculture, as well as other industries. Here we demonstrate empirically that the commercialization of this technology is essentially intertwined with the development of the underlying science in a way which illustrates the significance in practice of the localized spillovers concept in the agglomeration literature and of the tacit knowledge concept in the information literature. Indeed we present here strong evidence that the timing and location of initial usage by both new dedicated biotechnology firms ("entrants") and new biotech subunits of existing firms ( "incumbents ") are primarily explained by the presence at a particular time and place of scientists who are actively contributing to the basic science as represented by publications reporting genetic-sequence discoveries in academic journals. By quantifying separable effects of individual scientists, major universities, and federal research support we provide specific structure to the role of universities and their faculties in encouraging local economic development
1,334 citations
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TL;DR: In this paper, an analysis of the predictability of the returns reveals that emerging market returns are more likely than developed countries to be influenced by local information and that low correlations with developed countries' equity markets significantly reduces the unconditional portfolio risk of a world investor.
Abstract: The emergence of new equity markets in Europe, Latin America, Asia, the Mideast and Africa provides a new menu of opportunities for investors. These markets exhibit high expected returns as well as high volatility. Importantly, the low correlations with developed countries' equity markets significantly reduces the unconditional portfolio risk of a world investor. However, standard global asset pricing models, which assume complete integration of capital markets, fail to explain the cross-section of average returns in emerging countries. An analysis of the predictability of the returns reveals that emerging market returns are more likely than developed countries to be influenced by local information.
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TL;DR: The authors used the Flow of Funds accounts to assess the impact of a monetary policy shock on the borrowing and lending activities of different sectors of the economy and found that contractionary monetary policy shocks are associated with a fall in nonborrowed reserves, total reserves, M1, the Federal Reserves' holdings of government securities and a rise in the federal funds rate.
Abstract: This paper uses the Flow of Funds accounts to assess the impact of a monetary policy shock on the borrowing and lending activities of different sectors of the economy. Our measures of contractionary monetary policy shocks have the following properties: (i) they are associated with a fall in nonborrowed reserves, total reserves, M1, the Federal Reserves' holdings of government securities and a rise in the federal funds rate, (ii) they lead to persistent declines in real GNP, employment, retail sales and nonfinancial corporate profits as well as increases in unemployment and manufacturing inventories, (iii) they generate sharp, persistent declines in commodity prices and (iv) the GDP price deflator does not respond to them for roughly a year. After that the GDP price deflator declines. Our major findings regarding the borrowing activities of different sectors can be summarized as follows. First, following a contractionary shock to monetary policy, net funds raised by the business sector increases for roughly a year. Thereafter, as the recession induced by the policy shock gains momentum, net funds raised by the business sector begins to fall. This pattern is not captured by existing monetary business cycle models. Second, we cannot reject the view that households do not adjust their financial assets and liabilities for several quarters after a monetary shock. This is consistent with a key assumption of several recent monetary business cycle models.
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TL;DR: In this article, the authors used disaggregated data on bank balance sheets to provide a test of the lending view of monetary policy transmission and showed that the loan and security portfolios of large and small banks respond differentially to a contraction in monetary policy.
Abstract: This paper uses disaggregated data on bank balance sheets to provide a test of the lending view of monetary policy transmission. We argue that if the lending view is correct, one should expect the loan and security portfolios of large and small banks to respond differentially to a contraction in monetary policy. We first develop this point with a theoretical model; we then test to see if the model's predictions are borne out in the data.
TL;DR: In this article, the authors proposed a method for computing tax rates using national accounts and revenue statistics. And they constructed time series of tax rates for large industrial countries, identifying the revenue raised by different taxes at the general government level and defining aggregate measures of the corresponding tax bases.
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TL;DR: In this article, the authors provide a framework for understanding the cross-section and time series approaches which have been used to test the convergence hypothesis and provide two definitions of convergence which capture the implications of the neoclassical growth model for the relationship between current and future cross-country output differences.
Abstract: This paper provides a framework for understanding the cross- section and time series approaches which have been used to test the convergence hypothesis First, we present two definitions of convergence which capture the implications of the neoclassical growth model for the relationship between current and future cross-country output differences Second, we identify how the cross-section and time series approaches relate to these definitions Cross-section tests are shown to be associated with a weaker notion of convergence than time series tests Third, we show how these alternative approaches make different assumptions on whether the data are well characterized by a limiting distribution As a result, the choice of an appropriate testing framework is shown to depend on both the specific null and alternative hypotheses under consideration as well as on the initial conditions characterizing the data being studied
TL;DR: The authors provides a critical look at recent empirical work in international trade theory and addresses the issue of why empirical work has perhaps not been as influential as it could have been, and also provides several suggestions on directions for future empirical research in International Trade.
Abstract: This paper provides a critical look at recent empirical work in international trade theory. The paper addresses the issue of why empirical work in international trade has perhaps not been as influential as it could have been. The paper also provides several suggestions on directions for future empirical research in international trade.
TL;DR: In this article, a long literature since Feldstein and Horioka's seminal contribution documents the strong correlation of domestic saving and investment rates since the 1960s, and the result provides evidence of international capital market imperfections.
Abstract: A long literature since Feldstein and Horioka's seminal contribution documents the strong correlation of domestic saving and investment rates since the 1960s. According to conventional wisdom, the result provides evidence of international capital market imperfections. The macroeconomic theory of small open economies prescribes a relationship between the composition of aggregate demand and its relative price structure, a linkage hitherto ignored in the saving-investment literature. Theory and evidence also suggest a role for growth and demographic effects, well known in previous studies. If one controls for these effects, the standard correlation of saving and investment disappears. International capital markets may be better integrated than once thought, and the former correlations may have been spurious. The pattern of domestic investment rates is better explained by domestic price distortions and other variables than by domestic saving constraints.
TL;DR: In this paper, the authors investigated the link between the ethnic externality and ethnic neighborhoods and found that residential segregation and the external effect of ethnicity are linked, partly because ethnic capital summarizes the socioeconomic background of the neighborhood where the children were raised.
Abstract: The socioeconomic performance of today's workers depends not only on parental skills, but also on the average skills of the ethnic group in the parent's generation (or ethnic capital). This paper investigates the link between the ethnic externality and ethnic neighborhoods. The evidence indicates that residential segregation and the external effect of ethnicity are linked, partly because ethnic capital summarizes the socioeconomic background of the neighborhood where the children were raised. Ethnicity has an external effect, even among persons who grow up in the same neighborhood, when children are exposed frequently to persons who share the same ethnic background.
TL;DR: The authors examined micro data on U.S. manufacturing firms' inventory behavior during different macroeconomic episodes and found that the inventory investment of firms without access to public bond markets is significantly liquidity-constrained during this period.
Abstract: This paper examines micro data on U. S. manufacturing firms' inventory behavior during different macroeconomic episodes. Much of the analysis focuses on the 1981–1982 recession, which was apparently caused in large part by tight monetary policy. We find that the inventory investment of firms without access to public bond markets is significantly liquidity-constrained during this period. A similar pattern emerges during the 1974–1975 recession, in which tight money also appears to have played a role. In contrast, such liquidity constraints are largely absent during periods of looser monetary policy in the 1970s and 1980s.
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TL;DR: The available evidence suggests that the economic benefits from immigration for the United States are small, on the order of $6 billion and almost certainly less than $20 billion annually.
Abstract: Natives benefit from immigration mainly because of production complementarities between immigrant workers and other factors of production, and these benefits are larger when immigrants are sufficiently `different' from the stock of native productive inputs. The available evidence suggests that the economic benefits from immigration for the United States are small, on the order of $6 billion and almost certainly less than $20 billion annually. These gains, however, could be increased considerably if the United States pursued an immigration policy which attracted a more skilled immigrant flow.
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TL;DR: In this article, the authors investigated empirically and attempt to identify the sources of real exchange rate fluctuations since the collapse of Bretton Woods and found that demand shocks, to national saving and investment, explain the majority of the variance in real exchange-rate fluctuations, while supply shocks explain very little.
Abstract: This paper investigates empirically and attempts to identify the sources of real exchange rate fluctuations since the collapse of Bretton Woods. The paper's first two sections survey and extend earlier, non-structural empirical work on this subject by Campbell and Clarida (1987), Meese and Rogoff (1988), and Cumby and Huizinga (1990). The paper's main contribution is to build and estimate a three equation open macro model in the spirit of Dornbusch (1976) and Obstfeld (1985) and to identify the model's structural shocks - to demand, supply, and money -using the approach pioneered by Blanchard and Quah (1989). For two of the four countries we study, Germany and Japan, our structural estimates imply that monetary shocks, to money supply as well as to the demand for real money balances, explain a substantial amount of the variance of real exchange rates relative to the dollar. We find that demand shocks, to national saving and investment, explain the majority of the variance in real exchange rate fluctuations, while supply shocks explain very little. The model's estimated short run dynamics are strikingly consistent with the predictions of the simple textbook Mundell-Fleming model.
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TL;DR: In this paper, an experiment was performed to assess the prevalence of instability in univariate and bivariate macroeconomic time series relations and to ascertain whether various adaptive forecasting techniques successfully handle any such instability.
Abstract: An experiment is performed to assess the prevalence of instability in univariate and bivariate macroeconomic time series relations and to ascertain whether various adaptive forecasting techniques successfully handle any such instability. Formal tests for instability and out-of-sample forecasts from sixteen different models are computed using a sample of 76 representative U.S. monthly postwar macroeconomic time series, constituting 5700 bivariate forecasting relations. The tests indicate widespread instability in univariate and bivariate autoregressive models. However, adaptive forecasting models, in particular time varying parameter models, have limited success in exploiting this instability to improve upon fixed-parameter or recursive autoregressive forecasts.
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TL;DR: In this article, the prevalence of Silicon Valley-style localizations of individual manufacturing industries in the United States was discussed and several models in which firms choose locations by throwing darts at a map were used to test whether the degree of localization is greater than would be expected to arise randomly and motivate a new index of geographic concentration.
Abstract: This paper discusses the prevalence of Silicon Valley-style localizations of individual manufacturing industries in the United States. Several models in which firms choose locations by throwing darts at a map are used to test whether the degree of localization is greater than would be expected to arise randomly and to motivate a new index of geographic concentration. The proposed index controls for differences in the size distribution of plants and for differences in the size of the geographic areas for which data is available. As a consequence, comparisons of the degree of geographic concentration across industries can be made with more confidence. We reaffirm previous observations in finding that almost all industries are localized, although the degree of localization appears to be slight in about half of the industries in our sample. We explore the nature of agglomerative forces in describing patterns of concentration, the geographic scope of localization, and the extent to which agglomerations involve plants in similar as opposed to identical industries.
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TL;DR: In this article, the effect of foreign direct investment on economic growth in a cross-country regression framework, utilizing data on FDI flows from industrial countries to 69 developing countries over the last two decades.
Abstract: We test the effect of foreign direct investment (FDI) on economic growth in a cross-country regression framework, utilizing data on FDI flows from industrial countries to 69 developing countries over the last two decades. Our results suggest that FDI is an important vehicle for the transfer of technology, contributing relatively more to growth than domestic investment. However, the higher productivity of FDI holds only when the host country has a minimum threshold stock of human capital. In addition, FDI has the effect of increasing total investment in the economy more than one for one, which suggests the predominance of complementarity effects with domestic firms.
TL;DR: In this article, a framework for analyzing the costs and benefits of internal versus external capital allocation is presented, focusing pritnarily on comparing an internal capital market with bank lending.
Abstract: This paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation We focus pritnarily on comparing an internal capital market with bank lending While both represent centralized forms of financing, in the former case the financing is owner-provided, while in the latter ceise it is not We argue that the ownership aspect of internal capital allocation has three important consequences: (1) it leads to more monitoring than bank lending; (2) it reduces managers' entrepreneurial incentives; and (3) it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management
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TL;DR: This paper examined three rationales for the syndication of venture capital investments, using a sample of 271 private biotechnology firms, and argued that the results are consistent with the proposed explanations.
Abstract: This paper examines three rationales for the syndication of venture capital investments, using a sample of 271 private biotechnology firms Syndication is commonplace, even in the first-round investments Experienced venture capitalists primarily syndicate first-round investments to venture investors with similar levels of experience In later rounds, established venture capitalists syndicate investments to both their peers and to less experienced capita) providers When experienced venture capitalists invest for the first time in later rounds, the firm is usually doing well Syndication also often insures that the ownership stake of the venture capitalist stays constant in later venture rounds I argue that the results are consistent with the proposed explanations
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TL;DR: This paper examined the effect of easier choice among public schools using exogenous variation in the concentration of public school districts in metropolitan areas measured by a Herfindahl index on enrollment shares and found evidence that easier choice leads to greater productivity.
Abstract: Many school choice proposals would enable parents to choose among public school districts in their area, though not among private schools. Theory predicts three reactions to easier choice among public schools: increased sorting of students and parents among schools; easier choice will encourage competition among schools, forcing them into higher productivity (better student performance per input); easier choice among public schools will give parents less incentive to send their children to private schools. I examine easing choice among public schools using exogenous variation in the concentration of public school districts in metropolitan areas measured by a Herfindahl index on enrollment shares. The exogenous variation is generated by topography: I derive instruments for concentration from natural boundaries (rivers) that partially determine district size. I find evidence that easier choice leads to greater productivity. Areas with greater opportunities for choice among public schools have lower per-pupil spending, lower teacher salaries, and larger classes. The same areas have better average student performance, as measured by students' educational attainment, wages, and test scores. Performance improvements are concentrated among white non-Hispanics, males, and students who have a parent with at least a high school degree. However, student performance is not worse among Hispanics,African-Americans, females, or students who do not have a parent with a high school degree.Also, student performance improves at both ends of the educational attainment distribution and test score distribution.
TL;DR: The authors analyzed the ways in which financially distressed firms try to avoid bankruptcy through public and private debt restructurings, asset sales, mergers, and capital expenditure reductions, and found that the combination of secured private debt and numerous public debt issues seems to impede out-of-court restructures and increases the probability of a Chapter 11 filing.
Abstract: This paper analyzes the ways in which financially distressed firms try to avoid bankruptcy through public and private debt restructurings, asset sales, mergers, and capital expenditure reductions. Our main finding is that a firm's debt structure affects the way financially distressed firms restructure. The combination of secured private debt and numerous public debt issues seems to impede out-of-court restructurings and increases the probability of a Chapter 11 filing. In addition, we find that, while asset sales are a way of avoiding Chapter 11, they are limited by industry factors: firms in distressed and highly leveraged industries are less prone to sell assets.
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TL;DR: In this paper, the authors explore why the change takes place and why the þ-shape is traced out of the labor force participation rate of married women in the United States, finding that the initial decline in the participation rate is due to the movement of production from the household, family farm and small business to the wider market, and to a strong income effect.
Abstract: The labor force participation rate of married women first declines and then rises as countries develop. Its þ-shape is revealed both across the process of economic development and through the histories of currently advanced countries. The initial decline in the participation rate is due to the movement of production from the household, family farm, and small business to the wider market, and to a strong income effect. But the income effect weakens and the substitution effect strengthens at some point. This paper explores why the change takes place and why the þ-shape is traced out. When women are poorly educated their only wage labor outside the home and family is in manual work, against which a strong social stigma exists. But when women are educated, particularly at the secondary level, they enter white-collar work, against which no social stigma exists. Data for more than one-hundred countries and for United States history are used to explore the hypothesis of the þ-shaped female labor force function.
TL;DR: In this paper, the authors develop a framework for thinking about the "paradox" of very gradual diffusion of apparently cost-effective energy-conservation technologies, focusing on the factors that cause this to be the case, including those associated with potential market failures, information problems, principal/agent slippage, and unobserved costs.