Showing papers in "Quarterly Journal of Economics in 1995"
TL;DR: In this paper, a newly assembled data set consisting of subjective indices of corruption, the amount of red tape, the efficiency of the judicial system, and various categories of political stability for a cross section of countries is analyzed.
Abstract: This paper analyzes a newly assembled data set consisting of subjective indices of corruption, the amount of red tape, the efficiency of the judicial system, and various categories of political stability for a cross section of countries. Corruption is found to lower investment, thereby lowering economic growth. The results are robust to controlling for endogeneity by using an index of ethnolinguistic fractionalization as an instrument.
7,191 citations
TL;DR: The authors examined the relationship between per capita income and various environmental indicators and found no evidence that environmental quality deteriorates steadily with economic growth, rather, for most indicators, economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement.
Abstract: We examine the reduced-form relationship between per capita income and various environmental indicators. Our study covers four types of indicators: urban air pollution, the state of the oxygen regime in river basins, fecal contamination of ri'ver basins, and contamination of river basins by heavy metals. We find no evidence that environmental quality deteriorates steadily with economic growth. Rather, for most indicators, economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement. The turning points for the different pollutants vary, but in most cases they come before a country reaches a per capita income of $8000. I. INTRODUCTION Will continued economic growth bring ever greater harm to the earth's environment? Or do increases in income and wealth sow the seeds for the amelioration of ecological problems? The answers to these questions are critical for the design of appropriate development strategies for lesser developed countries. Exhaustible and renewable natural resources serve as inputs into the production of many goods and services. If the composition of output and the methods of production were immutable, then damage to the environment would be inextricably linked to the scale of global economic activity. But substantial evidence suggests that development gives rise to a structural transformation in what an economy produces (see Syrquin [1989]). And societies have shown remarkable ingenuity in harnessing new technologies to conserve scarce resources. In principle, the forces leading to change in the composition and techniques of production may be sufficiently strong to more than offset the adverse effects of increased economic activity on the environment. In this paper we address this empirical issue using panel data on ambient pollution levels in many countries. Examination of the empirical relationship between national income and measures of environmental quality began with our *We thank the Ford Foundation, the Sloan Foundation, the John S. Guggenheim Memorial Foundation, the Institute for Policy Reform, and the Centers of International Studies and of Economic Policy Studies at Princeton University for financial support. We are grateful to Peter Jaffee, who tutored us on the various dimensions of water quality, to Robert Bisson, who provided us with the GEMS/ Water data, and to seminar participants at the O.E.C.D. Development Centre and the Institute for International Economic Studies in Stockholm, Sweden, who gave us helpful comments and suggestions. Special thanks go to James Laity, whose research assistance was simply extraordinary.
5,582 citations
TL;DR: In this article, a panel data approach is advocated and implemented for studying growth convergence, and the familiar equation for testing convergence is reformulated as a dynamic panel data model, and different panel data estimators are used to estimate it.
Abstract: A panel data approach is advocated and implemented for studying growth convergence. The familiar equation for testing convergence is reformulated as a dynamic panel data model, and different panel data estimators are used to estimate it. The main usefulness of the panel approach lies in its ability to allow for differences in the aggregate production function across economies. This leads to results that are significantly different from those obtained from single cross-country regressions. In the process of identifying the individual "country effect," we can also see the point where neoclassical growth empirics meets development economics.
3,615 citations
TL;DR: The authors showed that the extent of competition in credit markets is important in determining the value of lending relationships and that creditors are more likely to finance credit constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms.
Abstract: This paper provides a simple model showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The model has implications about the availability and the price of credit as firms age in different markets. The paper offers evidence for these implications from small business data. It concludes with conjectures on the costs and benefits of liberalizing financial markets, as well as the timing of such reforms.
3,259 citations
TL;DR: Mehra and Prescott as mentioned in this paper proposed a new explanation based on two behavioral concepts: investors are assumed to be "loss averse" meaning that they are distinctly more sensitive to losses than to gains.
Abstract: The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be "loss averse," meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate their portfolios frequently. We dub this combination "myopic loss aversion." Using simulations, we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually. There is an enormous discrepancy between the returns on stocks and fixed income securities. Since 1926 the annual real return on stocks has been about 7 percent, while the real return on treasury bills has been less than 1 percent. As demonstrated by Mehra and Prescott [1985], the combination of a high equity premium, a low risk-free rate, and smooth consumption is difficult to explain with plausible levels of investor risk aversion. Mehra and Prescott estimate that investors would have to have coefficients of relative risk aversion in excess of 30 to explain the historical equity premium, whereas previous estimates and theoretical arguments suggest that the actual figure is close to 1.0. We are left with a pair of questions: why is the equity premium so large, or why is anyone willing to hold bonds? The answer we propose in this paper is based on two concepts from the psychology of decision-making. The first concept is loss aversion. Loss aversion refers to the tendency for individuals to be more sensitive to reductions in their levels of well-being than to increases. The concept plays a central role in Kahneman and Tversky's [1979] descriptive theory of decision-making under
2,576 citations
TL;DR: In this article, the authors consider a model in which an imperfectly competitive manufacturing sector produces goods which are used both for final consumption and as intermediates, and they show that when transport costs fall below a critical value, a core-periphery pattern forms spontaneously, and nations that find themselves in the periphery suffer a decline in real income.
Abstract: The paper considers a model in which an imperfectly competitive manufacturing sector produces goods which are used both for final consumption and as intermediates. Intermediate usage creates cost and demand linkages between firms and a tendency for manufacturing agglomeration. How does globalization affect the location of manufacturing and the gains from trade? At high transport costs all countries have some manufacturing industry, but when transport costs fall below a critical value a core-periphery pattern forms spontaneously, and nations that find themselves in the periphery suffer a decline in real income. As transport costs continue to fall there comes a second stage of convergence in real incomes, in which the peripheral nations gain and the core nations may well lose.
2,522 citations
TL;DR: In this paper, the fundamental role played by factor accumulation in explaining the extraordinary postwar growth of Hong Kong, Singapore, South Korea, and Taiwan has been discussed, and it has been shown that the growth of output and manufacturing exports in these newly industrializing countries of East Asia is virtually unprecedented, but the growth in total factor productivity in these economies is not.
Abstract: This paper documents the fundamental role played by factor accumulation in explaining the extraordinary postwar growth of Hong Kong, Singapore, South Korea, and Taiwan. Participation rates, educational levels, and (excepting Hong Kong) investment rates have risen rapidly in all four economies. In addition, in most cases there has been a large intersectoral transfer of labor into manufacturing, which has helped fuel growth in that sector. Once one accounts for the dramatic rise in factor inputs, one arrives at estimated total factor productivity growth rates that are closely approximated by the historical performance of many of the OECD and Latin American economies. While the growth of output and manufacturing exports in the newly industrializing countries of East Asia is virtually unprecedented, the growth of total factor productivity in these economies is not.
1,847 citations
TL;DR: In this paper, the authors argue that the determinants of long-run growth highlighted by a specific growth model must similarly exhibit no large persistent changes, or the persistent movement in these variables must be offsetting.
Abstract: According to endogenous growth theory, permanent changes in certain policy variables have permanent effects on the rate of economic growth. Empirically, however, U. S. growth rates exhibit no large persistent changes. Therefore, the determinants of long-run growth highlighted by a specific growth model must similarly exhibit no large persistent changes, or the persistent movement in these variables must be offsetting. Otherwise, the growth model is inconsistent with time series evidence. This paper argues that many AK-style models and R&D-based models of endogenous growth are rejected by this criterion. The rejection of the R&D-based models is particularly strong.
1,594 citations
TL;DR: In this article, the authors investigated the effects of shocks to U S monetary policy on exchange rates and found substantial evidence of a link between monetary policy and exchange rates, showing that a contractionary shock to US monetary policy leads to persistent, significant appreciations in U S nominal and real exchange rates.
Abstract: This paper investigates the effects of shocks to U S monetary policy on exchange rates We consider three measures of these shocks: orthogonalized shocks to the federal funds rate, orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the Romer and Romer index of monetary policy In sharp contrast to the literature, we find substantial evidence of a link between monetary policy and exchange rates Specifically, according to our results a contractionary shock to U S monetary policy leads to (i) persistent, significant appreciations in U S nominal and real exchange rates and (ii) significant, persistent deviations from uncovered interest rate parity in favor of U S interest rates
1,125 citations
TL;DR: In this article, the authors model rational agents as trying to learn from their dynastic income mobility experience the relative importance of effort and predetermined factors in the generation of income inequality and therefore the magnitude of these incentive costs.
Abstract: Just like economists, voters have conflicting views about redistributive taxation because they estimate its incentive costs differently. We model rational agents as trying to learn from their dynastic income mobility experience the relative importance of effort and predetermined factors in the generation of income inequality and therefore the magnitude of these incentive costs. In the long run, "left-wing dynasties" believing less in individual effort and voting for more redistribution coexist with "right-wing dynasties." This allows us to explain why individual mobility experience and not only current income matters for political attiitudes and how persistent differences in perceptions about social mobility can generate persistent differences in redistribution across countries.
1,087 citations
TL;DR: This article proposed the comparative ignorance hypothesis, according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals, and this hypothesis is supported in a series of studies showing that ambiguity aversion, present in a comparative context in which a person evaluates both clear and vague prospects, seems to disappear in a non-comparative context, in which the person evaluates only one of these prospects in isolation.
Abstract: Decisions under uncertainty depend not only on the degree of uncertainty but also on its source, as illustrated by Ellsberg's observation of ambiguity aversion. In this article we propose the comparative ignorance hypothesis, according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals. This hypothesis is supported in a series of studies showing that ambiguity aversion, present in a comparative context in which a person evaluates both clear and vague prospects, seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation.
TL;DR: This article studied the effect of word-of-mouth communication on the behavior of a population of identical players in a stochastic decision environment and found that the structure of the communication process determines whether all agents end up making identical choices, with less communication making this conformity more likely.
Abstract: This paper studies the way that word-of-mouth communication aggregates the information of individual agents. We find that the structure of the communication process determines whether all agents end up making identical choices, with less communication making this conformity more likely. Despite the players' naive decision rules and the stochastic decision environment, word-of-mouth communication may lead all players to adopt the action that is on average superior. These socially efficient outcomes tend to occur when each agent samples only a few others. I. INTRODUCTION Economic agents must often make decisions without knowing the costs and benefits of the possible choices. Given the frequency with which such situations arise, it is understandable that agents often choose not to perform studies or experiments, but instead rely on whatever information they have obtained via casual word-of-mouth communication. Reliance on this sort of easily obtained information appears to be common in circumstances ranging from consumers choosing restaurants or auto mechanics to business managers evaluating alternative organizational structures. This paper studies two related environments in arguing that individuals' reliance on word-of-mouth communication has interesting implications for their aggregate behavior. First, motivated by the diffusion of new technologies, we consider a choice between two competing products with unequal qualities or payoffs, and show that the structure of communication is important in determining whether the population as a whole is likely to learn to use the superior product. Second, we consider a choice between two products or practices that are equally good, and ask whether consumers are likely to "herd" onto a single choice, or whether "diversity" will obtain even in the long run. We explore the implications of word-of-mouth communication in a simple nonstrategic environment. There is a large population of identical players, each of whom repeatedly chooses between two possible actions. Each player's payoff is determined by his own
TL;DR: The authors found that subjects are more willing to cooperate when the externality is positive, even though the potential outcomes are the same, suggesting a behavioral asymmetry between the warm-glow of doing something good and cold-prickle of doing bad.
Abstract: Experiments on privately provided public goods generally find that subjects are far more cooperative than predicted, while experiments on oligopolies and the commons almost always obtain the Nash-equilibrium predictions, despite being very similar games. This paper examines whether this difference could be due to the fact that with public goods there is a positive externality, while with the others the externality is negative. The result of the experiments is that subjects are more willing to cooperate when the externality is positive, even though the potential outcomes are the same. This suggests a behavioral asymmetry between the warm-glow of doing something good and cold-prickle of doing something bad.
TL;DR: In this article, the authors consider two measures of the relative effectiveness of public and Catholic schools: finishing high school and starting college, and find that attending a Catholic high school raises the probability of entering a four-year college by thirteen percentage points.
Abstract: In this paper, we consider two measures of the relative effectiveness of public and Catholic schools: finishing high school and starting college. These measures are potentially more important indicators of school quality than standardized test scores in light of the economic consequences of obtaining more education. Single-equation estimates suggest that for the typical student, attending a Catholic high school raises the probability of finishing high school or entering a four-year college by thirteen percentage points. In bivariate probit models we find almost no evidence that our single-equation estimates are subject to selection bias.
TL;DR: In this paper, the authors present evidence on the long-run trends in U.S. regional specialization and localization and examine which model of regional specialization is most consistent with the data.
Abstract: This paper presents evidence on the long-run trends in U. S. regional specialization and localization and examines which model of regional specialization is most consistent with the data. Regional specialization in the United States rose substantially between 1860 and the turn of the twentieth century, flattened out during the interwar years, and then fell substantially and continuously since the 1930s. The analysis of the long-run trends in U. S. regional specialization and localization supports explanations based on production scale economies and the Heckscher-Ohlin model but is inconsistent with explanations based on external economies.
TL;DR: In this paper, a simple model of trade in the housing market is presented, where a minimum down payment is required for the purchase of a new home and the model has direct implications for the volatility of house prices, as well as for the correlation between prices and trading volume.
Abstract: This paper presents a simple model of trade in the housing market. The crucial feature is that a minimum down payment is required for the purchase of a new home. The model has direct implications for the volatility of house prices, as well as for the correlation between prices and trading volume. The model can also be extended to address the correlation between prices and time-to-sale, as well as certain aspects of the cyclical behavior of housing starts.
TL;DR: The authors analyzes the behavior of U.S. governors from 1950 to 1986 to investigate a reputation-building model of political behavior and find evidence that taxes, spending, and other policy instruments respond to a binding term limit if a Democrat is in office.
Abstract: This paper analyzes the behavior of U. S. governors from 1950 to 1986 to investigate a reputation-building model of political behavior. We argue that differences in the behavior of governors who face a binding term limit and those who are able to run again provides a source of variation in discount rates that can be used to test a political agency model. We find evidence that taxes, spending, and other policy instruments respond to a binding term limit if a Democrat is in office. The result is a fiscal cycle in term-limit states, which lowers state income when the term limit binds.
TL;DR: In this article, the authors propose a case-based decision-making model in which cases are primitive, and provide a simple axiomatization of a decision rule that chooses a "best" act based on its past performance in similar cases.
Abstract: This paper suggests that decision-making under uncertainty is, at least partly, case-based. We propose a model in which cases are primitive, and provide a simple axiomatization of a decision rule that chooses a "best" act based on its past performance in similar cases. Each act is evaluated by the sum of the utility levels that resulted from using this act in past cases, each weighted by the similarity of that past case to the problem at hand. The formal model of case-based decision theory naturally gives rise to the notions of satisficing decisions and aspiration levels.
TL;DR: In this paper, the authors investigate the factors behind the concentration of a nation's urban population in a single city and conclude that the predominant causality is from political factors to urban concentration, not from concentration to political change.
Abstract: Using theory, case studies, and cross-country evidence, we investigate the factors behind the concentration of a nation's urban population in a single city. High tariffs, high costs of internal trade, and low levels of international trade increase the degree of concentration. Even more clearly, politics (such as the degree of instability) determines urban primacy. Dictatorships have central cities that are, on average, 50 percent larger than their democratic counterparts. Using information about the timing of city growth, and a series of instruments, we conclude that the predominant causality is from political factors to urban concentration, not from concentration to political change.
TL;DR: In this paper, the authors studied the determinants of the value of voting rights in U S corporations and found that the price of a vote is determined by the expected additional payment vote holders will receive for their votes in case of a control contest.
Abstract: This paper studies the determinants of the value of voting rights in U S corporations Results support the hypothesis that the price of a vote is determined by the expected additional payment vote holders will receive for their votes in case of a control contest The size of this differential payment is a function of the probability that a vote is pivotal in a control contest and the magnitude of the private benefits obtainable by controlling the company Simple proxies for these two factors explain up to 30 percent of the variation of the voting premium across companies and through time My findings also suggest that the value of managerial perquisites are, at least partially, reflected in the price of votes
TL;DR: In this article, the authors investigate whether the volume of trade between OECD countries is consistent with the predictions of a model in which all trade is intraindustry trade in differentiated products.
Abstract: We test some propositions about international trade flows that are derived from models of monopolistic competition developed by Elhanan Helpman and Paul Krugman. We investigate whether the volume of trade between OECD countries is consistent with the predictions of a model in which all trade is intraindustry trade in differentiated products. We then repeat the test with non-OECD countries. We also investigate whether the share of intraindustry trade is consistent with a more general theoretical model in which some, but not all, trade is intraindustry trade. Our results lead us to question the apparent empirical success of these models.
TL;DR: In this paper, the authors show that lowering the cost of acquisition of information that a principal obtains about the performance of an agent may make it more difficult for the principal to commit to threats.
Abstract: We show that lowering the cost of acquisition of information that a principal obtains about the performance of an agent may make it more difficult for the principal to commit to threats. Hence it will weaken incentives and can therefore be counterproductive. This phenomenon is explored in a framework where improving the quality of information makes a commitment not to renegotiate less credible. Applications to the theory of the firm are briefly explored.
TL;DR: In this paper, the authors estimate the effect of arrests on the employment and earnings of arrestees, using a large longitudinal data set constructed by merging police records with UI earnings data, finding that the effects of arrests are moderate in magnitude and rather short-lived.
Abstract: Many young men commit crime, and many are arrested. I estimate the effect of arrests on the employment and earnings of arrestees, using a large longitudinal data set constructed by merging police records with UI earnings data. I find that the effects of arrests are moderate in magnitude and rather short-lived.
TL;DR: This article investigated the link between the trend in the returns to education and foreign competition in concentrated industries and argued that the impact of foreign competition on the relative wages of less skilled workers depends on the market structure of the industry penetrated.
Abstract: This paper investigates the link between the trend in the returns to education and foreign competition in concentrated industries. We argue that the impact of foreign competition on the relative wages of less skilled workers depends on the market structure of the industry penetrated. The empirical evidence indicates that employment changes in a small group of trade-impacted concentrated industries can explain not only part of the aggregate rise in wage inequality in the United States, but also some of the differences in the trends in wage inequality across metropolitan areas.
TL;DR: In this paper, the authors present new results on the size, frequency, and synchronization of price changes for twelve selected retail goods over the past 35 years, finding that nominal prices are typically fixed for more than one year although the time between changes is very irregular.
Abstract: This paper presents new results on the size, frequency, and synchronization of price changes for twelve selected retail goods over the past 35 years. Three basic facts about the data are uncovered: first, nominal prices are typically fixed for more than one year although the time between changes is very irregular; second, prices change more often during periods of high overall inflation; third, when prices do change, the sizes of the changes are widely dispersed. Both 'large' and 'small' changes occur for the same item and the sizes of these changes do not closely depend on overall inflation.
TL;DR: In this paper, the authors proposed a theory of supply shocks, or shifts in the short run Phillips curve, based on relative price changes and frictions in nominal price adjustment, which explains a large fraction of movements in postwar U. S. inflation.
Abstract: This paper proposes a theory of supply shocks, or shifts in the short-run Phillips curve, based on relative-price changes and frictions in nominal price adjustment. When price adjustment is costly, firms adjust to large shocks but not to small shocks, and so large shocks have disproportionate effects on the price level. Therefore, aggregate inflation depends on the distribution of relative-price changes: inflation rises when the distribution is skewed to the right, and falls when the distribution is skewed to the left. We show that this theoretical result explains a large fraction of movements in postwar U. S. inflation. Moreover, our model suggests measures of supply shocks that perform better than traditional measures, such as the relative prices of food and energy.
TL;DR: The impact of losing public health insurance on labor market decisions of women is assessed by examining a series of Medicaid eligibility expansions targeted toward young children by examining the historical tie between AFDC and Medicaid eligibility.
Abstract: I assess the impact of losing public health insurance on labor market decisions of women by examining a series of Medicaid eligibility expansions targeted toward young children. These targeted expansions severed the historical tie between AFDC and Medicaid eligibility. The reforms allowed a mother's earnings to increase without losing public health insurance for her young children. Increasing the income limit for Medicaid resulted in a decrease in AFDC participation and an increase in labor force participation among these women. The effects were large for ever married women, and negligible for never married women.
TL;DR: In this paper, the authors examine daily prices of eight goods at seventeen retail stores collected in Ann Arbor, Michigan, over a four-month period from November 1 to February 28.
Abstract: We examine daily prices of eight goods at seventeen retail stores collected in Ann Arbor, Michigan, over a four-month period from November 1 to February 28. We focus on weekly and seasonal price patterns, and on the frequency of price markdowns or "sales." There were frequent markdowns in the intensive shopping period prior to Christmas, and a tendency for such sales to occur on weekends. We interpret these findings as evidence that a significant number of markdowns are timed to occur when shopping intensity is exogenously high. We complement the imperfect information-based motives for sales in the literature by contributing an additional element based on the role of bulk shopping and increasing returns in the shopping technology.
TL;DR: In this paper, the authors measure the risky environments, the information structures, the institutions, and the risk-response mechanisms of ten villages in northern Thailand, and various key features are then modeled in an abstract but realistic way, either with a full-information risk sharing model or an information-constrained version of the same model.
Abstract: Field research attempted to measure the risky environments, the information structures, the institutions, and the risk-response mechanisms of ten villages in northern Thailand. Various key features are then modeled in an abstract but realistic way, either with a full-information risk-sharing model or an information-constrained version of the same model. Observations from some of the villages seem consistent with one or the other of these models, but in many of the villages one is left with risk-response variations across households which suggest that Pareto improvements are possible.
TL;DR: In this article, the authors present a general equilibrium matching model in which there is involuntary unemployment but wages are below market-clearing levels and raising wages can reduce unemployment, and consider the empirical evidence on employment and wage determination to argue that it is just as consistent with this model as with models in which wages are at or above market clearing levels.
Abstract: It is common belief that the wages that we observe are above the level that would prevail in a competitive labour market and also it is common to believe that wage moderation should be encouraged as a way to keep unemployment down. This paper considers whether we can have confidence in these beliefs. It presents a number of models designed to cast doubt on the conventional wisdom. First, we show that in an efficiency wage model in which there is involuntary unemployment, a binding minimum wage may increase employment. We then present a general equilibrium matching model in which there is involuntary unemployment but wages are below market-clearing levels and raising wages can reduce unemployment. We then consider the empirical evidence on employment and wage determination to argue that it is just as consistent with this model as with models in which wages are at or above market-clearing levels.