Showing papers in "Journal of Political Economy in 2015"
TL;DR: In this article, an asset-pricing model with money introduced via a cash-in-advance constraint is presented, where monetary velocity is variable and money demand does not obey the trivial quantity equation.
Abstract: An asset-pricing model with money introduced via a cash-in-advance constraint is presented. The monetary velocity is variable; hence money demand does not obey the trivial quantity equation. The effects of disturbances in output and money growth on real balances, the price level, and interest rates are examined. Monetary policy has effects on real asset prices. The Fisher relation and the premium on nominal bonds are discussed. The precise role of the timing of information and transactions for properties of price levels and interest rates are clarified.
405 citations
TL;DR: In this paper, it has become customary in the theoretical literature dealing with the impact of devaluation on the trade balance to distinguish two stages of such an impact: the initial effect and the reversal effect.
Abstract: I IT HAS become customary in the theoretical literature dealing with the impact of devaluation on the trade balance to distinguish two stages of such an impact: the initial effect and the reversal effect.2 The sign and size of the first effect will be determined by the price elasticities of demand and supply of imports and exports.3 While the first effect depends on changes in relative prices, the reversal effect depends mainly on the income mechanism and tends to offset the original impact of the devaluation on the trade balance. Although the initial and reversal effects arise from static models, a time se-
340 citations
TL;DR: In this paper, a community model with public expenditures set by voting, with migration between communities, and with land price differentials (capitalization) was shown to become heterogeneous in composition and (second best) inefficient.
Abstract: Public-service output depends on input expenditures, on own personal characteristics, and on the characteristics of the other residents in the community (the peer group effect). In a community model with public expenditures set by voting, with migration between communities, and with land price differentials (capitalization), it is shown that communities may become heterogeneous in composition and (second-best) inefficient. This equilibrium occurs when the peer group effect is neither "too strong" nor "too weak." The inefficiency arises because an externality is created by migration. The land price differential does not play the part of the "price" of the better peer group but of a transfer payment.
258 citations
TL;DR: In Norway, mothers giving birth before July 1, 1977, were eligible for 12 weeks of unpaid leave, while those giving birth after that date were entitled to 4 months of paid leave and 12 months of unsupervised leave.
Abstract: We study a change in maternity leave entitlements in Norway. Mothers giving birth before July 1, 1977, were eligible for 12 weeks of unpaid leave, while those giving birth after that date were entitled to 4 months of paid leave and 12 months of unpaid leave. The increased time spent with the child led to a 2 percentage point decline in high school dropout rates and a 5 percent increase in wages at age 30. These effects were larger for the children of mothers who, in the absence of the reform, would have taken very low levels of unpaid leave.
248 citations
TL;DR: In this article, the authors model demand for noninstrumental information, drawing on the idea that people derive entertainment utility from suspense and surprise, and analyze the optimal way to reveal information over time so as to maximize expected suspense or surprise experienced by a Bayesian audience.
Abstract: We model demand for noninstrumental information, drawing on the idea that people derive entertainment utility from suspense and surprise. A period has more suspense if the variance of the next period’s beliefs is greater. A period has more surprise if the current belief is further from the last period’s belief. Under these definitions, we analyze the optimal way to reveal information over time so as to maximize expected suspense or surprise experienced by a Bayesian audience. We apply our results to the design of mystery novels, political primaries, casinos, game shows, auctions, and sports.
234 citations
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TL;DR: This article found that workers increase output by voluntarily choosing dominated contracts (which penalize low output but give no additional rewards for high output), and effort increases closer to (randomly assigned) paydays.
Abstract: Self-control problems change the logic of agency theory by partly aligning the interests of the firm and worker: both now value contracts that elicit future effort. Findings from a year-long field experiment with full-time data entry workers support this idea. First, workers increase output by voluntarily choosing dominated contracts (which penalize low output but give no additional rewards for high output). Second, effort increases closer to (randomly assigned) paydays. Third, the contract and payday effects are strongly correlated within workers, and this correlation grows with experience. We suggest that workplace features such as high-powered incentives or effort monitoring may provide self-control benefits.
224 citations
TL;DR: In this paper, an incomplete information game for individual choice under social influences that nests standard models as special cases is developed, with alternative assumptions regarding an analyst's a priori knowledge of social structure or access to individual-level or aggregate data.
Abstract: This paper provides a systematic analysis of identification in linear social interactions models. This is a theoretical and econometric exercise as the analysis is linked to a rigorously delineated model of interdependent decisions. We develop an incomplete information game for individual choice under social influences that nests standard models as special cases. We consider identification of both endogenous and contextual social effects under alternative assumptions regarding an analyst’s a priori knowledge of social structure or access to individual-level or aggregate data. Finally, we discuss potential ramifications for identification of endogenous formation of social structure.
176 citations
TL;DR: In this article, the authors build a framework for the analysis of these patents, identifies several types of inefficiencies attached to the lack of price commitments, and shows how structured price commitments restore competition and why such commitments may not arise spontaneously in the marketplace.
Abstract: A major policy issue in standard setting is that patents that are ex ante not that important, by being included into a standard, may become standard-essential patents. In an attempt to curb the monopoly power that they create, most standard-setting organizations require the owners of patents covered by the standard to make a loose commitment to grant licenses on reasonable terms. Such commitments unsurprisingly are conducive to litigation. This paper builds a framework for the analysis of these patents, identifies several types of inefficiencies attached to the lack of price commitments, and shows how structured price commitments restore competition and why such commitments may not arise spontaneously in the marketplace.
158 citations
TL;DR: In this article, the authors derive a theory of share-tenancy with which to explore the nature of resource allocation under one of the main forms of land tenure in agriculture and show that the prevailing impression is that sharecropping results in inefficient allocation of resources.
Abstract: The purpose of this study is to derive a theory of share tenancy with which to explore the nature of resource allocation under one of the main forms of land tenure in agriculture. Share tenancy is a land lease under which rent is a contracted percentage of the output yield from the tenant per period of time. As a rule, the landowner provides land, and the tenant provides labor; other inputs may be provided by either party. Share tenancy (or sharecropping) is thus share contracting, defined here as two or more individual parties combining privately owned resources for the production of certain mutually agreed outputs, the actual outputs to be shared according to certain mutually accepted percentages as returns to the contracting parties for their productive resources forsaken. The theory, to be derived from standard economic principles, may be generalized to all forms of land tenure under similar ownership of resources. The prevailing impression is that sharecropping results in inefficient allocation of resources.' It will be shown here that the inefficiency argument is illusory. The implied resource allocation under private property rights is the same whether the landowner cultivates the land himself, hires farmhands to do the tilling, leases his holdings on a fixed rent basis,
156 citations
TL;DR: In this paper, the authors explain the coexistence of different farm lease arrangements in terms of the varying significance of entrepreneurial functions, and explain why crop-sharing arrangements are common in areas of relative economic certainty with very little scope for decision making, for example, for product and factor substitution, and where the entrepreneurial profit is low.
Abstract: This study attempts to explain the coexistence of different farm lease arrangements in terms of the varying significance of entrepreneurial functions. In India, crop-sharing arrangements are common in areas of relative economic certainty with very little scope for decision making, for example, for product and factor substitution, and where the entrepreneurial profit is low. Fixed-cash rents are common in situations of high uncertainty where the scope for decision making is significant or where the crops are highly profitable. Efficiency considerations predominate in areas of sharecropping, favoring a smaller farm size, whereas, under high uncertainty, large size is favored for reducing risk.
156 citations
TL;DR: This article showed that a subset of reference-dependent preferences predicts an "endowment effect for risk", which is that risk attitudes differ when reference points change from certain to stochastic.
Abstract: Recent models of reference-dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies. A subset of such expectations-based models predicts an “endowment effect for risk”: that risk attitudes differ when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminating often-discussed confounds, I demonstrate both between and within subjects such an endowment effect for risk. These results provide needed separation between expectations-based reference-dependent models, allow for evaluation of recent theoretical extensions, and may help to close a long-standing debate in decision science on inconsistency between utility elicitation methodologies.
TL;DR: It is found that patients who are brought to higher-cost hospitals achieve better outcomes, using exogenous variation in ambulance company assignment among patients who live near one another.
Abstract: We consider whether hospitals that receive higher payments from Medicare improve patient outcomes, using exogenous variation in ambulance company assignment among patients who live near one another. Using Medicare data from 2002–10 on assignment across ambulance companies and New York State data from 2000–6 on assignment across area boundaries, we find that patients who are brought to higher-cost hospitals achieve better outcomes. Our estimates imply that a one standard deviation increase in Medicare reimbursement leads to a 4 percentage point (or 10 percent) reduction in mortality; the implied cost per at least 1 year of life saved is approximately $80,000.
TL;DR: In this article, the authors argue that the second fundamental law of capitalism does not hold the net saving rate constant as growth falls, driving the gross savings rate to one as growth goes to zero.
Abstract: In Capital in the Twenty-First Century , Thomas Piketty uses what he calls “the second fundamental law of capitalism” to predict that capital-to-income ratios are poised to increase dramatically as economies’ growth rates fall during the twenty-first century. This law states that in the long run the capital-to-income ratio equals s=g, where s is the economy’s saving rate and g its growth rate. We argue that this law rests on a theory of saving that is hard to justify. First, it holds the net saving rate constant as growth falls, driving the gross savings rate to one as growth goes to zero. Second, it is inconsistent with both the textbook growth model and the theory of optimal saving: in both of these theories the net saving rate goes to zero as growth goes to zero. Third, both of these theories provide a reasonable fit to observed data on gross and net saving rates and growth rates in cross-country panel data, whereas Piketty’s does not. Finally, contrary to Piketty’s second law, both of these theories predict that capital-to-income ratios increase only modestly as growth falls.
TL;DR: In this paper, the authors investigate the antipoverty efficacy of minimum wage policies and show that an increase in the national minimum wage produces a value-added tax effect on consumer prices that is more regressive than a typical state sales tax and allocates benefits as higher earnings nearly evenly across the income distribution.
Abstract: This study investigates the antipoverty efficacy of minimum wage policies. Proponents of these policies contend that employment impacts are negligible and suggest that consumers pay for higher labor costs through imperceptible increases in goods prices. Adopting this empirical scenario, the analysis demonstrates that an increase in the national minimum wage produces a value-added tax effect on consumer prices that is more regressive than a typical state sales tax and allocates benefits as higher earnings nearly evenly across the income distribution. These income-transfer outcomes sharply contradict portraying an increase in the minimum wage as an antipoverty initiative.
TL;DR: In this paper, the authors tried to explain how Ibn Khaldu'n reached economic conclusions and how he organized them into an extremely coherent model, and they used these concepts to build a coherent dynamic system.
Abstract: Ibn Khalduin was a fourteenth-century thinker who found a large number of economic mechanisms which were rediscovered by modern economists. Also, he used these concepts to build a coherent dynamic system. By quoting Ibn Khaldu'n's Muqaddimah, this article tries to explain how Ibn Khaldu'n reached economic conclusions and how he organized them into an extremely coherent model.
TL;DR: In this article, the authors evaluate the impact of three different performance incentive schemes using data from a social experiment that randomized 88 Mexican high schools with over 40,000 students into three treatment groups and a control group.
Abstract: This paper evaluates the impact of three different performance incentive schemes using data from a social experiment that randomized 88 Mexican high schools with over 40,000 students into three treatment groups and a control group. Treatment 1 provides individual incentives for performance on curriculum-based mathematics tests to students only, treatment 2 to teachers only, and treatment 3 gives both individual and group incentives to students, teachers, and school administrators. Program impact estimates reveal the largest average effects for treatment 3, smaller impacts for treatment 1, and no impact for treatment 2.
TL;DR: This article studied the internal organization of French manufacturing firms and found that firms that expand substantially add layers and pay lower average wages in all preexisting layers, in contrast, those that expand little and do not reorganize pay higher average wages, while the probability of adding/dropping a layer is positively or negatively correlated with value added.
Abstract: We study the internal organization of French manufacturing firms. We divide the employees of each firm into “layers” using occupational categories. Layers are hierarchical in that the typical worker in a higher layer earns more, and the typical firm occupies less of them. The probability of adding/dropping a layer is positively/negatively correlated with value added. Reorganization, through changes in layers, is essential to understanding how firms grow. Firms that expand substantially add layers and pay lower average wages in all preexisting layers. In contrast, firms that expand little and do not reorganize pay higher average wages in all preexisting layers.
TL;DR: In this paper, a new way to identify the preference relation that is closest in terms of welfare loss to the revealed choice has been proposed, in order to analyze choice behavior for the purpose of welfare analysis.
Abstract: Evidence showing that individual behavior often deviates from the classical principle of preference maximization has raised at least two important questions: (1) How serious are the deviations? (2) What is the best way to analyze choice behavior in order to extract information for the purpose of welfare analysis? This paper addresses these questions by proposing a new way to identify the preference relation that is closest, in terms of welfare loss, to the revealed choice.
TL;DR: In this article, the existence of agency problems between party leaders and their constituents was found to hinder female representation in political institutions in Spain, by using pre-and post-quota data by party and municipality.
Abstract: We use Spain’s Equality Law to test for the existence of agency problems between party leaders and their constituents. The law mandates a 40 percent female quota on electoral lists in towns with populations above 5,000. Using pre- and postquota data by party and municipality, we implement a triple-difference design. We find that female quotas resulted in slightly better electoral results for the parties that were most affected by the quota. Our evidence shows that party leaders were not maximizing electoral results prior to the quota, suggesting the existence of agency problems that hinder female representation in political institutions.
TL;DR: In this article, the authors investigate how much of the foreclosure crisis can be explained by the large number of high-leverage mortgages originated during the housing boom and show that the increased number of such loans can explain over 60 percent of the rise in foreclosure rates.
Abstract: How much of the foreclosure crisis can be explained by the large number of high-leverage mortgages originated during the housing boom? In our model, heterogeneous households select from mortgages with different down payments and choose whether to default given income and housing shocks. The use of low–down payment loans is initially limited by payment-to-income requirements but becomes unrestricted during the boom. The model approximates key housing and mortgage market facts before and after the crisis. A counterfactual experiment suggests that the increased number of high-leverage loans originated prior to the crisis can explain over 60 percent of the rise in foreclosure rates.
TL;DR: In this article, the authors theoretically and empirically analyzes the trade finance terms that support international trade and find that importers located in countries with weak enforcement of contracts typically finance transactions, but these firms are able to overcome the constraints of such environments if they can establish a relationship with the exporter.
Abstract: This paper theoretically and empirically analyzes the financing terms that support international trade. The choice of trade finance terms balances the risk that an importer defaults on an exporter and the possibility that an exporter does not deliver goods as specified. Analysis of transaction-level data from a US exporter reveals that importers located in countries with weak enforcement of contracts typically finance transactions, but these firms are able to overcome the constraints of such environments if they can establish a relationship with the exporter. Furthermore, the manner in which trade is financed shapes the impact of crises.
TL;DR: This paper study the implications of preference heterogeneity for asset pricing and find that separating intertemporal elasticity of substitution and risk aversion heterogeneity can have a substantive impact on the model's ability to address some key asset-pricing issues.
Abstract: We study the implications of preference heterogeneity for asset pricing. We use recursive preferences in order to separate heterogeneity in risk aversion from heterogeneity in the intertemporal elasticity of substitution and an overlapping-generations framework to obtain a nondegenerate stationary equilibrium. We solve the model explicitly up to the solutions of ordinary differential equations and highlight the effects of overlapping generations and each dimension of preference heterogeneity on the market price of risk, interest rates, and the volatility of stock returns. We find that separating intertemporal elasticity of substitution and risk aversion heterogeneity can have a substantive impact on the model’s (qualitative and quantitative) ability to address some key asset-pricing issues.
TL;DR: In this article, a statistical test for identifying a specific type of cheating that involves bribing center technicians is presented. But the authors also estimate that 9.6 percent of car owners paid US$20 to circumvent the regulation and that eliminating cheating and increasing the cost of retests would reduce emissions by 3,708 tons at a high cost for vehicle owners.
Abstract: Emission regulations become more prevalent in developing countries, but they may be compromised by corruption. This paper documents the prevalence of corruption and the effectiveness of vehicle emission regulations in Mexico City. I develop a statistical test for identifying a specific type of cheating that involves bribing center technicians. I also estimate a structural model of car owner retesting and cheating decisions. Results suggest that 9.6 percent of car owners paid US$20 to circumvent the regulation. Eliminating cheating and increasing the cost of retests would reduce emissions by 3,708 tons at a high cost for vehicle owners.
TL;DR: Esteban et al. as discussed by the authors provided a model to identify the key variables and situations that make mass killings more likely to occur and distinguish conditions under which mass killings and military intensity reinforce each other from situations where they are substitute modes of strategic violence.
Abstract: Since World War II there have been about …fty episodes of large-scale mass killings of civilians and massive forced displacements. They were usually meticulously planned and independent of military goals. We provide a model where con‡ict onset, con‡ict intensity and the decision to commit mass killings are all endogenous, with two main goals: (1) to identify the key variables and situations that make mass killings more likely to occur; and (2) to distinguish conditions under which mass killings and military con‡ict intensity reinforce each other from situations where they are substitute modes of strategic violence. We predict that mass killings are most likely in societies with large natural resources, signi…cant proportionality constraints for rent sharing, low productivity and low state capacity. Further, massacres are more likely in a civil than in an interstate war, as in the latter group sizes matter less for future rents. In non polarized societies there are asymmetric equilibria with only the larger group wanting to engage in massacres. In such settings the smaller � We are grateful to CEPR for sponsoring the con‡ict conference in Gerzensee in July 2009, where we started this project. We also thank Borek Vasicek and Peter Van der Windt for research assistance. Helpful comments from Autumn Payton Lockwood, Kalle Moene, Debraj Ray, Alexander Wolitzky, Fabrizio Zilibotti and seminar and conference participants in Princeton, EUI, IMT-Lucca, Oslo, Dehli, Barcelona and Madrid are gratefully acknowledged. y Institut d’Analisis Economica, CSIC, Barcelona. Email: joan.esteban@iae.csic.es. Joan Esteban is a member of the Barcelona GSE Research Network funded by the Government of Catalonia. He gratefully acknowledges …nancial support from the AXA Research Fund and from the Spanish Government CICYT project n. SEJ2006-00369.
TL;DR: Using survey data from the Promise Academy in the Harlem Children's Zone, the authors estimate the effects of high-performing charter schools on human capital, risky behaviors, and health outcomes, and find that high performing charters are associated with higher absentee rates.
Abstract: Using survey data from the Promise Academy in the Harlem Children’s Zone, we estimate the effects of high-performing charter schools on human capital, risky behaviors, and health outcomes. Six year...
TL;DR: In this paper, the authors estimate that turnover taxes reduce evasion by up to 70 percent of corporate income in Pakistan, and they find that switching from profit to turnover taxation increases revenue by 74 percent without reducing aggregate profits.
Abstract: To fight evasion, many developing countries use production-inefficient tax policies. This includes minimum tax schemes whereby firms are taxed on either profits or turnover, depending on which tax liability is larger. Such schemes create nonstandard kink points, which allow for eliciting evasion responses to switches between profit and turnover taxes using a bunching approach. Using administrative data on corporations in Pakistan, we estimate that turnover taxes reduce evasion by up to 60–70 percent of corporate income. Incorporating this in a calibrated optimal tax model, we find that switching from profit to turnover taxation increases revenue by 74 percent without reducing aggregate profits.
TL;DR: In this article, the authors introduce a bad environment-good environment (BEGE) technology for consumption growth in a consumption-based asset pricing model with external habit formation, which fits standard salient features of asset prices including the means and volatilities of equity returns and a low risk-free rate.
Abstract: We introduce a “bad environment–good environment” (BEGE) technology for consumption growth in a consumption-based asset pricing model with external habit formation. The model generates realistic non-Gaussian features of consumption growth and fits standard salient features of asset prices including the means and volatilities of equity returns and a low risk-free rate. BEGE dynamics additionally allow the model to generate realistic properties of equity index options prices and their comovements with the macroeconomic outlook. In particular, when option-implied volatility is high—as measured, for instance, by the VIX index—the distribution of consumption growth is more negatively skewed.
TL;DR: In this article, the authors investigate the "conventional wisdom" that there is a policy conflict between the reduction of inequality and the encouragement of entrepreneurial risk taking, and provide a precise statement of this conflict in the context of the progressivity of tax regimes.
Abstract: The objective of this paper is to investigate the "conventional wisdom" that there is a policy conflict between the reduction of inequality and the encouragement of entrepreneurial risk taking. The paper attempts to provide a precise statement of this conflict in the context of the progressivity of tax regimes. Using the method of inequality decomposition analysis, a taxonomy is developed which locates the sources of the policy conflict in a precise fashion. A detailed analysis then shows that the conventional wisdom is misleading if not wrong, and that in many cases the claimed policy conflict is quite simply illusory.
TL;DR: The authors found that genetic differences explain about 33 percent of the variation in savings propensities across individuals, suggesting that the genetic component of savings behavior reflects genetic variation in time preferences or self-control.
Abstract: Analyzing the savings behavior of a large sample of identical and fraternal twins, we find that genetic differences explain about 33 percent of the variation in savings propensities across individuals. Individuals are born with a persistent genetic predisposition to a specific savings behavior. Parenting contributes to the variation in savings rates among younger individuals, but its effect decays over time. The environment when growing up (e.g., parents’ wealth) moderates genetic effects. Finally, savings behavior is genetically correlated with income growth, smoking, and obesity, suggesting that the genetic component of savings behavior reflects genetic variation in time preferences or self-control.
TL;DR: In this article, the role of social security in providing insurance when there is adverse selection in the annuity market was studied and the welfare gain from mandatory annuitization in the social security system relative to a laissez-faire benchmark was calculated.
Abstract: I study the role of social security in providing insurance when there is adverse selection in the annuity market. I calculate welfare gain from mandatory annuitization in the social security system relative to a laissez-faire benchmark, using a model in which individuals have private information about their mortality. I estimate large heterogeneity in mortality using the Health and Retirement Study. Despite that, I find small welfare gain from mandatory annuitization. Social security has a large effect on annuity prices because it crowds out demand by high-mortality individuals. Welfare gain would have been significantly larger in the absence of this effect.