Showing papers in "Journal of Political Economy in 2008"
TL;DR: In this article, the authors focus on connections between mutual fund managers and corporate board members via shared education networks and find that portfolio managers place larger bets on connected firms and perform significantly better on these holdings relative to their nonconnected holdings.
Abstract: This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on connected firms and perform significantly better on these holdings relative to their nonconnected holdings. A replicating portfolio of connected stocks outperforms nonconnected stocks by up to 7.8 percent per year. Returns are concentrated around corporate news announcements, consistent with portfolio managers gaining an informational advantage through the education networks. Our results suggest that social networks may be important mechanisms for information flow into asset prices.
1,038 citations
TL;DR: In this article, the impact of ambiguous and contested land rights on investment and productivity in agriculture in Akwapim, Ghana is examined and it is shown that individuals who hold powerful positions in a local political hierarchy have more secure tenure rights and as a consequence they invest more in land fertility and have substantially higher output.
Abstract: We examine the impact of ambiguous and contested land rights on investment and productivity in agriculture in Akwapim, Ghana. We show that individuals who hold powerful positions in a local political hierarchy have more secure tenure rights and that as a consequence they invest more in land fertility and have substantially higher output. The intensity of investments on different plots cultivated by a given individual corresponds to that individual’s security of tenure over those specific plots and, in turn, to the individual’s position in the political hierarchy relevant to those specific plots.
1,031 citations
TL;DR: This paper showed that taller children have higher average cognitive test scores and that these test scores explain a large portion of the height premium in earnings, and that children who have higher test scores also experience earlier adolescent growth spurts, so that height in adolescence serves as a marker of cognitive ability.
Abstract: The well-known association between height and earnings is often thought to reflect factors such as self-esteem, social dominance, and discrimination. We offer a simpler explanation: height is positively associated with cognitive ability, which is rewarded in the labor market. Using data from the United States and the United Kingdom, we show that taller children have higher average cognitive test scores and that these test scores explain a large portion of the height premium in earnings. Children who have higher test scores also experience earlier adolescent growth spurts, so that height in adolescence serves as a marker of cognitive ability.
704 citations
TL;DR: In this article, the authors analyze the impact of highly subsidized, universally accessible child care in Quebec, addressing the impact on child care utilization, maternal labor supply, and family well-being.
Abstract: We analyze the introduction of highly subsidized, universally accessible child care in Quebec, addressing the impact on child care utilization, maternal labor supply, and family well‐being. We find strong evidence of a shift into new child care use, although some crowding out of existing arrangements is evident. Maternal labor supply increases significantly. Finally, the evidence suggests that children are worse off by measures ranging from aggression to motor and social skills to illness. We also uncover evidence that the new child care program led to more hostile, less consistent parenting, worse parental health, and lower‐quality parental relationships.
595 citations
TL;DR: This article presented insolvency practitioners from 88 countries, and asked them to describe in detail how debt enforcement will proceed in their countries, using the data on time, cost, and the likely disposition of the assets (preservation as a going concern versus piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country.
Abstract: We present insolvency practitioners from 88 countries, and ask them to describe in detail how debt enforcement will proceed in their countries. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern versus piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. We identify several characteristics of debt enforcement procedures, such as the structure of appeals and availability of floating charge finance, that influence efficiency. Our measure of efficiency of debt enforcement is strongly correlated with per capita income and legal origin and predicts debt market development across countries. Interestingly, it is also highly correlated with measures of the quality of contract enforcement and public regulation obtained in other studies.
566 citations
TL;DR: In this article, the authors characterize and measure a long-term risk-return trade-off for the valuation of cash flows exposed to fluctuations in macroeconomic growth, and apply this analysis to claims on aggregate cash flows and to cash flows from value and growth portfolios by imputing values to the long-run dynamic responses of the cash flows to macroeconomic shocks.
Abstract: We characterize and measure a long-term risk-return trade-off for the valuation of cash flows exposed to fluctuations in macroeconomic growth. This trade-off features risk prices of cash flows that are realized far into the future but continue to be reflected in asset values. We apply this analysis to claims on aggregate cash flows and to cash flows from value and growth portfolios by imputing values to the long-run dynamic responses of cash flows to macroeconomic shocks. We explore the sensitivity of our results to features of the economic valuation model and of the model cash flow dynamics.
535 citations
TL;DR: In this article, the effect of social interactions on labor market outcomes was empirically analyzed using Census data on residential and employment locations, and the authors found evidence of significant social interactions.
Abstract: We use a novel research design to empirically detect the effect of social interactions on labor market outcomes. Using Census data on residential and employment locations, we examine whether individuals residing in the same city block are more likely to work together than those in nearby blocks. We find evidence of significant social interactions. The estimated referral effect is stronger when individuals are similar in sociodemographic characteristics. These findings are robust across specifications intended to address sorting and reverse causation. Further, the increased availability of neighborhood referrals has a significant impact on a wide range of labor market outcomes.
506 citations
TL;DR: In this article, the authors present a model of nonbalanced growth based on differences in factor proportions and capital deepening, which is consistent with an asymptotic equilibrium with a constant interest rate and capital share in national income.
Abstract: We present a model of nonbalanced growth based on differences in factor proportions and capital deepening. Capital deepening increases the relative output of the more capital‐intensive sector but simultaneously induces a reallocation of capital and labor away from that sector. Using a two‐sector general equilibrium model, we show that nonbalanced growth is consistent with an asymptotic equilibrium with a constant interest rate and capital share in national income. For plausible parameter values, the model generates dynamics consistent with U.S. data, in particular, faster growth of employment and slower growth of output in less capital‐intensive sectors, and aggregate behavior consistent with the Kaldor facts.
496 citations
TL;DR: In this paper, the authors exploit the large variation across U.S. cities and through time in the relative size of the low-skilled immigrant population to estimate the causal effect of immigration on prices of nontraded goods and services.
Abstract: I exploit the large variation across U.S. cities and through time in the relative size of the low‐skilled immigrant population to estimate the causal effect of immigration on prices of nontraded goods and services. Using an instrumental variables strategy, I find that, at current immigration levels, a 10 percent increase in the share of low‐skilled immigrants in the labor force decreases the price of immigrant‐intensive services, such as housekeeping and gardening, by 2 percent. Wage equations suggest that lower wages are a likely channel through which these effects take place. However, wage effects are significantly larger for low‐skilled immigrants than for low‐skilled natives, implying that the two are imperfect substitutes.
488 citations
TL;DR: In 1989, the government of Mexico City introduced a program, Hoy No Circula, that banned most drivers from using their vehicles one weekday per week on the basis of the last digit of the vehicle's license plate as mentioned in this paper.
Abstract: In 1989, the government of Mexico City introduced a program, Hoy No Circula, that bans most drivers from using their vehicles one weekday per week on the basis of the last digit of the vehicle’s license plate. This article measures the effect of the driving restrictions on air quality using high‐frequency measures from monitoring stations. Across pollutants and specifications there is no evidence that the restrictions have improved air quality. Evidence from additional sources indicates that the restrictions led to an increase in the total number of vehicles in circulation as well as a change in composition toward high‐emissions vehicles.
474 citations
TL;DR: This article showed that 60 percent of the increase in unemployment durations caused by UI benefits is due to a "liquidity effect" rather than distortions on marginal incentives to search (moral hazard) by combining two empirical strategies.
Abstract: This paper presents new evidence on why unemployment insurance (UI) benefits affect search behavior and develops a simple method of calculating the welfare gains from UI using this evidence. I show that 60 percent of the increase in unemployment durations caused by UI benefits is due to a “liquidity effect” rather than distortions on marginal incentives to search (“moral hazard”) by combining two empirical strategies. First, I find that increases in benefits have much larger effects on durations for liquidity‐constrained households. Second, lump‐sum severance payments increase durations substantially among constrained households. I derive a formula for the optimal benefit level that depends only on the reduced‐form liquidity and moral hazard elasticities. The formula implies that the optimal UI benefit level exceeds 50 percent of the wage. The “exact identification” approach to welfare analysis proposed here yields robust optimal policy results because it does not require structural estimation of primitives.
TL;DR: In this article, the authors provide evidence of advantageous selection in the Medigap insurance market and analyze its sources, including income, education, longevity expectations, and financial planning horizons, as well as cognitive ability.
Abstract: We provide evidence of advantageous selection in the Medigap insurance market and analyze its sources. Conditional on controls for Medigap prices, those with Medigap spend, on average, $4,000 less on medical care than those without. But if we condition on health, those with Medigap spend $2,000 more. The sources of this advantageous selection include income, education, longevity expectations, and financial planning horizons, as well as cognitive ability. Conditional on all these factors, those with higher expected medical expenditures are more likely to purchase Medigap. Risk preferences do not appear as a source of advantageous selection; cognitive ability is particularly important.
TL;DR: In this article, the authors explore the hypothesis that women attain less schooling as a result of social and financial pressure to marry young, and isolate the causal effect of marriage timing using age of menarche as an instrumental variable, and show that each additional year that marriage is delayed is associated with 0.22 additional year of schooling and 5.6 percent higher literacy.
Abstract: Using data from rural Bangladesh, we explore the hypothesis that women attain less schooling as a result of social and financial pressure to marry young. We isolate the causal effect of marriage timing using age of menarche as an instrumental variable. Our results indicate that each additional year that marriage is delayed is associated with 0.22 additional year of schooling and 5.6 percent higher literacy. Delayed marriage is also associated with an increase in use of preventive health services. In the context of competitive marriage markets, we use the above results to obtain estimates of the change in equilibrium female education that would arise from introducing age of consent laws.
TL;DR: In this article, the maturity composition and the term structure of interest rate spreads of government debt in emerging markets were studied and the trade-off between these hedging and incentive benefits was quantitatively important for understanding the maturity structure of emerging markets.
Abstract: This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. In the data, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds rises more than the spread on long-term bonds. We build a dynamic model of international borrowing with endogenous default and multiple debt maturities. Long-term debt provides a hedge against future fluctuations in spreads, whereas short-term debt is more effective at providing incentives to repay. The trade-off between these hedging and incentive benefits is quantitatively important for understanding the maturity structure in emerging markets.
TL;DR: In this article, the authors examined hours worked in continental Europe and the United States from 1956 to 2003, and found that the hours working in Europe decline by almost 45 percent compared to the United states over this period.
Abstract: This paper examines hours worked in continental Europe and the United States from 1956 to 2003. The empirical work establishes two results. First, hours worked in Europe decline by almost 45 percent compared to the United States over this period. Second, this decline is almost entirely accounted for by the fact that Europe develops a much smaller market service sector than the United States. A simple model of time allocation is used to understand these patterns. I find that relative increases in taxes and technological catch‐up can account for most of the differences between the European and American time allocations over this period.
TL;DR: This article defined the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble and characterized this index by axioms, chief among them a "duality" axiom that, roughly speaking, asserts that less risk-averse individuals accept riskier gambles.
Abstract: Define the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble. We characterize this index by axioms, chief among them a “duality” axiom that, roughly speaking, asserts that less risk‐averse individuals accept riskier gambles. The index is positively homogeneous, continuous, and subadditive; respects first‐ and second‐order stochastic dominance; and for normally distributed gambles is half of variance/mean. Examples are calculated, additional properties are derived, and the index is compared with others.
TL;DR: This article test the predictions from Becker's (1957) seminal work on employer prejudice and find that relative black wages vary negatively with the prejudice of the "marginal" white in a state.
Abstract: We test the predictions from Becker’s (1957) seminal work on employer prejudice and find that relative black wages (a) vary negatively with the prejudice of the “marginal” white in a state, (b) vary negatively with the prejudice in the lower tail of the prejudice distribution but are unaffected by the prejudice of the most prejudiced persons in a state, and (c) vary negatively with the fraction of a state that is black. Our estimates suggest that one-quarter of the racial wage gap is due to prejudice, with nontrivial consequences for black lifetime earnings.
TL;DR: This paper found that children on the margin of placement were two to three times more likely to enter the criminal justice system as adults if they were placed in foster care, and the types of children on this margin include African Americans, girls, and young adolescents.
Abstract: This paper uses the randomization of families to child protection investigators to estimate causal effects of foster care on adult crime. The analysis uses a new data set that links criminal justice data to child protection data in Illinois, and I find that investigators affect foster care placement. Children on the margin of placement are found to be two to three times more likely to enter the criminal justice system as adults if they were placed in foster care. One innovation describes the types of children on the margin of placement, a group that is more likely to include African Americans, girls, and young adolescents.
TL;DR: It is found that PPS seems to have encouraged the adoption of a range of new medical technologies, and substantial increases in capital‐labor ratios and declines in labor inputs following PPS are documented.
Abstract: This paper examines the implications of regulatory change for input mix and technology choices of regulated industries. We study the increase in the relative price of labor faced by U.S. hospitals that resulted from the move from full cost to partial cost reimbursement under the Medicare Prospective Payment System (PPS) reform. Using the interaction of hospitals’ pre‐PPS Medicare share of patient days with the introduction of PPS, we document substantial increases in capital‐labor ratios and declines in labor inputs following PPS. Most interestingly, we find that PPS seems to have encouraged the adoption of a range of new medical technologies.
TL;DR: In this paper, the authors examine the consequences of vote buying, assuming this practice were allowed and free of stigma, and analyze the role of the parties' and voters' preferences in determining the winner and the payments to voters.
Abstract: We examine the consequences of vote buying, assuming this practice were allowed and free of stigma. Two parties compete in a binary election and may purchase votes in a sequential bidding game via up‐front binding payments and/or campaign promises (platforms) that are contingent on the outcome of the election. We analyze the role of the parties’ and voters’ preferences in determining the winner and the payments to voters.
TL;DR: This article showed that 60 percent of the increase in unemployment durations caused by UI benefits is due to a "liquidity effect" rather than distortions on marginal incentives to search, and developed a simple method of calculating the welfare gains from UI using this evidence.
Abstract: This paper presents new evidence on why unemployment insurance (UI) benefits affect search behavior and develops a simple method of calculating the welfare gains from UI using this evidence. I show that 60 percent of the increase in unemployment durations caused by UI benefits is due to a "liquidity effect" rather than distortions on marginal incentives to search ("moral hazard") by combining two empirical strategies. First, I find that increases in benefits have much larger effects on durations for liquidity-constrained households. Second, lump-sum severance payments increase durations substantially among constrained households. I derive a formula for the optimal benefit level that depends only on the reduced-form liquidity and moral hazard elasticities. The formula implies that the optimal UI benefit level exceeds 50 percent of the wage. The "exact identification" approach to welfare analysis proposed here yields robust optimal policy results because it does not require structural estimation of primitives. (c) 2008 by The University of Chicago. All rights reserved.(This abstract was borrowed from another version of this item.)
TL;DR: The authors showed that the barrier-induced sectoral distortion and an ensuring lack of capital accumulation account well for Japan's depressed output level, and that without the barrier, Japan's prewar GNP per worker would have been at least about a half of that of the United States, not about a third.
Abstract: Why didn’t the Japanese miracle take place before World War II? The culprit we identify is a barrier that kept prewar agricultural employment constant. Using a standard neoclassical two‐sector growth model, we show that the barrier‐induced sectoral distortion and an ensuring lack of capital accumulation account well for the depressed output level. Without the barrier, Japan’s prewar GNP per worker would have been at least about a half of that of the United States, not about a third as in the data. The labor barrier existed because, we argue, the prewar patriarchy forced the son designated as heir to stay in agriculture.
TL;DR: In this paper, the impact of innovations in birth control technology on intra-household allocation of resources is analyzed from a theoretical perspective, and it is shown that more efficient birth control technologies generally increase the "power" of women, hence the welfare of all women, including those who do not use them.
Abstract: We analyze, from a theoretical perspective, the impact of innovations in birth control technology on intrahousehold allocation of resources. We consider a model of frictionless matching on the marriage market in which men, as well as women, differ in their preferences for children; moreover, men, unlike women, must marry to enjoy fatherhood. We show that more efficient birth control technologies generally increase the “power,” hence the welfare, of all women, including those who do not use them. This “empowerment” effect requires that the new technology be available to single women. An innovation reserved to married women may result in a “disempowerment” effect.
TL;DR: In this paper, the implications of price-setting restrictions for the conduct of cyclical fiscal and monetary policy were analyzed and it was shown that, independently of the degree or type of price stickiness, it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the pricestickiness.
Abstract: In this article, we analyze the implications of price-setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider standard monetary economies that differ in the price-setting restrictions imposed on the firms. We show that, independently of the degree or type of price stickiness, it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness. In this sense, environments with different price-setting restrictions are equivalent.
TL;DR: In this article, the optimal inflation tax in an economy with heterogeneous agents subject to nonlinear taxation of labor income was studied and it was shown that the Friedman rule is Pareto efficient when combined with a nondecreasing labor income tax.
Abstract: We study the optimal inflation tax in an economy with heterogeneous agents subject to nonlinear taxation of labor income. We find that the Friedman rule is Pareto efficient when combined with a nondecreasing labor income tax. In addition, the optimum for a utilitarian social welfare function lies on this region of the Pareto frontier. The welfare costs from inflation are bounded below by the area under the demand curve.
TL;DR: In this article, the authors explore the efficiency properties of a competitive search model with match-specific private information and limited commitment on the workers' side, and show that in a static setting the competitive search equilibrium is constrained efficient, whereas in a dynamic setting it is constrained inefficient whenever the initial unemployment rate is different from its steady state level.
Abstract: I explore the efficiency properties of a competitive search model with match‐specific private information and limited commitment on the workers’ side. In a static setting the competitive search equilibrium is constrained efficient, whereas in a dynamic setting it is constrained inefficient whenever the initial unemployment rate is different from its steady‐state level. Inefficiency arises because the workers’ outside option becomes endogenous and affects the severity of the distortion due to the informational friction. This generates a novel externality: firms offering contracts at a given time do not internalize their effect on the outside option of workers hired in previous periods.
TL;DR: In this article, the authors considered the profit maximization problem of a firm that must make sunk investments in long-lived assets to produce output and showed that if per-period accounting income is calculated using a simple and natural allocation rule for investment, called the relative replacement cost (RRC) rule, under a broad range of plausible circumstances, the firm can choose the fully optimal sequence of investments over time simply by choosing a level of investment each period to maximize the next period's accounting income.
Abstract: This paper considers the profit‐maximization problem of a firm that must make sunk investments in long‐lived assets to produce output It is shown that if per‐period accounting income is calculated using a simple and natural allocation rule for investment, called the relative replacement cost (RRC) rule, under a broad range of plausible circumstances, the firm can choose the fully optimal sequence of investments over time simply by choosing a level of investment each period in order to maximize the next period’s accounting income Furthermore, in a model in which shareholders delegate the investment decision to a better‐informed manager, it is shown that if accounting income based on the RRC allocation rule is used as a performance measure for the manager, robust incentives are created for the manager to choose the profit‐maximizing sequence of investments, regardless of the manager’s own personal discount rate or other aspects of the manager’s personal preferences
TL;DR: This paper showed that under an equilibrium refinement, all economically relevant firm outcomes are uniquely determined across all strict subgame perfect Nash equilibria, and that more productive firms are more isolated, all else equal.
Abstract: I model endogenous horizontal and vertical product differentiation with arbitrarily many heterogeneous firms. Firms are asymmetric in that they differ in their marginal costs. I prove that under an equilibrium refinement, all economically relevant firm outcomes are uniquely determined across all strict subgame perfect Nash equilibria. There are two central results. First, a firm’s price, market share, and profit are independent of its neighbors’ marginal costs, conditional on the average marginal cost in the market. Second, more productive firms are more isolated, all else equal. In particular, the distance between two firms is strictly decreasing in their average marginal cost.
TL;DR: The authors examined tax evasion in the diesel fuel market and found that sales of diesel fuel rose 26 percent following the regulatory change, while sales of heating oil, which is an untaxed perfect substitute, fell by a similar amount.
Abstract: This article examines tax evasion in the diesel fuel market. Diesel fuel used for on‐road purposes is taxed, while other uses are untaxed, creating an incentive for firms and individuals to evade on‐road diesel taxes by purchasing untaxed diesel fuel and then using it for on‐road use. We examine the effects of a federal regulatory innovation in October 1993, the addition of red dye to untaxed diesel fuel at the point of distribution, which significantly lowered the cost of regulatory enforcement. We find that sales of diesel fuel rose 26 percent following the regulatory change, while sales of heating oil, which is an untaxed perfect substitute, fell by a similar amount. The effect on sales was higher in states with higher tax rates and in states likely to have higher audit costs. We also find evidence that heating oil sales were less responsive to demand factors, such as temperature, prior to the dye program, indicating that a significant fraction of predye sales was illegitimate. Furthermore, we find a p...
TL;DR: In this paper, the authors present a theory in which increases in female labor force participation and reductions in the gender wage gap are generated as part of a single process of demographic transition, initially characterized by reductions in mortality and fertility.
Abstract: This paper presents a theory in which increases in female labor force participation and reductions in the gender‐wage gap are generated as part of a single process of demographic transition, initially characterized by reductions in mortality and fertility. The paper suggests a relationship between gains in life expectancy and changes in the role of women in society that has not been identified before in the literature. Mortality reductions affect the incentives of individuals to invest in human capital and to have children, with implications for female labor force participation and the wage differential between men and women. The paper also presents some empirical evidence to support the predictions of the theory.