Showing papers in "Journal of Political Economy in 2009"

Financial Integration, Financial Development, and Global Imbalances

Abstract: Global financial imbalances can result from financial integration when countries differ in financial markets development. Countries with more advanced financial markets accumulate foreign liabilities in a gradual, long‐lasting process. Differences in financial development also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of nondiversifiable equity and foreign direct investment. Three observations motivate our analysis: (1) financial development varies widely even among industrial countries, with the United States on top; (2) the secular decline in the U.S. net foreign asset position started in the early 1980s, together with a gradual process of international financial integration; (3) the portfolio composition of U.S. net foreign assets features increased holdings of risky assets and a large increase in debt.

Unemployment fluctuations with staggered nash wage bargaining

Abstract: A number of authors have recently emphasized that the conventional model of unemployment dynamics due to Mortensen and Pissarides has difficulty accounting for the relatively volatile behavior of labor market activity over the business cycle. We address this issue by modifying the MP framework to allow for staggered multiperiod wage contracting. What emerges is a tractable relation for wage dynamics that is a natural generalization of the period-by-period Nash bargaining outcome in the conventional formulation. An interesting side-product is the emergence of spillover effects of average wages on the bargaining process. We then show that a reasonable calibration of the model can account well for the cyclical behavior of wages and labor market activity observed in the data. The spillover effects turn out to be important in this respect.

Does Competition Reduce Price Dispersion? New Evidence from the Airline Industry

Abstract: We analyze the effects of competition on price dispersion in the airline industry, using panel data from 1993:Q1 through 2006:Q3. Competition has a negative effect on price dispersion, in line with the textbook treatment of price discrimination. This effect is pronounced for routes with consumers characterized by relatively heterogeneous elasticities of demand. On routes with a homogeneous customer base, the effects of competition on price dispersion are smaller. Our results contrast with those of Borenstein and Rose, who found that price dispersion increases with competition. We reconcile the different results by showing that the cross‐sectional estimator suffers from omitted‐variable bias.

Firm-Specific Human Capital: A Skill-Weights Approach

Abstract: The theory of human capital is agnostic on what constitutes firm‐specific skills. The theory specifies that specific skills contribute to productivity only at the current firm. A broader approach lets all skills be general, but firms use them with different weights attached. For example, computer programming, economics, and accounting are general skills, but there may be only one firm that wants workers trained in all three. One implication is that wage profiles and the split of human capital costs depend on thickness of the market. Another is that firms pay for what appears to be general training.

The Deterrent Effects of Prison: Evidence from a Natural Experiment

Abstract: In this paper we test for the theory of deterrence. We exploit the natural experiment provided by the Collective Clemency Bill passed by the Italian Parliament in July 2006. As a consequence of the provisions of the bill, expected punishment to former inmates recommitting a crime can be considered as good as randomly assigned. Based on a unique data set on post-release behaviour of former inmates, we find that an additional month in expected sentence reduces the propensity to recommit a crime by 1.24 percent: this corroborates the general deterrence hypothesis. However, this effect depends on the time previously served in prison: the behavioural response to an additional month of expected sentence decreases with the length of the prison spell. This second result can be hardly reconciled with the specific deterrence hypothesis according to which a stronger past experience of punishment should increase the sensitivity to future expected sanctions.

Is the Allocation of Resources within the Household Efficient? New Evidence from a Randomized Experiment

Abstract: I study whether households make Pareto‐efficient intrahousehold resource allocation decisions. Combining randomized variation in women’s income generated by the evaluation of the Mexican PROGRESA program with variation attributable to localized rainfall shocks as distribution factors in the collective model, I find evidence favoring Pareto optimality. More specifically, female‐specific income changes have positive effects on children’s goods expenditures, whereas changes due to rainfall shocks have a smaller influence on household public goods expenditures. The evidence is consistent with female partners having greater sensitivity to own‐income changes and norms that oblige women to devote their earnings to meet collective consumption needs.

Investment‐Based Expected Stock Returns

Abstract: We derive and test q‐theory implications for cross‐sectional stock returns. Under constant returns to scale, stock returns equal levered investment returns, which are tied directly to firm characteristics. When we use generalized method of moments to match average levered investment returns to average observed stock returns, the model captures the average stock returns of portfolios sorted by earnings surprises, book‐to‐market equity, and capital investment. When we try to match expected returns and return variances simultaneously, the variances predicted in the model are largely comparable to those observed in the data. However, the resulting expected return errors are large.

Trade and Capital Flows: A Financial Frictions Perspective

Abstract: The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes, in the sense that trade integration reduces the incentives for capital to ‡ow to capital-scarce countries. In this paper we show that in a world with heterogeneous …nancial development, the classic conclusion does not hold. In particular, in less …nancially developed economies (South), trade and capital mobility are complements. Within a dynamic framework, the complementarity carries over to (…nancial) capital ‡ows. This interaction implies that deepening trade integration in South raises net capital in‡ows (or reduces net capital out‡ows). It also implies that, at the global level, protectionism may back…re if the goal is to rebalance capital ‡ows, when these are already heading from South to North. Our perspective also has

Reconciling Cyclical Movements in the Marginal Value of Time and the Marginal Product of Labor

Abstract: Recessions appear to be times when the marginal rate of substitution between goods and workers’ time falls below the marginal product of labor. If so, the allocation of workers’ time is inefficient. I develop a model of households and production that reconciles cyclical movements in the marginal value of time and the marginal product. The model embodies the findings of research that the Frisch elasticity of labor supply is less than one. It treats unemployment in a search‐and‐matching setup. Recessions do not result in private inefficiency in the allocation of labor, but the unemployment rate may be socially inefficiently high.

The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates

Abstract: Who benefits from agricultural subsidies is an open question. Economic theory predicts that the entire subsidy incidence should be on the farmland owners. Using a complementary set of policy quasi experiments, I find that farmers who rent the land they cultivate capture 75 percent of the subsidy, leaving just 25 percent for landowners. This finding contradicts the prediction from neoclassical models. The standard prediction may not hold because of less than perfect competition in the farmland rental market; the share captured by landowners increases with local measures of competitiveness in the farmland rental market.

The Simple Economics of Extortion: Evidence from Trucking in Aceh

Abstract: This paper tests whether the behavior of corrupt officials is consistent with standard industrial organization theory. We designed a study in which surveyors accompanied Indonesian truck drivers on 304 trips, during which they observed over 6,000 illegal payments to police, soldiers, and weigh station attendants. Using plausibly exogenous changes in the number of checkpoints, we show that market structure affects the level of illegal payments. We further show that corrupt officials use complex pricing schemes, including third‐degree price discrimination and a menu of two‐part tariffs. Our findings illustrate the importance of considering the market structure for bribes when designing anticorruption policy.

The Unequal Geographic Burden of Federal Taxation

Abstract: In the United States, workers in cities offering above‐average wages—cities with high productivity, low quality of life, or inefficient housing sectors—pay 27 percent more in federal taxes than otherwise identical workers in cities offering below‐average wages. According to simulation results, taxes lower long‐run employment levels in high‐wage areas by 13 percent and land and housing prices by 21 and 5 percent, causing locational inefficiencies costing 0.23 percent of income, or $28 billion in 2008. Employment is shifted from north to south and from urban to rural areas. Tax deductions index taxes partially to local cost of living, improving locational efficiency.

Opinions as Incentives

Abstract: We study costs and benefits of differences of opinion between an adviser and a decision maker. Even when they share the same underlying preferences over decisions, a difference of opinion about payoff‐relevant information leads to strategic information acquisition and transmission. A decision maker faces a fundamental trade‐off: a greater difference of opinion increases an adviser's incentives to acquire information but exacerbates the strategic disclosure of any information that is acquired. Nevertheless, when choosing from a rich pool of opinion types, it is optimal for a decision maker to select an adviser with some difference of opinion. Centralization of authority is essential to harness these incentive gains since delegation to the adviser can discourage effort.

Monetary Intervention Mitigated Banking Panics during the Great Depression: Quasi- Experimental Evidence from a Federal Reserve District Border, 1929-1933

Abstract: The Federal Reserve Act divided Mississippi between the 6th (Atlanta) and 8th (St. Louis) Districts. During the Great Depression, these districts’ policies differed. Atlanta championed monetary activism and the extension of aid to ailing banks. St. Louis eschewed expansionary initiatives. During a banking crisis in 1930, Atlanta expedited lending to banks in need. St. Louis did not. Outcomes differed across districts. In Atlanta, banks survived at higher rates, lending continued at higher levels, commerce contracted less, and recovery began earlier. These patterns indicate that central bank intervention influenced bank health, credit availability, and business activity.

The Performance and Competitive Effects of School Autonomy

Abstract: This paper studies a recent British reform that allowed public high schools to opt out of local authority control and become autonomous schools funded directly by the central government. Schools seeking autonomy had only to propose and win a majority vote among current parents. Almost one in three high schools voted on autonomy between 1988 and 1997, and using a version of the regression discontinuity design, I find large achievement gains at schools in which the vote barely won compared to schools in which it barely lost. Despite other reforms that ensured that the British education system was, by international standards, highly competitive, a comparison of schools in the geographic neighborhoods of narrow vote winners and narrow vote losers suggests that these gains did not spill over.

An Operational Measure of Riskiness

Abstract: We propose a measure of riskiness of “gambles” (risky assets) that is objective: it depends only on the gamble and not on the decision maker. The measure is based on identifying for every gamble the critical wealth level below which it becomes “risky” to accept the gamble.

Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia

Abstract: We examine the effects of Russia’s 2001 flat rate income tax reform on consumption, income, and tax evasion. We use the gap between household expenditures and reported earnings as a proxy for tax e...

(Mixed) Strategy in Oligopoly Pricing: Evidence from Gasoline Price Cycles Before and Under a Timing Regulation

Abstract: This paper studies oligopoly firms’ dynamic pricing strategies in a gasoline market before and after the introduction of a unique law that constrains firms to set price simultaneously and only once per day. The observed gasoline pricing behavior, both before and under the law, is well captured by the Edgeworth price cycle equilibrium in the Maskin and Tirole dynamic oligopoly model. My results highlight the importance of price commitment in tacit collusion. I also find evidence that the price leadership outcome under the law is better predicted by mixed strategies play than by alternative hypotheses.

Durability of Output and Expected Stock Returns

Abstract: The demand for durable goods is more cyclical than that for nondurable goods and services. Consequently, the cash flows and stock returns of durable‐good producers are exposed to higher systematic risk. Using the benchmark input‐output accounts of the National Income and Product Accounts, we construct portfolios of durable‐good, nondurable‐good, and service producers. In the cross section, an investment strategy that is long on the durable‐good portfolio and short on the service portfolio earns a risk premium exceeding 4 percent annually. In the time series, an investment strategy that is long on the durable‐good portfolio and short on the market portfolio earns a countercyclical risk premium. We explain these findings in a general equilibrium asset‐pricing model with endogenous production.

Information and the Skewness of Music Sales

Abstract: This paper studies the role of product discovery in the demand for recorded music. We show that releasing a new album causes a substantial and permanent increase in sales of the artist's old albums—especially if the new release is a hit. Patterns in these “backward spillovers” suggest that they result from consumers discovering the artist upon hearing the new release. To explore the implications of consumers’ incomplete information, we estimate a simple, learning‐based model of market demand. Our results imply that the distribution of sales is substantially more skewed than it would be if consumers were more fully informed.

Brand History, Geography, and the Persistence of Brand Shares

Abstract: We document evidence of a persistent “early entry” advantage for brands in 34 consumer packaged goods industries across the 50 largest U.S. cities. Current market shares are higher in markets closest to a brand’s historic city of origin than in those farthest. For six industries, we know the order of entry among the top brands in each of the markets. We find an early entry effect on a brand’s current market share and perceived quality across U.S. cities. The magnitude of this effect typically drives the rank order of market shares and perceived quality levels across cities.

Efficiency of Simultaneous Search

Abstract: This paper presents an equilibrium labor search model in which workers can simultaneously apply to multiple firms to increase their search intensity. They observe firms’ wage postings before choosing where to apply. Owing to coordination frictions, a firm may not receive any applications; otherwise it is able to hire unless all its applicants have better offers. It is shown that the equilibrium converges to the efficient Walrasian outcome as application costs vanish. Even for nonnegligible application costs, the entry of firms, the search intensity, and the number of filled vacancies are constrained efficient. Wage dispersion is essential for constrained efficiency.

Tax Smoothing in Frictional Labor Markets

Abstract: We re-examine the optimality of tax smoothing from the point of view of frictional labor markets. Our central result is that whether or not this cornerstone optimal scal policy pre

Opening the black box of intra-household decision-making: Theory and non-parametric empirical tests of general collective consumption models

Abstract: We provide “revealed preference” tests of general collective consumption models that account for public consumption and externalities within the household. We further propose a novel approach to model special cases of this model, which imply alternative assumptions regarding the sharing rule. Our application uses the panel data from the Russia Longitudinal Monitoring Survey. We find that the general model, together with a large class of special cases, cannot be rejected. By contrast, we do reject the standard unitary model. Since our tests are entirely nonparametric, this provides strong evidence in favor of models focusing on intrahousehold decision making.

Branch Banking as a Device for Discipline: Competition and Bank Survivorship during the Great Depression

Abstract: Because California was a pioneer in the development of large‐scale branching, we use its experience during the 1920s and 1930s to assess the effects of branching on competition and on the stability of banking systems. Using individual bank balance sheets, income statements, and branch establishment data, we show that smaller incumbent banks responded to the entry of a large branch bank by adjusting their operations in a manner consistent with increased efficiency. Competition from branching networks also produced an externality: unit banks exposed to this competition were more likely to survive the Great Depression than banks not exposed to it.

Asset Pricing Implications of Pareto Optimality with Private Information

Abstract: We compare the empirical performance of a standard incomplete markets asset pricing model with that of a novel model with constrained Pareto‐optimal allocations. We represent the models’ stochastic discount factors in terms of the cross‐sectional distribution of consumption and use these representations to evaluate the models’ empirical implications. The first model is inconsistent with the equity premium in the United States, United Kingdom, and Italy. The second model is consistent with the equity premium and the risk‐free rate in all three countries if the coefficient of relative risk aversion is roughly 5 and the quarterly discount factor is less than 0.5.

Coalition-Proof Trade and the Friedman Rule in the Lagos-Wright Model

Abstract: The Lagos‐Wright model—a monetary model in which pairwise meetings alternate in time with a centralized meeting—has been extensively analyzed, but always using particular trading protocols. Here, trading protocols are replaced by two alternative notions of implementability: one that allows only individual defections and one that also allows cooperative defections in meetings. It is shown that the first‐best allocation is implementable under the stricter notion without taxation if people are sufficiently patient. And, if people are free to skip the centralized meeting, then lump‐sum taxation used to pay interest on money does not enlarge the set of implementable allocations.

Chronicle of a Deflation Unforetold

Abstract: Suppose the nominal money supply could be cut literally overnight by, say, 20%. What would happen to prices, wages, output? The answer can be found in 1720s France, where just such an experiment was carried out, repeatedly. Prices adjusted instantaneously and fully on one market only, that for foreign exchange. Prices on other markets (such as commodities) as well as prices of manufactured goods and industrial wages fell slowly, over many months, and not by the full amount of the nominal reduction. Coincidentally or not, the industrial sector (as represented by manufacturing of woolen cloths) experienced a contraction of 30%. When the government changed course and increased the nominal money supply overnight by 20%, prices responded much more, and the woolen industry rebounded.

How Much Is a Dollar Worth? Tipping versus Equilibrium Coexistence on Competing Online Auction Sites

Abstract: Theory models of platform competition predict that prices and buyer‐seller ratios should be approximately equal on coexisting auction sites. Using field experiments on eBay and Yahoo Auctions, we find evidence that is inconsistent with equilibrium hypotheses and suggest that the market is tipping. Prices on eBay are consistently 20–70 percent higher than those on Yahoo, and eBay attracts two additional buyers per seller. On Yahoo, prices and bidders counts are unaffected by the auction ending rule. Various differences between the sites cannot account for the magnitude of these disparities. However, a model of imitation dynamics can rationalize our findings.

Reconsidering Racial Bias in Motor Vehicle Searches: Theory and Evidence

Abstract: In an influential paper in the February 2001 Journal of Political Economy, Knowles, Persico, and Todd present a model of police and motorist behavior in the context of vehicle searches and test it using data from Maryland. Their work marked a resurgence in interest on how to interpret purported evidence of statistical and racial discrimination. (For recent studies, see Hernandez-Murillo and Knowles [2004], Levitt [2004], Anwar and Fang [2006], Dominitz and Knowles [2006], and Persico and Todd [2006].) The main implication of the Knowles et al. model is that in the absence of racial discrimination, the proportion of searches yielding drugs (or “hit rate”) will be equated across races. A relatively low hit rate for any group suggests that police may improve their overall hit rate by shifting resources away from that group and is thus evidence toward discrimination. Using data on vehicle searches by the Maryland State Police (MSP), they find no bias against blacks relative to whites but significant bias against white females and particularly Hispanics (though both groups had limited observations: 41 white females and 97 Hispanics). An important feature of the data used by Knowles et al. is that they are limited to searches occurring on Interstate 95, which was also the focus of the racial profiling lawsuit filed against the MSP in 1993. Since