Showing papers in "Journal of Political Economy in 2007"
TL;DR: The authors found that shocks to trend growth, rather than transitory fluctuations around a stable trend, are the primary source of fluctuations in emerging markets, and the key features of emerging market business cycles are consistent with this underlying income process in an otherwise standard equilibrium model.
Abstract: Emerging market business cycles exhibit strongly countercyclical current accounts, consumption volatility that exceeds income volatility, and “sudden stops” in capital inflows. These features contrast with developed small open economies. Nevertheless, we show that a standard model characterizes both types of markets. Motivated by the frequent policy regime switches observed in emerging markets, our premise is that these economies are subject to substantial volatility in trend growth. Our methodology exploits the information in consumption and net exports to identify the persistence of productivity. We find that shocks to trend growth—rather than transitory fluctuations around a stable trend—are the primary source of fluctuations in emerging markets. The key features of emerging market business cycles are then shown to be consistent with this underlying income process in an otherwise standard equilibrium model.
1,010 citations
TL;DR: In this paper, the authors exploit the major international health improvements from the 1940s to estimate the effect of life expectancy on economic performance and find that a 1 percent increase in life expectancy leads to a 1.7 −2 percent increase of population.
Abstract: We exploit the major international health improvements from the 1940s to estimate the effect of life expectancy on economic performance. We construct predicted mortality using preintervention mortality rates from various diseases and dates of global interventions. Predicted mortality has a large impact on changes in life expectancy starting in 1940 but no effect before 1940. Using predicted mortality as an instrument, we find that a 1 percent increase in life expectancy leads to a 1.7‐2 percent increase in population. Life expectancy has a much smaller effect on total GDP, however. Consequently, there is no evidence that the large increase in life expectancy raised income per capita.
885 citations
TL;DR: In this paper, cultural norms and legal enforcement in controlling corruption were studied by analyzing the parking behavior of United Nations officials in Manhattan. But, until 2002, diplomatic immunity protected UN diplomats from parking enforcement actions, so diplomats’ actions were constrained by cultural norms alone.
Abstract: We study cultural norms and legal enforcement in controlling corruption by analyzing the parking behavior of United Nations officials in Manhattan. Until 2002, diplomatic immunity protected UN diplomats from parking enforcement actions, so diplomats’ actions were constrained by cultural norms alone. We find a strong effect of corruption norms: diplomats from high‐corruption countries (on the basis of existing survey‐based indices) accumulated significantly more unpaid parking violations. In 2002, enforcement authorities acquired the right to confiscate diplomatic license plates of violators. Unpaid violations dropped sharply in response. Cultural norms and (particularly in this context) legal enforcement are both important determinants of corruption.
871 citations
TL;DR: In this article, the authors analyzed whether file sharing has reduced the legal sales of music and found that downloads have an effect on sales that is statistically indistinguishable from zero, which is inconsistent with claims that file sharing is the primary reason for the decline in music sales during their study period.
Abstract: For industries ranging from software to pharmaceuticals and entertainment, there is an intense debate about the appropriate level of protection for intellectual property. The Internet provides a natural crucible to assess the implications of reduced protection because it drastically lowers the cost of copying information. In this paper, we analyze whether file sharing has reduced the legal sales of music. While this question is receiving considerable attention in academia, industry, and Congress, we are the first to study the phenomenon employing data on actual downloads of music files. We match an extensive sample of downloads to U.S. sales data for a large number of albums. To establish causality, we instrument for downloads using data on international school holidays. Downloads have an effect on sales that is statistically indistinguishable from zero. Our estimates are inconsistent with claims that file sharing is the primary reason for the decline in music sales during our study period.
855 citations
TL;DR: In this paper, the authors present a randomized field experiment on reducing corruption in over 600 Indonesian village road projects, finding that increasing government audits from 4 percent of projects to 100 percent reduced missing expenditures, as measured by discrepancies between official project costs and an independent engineers' estimate of costs.
Abstract: This paper presents a randomized field experiment on reducing corruption in over 600 Indonesian village road projects. I find that increasing government audits from 4 percent of projects to 100 percent reduced missing expenditures, as measured by discrepancies between official project costs and an independent engineers’ estimate of costs, by eight percentage points. By contrast, increasing grassroots participation in monitoring had little average impact, reducing missing expenditures only in situations with limited free-rider problems and limited elite capture. Overall, the results suggest that traditional topdown monitoring can play an important role in reducing corruption, even in a highly corrupt environment.
826 citations
TL;DR: The authors explored more closely the dictator game and the literature's preferred interpretation of its meaning by collecting data from nearly 200 dictators across treatments that varied the action set and the origin of endowment.
Abstract: The dictator game represents a workhorse within experimental economics, frequently used to test theory and to provide insights into the prevalence of social preferences. This study explores more closely the dictator game and the literature’s preferred interpretation of its meaning by collecting data from nearly 200 dictators across treatments that varied the action set and the origin of endowment. The action set variation includes choices in which the dictator can “take” money from the other player. Empirical results question the received interpretation of dictator game giving: many fewer agents are willing to transfer money when the action set includes taking. Yet, a result that holds regardless of action set composition is that agents do not ubiquitously choose the most selfish outcome. The results have implications for theoretical models of social preferences, highlight that “institutions” matter a great deal, and point to useful avenues for future research using simple dictator games and relevant manipulations.
706 citations
TL;DR: In this article, the authors developed a framework for estimating household preferences for school and neighborhood attributes in the presence of sorting, embedding a boundary discontinuity design in a heterogeneous residential choice model, addressing the endogeneity of school and neighbourhood characteristics.
Abstract: This paper develops a framework for estimating household preferences for school and neighborhood attributes in the presence of sorting. It embeds a boundary discontinuity design in a heterogeneous residential choice model, addressing the endogeneity of school and neighborhood characteristics. The model is estimated using restricted‐access Census data from a large metropolitan area, yielding a number of new results. First, households are willing to pay less than 1 percent more in house prices—substantially lower than previous estimates—when the average performance of the local school increases by 5 percent. Second, much of the apparent willingness to pay for more educated and wealthier neighbors is explained by the correlation of these sociodemographic measures with unobserved neighborhood quality. Third, neighborhood race is not capitalized directly into housing prices; instead, the negative correlation of neighborhood percent black and housing prices is due entirely to the fact that blacks live in unobse...
684 citations
TL;DR: In this article, the authors investigated the efficiency of household investment decisions in a unique dataset containing the disaggregated wealth and income of the entire population of Sweden and found that households with greater financial sophistication tend to invest more efficiently but also more aggressively, so the welfare cost of portfolio inefficiency tends to be greater for these households.
Abstract: This paper investigates the efficiency of household investment decisions in a unique dataset containing the disaggregated wealth and income of the entire population of Sweden. The analysis focuses on two main sources of inefficiency in the financial portfolio: underdiversification of risky assets ("down") and nonparticipation in risky asset markets ("out"). We find that while a few households are very poorly diversified, the cost of diversification mistakes is quite modest for most of the population. For instance, a majority of participating Swedish households are sufficiently diversified internationally to outperform the Sharpe ratio of their domestic stock market. We document that households with greater financial sophistication tend to invest more efficiently but also more aggressively, so the welfare cost of portfolio inefficiency tends to be greater for these households. The welfare cost of nonparticipation is smaller by almost one half when we take account of the fact that nonparticipants would be unlikely to invest efficientlyiftheyparticipatedinrisky asset markets.
624 citations
TL;DR: This article developed a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation, and calibrated this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov.
Abstract: This paper develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real “menu cost.” We calibrate this cost and the variance and autocorrelation of the idiosyncratic shock using a new U.S. data set of individual prices due to Klenow and Kryvtsov. The prediction of the calibrated model for the effects of high inflation on the frequency of price changes accords well with international evidence from various studies. The model is also used to conduct numerical experiments on the economy’s response to various shocks. In none of the simulations we conducted did monetary shocks induce large or persistent real responses.
528 citations
TL;DR: In this paper, the authors explore the implications of a country's external budget constraint to study the dynamics of net foreign assets and exchange rate movements, and find that deterioration in a country net exports or net foreign asset position relative to their trend have to be matched either by future net export growth (the trade channel) or by future increases in the returns of the net-foreign asset portfolio, a hitherto unexplored valuation channel.
Abstract: The paper explores the implications of a country’s external budget constraint to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country’s net exports or net foreign asset position relative to their trend have to be matched either by future net export growth (the trade channel) or by future increases in the returns of the net foreign asset portfolio, a hitherto unexplored valuation channel. Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 27% of the cyclical external adjustment. Our approach also has asset pricing implications. Our measure of external imbalance predicts net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation increase in external imbalances predicts an annualized 4% depreciation of the exchange rate over the next quarter.
447 citations
TL;DR: In this paper, the authors model happiness as a measurement tool used to rank alternative actions and draw a parallel with a problem of optimal incentives, which allows them to apply statistical insights from agency theory to the study of happiness.
Abstract: We model happiness as a measurement tool used to rank alternative actions. Evolution favors a happiness function that measures the individual’s success in relative terms. The optimal function is based on a time‐varying reference point—or performance benchmark—that is updated over time in a statistically optimal way in order to match the individual’s potential. Habits and peer comparisons arise as special cases of such an updating process. This updating also results in a volatile level of happiness that continuously reverts to its long‐term mean. Throughout, we draw a parallel with a problem of optimal incentives, which allows us to apply statistical insights from agency theory to the study of happiness.
TL;DR: Using data on treatments for heart attacks, a simple Roy model of patient treatment choice with productivity spillovers is developed that predicts that high‐use areas will have higher returns to surgery, better outcomes among patients most appropriate for surgery, and worse outcomes among Patients leastappropriate for surgery while displaying no relationship between treatment intensity and overall outcomes.
Abstract: A large literature in medicine documents variation across areas in the use of surgical treatments that is unrelated to outcomes. Observers of this phenomenon have invoked “flat of the curve medicine” to explain it and have advocated for reductions in spending in high‐use areas. In contrast, we develop a simple Roy model of patient treatment choice with productivity spillovers that can generate the empirical facts. Our model predicts that high‐use areas will have higher returns to surgery, better outcomes among patients most appropriate for surgery, and worse outcomes among patients least appropriate for surgery, while displaying no relationship between treatment intensity and overall outcomes. Using data on treatments for heart attacks, we find strong empirical support for these and other predictions of our model and reject alternative explanations such as “flat of the curve medicine” or supplier‐induced demand for geographic variation in medical care.
TL;DR: In this article, the authors investigate the internal governance institutions of violent criminal enterprise by examining the law, economics, and organization of pirates, and examine how pirates used democratic constitutions to minimize conflict and create piratical law and order.
Abstract: This article investigates the internal governance institutions of violent criminal enterprise by examining the law, economics, and organization of pirates. To effectively organize their banditry, pirates required mechanisms to prevent internal predation, minimize crew conflict, and maximize piratical profit. Pirates devised two institutions for this purpose. First, I analyze the system of piratical checks and balances crews used to constrain captain predation. Second, I examine how pirates used democratic constitutions to minimize conflict and create piratical law and order. Pirate governance created sufficient order and cooperation to make pirates one of the most sophisticated and successful criminal organizations in history.
TL;DR: The Cardozo theorem as discussed by the authors states that even when judges are motivated by personal agendas, legal evolution is, on average, beneficial because it washes out judicial biases and renders the law more precise.
Abstract: We present a model of lawmaking by appellate courts in which judges influenced by policy preferences can distinguish precedents at some cost. We find a cost and a benefit of diversity of judicial views. Policy‐motivated judges distort the law away from efficiency, but diversity of judicial views also fosters legal evolution and increases the law’s precision. We call our central finding the Cardozo theorem: even when judges are motivated by personal agendas, legal evolution is, on average, beneficial because it washes out judicial biases and renders the law more precise. Our paper provides a theoretical foundation for the evolutionary adaptability of common law.
TL;DR: This paper used a new panel data set of credit card accounts to analyze how consumers responded to the 2001 federal income tax rebates and found that on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt, but soon afterward their spending increased, counter to the permanent income model.
Abstract: We use a new panel data set of credit card accounts to analyze how consumers responded to the 2001 federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterward their spending increased, counter to the permanent income model. Spending rose most for consumers who were initially most likely to be liquidity constrained, whereas debt declined most (so saving rose most) for unconstrained consumers.
TL;DR: This article used longitudinal earnings data from Social Security records to study the effect of selective emigration on the measured progress of immigrants to the United States and found that the immigrant-native earnings gap closed by 10-15 percent during immigrants' first 20 years in the United states.
Abstract: I use longitudinal earnings data from Social Security records to study the effect of selective emigration on the measured progress of immigrants to the United States. The immigrant-native earnings gap closes by 10–15 percent during immigrants’ first 20 years in the United States, or about half as fast as typical estimates from repeated cross sections of the decennial census. The divergent results indicate that emigration by low-wage immigrants has systematically led past researchers to overestimate the wage progress of immigrants who remain in the United States. Selective back-and-forth migration also leads typical estimates to overstate the measured decline in earnings among successive immigrant arrival cohorts between 1960 and 1980.
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TL;DR: In this paper, the optimal design of organizations under the assumption that agents in a contest care about their relative position is studied, where a principal determines the number and size of status categories in order to maximize output.
Abstract: We study the optimal design of organizations under the assumption that agents in a contest care about their relative position. A principal determines the number and size of status categories in order to maximize output. We first consider the pure status case without tangible prizes. Our results connect the optimal partition in status categories to properties of the distribution of ability among contestants. The top status category always contains a unique element. For distributions that have an increasing failure rate (IFR), a proliferation of status classes is optimal, whereas the optimal partition involves only two categories if the distribution of abilities is sufficiently concave. Moreover, for IFR distributions, a coarse partition with two status categories achieves at least half of the output obtained in the optimal partition with many categories. Finally, if status is derived solely from monetary rewards, we show that the optimal partition in status classes contains only two categories.
TL;DR: The authors empirically investigated the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure and found evidence that integrated producers' productivity advantage is tied to improved logistics coordination afforded by large local concrete operations.
Abstract: This paper empirically investigates the possible market power effects of vertical integration proposed in the theoretical literature on vertical foreclosure. It uses a rich data set of cement and ready‐mixed concrete plants that spans several decades to perform a detailed case study. There is little evidence that foreclosure is quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. These patterns are consistent, however, with an alternative efficiency‐based mechanism. Namely, higher‐productivity producers are more likely to vertically integrate and are also larger, more likely to survive, and more likely to charge lower prices. We find evidence that integrated producers’ productivity advantage is tied to improved logistics coordination afforded by large local concrete operations. Interestingly, this benefit is not due to firms’ vertical structures per se: nonvertical firms with large local concrete operatio...
TL;DR: In this paper, the authors examined the behavior of prices following the unexpected arrival of a large number of immigrants from the former Soviet Union (FSU) to Israel during 1990 and found that the increase in aggregate demand prompted by the arrival of the FSU immigration significantly reduced prices during 1990.
Abstract: This paper examines the behavior of prices following the unexpected arrival of a large number of immigrants from the former Soviet Union (FSU) to Israel during 1990. I use store‐level price data on 915 consumer price index products to show that the increase in aggregate demand prompted by the arrival of the FSU immigration significantly reduced prices during 1990. When one controls for native population size and city and month effects, a one‐percentage‐point increase in the ratio of immigrants to natives in a city decreases prices by 0.5 percentage point on average. It is argued that this negative immigration effect is consistent with FSU immigrants—the new consumers—having higher price elasticities and lower search costs than the native population. Thus immigration can have a moderating effect on inflation through its direct effect on product markets, and not only by increasing the supply of labor.
TL;DR: In this paper, the authors show that the distribution of consumption expenditures across households is closer to log normal than the distributions of income, and explain these empirical results by showing that the logic of Gibrat's law applies not to total income, but to permanent income and to maginal utility.
Abstract: Significant departures from log normality are observed in income data, in violation of Gibrat’s law. We identify a new empirical regularity, which is that the distribution of consumption expenditures across households is, within cohorts, closer to log normal than the distribution of income. We explain these empirical results by showing that the logic of Gibrat’s law applies not to total income, but to permanent income and to maginal utility. These findings have important implications for welfare and inequality
TL;DR: In this paper, the authors explore steady-state inequality in an intergenerational model with altruistically linked individuals who experience privately observed taste shocks, and they find that consumption exhibits mean reversion and that a steadystate, cross-sectional distribution for consumption and welfare exists, with no one trapped at misery.
Abstract: We explore steady‐state inequality in an intergenerational model with altruistically linked individuals who experience privately observed taste shocks. When the welfare function depends only on the initial generation, efficiency requires immiseration: inequality grows without bound and everyone’s consumption converges to zero. We study other efficient allocations in which the welfare function values future generations directly, placing a positive but vanishing weight on their welfare. The social discount factor is then higher than the private one, and for any such difference we find that consumption exhibits mean reversion and that a steady‐state, cross‐sectional distribution for consumption and welfare exists, with no one trapped at misery.
TL;DR: The authors show that the second moments of the distribution of skills are critical, as in the Roy model, for international differences in worker skill bundles have important implications for international trade, industrial structure, and domestic income distribution.
Abstract: Each worker brings a bundle of skills to the workplace, for example, quantitative and communication skills. Since employers must take this bundle as a package deal, they choose workers with just the right mix of skills. We show that international differences in the distribution of worker skill bundles—for example, Japan’s abundance of workers with a modest mix of both quantitative and teamwork skills—have important implications for international trade, industrial structure, and domestic income distribution. Formally, we model two‐dimensional worker heterogeneity and show that the second moments of the distribution of skills are critical, as in the Roy model.
TL;DR: In this article, moral sanctions and moral rewards are employed to govern individuals' behavior if the objective is to maximize social welfare, assuming that guilt is a disincentive to act and virtue is an incentive because they are negative and positive sources of utility.
Abstract: How should moral sanctions and moral rewards—the moral sentiments involving feelings of guilt and of virtue—be employed to govern individuals’ behavior if the objective is to maximize social welfare? In the model that we examine, guilt is a disincentive to act and virtue is an incentive because we assume that they are negative and positive sources of utility. We also suppose that guilt and virtue are costly to inculcate and are subject to certain constraints on their use. We show that the moral sentiments should be used chiefly to control externalities and further that guilt is best to employ when most harmful acts can successfully be deterred whereas virtue is best when only a few individuals can be induced to behave well. We also contrast the optimal use of guilt and virtue to optimal Pigouvian taxation and discuss extensions of our analysis.
TL;DR: In this article, the authors reconcile RBC theory with the investment dynamics by extending the traditional home production model to make household capital complementary to business capital and labor in market production, and empirically evidence suggests that household capital is a complementary input in the market production.
Abstract: Household investment leads nonresidential business fixed investment over the U.S. business cycle. Because real business cycle theory has not been able to account for this observation, it represents a potent challenge to the view that transitory productivity disturbances are the main source of aggregate fluctuations. This paper reconciles RBC theory with the investment dynamics by extending the traditional home production model to make household capital complementary to business capital and labor in market production. Empirical evidence suggesting that household capital is a complementary input in market production is also presented.
TL;DR: In this paper, the optimal allocation of risk in an overlappinggenerations economy is compared to the allocation that would be reached if generations behind a Rawlsian "veil of ignorance" could share risk with one another through complete Arrow-Debreu contingent claims markets.
Abstract: This paper examines the optimal allocation of risk in an overlapping‐generations economy. It compares the allocation of risk the economy reaches naturally to the allocation that would be reached if generations behind a Rawlsian “veil of ignorance” could share risk with one another through complete Arrow‐Debreu contingent‐claims markets. The paper then examines how the government might implement optimal intergenerational risk sharing with a social security system. One conclusion is that the system must either hold equity claims to capital or negatively index benefits to equity returns.
TL;DR: The authors analyzes Markov equilibria in a model of strategic lending in which agents cannot commit to long-term contracts, contracts are incomplete, and incumbent lenders can coordinate their actions.
Abstract: This paper analyzes Markov equilibria in a model of strategic lending in which (i) agents cannot commit to long-term contracts, (ii) contracts are incomplete, and (iii) incumbent lenders can coordinate their actions. Default cycles occur endogenously over time along every equilibrium path. After a sequence of bad shocks, the borrower in a competitive market accumulates debt so large that the incumbent lenders exercise monopoly power. Even though the incumbents could maintain this power forever, they find it profitable to let the borrower regain access to the competitive market after a sequence of good shocks. Equilibria are computed numerically, and their attributes are qualitatively consistent with numerous known empirical facts on sovereign lending. In addition, the model predicts that a borrower who accumulates debt overhang will regain access to the competitive credit market only after good shocks. This prediction is shown to be consistent with data on emerging market economies.
TL;DR: In this paper, a search model of the labor market in which firms have private information about the quality of their vacancies, they can costlessly communicate with unemployed workers before the beginning of the application process, but the content of the communication does not constitute a contractual obligation.
Abstract: This article studies a search model of the labor market in which firms have private information about the quality of their vacancies, they can costlessly communicate with unemployed workers before the beginning of the application process, but the content of the communication does not constitute a contractual obligation. At the end of the application process, wages are determined as the outcome of an alternating offer bargaining game. The model is used to show that vague noncontractual announcements about compensation—such as those one is likely to find in help wanted ads—can be correlated with actual wages and can partially direct the search strategy of workers.
TL;DR: This paper showed that competition for repayment between lenders may result in a sovereign debt that is excessively difficult to restructure in equilibrium, and this inefficiency may be alleviated by a suitably designed bankruptcy regime that facilitates debt restructuring.
Abstract: In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure ex post. We show, however, that competition for repayment between lenders may result in a sovereign debt that is excessively difficult to restructure in equilibrium. This inefficiency may be alleviated by a suitably designed bankruptcy regime that facilitates debt restructuring.
TL;DR: This paper found that smokers who are exposed to more advertising are more likely to attempt to quit and to successfully quit, while some increased quitting involves product purchases, and product advertisements also prompt cold turkey quitting.
Abstract: We study the impact of smoking cessation product advertising. To measure potential exposure, we link survey data on magazine‐reading habits and smoking behavior with an archive of print advertisements. We find that smokers who are exposed to more advertising are more likely to attempt to quit and to successfully quit. While some increased quitting involves product purchases, we find that product advertisements also prompt cold turkey quitting. Identifying the causal impact of advertising is difficult because advertisers target consumers. Although reverse causality could bias our estimates upward, our baseline results are not sensitive to a series of checks.
TL;DR: This article developed a model of gross job and worker flows and used it to study how the wages, permanent incomes and employment status of individual workers evolve over time and how they are affected by aggregate labor market conditions.
Abstract: We develop a model of gross job and worker flows and use it to study how the wages, permanent incomes and employment status of individual workers evolve over time and how they are affected by aggregate labor market conditions. Our model helps explain various other features of labor markets, such as the size and persistence of the changes in income that workers experience due to displacements or job-to-job transitions, the length of job tenures and unemployment duration, and the amount of worker turnover in excess of job reallocation. We also examine the effects that labor market institutions and public policy have on the gross flows, as well as on the resulting wage distribution, employment and aggregate output in the equilibrium. From a theoretical point of view, we study the extent to which the competitive equilibrium achieves an efficient allocation of resources.