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Showing papers in "Journal of Political Economy in 2011"


Journal ArticleDOI
TL;DR: In this article, the size of the multiplier in a dynamic, stochastic, general equilibrium model was investigated and it was shown that the multiplier effect is substantially larger than one when the zero lower bound on the nominal interest rate binds.
Abstract: We argue that the government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds. The larger the fraction of government spending that occurs while the nominal interest rate is zero, the larger the value of the multiplier. After providing intuition for these results, we investigate the size of the multiplier in a dynamic, stochastic, general equilibrium model. In this model the multiplier effect is substantially larger than one when the zero bound binds. Our model is consistent with the behavior of key macro aggregates during the recent financial crisis.

1,798 citations


Journal ArticleDOI
TL;DR: In this paper, a new competitive saving incentive was proposed: as the sex ratio rises, Chinese parents with a son raise their savings in a competitive manner in order to improve their son's relative attractiveness for marriage.
Abstract: The high and rising household savings rate in China is not easily reconciled with the traditional explanations that emphasize life cycle factors, the precautionary saving motive, financial development, or habit formation. This paper proposes a new competitive saving motive: as the sex ratio rises, Chinese parents with a son raise their savings in a competitive manner in order to improve their son’s relative attractiveness for marriage. The pressure on savings spills over to other households. Both cross-regional and household-level evidence supports this hypothesis. This factor can potentially account for about half the actual increase in the household savings rate during 1990–2007.

632 citations


Journal ArticleDOI
TL;DR: This paper proposed a combinatorial assignment mechanism based on an approximation to competitive equilibrium from equal incomes (CEEI) in which incomes are unequal but arbitrarily close together, and the mechanism is approximately efficient, satisfies two new criteria of outcome fairness, and is strategyproof in large markets.
Abstract: This paper proposes a new mechanism for combinatorial assignment—for example, assigning schedules of courses to students—based on an approximation to competitive equilibrium from equal incomes (CEEI) in which incomes are unequal but arbitrarily close together. The main technical result is an existence theorem for approximate CEEI. The mechanism is approximately efficient, satisfies two new criteria of outcome fairness, and is strategyproof in large markets. Its performance is explored on real data, and it is compared to alternatives from theory and practice: all other known mechanisms are either unfair ex post or manipulable even in large markets, and most are both manipulable and unfair.

531 citations


Journal ArticleDOI
TL;DR: In this paper, the impact of a teacher performance pay program implemented across a large representative sample of government-run rural primary schools in the Indian state of Andhra Pradesh on the student and school level was evaluated.
Abstract: This brief summarizes the results of a gender impact evaluation study, entitled Teacher performance pay : experimental evidence from India, conducted in August 2005 in India. The study observed the impact of a teacher performance pay program implemented across a large representative sample of government-run rural primary schools in the Indian state of Andhra Pradesh on the student and school level. After two years, students in incentive schools performed significantly better than control schools. The mean treatment effect is 0.22 standard deviations. There are significant improvements across the performance distribution. Additionally there were no observations of adverse consequences, given that students also do better in non-incentivized subjects. The main mechanism of impact is increased teacher effort conditional on the teacher being present. The student's gender does not have a significant effect on the impact of the intervention. Funding for the study derived from the Andhra Pradesh, Department for International Development (DFID), Azim Premji Foundation, and the Spanish Impact Evaluation Fund.

438 citations


Journal ArticleDOI
TL;DR: This paper developed and tested an economic theory of insurgency motivated by the informal literature and by recent military doctrine and found that improved service provision reduces insurgent violence, particularly for smaller projects and since the “surge” began in 2007.
Abstract: We develop and test an economic theory of insurgency motivated by the informal literature and by recent military doctrine. We model a three-way contest between violent rebels, a government seeking to minimize violence by mixing service provision and coercion, and civilians deciding whether to share information about insurgents. We test the model using panel data from Iraq on violence against Coalition and Iraqi forces, reconstruction spending, and community characteristics (sectarian status, socioeconomic grievances, and natural resource endowments). Our results support the theory’s predictions: improved service provision reduces insurgent violence, particularly for smaller projects and since the “surge” began in 2007.

379 citations


Journal ArticleDOI
TL;DR: This paper found that the presence of a superstar player is associated with lower performance in professional golf tournaments and no evidence that reduced performance is attributable to media attention intensity or risky strategy adoption, while the adverse superstar effect varies with the quality of Woods's play.
Abstract: Internal competition may motivate worker effort, yet the benefits of competition may depend critically on workers’ relative abilities: large skill differences may reduce efforts. I use panel data from professional golf tournaments and find that the presence of a superstar is associated with lower performance. On average, golfers’ first-round scores are approximately 0.2 strokes worse when Tiger Woods participates relative to when Woods is absent. The overall tournament effect is 0.8 strokes. The adverse superstar effect varies with the quality of Woods’s play. There is no evidence that reduced performance is attributable to media attention intensity or risky strategy adoption.

321 citations


Journal ArticleDOI
TL;DR: The authors decompose industrial production into components arising from aggregate and sector-specific shocks, and find that nearly all of IP variability is associated with common factors, while the role of idiosyncratic shocks increased considerably after the mid-1980s, explaining half of the quarterly variation in IP.
Abstract: Using factor methods, we decompose industrial production (IP) into components arising from aggregate and sector-specific shocks. An approximate factor model finds that nearly all of IP variability is associated with common factors. We then use a multisector growth model to adjust for the effects of input-output linkages in the factor analysis. Thus, a structural factor analysis indicates that the Great Moderation was characterized by a fall in the importance of aggregate shocks while the volatility of sectoral shocks was essentially unchanged. Consequently, the role of idiosyncratic shocks increased considerably after the mid-1980s, explaining half of the quarterly variation in IP.

292 citations


Journal ArticleDOI
TL;DR: In this paper, the authors explore the implications for asset prices and macroeconomic dynamics of shocks that improve real investment opportunities and thus affect the representative household's marginal utility and find that a positive investment shock leads to high marginal utility states.
Abstract: I explore the implications for asset prices and macroeconomic dynamics of shocks that improve real investment opportunities and thus affect the representative household’s marginal utility. These investment shocks generate differences in risk premia due to their heterogeneous impact on firms: they benefit firms producing investment relative to firms producing consumption goods and increase the value of growth opportunities relative to the value of existing assets. Using data on asset returns, I find that a positive investment shock leads to high marginal utility states. A general equilibrium model with investment shocks matches key features of macroeconomic quantities and asset prices.

265 citations


Journal ArticleDOI
TL;DR: In this article, the authors develop a framework for studying trade in horizontally and vertically differentiated products, where consumers with heterogeneous incomes and tastes purchase a homogeneous good and make a discrete choice of quality and variety of a differentiated product.
Abstract: The authors develop a framework for studying trade in horizontally and vertically differentiated products. In their model, consumers with heterogeneous incomes and tastes purchase a homogeneous good and make a discrete choice of quality and variety of a differentiated product. The distribution of preferences generates a nested-logit demand structure such that the fraction of consumers who buy a higher-quality product rises with income. The model features a home-market effect that helps to explain why richer countries export higher-quality goods. It provides a tractable tool for studying the welfare consequences of trade and trade policy for different income groups in an economy.

247 citations


Journal ArticleDOI
TL;DR: The Taylor rule is not identified without unrealistic assumptions as mentioned in this paper, and the Taylor rule regressions do not show that the Fed moved from "passive" to "active" policy in 1980.
Abstract: The new-Keynesian, Taylor rule theory of inflation determination relies on explosive dynamics. By raising interest rates in response to inflation, the Fed induces ever-larger inflation, unless inflation jumps to one particular value on each date. However, economics does not rule out explosive inflation, so inflation remains indeterminate. Attempts to fix this problem assume that the government will choose to blow up the economy if alternative equilibria emerge, by following policies we usually consider impossible. The Taylor rule is not identified without unrealistic assumptions. Thus, Taylor rule regressions do not show that the Fed moved from “passive” to “active” policy in 1980.

227 citations


Journal ArticleDOI
TL;DR: This paper proposed an equilibrium model that can explain a wide range of international finance puzzles, including the high correlation of international stock markets, despite the lack of correlation of fundamentals, by combining cross-country-correlated long-run risk with Epstein and Zin preferences, using U.S. and U.K. data.
Abstract: We propose an equilibrium model that can explain a wide range of international finance puzzles, including the high correlation of international stock markets, despite the lack of correlation of fundamentals. We conduct an empirical analysis of our model, which combines cross-country-correlated long-run risk with Epstein and Zin preferences, using U.S. and U.K. data, and show that it successfully reconciles international prices and quantities, thereby solving the international equity premium puzzle. These results provide evidence suggesting a link between common long-run growth perspectives and exchange rate movements.

Journal ArticleDOI
TL;DR: This article developed a model of directed search on the job in which transitions of workers between unemployment and employment and across employers are driven by heterogeneity in the quality of firm-worker matches, and the equilibrium is such that the agents' value and policy functions are independent of the endogenous distribution of workers across employment states.
Abstract: The paper develops a model of directed search on the job in which transitions of workers between unemployment and employment and across employers are driven by heterogeneity in the quality of firm-worker matches The equilibrium is such that the agents’ value and policy functions are independent of the endogenous distribution of workers across employment states Hence, the model can be solved outside of the steady state and used to measure the effect of cyclical productivity shocks on the labor market Productivity shocks are found to generate large fluctuations in workers’ transitions, unemployment, and vacancies when matches are experience goods, but not when matches are inspection goods

Journal ArticleDOI
TL;DR: The authors employ a new empirical approach for identifying the impact of government spending on the private sector, using changes in congressional committee chairmanships as a source of exogenous variation in state-level federal expenditures.
Abstract: This paper employs a new empirical approach for identifying the impact of government spending on the private sector Our key innovation is to use changes in congressional committee chairmanships as a source of exogenous variation in state-level federal expenditures We show that fiscal spending shocks appear to significantly dampen corporate investment activity This retrenchment occurs within large and small states and is most pronounced among geographically concentrated firms The effects are economically meaningful, and the mechanism—entirely distinct from interest rate and tax channels—suggests new considerations in assessing the impact of government spending on private-sector economic activity

Journal ArticleDOI
TL;DR: This paper proposed a new trade model for GATT/WTO negotiations based on Krugman's "new trade" model, which emphasizes international production relocations and is easy to calibrate to bilateral trade data.
Abstract: I suggest a novel theory of GATT/WTO negotiations based on Krugman’s “new trade” model. It emphasizes international production relocations and is easy to calibrate to bilateral trade data. Focusing on the major players in recent GATT/WTO negotiations, I find that it implies reasonable noncooperative tariffs as well as moderate gains from GATT/WTO negotiations.

Journal ArticleDOI
TL;DR: Using a 12-year county-level panel, it is found that a 10 percent increase in births that occur in hospitals with EMRs reduces neonatal mortality by 16 deaths per 100,000 live births.
Abstract: Electronic medical records (EMRs) facilitate fast and accurate access to patient records, which could improve diagnosis and patient monitoring. Using a 12-year county-level panel, we find that a 10 percent increase in births that occur in hospitals with EMRs reduces neonatal mortality by 16 deaths per 100,000 live births. This is driven by a reduction of deaths from conditions requiring careful monitoring. We also find a strong decrease in mortality when we instrument for EMR adoption using variation in state medical privacy laws. Rough cost-effectiveness calculations suggest that EMRs are associated with a cost of $531,000 per baby’s life saved.

Journal ArticleDOI
TL;DR: In this article, the authors study an over-the-counter (OTC) market in which the usefulness of assets as a means of payment or collateral is limited by the threat of fraudulent practices.
Abstract: We study an over-the-counter (OTC) market in which the usefulness of assets as a means of payment or collateral is limited by the threat of fraudulent practices. Agents can produce fraudulent assets at a positive cost, which generates upper bounds on the quantity of each asset that can be traded in the OTC market. Each of these endogenous, asset-specific, resalability constraints depends on the cost of fraud, on the frequency of trade, and on the asset price. In equilibrium, assets are partitioned into three liquidity tiers, which differ in their resalability, prices, haircuts, sensitivity to shocks, and responses to policies.

Journal ArticleDOI
TL;DR: In this paper, the authors introduce a measure of the severity of violations of the revealed preference axioms, the money pump index (MPI), which is also a statistical test for the hypothesis that a consumer is rational when behavior is observed with error.
Abstract: We introduce a measure of the severity of violations of the revealed preference axioms, the money pump index (MPI). The MPI is the amount of money one can extract from a consumer who violates the axioms. It is also a statistical test for the hypothesis that a consumer is rational when behavior is observed with error. We present an application using a panel data set of food expenditures. The data exhibit many violations of the axioms. Mostly, the MPI for these violations is small. The MPI indicates that the hypothesis of consumer rationality cannot be rejected.

Journal ArticleDOI
TL;DR: The authors analyzed the economic effects of two dominant land demarcation regimes, metes and bounds (MB) and the rectangular system (RS), in nineteenth-century Ohio and found large initial net benefits in land values from the RS and also these effects persist into the twenty-first century.
Abstract: We use a natural experiment in nineteenth-century Ohio to analyze the economic effects of two dominant land demarcation regimes, metes and bounds (MB) and the rectangular system (RS). MB is decentralized with plot shapes, alignment, and sizes defined individually; RS is a centralized grid of uniform square plots that does not vary with topography. We find large initial net benefits in land values from the RS and also that these effects persist into the twenty-first century. These findings reveal the importance of transaction costs and networks in affecting property rights, land values, markets, and economic growth.

Journal ArticleDOI
TL;DR: In this paper, the authors estimate an equilibrium model of dynamic oligopoly with durable goods and endogenous innovation to examine the effect of competition on innovation in the personal computer microprocessor industry and find that the rate of innovation in product quality would be 4.2 percent higher without AMD present, though higher prices would reduce consumer surplus by $12 billion per year.
Abstract: We estimate an equilibrium model of dynamic oligopoly with durable goods and endogenous innovation to examine the effect of competition on innovation in the personal computer microprocessor industry. Firms make dynamic pricing and investment decisions while consumers make dynamic upgrade decisions, anticipating product improvements and price declines. Consistent with Schumpeter, we find that the rate of innovation in product quality would be 4.2 percent higher without AMD present, though higher prices would reduce consumer surplus by $12 billion per year. Comparative statics illustrate the role of product durability and provide implications of the model for other industries.

Journal ArticleDOI
TL;DR: This paper found that the Rosenwald program accounts for a sizable portion of the educational gains of rural southern blacks, and that the gains are highest in the most disadvantaged counties, suggesting that schooling treatments have the largest impact among those with limited access to education.
Abstract: The black-white gap in schooling among southern-born men narrowed sharply between the world wars. From 1914 to 1931, nearly 5,000 schools were constructed as part of the Rosenwald Rural Schools Initiative. Using census data and World War II records, we find that the Rosenwald program accounts for a sizable portion of the educational gains of rural southern blacks. We find significant effects on school attendance, literacy, years of schooling, cognitive test scores, and northern migration. The gains are highest in the most disadvantaged counties, suggesting that schooling treatments have the largest impact among those with limited access to education.

Journal ArticleDOI
TL;DR: In this paper, the Federal Reserve Bank of Atlanta rushed currency to member banks beset by runs and showed that this intervention arrested the panic and estimate that bank failures would have been twice as high without the Fed's intervention.
Abstract: Scholars differ on whether central bank intervention mitigates banking panics. In April 1929, a fruit fly infestation in Florida forced the U.S. government to quarantine fruit shipments from the state and destroy infested groves. In July, depositors panicked in Tampa and surrounding cities. The Federal Reserve Bank of Atlanta rushed currency to member banks beset by runs. We show that this intervention arrested the panic and estimate that bank failures would have been twice as high without the Federal Reserve’s intervention. Our results suggest that similar interventions may have reduced bank failures during the Great Depression.

Journal ArticleDOI
TL;DR: In this article, the authors developed a model of costly capital reallocation to understand how leasing reduces trading frictions and showed that leased assets trade more frequently and produce more output than owned assets.
Abstract: I develop a model of costly capital reallocation to understand how leasing reduces trading frictions. Leased assets trade more frequently and produce more output than owned assets because (1) high-volatility firms are more likely to lease than low-volatility firms and (2) firms shed leased asssets faster than owned assets amid productivity shocks because of lower transaction costs. Commercial aircraft data show that leased aircraft have holding durations 38 percent shorter and fly 6.5 percent more hours than owned aircraft. These differences arise primarily because when profitability declines, carriers keep owned aircraft and return leased aircraft, which lessors redeploy to more productive operators.

Journal ArticleDOI
TL;DR: In this paper, the authors modify the stochastic dominance requirement by taking into account the status quo (given by the current wealth) and the possibility of rejecting gambles, and by comparing rejections that are substantive (i.e., uniform over wealth levels or over utilities).
Abstract: Stochastic dominance is a partial order on risky assets (“gambles”) that is based on the uniform preference—of all decision-makers in an appropriate class—for one gamble over another. We modify this requirement, first, by taking into account the status quo (given by the current wealth) and the possibility of rejecting gambles, and second, by comparing rejections that are substantive (i.e., uniform over wealth levels or over utilities). This yields two new stochastic orders: “wealth-uniform dominance” and “utility-uniform dominance.” Unlike stochastic dominance, these two orders are complete: any two gambles can be compared. Moreover, they are equivalent to the orders induced by, respectively, the Aumann–Serrano index of riskiness and the Foster–Hart measure of riskiness.

Journal ArticleDOI
TL;DR: In this paper, the optimal strength of the burden of proof, as well as optimal enforcement effort and sanctions, involves trading off deterrence and the chilling of desirable behavior, the latter being absent in previous work.
Abstract: The burden of proof, a central feature of adjudication and other decision-making contexts, constitutes an important but largely unappreciated policy instrument. The optimal strength of the burden of proof, as well as optimal enforcement effort and sanctions, involves trading off deterrence and the chilling of desirable behavior, the latter being absent in previous work. The character of the optimum differs markedly from prior results and from conventional understandings of proof burdens. There are important divergences across models in which enforcement involves monitoring, investigation, and auditing. A number of extensions are analyzed, in one instance nullifying key results in prior work.

Journal ArticleDOI
TL;DR: The authors studied a model in which voters choose between two candidates on the basis of both ideology and competence and showed that when voting is voluntary and costly, the outcome of a large election is always first-best.
Abstract: We study a model in which voters choose between two candidates on the basis of both ideology and competence. While the ideology of the candidates is commonly known, voters are imperfectly informed about competence. Voter preferences, however, are such that ideology alone determines voting. When voting is compulsory, the candidate of the majority ideology prevails, and this may not be optimal from a social perspective. However, when voting is voluntary and costly, we show that turnout adjusts endogenously so that the outcome of a large election is always first-best.

Journal ArticleDOI
TL;DR: This paper showed that risk-tolerant workers hold jobs in which earnings carry more aggregate risk, and that the effect of idiosyncratic income shocks on consumption is practically small and statistically difficult to distinguish from zero.
Abstract: How well do people share risk? Standard risk-sharing regressions assume that any variation in households’ risk preferences is uncorrelated with variation in the cyclicality of income. I combine administrative and survey data to show that this assumption is questionable: Risk-tolerant workers hold jobs in which earnings carry more aggregate risk. The correlation makes risk-sharing regressions in the previous literature too pessimistic. I derive techniques that eliminate the bias, apply them to U.S. data, and find that the effect of idiosyncratic income shocks on consumption is practically small and statistically difficult to distinguish from zero.

Journal ArticleDOI
TL;DR: In this article, the authors demonstrate the empirical importance of this allocative cost for the U.S. residential market for natural gas, which was subject to price ceilings during 1954-89.
Abstract: A direct consequence of restricting the price of a good for which secondary markets do not exist is that, in the presence of excess demand, the good will not be allocated to the buyers who value it the most. We demonstrate the empirical importance of this allocative cost for the U.S. residential market for natural gas, which was subject to price ceilings during 1954–89. Using a household-level, discrete-continuous model of natural gas demand, we estimate that the allocative cost in this market averaged $3.6 billion annually, nearly tripling previous estimates of the net welfare loss to U.S. consumers.

Journal ArticleDOI
TL;DR: In this paper, the problem of a monopolist who must sell her inventory before some deadline, facing buyers with independent private values, is considered, and the seller faces a basic trade-off between imperfect price discrimination and maintaining an effective reserve price.
Abstract: We consider the problem of a monopolist who must sell her inventory before some deadline, facing buyers with independent private values. The seller faces a basic trade-off between imperfect price discrimination and maintaining an effective reserve price. When there is only one unit and only a few buyers, the seller essentially posts unacceptable prices up to the very end, at which point prices collapse in a series of jumps to a “reserve price” exceeding marginal cost. When there are many buyers, the seller abandons this reserve price in order to more effectively screen buyers, with prices decreasing continuously over time.

Journal ArticleDOI
TL;DR: In this paper, the authors analyze the consequences of knowledge sharing in the model where homogeneous agents share knowledge with their peers whenever the private benefits exceed communication costs, and the welfare implications of this transmission mechanism hinge on whether units of knowledge complement, substitute for, or are independent of each other.
Abstract: Knowledge sharing is economically important but also typically incomplete: we “filter” our communication. This paper analyzes the consequences of filtering. In the model, homogeneous agents share knowledge with their peers whenever the private benefits exceed communication costs. The welfare implications of this transmission mechanism hinge on whether units of knowledge complement, substitute for, or are independent of each other. Both substitutability and complementarity generate externalities; cheaper communication eliminates externalities in the former case but not necessarily in the latter. Complementary basic skills such as numeracy catalyze technology adoption, and adoption may be path dependent even when payoffs are certain and independent across agents.

Journal ArticleDOI
TL;DR: In this paper, the authors present a new model of political competition in which candidates belong to factions and compete to direct local public goods to their local constituency before elections, and provide a unified explanation of two prominent features of public resource allocations: the persistence of inefficient policies and the tendency of public spending to favor incumbent party strongholds over swing constituency.
Abstract: This paper presents a new model of political competition in which candidates belong to factions. Before elections, factions compete to direct local public goods to their local constituencies. The model of factional competition delivers a rich set of implications relating the internal organization of the party to the allocation of resources. In doing so, the model provides a unified explanation of two prominent features of public resource allocations: the persistence of (possibly inefficient) policies and the tendency of public spending to favor incumbent party strongholds over swing constituencies.