Showing papers in "Journal of Political Economy in 2014"
TL;DR: In this paper, the authors analyze a model economy with many agents, each with a different productivity level, who divide their time between two activities: producing goods with the production-related knowledge they already have and interacting with others in search of new, productivity-increasing ideas.
Abstract: We analyze a model economy with many agents, each with a different productivity level. Agents divide their time between two activities: producing goods with the production-related knowledge they already have and interacting with others in search of new, productivity-increasing ideas. These choices jointly determine the economy’s current production level and its rate of learning and real growth. We construct the balanced growth path for this economy. We also study the allocation chosen by an idealized planner who takes into account and internalizes the external benefits of search. Finally, we provide three examples of alternative learning technologies and show that the properties of equilibrium allocations are quite sensitive to two of these variations.
338 citations
TL;DR: The authors show that the average immigrant did not face a substantial occupation-based earnings penalty upon first arrival and experienced occupational advancement at the same rate as native immigrants, driven by biases from declining arrival cohort skill level and departures of negatively selected return migrants.
Abstract: During the Age of Mass Migration (1850–1913), the United States maintained an open border, absorbing 30 million European immigrants. Prior cross-sectional work finds that immigrants initially held lower-paid occupations than natives but converged over time. In newly assembled panel data, we show that, in fact, the average immigrant did not face a substantial occupation-based earnings penalty upon first arrival and experienced occupational advancement at the same rate as natives. Cross-sectional patterns are driven by biases from declining arrival cohort skill level and departures of negatively selected return migrants. We show that assimilation patterns vary substantially across sending countries and persist in the second generation.
331 citations
TL;DR: This paper developed a model of systems of cities that combines all three elements and suggests interesting complementarities between them, and also generated Zipf's law for cities under empirically plausible parameter values.
Abstract: Large cities produce more output per capita than small cities. This higher productivity may occur because more talented individuals sort into large cities, because large cities select more productive entrepreneurs and firms, or because of agglomeration economies. We develop a model of systems of cities that combines all three elements and suggests interesting complementarities between them. The model can replicate stylized facts about sorting, agglomeration, and selection in cities. It also generates Zipf’s law for cities under empirically plausible parameter values. Finally, it provides a useful framework within which to reinterpret extant empirical evidence.
325 citations
TL;DR: In this article, the effect of constraints on chiefs' power on economic outcomes, citizens' attitudes, and social capital was studied in Sierra Leone, where a paramount chief must come from a ruling family originally recognized by British colonial authorities.
Abstract: We study the effect of constraints on chiefs' power on economic outcomes, citizens' attitudes, and social capital. A paramount chief in Sierra Leone must come from a ruling family originally recognized by British colonial authorities. In chiefdoms with fewer ruling families, chiefs face less political competition, and development outcomes are significantly worse today. Variation in the security of property rights over land is a potential mechanism. Paradoxically, with fewer ruling families, the institutions of chiefs' authority are more highly respected, and measured social capital is higher. We argue that these results reflect the capture of civil society organizations by chiefs.
321 citations
TL;DR: In this paper, the authors investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of static measures of capital misallocation within industries (and countries).
Abstract: We investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of static measures of capital misallocation within industries (and countries). Across nine data sets spanning 40 countries, we find that industries exhibiting greater time-series volatility of productivity have greater cross-sectional dispersion of the marginal revenue product of capital. We use a standard investment model with adjustment costs to show that variation in the volatility of productivity across these industries and economies can explain a large share (80–90 percent) of the cross-industry (and cross-country) variation in the dispersion of the marginal revenue product of capital.
268 citations
TL;DR: The authors found that initial case and defendant characteristics, including arrest offense and criminal history, can explain most of the large raw racial disparity in federal sentences, but significant gaps remain, and most of this disparity can be explained by prosecutors' initial charging decisions, particularly the filing of charges carrying mandatory minimum sentences.
Abstract: Using rich data linking federal cases from arrest through to sentencing, we find that initial case and defendant characteristics, including arrest offense and criminal history, can explain most of the large raw racial disparity in federal sentences, but significant gaps remain. Across the distribution, blacks receive sentences that are almost 10 percent longer than those of comparable whites arrested for the same crimes. Most of this disparity can be explained by prosecutors’ initial charging decisions, particularly the filing of charges carrying mandatory minimum sentences. Ceteris paribus, the odds of black arrestees facing such a charge are 1.75 times higher than those of white arrestees.
224 citations
TL;DR: The authors explored the tension between the standard economic theory of preference and nonstandard theories of preference that are motivated by an underlying theory of framing and concluded that the divergence of the measured preference from the known preference reflects a mistake, arising from some subjects' misconception of the game form.
Abstract: This study explores the tension between the standard economic theory of preference and nonstandard theories of preference that are motivated by an underlying theory of framing. A simple experiment fails to measure a known preference. The divergence of the measured preference from the known preference reflects a mistake, arising from some subjects’ misconception of the game form. We conclude that choice data should not be granted an unqualified interpretation of preference revelation. Mistakes in choices obscured by a possible error at the foundation of the theory of framing can masquerade as having been produced by nonstandard preferences.
215 citations
TL;DR: This article constructed indices of mutual attractiveness that aggregate information about agents' attributes, such as education, height, body mass index, health, attitude toward risk, and personality traits of spouses.
Abstract: Which and how many attributes are relevant for the sorting of agents in a matching market? This paper addresses these questions by constructing indices of mutual attractiveness that aggregate information about agents’ attributes. The first k indices for agents on each side of the market provide the best approximation of the matching surplus by a k-dimensional model. The methodology is applied on a unique Dutch household survey containing information about education, height, body mass index, health, attitude toward risk, and personality traits of spouses.
186 citations
TL;DR: In this article, the impact of labor market frictions on asset prices was studied and an investment-based model with stochastic labor adjustment costs was proposed to explain the finding that firms with high hiring rates are expanding firms that incur high adjustment costs.
Abstract: We study the impact of labor market frictions on asset prices. In the cross section of US firms, a 10 percentage point increase in the firm’s hiring rate is associated with a 1.5 percentage point decrease in the firm’s annual risk premium. We propose an investment-based model with stochastic labor adjustment costs to explain this finding. Firms with high hiring rates are expanding firms that incur high adjustment costs. If the economy experiences a shock that lowers adjustment costs, these firms benefit the most. The corresponding increase in firm value operates as a hedge against these shocks, explaining the lower risk premium of these firms in equilibrium.
169 citations
TL;DR: In this article, the authors study a mechanism design model in which agents each arrive sequentially and choose one action from a set of actions with unknown rewards, and characterize the optimal disclosure policy of a planner whose goal is to maximize social welfare.
Abstract: We study a novel mechanism design model in which agents each arrive sequentially and choose one action from a set of actions with unknown rewards. The information revealed by the principal affects the incentives of the agents to explore and generate new information. We characterize the optimal disclosure policy of a planner whose goal is to maximize social welfare. One interpretation of our result is the implementation of what is known as the “wisdom of the crowd.” This topic has become increasingly relevant with the rapid spread of the Internet over the past decade.
169 citations
TL;DR: This article developed an analytically tractable model in which growth is created as a positive externality from risk taking by firms at the bottom of the productivity distribution imitating more productive firms.
Abstract: The least productive agents in an economy can be vital in generating growth by spurring technology diffusion. We develop an analytically tractable model in which growth is created as a positive externality from risk taking by firms at the bottom of the productivity distribution imitating more productive firms. Heterogeneous firms choose to produce or pay a cost and search within the economy to upgrade their technology. Sustained growth comes from the feedback between the endogenously determined distribution of productivity, as evolved from past search decisions, and an optimal, forward-looking search policy. The growth rate depends on characteristics of the productivity distribution, with a thicker-tailed distribution leading to more growth.
TL;DR: This article showed that if group incomes are low, increasing group incomes raises violence against that group and lowers violence generated by it and applied the model to data on Hindu-Muslim violence in India.
Abstract: We model intergroup conflict driven by economic changes within groups We show that if group incomes are low, increasing group incomes raises violence against that group and lowers violence generated by it We then apply the model to data on Hindu-Muslim violence in India Our main result is that an increase in per capita Muslim expenditures generates a large and significant increase in future religious conflict An increase in Hindu expenditures has a negative or no effect These findings speak to the origins of Hindu-Muslim violence in post-Independence India
TL;DR: In this article, the authors distinguish between the human capital and signaling theories by estimating the earnings return to a high school diploma, and they find little evidence of diploma signaling effects, while using regression discontinuity methods to compare the earnings of workers who barely passed and barely failed high school exit exams.
Abstract: This paper distinguishes between the human capital and signaling theories by estimating the earnings return to a high school diploma. Unlike most indicators of education (e.g., a year of school), a diploma is essentially a piece of paper and, hence, by itself cannot affect productivity. Any earnings return to holding a diploma must therefore reflect the diploma’s signaling value. Using regression discontinuity methods to compare the earnings of workers who barely passed and barely failed high school exit exams—standardized tests that students must pass to earn a high school diploma—we find little evidence of diploma signaling effects.
TL;DR: In this paper, the authors develop a theory of capital controls as dynamic terms-of-trade manipulation and show that a country growing faster than the rest of the world has incentives to promote domestic savings by taxing capital inflows or subsidizing capital outflows.
Abstract: We develop a theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite-horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. We show that a country growing faster than the rest of the world has incentives to promote domestic savings by taxing capital inflows or subsidizing capital outflows. Although our theory of capital controls emphasizes interest rate manipulation, the pattern of borrowing and lending, per se, is irrelevant.
TL;DR: In this paper, the authors measure the capitalization of housing market externalities into residential housing values by studying the unanticipated elimination of stringent rent controls in Cambridge, Massachusetts, in 1995, and find that rent decontrol generated substantial, robust price appreciation at decontrolled units and nearby never-controlled units.
Abstract: We measure the capitalization of housing market externalities into residential housing values by studying the unanticipated elimination of stringent rent controls in Cambridge, Massachusetts, in 1995. Pooling data on the universe of assessed values and transacted prices of Cambridge residential properties between 1988 and 2005, we find that rent decontrol generated substantial, robust price appreciation at decontrolled units and nearby never-controlled units, accounting for a quarter of the $7.8 billion in Cambridge residential property appreciation during this period. The majority of this contribution stems from induced appreciation of never-controlled properties. Residential investment explains only a small fraction of the total.
TL;DR: The authors developed an alternative theory in which industries are made up of large plants producing standardized goods and small plants making custom or specialty goods, and used confidential census data to estimate the parameters of the model.
Abstract: There is wide variation in the sizes of manufacturing plants, even within the most narrowly defined industry classifications. Standard theories attribute such size differences to productivity differences. This paper develops an alternative theory in which industries are made up of large plants producing standardized goods and small plants making custom or specialty goods. It uses confidential census data to estimate the parameters of the model. The model fits the data well. In particular, the predictions of the model regarding the effect of a surge of imports from China are consistent with what happened over the period 1997–2007.
TL;DR: In this paper, a risk premium is defined as the price of risk and the degree of exposure to risk in a decentralized security market, and the risk premium reflects both the price and exposure of a security to macroeconomic shocks.
Abstract: Asset pricing theory has long recognized that financial markets compensate investors who are exposed to some components of uncertainty. This is where macroeconomics comes into play. The economywide shocks, the primary concern of macroeconomists, by their nature are not diversifiable. Exposures to these shocks cannot be averaged out with exposures to other shocks. Thus returns on assets that depend on these macroeconomic shocks reflect “risk” premia and are a linchpin connecting macroeconomic uncertainty to financial markets. A risk premium reflects both the price of risk and the degree of exposure to risk. I will be particularly interested in how the exposures to macroeconomic impulses are priced by decentralized security markets.
TL;DR: Acemoglu and Johnson as mentioned in this paper showed that childhood health affects adult productivity and argued that such an effect is likely, primarily because childhood health affect adult productivity. But they did not identify the effect of contemporaneous improvements in health on economic growth, and their results depend critically on the assumption that initial health has no causal effect on subsequent economic growth.
Abstract: Acemoglu and Johnson (2007) present evidence that improvements in population health do not promote economic growth. We show that their result depends critically on the assumption that initial health has no causal effect on subsequent economic growth. We argue that such an effect is likely, primarily because childhood health affects adult productivity. In our augmented model, which includes initial health, the instrumental variable proposed by Acemoglu and Johnson has no significant predictive power for improvements in health and does not identify the effect of contemporaneous improvements in health on economic growth.(This abstract was borrowed from another version of this item.)
TL;DR: This paper developed and estimated a structural equilibrium model of the college market, where students, having heterogeneous abilities and preferences, make college application decisions, subject to uncertainty and application costs, and colleges, observing only noisy measures of student ability, choose tuition and admissions policies to compete for more able students.
Abstract: I develop and estimate a structural equilibrium model of the college market. Students, having heterogeneous abilities and preferences, make college application decisions, subject to uncertainty and application costs. Colleges, observing only noisy measures of student ability, choose tuition and admissions policies to compete for more able students. Tuition, applications, admissions and enrollment are joint outcomes from a subgame perfect Nash equilibrium. I estimate the structural parameters of the model using data from the National Longitudinal Survey of Youth 1997, via a three-step procedure to deal with potential multiple equilibria. In counterfactual experiments, I use the model …rst to examine the extent to which college enrollment can be increased by expanding the supply of colleges, and then to assess the importance of various measures of student ability.
TL;DR: The authors developed a model that can also generate the intermediate case of cities that feature the coagglomeration of some but not all industries, thus giving theoretical foundations to the analysis of business clusters.
Abstract: Cities are neither completely specialized nor completely diverse. However, prior research has focused almost entirely on the polar cases of complete specialization and complete diversity. This paper develops a model that can also generate the intermediate case of cities that feature the coagglomeration of some but not all industries, thus giving theoretical foundations to the analysis of business clusters. The analysis sharply challenges the conventional wisdom that the size and composition of cities are necessarily driven primarily by agglomerative efficiencies.
TL;DR: In this paper, the authors study the wealth accumulation of Indian state politicians using public disclosures required of all candidates and find that the annual asset growth of winners is 3-5 percent higher than that of runners-up.
Abstract: We study the wealth accumulation of Indian state politicians using public disclosures required of all candidates. The annual asset growth of winners is 3–5 percent higher than that of runners-up, a difference that holds also in a set of close elections. The relative asset growth of winners is greater in more corrupt states and for those holding ministerial positions. These results are consistent with a rent-seeking explanation for the relatively high rate of growth in winners’ assets.
TL;DR: In this paper, the authors evaluate the impact on crime of a localized policing experiment that depenalized the possession of small quantities of cannabis in the London borough of Lambeth and find that the overall welfare of local residents likely fell, as measured by house prices.
Abstract: We evaluate the impact on crime of a localized policing experiment that depenalized the possession of small quantities of cannabis in the London borough of Lambeth. We find that depenalization policy caused the police to reallocate effort toward nondrug crime. Despite the overall fall in crime attributable to the policy, we find that the total welfare of local residents likely fell, as measured by house prices. We shed light on what would be the impacts on crime of a citywide depenalization policy by developing and calibrating a structural model of the market for cannabis and crime.
TL;DR: In this article, the authors propose a simple model that captures these features, conveying new insights, and characterize the equilibrium and show that having partially attentive consumers improves consumer welfare, while enhanced cross-market competition decreases average price paid, as leading firms try to stay under the consumers' radar.
Abstract: Consumers purchase multiple types of goods but may be able to examine only a limited number of markets for the best price. We propose a simple model that captures these features, conveying new insights. A firm’s price can deflect or draw attention to its market, and consequently, limited attention introduces a new dimension of cross-market competition. We characterize the equilibrium and show that having partially attentive consumers improves consumer welfare. With less attention, consumers are more likely to miss the best offers; but enhanced cross-market competition decreases average price paid, as leading firms try to stay under the consumers’ radar.
TL;DR: In this paper, an efficient and incentive compatible dynamic auction for selling multiple complementary goods is proposed, where the seller has reserve prices and every bidder responds with a set of goods demanded at these prices, and the auctioneer adjusts prices.
Abstract: This article proposes an efficient and incentive compatible dynamic auction for selling multiple complementary goods. The seller has reserve prices. The auctioneer announces a current price for every bundle of goods and a supply set of goods, every bidder responds with a set of goods demanded at these prices, and the auctioneer adjusts prices. We prove that even when bidders can exercise their market power strategically, this dynamic auction always induces them to bid truthfully, resulting in an efficient allocation, its supporting Walrasian equilibrium price for every bundle of goods, and a generalized Vickrey-Clarke-Groves payment for every bidder.
TL;DR: In this paper, the average plumber whose name begins with A or a number receives five times more service complaints than other plumbers and also charges higher prices, while plumbers with A names advertise more in the Yellow Pages and on Google, and doing so is positively correlated with receiving complaints.
Abstract: This paper considers when a firm’s deliberately chosen name can signal meaningful information. The average plumbing firm whose name begins with A or a number receives five times more service complaints than other firms and also charges higher prices. Relatedly, plumbers with A names advertise more in the Yellow Pages and on Google, and doing so is positively correlated with receiving complaints. As the use of A names is more prevalent in larger markets, I reconcile these findings with a simple model in which firms have different qualities and consumers have heterogeneous search costs.
TL;DR: The authors presented a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy-relevant information, and developed a theory of fiscal (de-)centralization, which revisits the work of Oates in a world of incomplete information and strategic communication.
Abstract: The paper presents a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy-relevant information. Depending on the type of policy under consideration, communication between delegates generally suffers from a bias that makes truthful communication difficult and sometimes impossible. This generates inefficient federal policy choices that are often endogenously characterized by overspending, universalism, and uniformity. Building on these findings, I develop a theory of fiscal (de-)centralization, which revisits the work of Oates in a world of incomplete information and strategic communication. Empirical results from a cross section of US municipalities are consistent with the predicted pattern of spending.
TL;DR: In this paper, the authors assess the effect of life expectancy on GDP per capita using data from 1900, employing a nonlinear estimator suggested by their framework, and using information from microeconomic estimates on the effects of improving health.
Abstract: Bloom, Canning, and Fink (2014) argue that the results in Acemoglu and Johnson (2006, 2007) are not robust because initial level of life expectancy (in 1940) should be included in our regressions of changes in GDP per capita on changes in life expectancy. We assess their claims controlling for potential lagged effects of initial life expectancy using data from 1900, employing a nonlinear estimator suggested by their framework, and using information from microeconomic estimates on the effects of improving health. There is no evidence for a positive effect of life expectancy on GDP per capita in this important historical episode.
TL;DR: It is shown that mechanisms that centralize production decisions are strictly dominated by those that decentralize decision-making authority to agents, and optimal communication mechanisms maximize information exchanged directly among agents.
Abstract: We consider mechanism design in which message sets are restricted owing to communication costs, preventing full revelation of information. A principal contracts with multiple agents each supplying a one-dimensional good at a privately known cost. We characterize optimal mechanisms subject to incentive and communication constraints, without imposing arbitrary restrictions on the number of communication rounds. We show that mechanisms that centralize production decisions are strictly dominated by those that decentralize decision-making authority to agents, and optimal communication mechanisms maximize information exchanged directly among agents. Conditions are provided for these to involve gradual release of information over multiple rounds either simultaneously or sequentially.
TL;DR: Investment of US firms responds asymmetrically to Tobin's Q: investment of established firms (intensive investment) reacts negatively to Q whereas investment of new firms (extensive investment) responds positively and elastically to Q as discussed by the authors.
Abstract: Investment of US firms responds asymmetrically to Tobin’s Q: investment of established firms—“intensive” investment—reacts negatively to Q whereas investment of new firms—“extensive” investment—responds positively and elastically to Q. This asymmetry, we argue, reflects a difference between established and new firms in the cost of adopting new technologies. A fall in the compatibility of new capital with old capital raises measured Q and reduces the incentive of established firms to invest. New firms do not face such compatibility costs and step up their investment in response to the rise in Q.