Showing papers in "Journal of Political Economy in 2001"
TL;DR: In this paper, a bank with a fragile capital structure, subject to runs, is identified as a potential source of illiquidity in a bank relationship lender, where the relationship lender may demand to liquidate early or require a return premium when she lends directly.
Abstract: Loans are illiquid when a lender needs relationship‐specific skills to collect them. Consequently, if the relationship lender needs funds before the loan matures, she may demand to liquidate early, or require a return premium, when she lends directly. Borrowers also risk losing funding. The costs of illiquidity are avoided if the relationship lender is a bank with a fragile capital structure, subject to runs. Fragility commits banks to creating liquidity, enabling depositors to withdraw when needed, while buffering borrowers from depositors' liquidity needs. Stabilization policies, such as capital requirements, narrow banking, and suspension of convertibility, may reduce liquidity creation.
1,331 citations
TL;DR: This article applied a geographic lens to mutual fund performance and found that fund managers earn substantial abnormal returns in nearby investments These returns are particularly strong among funds that are small and old, focus on few holdings, and operate out of remote areas.
Abstract: Applying a geographic lens to mutual fund performance, this study finds that fund managers earn substantial abnormal returns in nearby investments These returns are particularly strong among funds that are small and old, focus on few holdings, and operate out of remote areas Furthermore, we find that while the average fund exhibits only a modest bias toward local stocks, certain funds strongly bias their holdings locally and exhibit even greater local performance Finally, we demonstrate that the extent to which a firm is held by nearby investors is positively related to its future expected return Our results suggest that investors trade local securities at an informational advantage and point toward a link between such trading and asset prices
1,318 citations
TL;DR: This paper explored the ability of conditional versions of the CAPM and the consumption CAPM to explain the cross section of average stock returns and showed that such conditional models perform far better than unconditional specifications and about as well as the Fama-French three-factor model on portfolios sorted by size and book-to-market characteristics.
Abstract: This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditional models perform far better than unconditional specifications and about as well as the Fama‐French three‐factor model on portfolios sorted by size and book‐to‐market characteristics. The conditional consumption CAPM can account for the difference in returns between low‐book‐to‐market and high‐book‐to‐market portfolios and exhibits little evidence of residual size or book‐to‐market effects.
1,095 citations
TL;DR: The authors found that the long-run factors associated with parental background and family environment, and not credit constraints facing prospective students in the college-going years, account for most of the racial and ethnic disparities in college attendance.
Abstract: This paper estimates a dynamic model of schooling attainment to investigate the sources of racial and ethnic disparity in college attendance. Parental income in the child’s adolescent years is a strong predictor of this disparity. This is widely interpreted to mean that credit constraints facing families during the college‐going years are important. Using NLSY data, we find that it is the long‐run factors associated with parental background and family environment, and not credit constraints facing prospective students in the college‐going years, that account for most of the racial‐ethnic college‐going differential. Policies aimed at improving these long‐term family and environmental factors are more likely to be successful in eliminating college attendance differentials than short‐term tuition reduction and family income supplement policies aimed at families with college age children.
1,004 citations
TL;DR: This paper used survey data to investigate interpersonal preferences and found that self-reported attitudes toward welfare spending are determined not only by financial self-interest but also by interpersonal preferences, which helps to explain why levels of welfare benefits are relatively low in racially heterogeneous states.
Abstract: Interpersonal preferences—preferences that depend on the characteristics of others—are typically hard to infer from observable individual behavior. As an alternative approach, this paper uses survey data to investigate interpersonal preferences. I show that self‐reported attitudes toward welfare spending are determined not only by financial self‐interest but also by interpersonal preferences. These interpersonal preferences are characterized by a negative exposure effect—individuals decrease their support for welfare as the welfare recipiency rate in their community rises—and racial group loyalty—individuals increase their support for welfare spending as the share of local recipients from their own racial group rises. These findings help to explain why levels of welfare benefits are relatively low in racially heterogeneous states.
950 citations
TL;DR: The authors summarized the contributions of micro-econometrics to economic knowledge and developed new tools to respond to econometric problems raised by the analysis of the new sources of micro data produced after the Second World War.
Abstract: This paper summarizes the contributions of microeconometrics to economic knowledge Four main themes are developed (1) Microeconometricians developed new tools to respond to econometric problems raised by the analysis of the new sources of micro data produced after the Second World War (2) Microeconometrics improved on aggregate time‐series methods by building models that linked economic models for individuals to data on individual behavior (3) An important empirical regularity detected by the field is the diversity and heterogeneity of behavior This heterogeneity has profound consequences for economic theory and for econometric practice (4) Microeconometrics has contributed substantially to the scientific evaluation of public policy
687 citations
TL;DR: In this paper, a joint study of the U.S. structural transformation and regional convergence of agricultural wages to non-agricultural wages is presented, and the authors find empirically that most of the regional convergence is attributable to the structural transformation: a disproportionate share of the unskilled labor force and lower per capita incomes.
Abstract: We present a joint study of the U.S. structural transformation (the decline of agriculture as the dominating sector) and regional convergence (of southern to northern average wages). We find empirically that most of the regional convergence is attributable to the structural transformation: the nationwide convergence of agricultural wages to nonagricultural wages and the faster rate of transition of the southern labor force from agricultural to nonagricultural jobs. Similar results describe the Midwest’s catch‐up to the Northeast (but not the relative experience of the West). To explain these observations, we construct a model in which the South (Midwest) has a comparative advantage in producing unskilled labor–intensive agricultural goods. Thus it starts with a disproportionate share of the unskilled labor force and lower per capita incomes. Over time, declining education/training costs induce an increasing proportion of the labor force to move out of the (unskilled) agricultural sector and into the (skil...
650 citations
TL;DR: In this article, the authors considered the matching function for symmetric and non-symmetric equilibria and showed that the standard matching function in the literature is misspecified and discussed implications for the Beveridge curve.
Abstract: Suppose that n buyers each want one unit and m sellers each have one or more units of a good. Sellers post prices, and then buyers choose sellers. In symmetric equilibrium, similar sellers all post one price, and buyers randomize. Hence, more or fewer buyers may arrive than a seller can accommodate. We call this frictions. We solve for prices and the endogenous matching function for finite n and m and consider the limit as n and m grow. The matching function displays decreasing returns but converges to constant returns. We argue that the standard matching function in the literature is misspecified and discuss implications for the Beveridge curve.
533 citations
TL;DR: In this paper, the authors developed a model of police and motorist behavior that suggests an empirical test for distinguishing whether this disparity is due to racial prejudice or to the police's objective to maximize arrests.
Abstract: Police checking for illegal drugs are much more likely to search the vehicles of African‐American motorists than those of white motorists. This paper develops a model of police and motorist behavior that suggests an empirical test for distinguishing whether this disparity is due to racial prejudice or to the police’s objective to maximize arrests. When applied to vehicle search data from Maryland, our test results are consistent with the hypothesis of no racial prejudice against African‐American motorists. However, if police have utility only for searches yielding large drug finds, then our analysis would suggest bias against white drivers. The model’s prediction regarding nonrace characteristics is also largely supported by the data.
428 citations
TL;DR: In this article, the process of moving installed physical capital to a new use was studied using equipment-level data from aerospace plants that closed during the 1990s, and the analysis yields three results that suggest significant sectoral specificity of physical capital and substantial costs of redeploying the capital.
Abstract: Using equipment‐level data from aerospace plants that closed during the 1990s, this paper studies the process of moving installed physical capital to a new use. The analysis yields three results that suggest significant sectoral specificity of physical capital and substantial costs of redeploying the capital. First, other aerospace companies are overrepresented among buyers of the used capital relative to their representation in the market for new investment goods. Second, even after age‐related depreciation is taken into account, capital sells for a substantial discount relative to replacement cost; the more specialized the type of capital, the greater the discount. Yet, capital sold to other aerospace firms fetches a higher price than capital sold to industry outsiders. Finally, the process of winding down operations and selling the equipment takes several years.
427 citations
TL;DR: For men of all working ages and women under 40, current population survey data show a sharp drop in the employment of disabled workers after the ADA went into effect as mentioned in this paper, leaving the ADA as a likely cause.
Abstract: The Americans with Disabilities Act (ADA) requires employers to accommodate disabled workers and outlaws discrimination against the disabled in hiring, firing, and pay. Although the ADA was meant to increase the employment of the disabled, the net theoretical effects are ambiguous. For men of all working ages and women under 40, Current Population Survey data show a sharp drop in the employment of disabled workers after the ADA went into effect. Although the number of disabled individuals receiving disability transfers increased at the same time, the decline in employment of the disabled does not appear to be explained by increasing transfers alone, leaving the ADA as a likely cause. Consistent with this view, the effects of the ADA appear larger in medium‐size firms, possibly because small firms were exempt from the ADA. The effects are also larger in states with more ADA‐related discrimination charges.
TL;DR: The authors examined the relationship between gun ownership and crime and found that changes in gun ownership are significantly positively related to changes in the homicide rate, with this relationship driven almost entirely by an impact of gun ownership on murders in which a gun is used.
Abstract: This paper examines the relationship between gun ownership and crime. Previous research has suffered from a lack of reliable data on gun ownership. I exploit a unique data set to reliably estimate annual rates of gun ownership at both the state and the county levels during the past two decades. My findings demonstrate that changes in gun ownership are significantly positively related to changes in the homicide rate, with this relationship driven almost entirely by an impact of gun ownership on murders in which a gun is used. The effect of gun ownership on all other crime categories is much less marked. Recent reductions in the fraction of households owning a gun can explain one-third of the differential decline in gun homicides relative to nongun homicides since 1993.
TL;DR: In this paper, Puelz and Snow presented empirical evidence of adverse selection in the market for automobile collision insurance, using data from a private insurer, and they claimed to have found strong evidence for adverse selection.
Abstract: In 1994, Puelz and Snow presented empirical evidence of adverse selection in the market for automobile collision insurance. Using data from a private insurer, they claimed to have found strong evidence of adverse selection in the insurer’s portfolio. Their test was based on individuals’ choice of deductible in each risk class. From the models of Rothschild and Stiglitz (1976) and Wilson (1977), it is well known that if residual adverse selection is present in some risk classes, insurers will offer menus of contracts from which insureds will self-select. At equilibrium, higher-risk individuals will choose the smaller deductible and will be charged the higher price per unit of insurance (Dionne, Doherty, and Fombaron 2000). An empirical test of the theory is to verify, in each risk class, whether lower deductibles are chosen by insureds with higher accident proba-
TL;DR: In this article, the authors test the contradictory high school dropout predictions of the human capital and signaling models using data from the late 1960s and early 1970s and find that labor markets that contain universities have higher high-school dropout rates.
Abstract: Under the educational sorting hypothesis, an environment in which some individuals are constrained from entering university will be characterized by increased pooling at the high school graduation level, as compared to an environment with greater university access. This results because some potential high school dropouts and university enrollees choose the high school graduate designation in order to take advantage of high‐ability individuals who are constrained from entering university. This is in stark contrast to human capital theory, which predicts higher university enrollment but identical high school dropout rates in regions with greater university access. I test the contradictory high school dropout predictions of the human capital and signaling models using NLSYM and NLSYW education data from the late 1960s and early 1970s. I find that labor markets that contain universities have higher high school dropout rates. This result is consistent with a signaling model and inconsistent with a pure human c...
TL;DR: This article examined the accumulation of debt by Swedish local governments and found that right-wing governments accumulate more debt when facing a higher probability of defeat, whereas the opposite occurs for leftwing governments.
Abstract: The paper examines the accumulation of debt by Swedish local governments. I find that right‐wing governments accumulate more debt when facing a higher probability of defeat, whereas the opposite occurs for left‐wing governments. These effects are sizable: a right‐wing government increases its level of debt by 15 percent, whereas a left‐wing government decreases its debt by 11 percent if they are both certain of being replaced as compared to when they are certain of remaining in office. The results are consistent with the predictions from a strategic debt model developed by Persson and Svensson.
TL;DR: A methodology for measuring the risks posed by drinking drivers that relies solely on readily available data on fatal crashes is presented and the key to the identification strategy is a hidden richness inherent in two‐car crashes.
Abstract: We present a methodology for measuring the risks posed by drinking drivers that relies solely on readily available data on fatal crashes. The key to our identification strategy is a hidden richness inherent in two‐car crashes. Drivers with alcohol in their blood are seven times more likely to cause a fatal crash; legally drunk drivers pose a risk 13 times greater than sober drivers. The externality per mile driven by a drunk driver is at least 30 cents. At current enforcement rates the punishment per arrest for drunk driving that internalizes this externality would be equivalent to a fine of $8,000.
TL;DR: In this paper, the authors present a theory of rent seeking within farmer cooperatives in which inequality of asset ownership affects relative control rights of different groups of members, and predict that increased heterogeneity of landholdings in the local area causes increased inefficiency by inducing a lower input price and a lower level of installed crushing capacity.
Abstract: This paper presents a theory of rent seeking within farmer cooperatives in which inequality of asset ownership affects relative control rights of different groups of members. The two key assumptions are constraints on lump‐sum transfers from poorer members and disproportionate control rights wielded by wealthier members. Transfers of rents to the latter are achieved by depressing prices paid for inputs supplied by members and diverting resulting retained earnings. The theory predicts that increased heterogeneity of landholdings in the local area causes increased inefficiency by inducing a lower input price and a lower level of installed crushing capacity. Predictions concerning the effect of the distribution of local landownership on sugarcane price, capacity levels, and participation rates of different classes of farmers are confirmed by data from nearly 100 sugar cooperatives in the Indian state of Maharashtra over the period 1971–93.
TL;DR: In this paper, the authors develop a notion of an equilibrium coalition structure, based on the assumption that each coalition that forms does so under a rational prediction of the society-wide coalition structure.
Abstract: We study the provision of public goods when all agents have complete information and can write binding agreements. This framework is in deliberate contrast to a traditional view of the free‐rider problem based on hidden information or voluntary provision. We focus on coalition formation as a potential source of inefficiency. To this end, we develop a notion of an equilibrium coalition structure, based on the assumption that each coalition that forms does so under a rational prediction of the society‐wide coalition structure. In a simple model, we characterize the (unique) equilibrium coalition structure. Only in some cases does the equilibrium involve full cooperation, resulting in efficient provision of the public good. In other cases, the equilibrium consists of several coalitions and inefficient provision. However, the degree of inefficiency and the number of possible coalitions are bounded.
TL;DR: In this article, the role of private information in U.S. Forest Service timber auctions is analyzed and an equilibrium theory for these auctions is developed. But the analysis is limited to the auction of a single tract.
Abstract: This paper analyzes the role of private information in U.S. Forest Service timber auctions. In these auctions, firms bid a per unit price for each timber species. Total bids are computed by multiplying these prices by Forest Service volume estimates, but payments depend on actual volumes harvested. We develop an equilibrium theory for these auctions. We then relate (ex post) data about volume to (ex ante) bids. We show that bidders have private information about volumes of species and use it as predicted by theory. Differences in bidder estimates appear to affect the allocation of tracts, but competition limits information rents.
TL;DR: In this article, the authors investigated the contribution of learning to the rapid increases in labor productivity observed in the construction of Liberty ships during World War II and found that part of the measured productivity increases were secured at the expense of quality.
Abstract: This paper offers some new estimates of the contribution of learning to the rapid increases in labor productivity observed in the construction of Liberty ships during World War II. The study exploits new data on physical capital investment and vessel quality constructed from contemporary records held at the National Archives. Estimates of the rate of learning are shown to be sensitive to the inclusion of the new capital data, and data on vessel quality provide evidence that part of the measured productivity increases were secured at the expense of quality.
TL;DR: The authors show that any non-welfarist method of policy assessment violates the Pareto principle and show that such a method is not consistent with the public at large, many policymakers, and many economists.
Abstract: The public at large, many policymakers, and a number of economists hold views of social welfare that are non‐welfarist. That is, they attach some importance to factors other than the effects of policies on individuals’ utilities. We show, however, that any non‐welfarist method of policy assessment violates the Pareto principle.
TL;DR: This paper provided the first estimates of overall CPI bias prior to 1970s and new estimates of bias since the 1970s, finding that annual CPI bias was −0.1 percent between 1888 and 1919 and rose to 0.7 percent between 1919 and 1935.
Abstract: This paper provides the first estimates of overall CPI bias prior to the 1970s and new estimates of bias since the 1970s. It finds that annual CPI bias was −0.1 percent between 1888 and 1919 and rose to 0.7 percent between 1919 and 1935. Annual CPI bias was 0.4 percent in the 1960s and then rose to 2.7 percent between 1972 and 1982 before falling to 0.6 percent between 1982 and 1994. The findings imply that we have underestimated growth rates in true income in the 1920s and 1930s and in the 1970s.
TL;DR: The authors argue that parents' ability to mold their children's behavior through pecuniary incentives is limited at low incomes, leading to lower outcomes and increased reliance on non-pecuniary mechanisms such as corporal punishment.
Abstract: Economists explain the positive relationship between parental income and children’s outcomes using an investment model. Building on work in psychology and sociology, this paper emphasizes the importance of child‐rearing practices, which vary with income. I argue that parents’ ability to mold their children’s behavior through pecuniary incentives is limited at low incomes, leading to lower outcomes and increased reliance on nonpecuniary mechanisms such as corporal punishment. My model generates a positive relationship between parental income and children’s outcomes especially at low incomes and endogenously produces a relationship between parental income and child‐rearing practices. Empirical work confirms these implications.
TL;DR: In this paper, the authors introduce a time-to-build technology for the production of market capital into a model with home production and find that the two anomalies that have plagued all household production models are resolved when time to build is added.
Abstract: An innovation in this paper is to introduce a time‐to‐build technology for the production of market capital into a model with home production. Our main finding is that the two anomalies that have plagued all household production models—the positive correlation between business and household investment, and household investment's leading business investment over the business cycle—are resolved when time to build is added.
TL;DR: If individuals possess a utility function stemming from the rate of production of expected offspring, they can rapidly adapt to arbitrary unknown distributions in a bandit problem, and any rule whatever yields evolutionary optimality for all distributions must be implicit, in a revealed preference sense.
Abstract: Consider the possible biological origin of the expected utility criterion. On the one hand, if individuals possess a utility function stemming from the rate of production of expected offspring, they can rapidly adapt to arbitrary unknown distributions in a bandit problem. Embedding such a utility function in a simple rule of thumb involving no beliefs about probabilities leads to evolutionary optimality. On the other hand, if any rule whatever yields evolutionary optimality for all distributions, this precise utility function must be implicit, in a revealed preference sense.
[...]
TL;DR: The authors presented a general equilibrium model of conflict to investigate whether the prevalence of democracy is sufficient to foster the perpetual peace hypothesized by Immanuel Kant and whether the world would necessarily become more peaceful as more countries adopt democratic institutions.
Abstract: We present a general equilibrium model of conflict to investigate whether the prevalence of democracy is sufficient to foster the perpetual peace hypothesized by Immanuel Kant and whether the world would necessarily become more peaceful as more countries adopt democratic institutions. Our exploration suggests that neither hypothesis is true. The desire of incumbent leaders with unfavorable economic performance to hold on to power generates an incentive to initiate conflict and salvage their position—with some probability. An equilibrium with positive war frequency is sustained even if all nations were to adopt representative democratic institutions and even in the absence of an appropriative motive for war.
TL;DR: This paper showed that while individuals may not value the vote, they nonetheless value the franchise, and in the presence of nonconvexities, it is more likely that the group in power will grant the franchise when preferences are severely opposed.
Abstract: In their seminal paper, Aumann, Kurz, and Neyman found the surprising result that the choice of levels of public goods in a democracy is not affected by the distribution of voting rights. This implies that groups of individuals may not value the franchise. This conclusion, however, does not correspond to what we commonly observe. We propose a new model to address the question of enfranchisement. The main feature of our model is that it takes into account natural affinities, such as religion or class, that may exist between voters. This allows us to show that while individuals may not value the vote, they nonetheless value the franchise. We also show that in the presence of nonconvexities, it is more likely that the group in power will grant the franchise when preferences are severely opposed.
TL;DR: The authors examined the role of individual instruction and teacher quality in determining economic growth and convergence across school districts and showed that teacher quality is relatively more important for human capital accumulation than individual instruction.
Abstract: This paper examines the role of individual instruction and teacher quality in determining economic growth and convergence across school districts. The model shows that if teacher quality is more important for human capital accumulation than individual instruction, human capital convergence will occur between two school districts. This convergence arises because a poor school district hires relatively better teachers but uses them in larger classes in comparison with a rich school district. The model is estimated on panel data of the states of the United States from 1882 to 1990. The estimates indicate that teacher quality is relatively more important for human capital accumulation than individual instruction. The model accounts for all the mean growth in state per capita incomes and between 80 and 100 percent of convergence in state per capita incomes.
TL;DR: In the free-rider problem, a group choice between two alternatives has to be made on the basis of privately collected evidence, leading to insufficient effort in gathering evidence and an ex ante welfare loss for the group.
Abstract: A free‐rider problem arises when a group choice between two alternatives has to be made on the basis of privately collected evidence, leading to insufficient effort in gathering evidence and an ex ante welfare loss for the group. To alleviate the free‐rider problem, the group can commit to a “conservative” rule, whereby the decision is made against the alternative favored by the group’s preference or prior when evidence supports it but is not preponderant. Optimal conservatism increases private incentives to gather evidence and improves the quality of the group decision. My result explains why sometimes groups appear overly cautious toward favored alternatives.
TL;DR: The authors studied the relationship between welfare benefits and the time to first marriage and time to next birth among initially unwed mothers and found no evidence that the marginal benefit paid at the birth of an additional child, the focus of the family cap debate, affects fertility.
Abstract: We study the relationship between welfare benefits and the time to first marriage and time to next birth among initially unwed mothers. We use twin births to generate random within‐state variation in benefits, effectively controlling for unobservables that may confound the relationship between welfare payments and behavior. Higher base welfare benefits (1) lead unwed white mothers to forestall their eventual marriage and (2) lead unwed black mothers to hasten their next birth. The magnitudes of these effects are fairly modest. Moreover, we find no evidence that the marginal benefit paid at the birth of an additional child—the focus of the family cap debate—affects fertility.