Showing papers in "Quarterly Journal of Economics in 1999"
TL;DR: This paper showed that if some people care about equity, the puzzles can be resolved and that the economic environment determines whether the fair types or the selesh types dominate equilibrium behavior in cooperative games.
Abstract: There is strong evidence that people exploit their bargaining power in competitivemarkets butnot inbilateral bargainingsituations. Thereisalsostrong evidence that people exploit free-riding opportunities in voluntary cooperation games. Yet, when they are given the opportunity to punish free riders, stable cooperation is maintained, although punishment is costly for those who punish. This paper asks whether there is a simple common principle that can explain this puzzling evidence. We show that if some people care about equity the puzzles can be resolved. It turns out that the economic environment determines whether the fair types or the selesh types dominate equilibrium behavior.
8,783 citations
TL;DR: This article showed that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which are referred to as social infrastructure and called social infrastructure as endogenous, determined historically by location and other factors captured by language.
Abstract: Output per worker varies enormously across countries. Why? On an accounting basis our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker—we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language. In 1988 output per worker in the United States was more than 35 times higher than output per worker in Niger. In just over ten days the average worker in the United States produced as much as an average worker in Niger produced in an entire year. Explaining such vast differences in economic performance is one of the fundamental challenges of economics. Analysis based on an aggregate production function provides some insight into these differences, an approach taken by Mankiw, Romer, and Weil [1992] and Dougherty and Jorgenson [1996], among others. Differences among countries can be attributed to differences in human capital, physical capital, and productivity. Building on their analysis, our results suggest that differences in each element of the production function are important. In particular, however, our results emphasize the key role played by productivity. For example, consider the 35-fold difference in output per worker between the United States and Niger. Different capital intensities in the two countries contributed a factor of 1.5 to the income differences, while different levels of educational attainment contributed a factor of 3.1. The remaining difference—a factor of 7.7—remains as the productivity residual. * A previous version of this paper was circulated under the title ‘‘The Productivity of Nations.’’ This research was supported by the Center for Economic Policy Research at Stanford and by the National Science Foundation under grants SBR-9410039 (Hall) and SBR-9510916 (Jones) and is part of the National Bureau of Economic Research’s program on Economic Fluctuations and Growth. We thank Bobby Sinclair for excellent research assistance and colleagues too numerous to list for an outpouring of helpful commentary. Data used in the paper are available online from http://www.stanford.edu/,chadj.
6,454 citations
TL;DR: In this article, the authors present new data on the regulation of entry of start-up firms in 85 countries, covering the number of procedures, official time, and official cost that a startup must bear before it can operate legally.
Abstract: We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats.
2,811 citations
TL;DR: In this paper, it was shown that, at least in the upper tail, all cities follow some proportional growth process (this appears to be verified empirically), which automatically leads their distribution to converge to Zipf's law.
Abstract: Zipf ’s law is a very tight constraint on the class of admissible models of local growth. It says that for most countries the size distribution of cities strikingly fits a power law: the number of cities with populations greater than S is proportional to 1/S. Suppose that, at least in the upper tail, all cities follow some proportional growth process (this appears to be verified empirically). This automatically leads their distribution to converge to Zipf ’s law.
1,875 citations
TL;DR: The authors used house prices to infer the value parents place on school quality, and found that parents are willing to pay 2.5 percent more for a 5 percent increase in test scores.
Abstract: The evaluation of numerous school reforms requires an understanding of the value of better schools. Given the difficulty of calculating the relationship between school quality and student outcomes, I turn to another method and use house prices to infer the value parents place on school quality. I look within school districts at houses located on attendance district boundaries; houses then differ only by the elementary school the child attends. I thereby effectively remove the variation in neighborhoods, taxes, and school spending. I find that parents are willing to pay 2.5 percent more for a 5 percent increase in test scores. This finding is robust to a number of sensitivity checks.
1,659 citations
TL;DR: In this paper, the relative influence of trade versus technology on wages in a "large country" setting, where technological change affects product prices is estimated, where trade is measured by the foreign outsourcing of intermediate inputs, while technological change is defined as expenditures on high-technology capital such as computers.
Abstract: We estimate the relative influence of trade versus technology on wages in a "large-country" setting, where technological change affects product prices. Trade is measured by the foreign outsourcing of intermediate inputs, while technological change is measured by expenditures on high-technology capital such as computers. The estimation procedure we develop, which modifies the conventional "price regression," is able to distinguish whether product price changes are due to factor-biased versus sector-biased technology shifts. In our base specification we find that computers explain about 35 percent of the increase in the relative wage of nonproduction workers, while outsourcing explains 15 percent; both of these effects are higher in other specifications.
1,596 citations
TL;DR: In this paper, the authors used Maimonides' rule of 40 to construct instrumental variables estimates of effects of class size on test scores and found that reducing class size induces a signiecant and substantial increase in test scores for fourth and efth graders, although not for third graders.
Abstract: The twelfth century rabbinic scholar Maimonides proposed a maximum class size of 40. This same maximum induces a nonlinear and nonmonotonic relationship between grade enrollment and class size in Israeli public schools today. Maimonides’ rule of 40 is used here to construct instrumental variables estimates of effects of class size on test scores. The resulting identiecation strategy can be viewed as an application of Donald Campbell’s regression-discontinuity design to the class-size question. The estimates show that reducing class size induces a signiecant and substantial increase in test scores for fourth and efth graders, although not for third graders. When asked about their views on class size in surveys, parents and teachers generally report that they prefer smaller classes. This may be because those involved with teaching believe that smaller classes promote student learning, or simply because smaller classes offer a more pleasant environment for the pupils and teachers who are in them [Mueller, Chase, and Walden 1988]. Social scientists and school administrators also have a longstanding interest in the class-size question. Class size is often thought to be easier to manipulate than other school inputs, and it is a variable at the heart of policy debates on school quality and the allocation of school resources in many countries (see, e.g., Robinson [1990] for the United States; OFSTED [1995] for the United Kingdom; and Moshel-Ravid [1995] for Israel). This broad interest in the consequences of changing class size
1,218 citations
TL;DR: The authors analyzed data on 11,600 students and their teachers who were randomly assigned to different size classes from kindergarten through third grade and found that on average, performance on standardized tests increases by four percentile points the first year students attend small classes; the test score advantage of students in small classes expands by about one percentile point per year in subsequent years.
Abstract: This paper analyzes data on 11,600 students and their teachers who were randomly assigned to different size classes from kindergarten through third grade. Statistical methods are used to adjust for nonrandom attrition and transitions between classes. The main conclusions are (1) on average, performance on standardized tests increases by four percentile points the first year students attend small classes; (2) the test score advantage of students in small classes expands by about one percentile point per year in subsequent years; (3) teacher aides and measured teacher characteristics have little effect; (4) class size has a larger effect for minority students and those on free lunch; (5) Hawthorne effects were unlikely.
1,134 citations
TL;DR: In this paper, an approximate analytical solution to the optimal consumption and portfolio choice problem of an infinitely lived investor with Epstein-Zin-Weil utility who faces a constant riskless interest rate and a time-varying equity premium is presented.
Abstract: This paper presents an approximate analytical solution to the optimal consumption and portfolio choice problem of an infinitely lived investor with Epstein-Zin-Weil utility who faces a constant riskless interest rate and a time-varying equity premium. When the model is calibrated to U. S. stock market data, it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by investors whose risk-aversion coefficients exceed one. The optimal portfolio policy also involves timing the stock market. Failure to time or to hedge can cause large welfare losses relative to the optimal policy.
1,004 citations
TL;DR: In this article, the authors used a unique data set on corruption containing quantitative information on bribe payments of Ugandan firms and found that not all firms report that they need to pa...
Abstract: This paper uses a unique data set on corruption containing quantitative information on bribe payments of Ugandan firms. The data has two striking features: not all firms report that they need to pa ...
997 citations
TL;DR: Rabin and Schrag as mentioned in this paper proposed a model of confirmatory bias for first impressions, which they called First Impressions Matter, and used it to study the first impressions in economics.
Abstract: UNIVERSITY OF C A L I F O R N I A A T B E R K E L E Y Department of Economics Berkeley, California 94720-3880 Working Paper No. 97-250 First Impressions Matter: A Model of Confirmatory Bias Matthew Rabin University of California, Berkeley and Joel Schrag Emory University January 1997 Key words: confirmatory bias, overconfidence, bounded rationality JEL Classification: A12, B49, D83 We thank Jimmy Chan, Erik Eyster, Bruce Hsu, Clara Wang, and especially Steven Blatt for research assistance. We thank Steven Blatt, George Loewenstein, and seminar participants at Berkeley and Camegie-Mellon for helpful comments. For financial support, Rabin thanks the Alfred P. Sloan and Russell Sage Foundations and Schrag thanks the University Research Committee of Emory University.
TL;DR: This paper developed a tractable theoretical state-dependent pricing framework and used it to study how optimal pricing depends on the persistence of monetary shocks, the elasticities of labor supply and goods demand, and the interest sensitivity of money demand.
Abstract: Economists have long suggested that nominal product prices are changed infrequently because of fixed costs. In such a setting, optimal price adjustment should depend on the state of the economy. Yet, while widely discussed, statedependent pricing has proved difficult to incorporate into macroeconomic models. This paper develops a new, tractable theoretical state-dependent pricing framework. We use it to study how optimal pricing depends on the persistence of monetary shocks, the elasticities of labor supply and goods demand, and the interest sensitivity of money demand.
TL;DR: In this paper, the authors investigated the effects of uncertainty on investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms' products according to the entrepreneurs.
Abstract: This paper investigates the effects of uncertainty on the investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms' products according to the entrepreneurs. The results support the view that uncertainty weakens the response of investment to demand thus slowing down capital accumulation. Consistent with the predictions of the theory, there is considerable heterogeneity in the effect of uncertainty on investment: it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power. We show that the negative effect of uncertainty on investment cannot be explained by uncertainty proxying for liquidity constraints.
TL;DR: In this article, the authors examine the labor market for mutual fund managers and find that "termination" is more performance sensitive for younger managers than older managers and identify possible implicit incentives created by the termination-performance relationship, which may give younger managers an incentive to avoid unsystematic risk.
Abstract: We examine the labor market for mutual fund managers. Using data from 1992–1994, we find that "termination" is more performance-sensitive for younger managers. We identify possible implicit incentives created by the termination-performance relationship. The shape of the termination-performance relationship may give younger managers an incentive to avoid unsystematic risk. Direct effects of portfolio composition may also give younger managers an incentive to "herd" into popular sectors. Consistent with these incentives, we find that younger managers hold less unsystematic risk and have more conventional portfolios. Promotion incentives and market responses to managerial turnover are also studied.
TL;DR: In this paper, the authors compare the performance of privatized and state firms in the transition economies of Central Europe, while controlling for various forms of selection bias, and argue that privatization has different effects depending on the types of owners to whom it gives control.
Abstract: This paper compares the performance of privatized and state firms in the transition economies of Central Europe, while controlling for various forms of selection bias. It argues that privatization has different effects depending on the types of owners to whom it gives control. In particular, privatization to outsider, but not insider, owners has significant performance effects. Where privatization is effective, the effect on revenue performance is very pronounced, but there is no comparable effect on cost reduction. Overlooking the strong revenue effect of privatization to outsider owners leads to a substantial overstatement of potential employment losses from postprivatization restructuring.
TL;DR: In this article, the interplay between social norms and economic incentives in the context of work decisions in the modern welfare state is analyzed, assuming that to live off one's own work is a social no-no.
Abstract: This paper analyzes the interplay between social norms and economic incentives in the context of work decisions in the modern welfare state. We assume that to live off one's own work is a social no ...
TL;DR: This paper found that a firm trusts its customer enough to offer credit when the customer finds it hard to locate an alternative supplier, suggesting that network effects are used to sanction defaulting customers.
Abstract: Trading relations in Vietnam's emerging private sector are shaped by two market frictions: the difficulty of locating trading partners and the absence of legal enforcement of contracts. Examining relational contracting, we find that a firm trusts its customer enough to offer credit when the customer finds it hard to locate an alternative supplier. A longer duration of trading relationship is associated with larger credit, as is prior information gathering. Customers identified through business networks receive more credit. These network effects are enduring, suggesting that networks are used to sanction defaulting customers.
TL;DR: This article used regional variation in the relative level of the federal minimum wage to separately identify the impact of the minimum wage from nationwide growth in "latent" wage dispersion during the 1980s.
Abstract: The magnitude of growth in "underlying" wage inequality in the United States during the 1980s is obscured by a concurrent decline in the federal minimum wage, which itself could cause an increase in observed wage inequality. This study uses regional variation in the relative level of the federal minimum wage to separately identify the impact of the minimum wage from nationwide growth in "latent" wage dispersion during the 1980s. The analysis suggests that the minimum wage can account for much of the rise in dispersion in the lower tail of the wage distribution, particularly for women.
TL;DR: This article showed that in times of "fiscal stress" shocks to government revenues and especially expenditure have very different effects on private consumption than in "normal" times, contrary to widespread expectations, private consumption boomed rather than contracted.
Abstract: In the 1980s several countries with large government debt or deficit implemented substantial, and in some cases drastic, deficit cuts. Contrary to widespread expectations, in many cases private consumption boomed rather than contracted. This paper shows that in times of "fiscal stress" shocks to government revenues and, especially, expenditure have very different effects on private consumption than in "normal" times.
TL;DR: The authors developed a methodology for testing Hicks's induced innovation hypothesis by estimating a product-characteristics model of energy-using consumer durables, augmenting the hypothesis to allow for the ine uence of government regulations.
Abstract: We develop a methodology for testing Hicks’s induced innovation hypothesis by estimating a product-characteristics model of energy-using consumer durables, augmenting the hypothesis to allow for the ine uence of government regulations. For the products we explored, the evidence suggests that (i) the rate of overall innovation was independent of energy prices and regulations; (ii) the direction of innovation was responsive to energy price changes for some products but not for others; (iii) energy price changes induced changes in the subset of technically feasible models that were offered for sale; (iv) this responsiveness increased substantially during the period after energy-efficiency product labeling was required; and (v) nonetheless, a sizable portion of efficiency improvements were autonomous.
TL;DR: The authors investigated private-interest, public-interest and political-institutional theories of regulatory change to analyze state-level deregulation of bank branching restrictions using a hazard model, finding that interest group factors related to the relative strength of potential winners and losers (small banks and the rival insurance firms) can explain the timing of branching deregulation across states during the last quarter century.
Abstract: This paper investigates private-interest, public-interest, and political-institutional theories of regulatory change to analyze state-level deregulation of bank branching restrictions. Using a hazard model, we find that interest group factors related to the relative strength of potential winners (large banks and small, bank-dependent firms) and losers (small banks and the rival insurance firms) can explain the timing of branching deregulation across states during the last quarter century. The same factors also explain congressional voting on interstate branching deregulation. While we find some support for each theory, the private interest approach provides the most compelling overall explanation of our results.
TL;DR: In this article, the authors investigate stock option exercise decisions by over 50,000 employees at seven corporations and find that employees exercise in response to stock price trends, and that exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons.
Abstract: We investigate stock option exercise decisions by over 50,000 employees at seven corporations. Controlling for economic factors, psychological factors influence exercise. Consistent with psychological models of beliefs, employees exercise in response to stock price trends—exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons. Consistent with psychological models of values that include reference points, employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year.
TL;DR: This paper examined the relationship between educational inputs and school outcomes in South Africa immediately before the end of apartheid government and found strong and significant effects of pupilteacher ratios on enrollment, on educational achievement, and on test scores for numeracy.
Abstract: We examine the relationship between educational inputs—primarily pupilteacher ratios—and school outcomes in South Africa immediately before the end of apartheid government. Black households were severely limited in their residential choice under apartheid and attended schools for which funding decisions were made centrally, by White-controlled entities over which they had no control. The allocations resulted in marked disparities in average class sizes. Controlling for household background variables, we find strong and significant effects of pupilteacher ratios on enrollment, on educational achievement, and on test scores for numeracy.
TL;DR: In this article, a framework that integrates job assignment, human-capital acquisition, and learning captures several empirical findings concerning wage and promotion dynamics inside firms, including the following: real-wage decreases are not rare but demotions are.
Abstract: We show that a framework that integrates job assignment, human-capital acquisition, and learning captures several empirical findings concerning wage and promotion dynamics inside firms, including the following. First, real-wage decreases are not rare but demotions are. Second, wage increases are serially correlated. Third, promotions are associated with large wage increases. Fourth, wage increases at promotion are small relative to the difference between average wages across levels of the job ladder. Fifth, workers who receive large wage increases early in their stay at one level of the job ladder are promoted quickly to the next.
TL;DR: This paper developed a simple macroeconomic model that shows that combining capital market imperfections together with unequal access to investment opportunities across individuals can generate endogenous and permanent euctuations in aggregate GDP, investment, and interest rates.
Abstract: This paper develops a simple macroeconomic model that shows that combining capital market imperfections together with unequal access to investment opportunities across individuals can generate endogenous and permanent euctuations in aggregate GDP, investment, and interest rates. Reducing inequality of access may be a necessary condition for macroeconomic stabilization. Moreover, countercyclical escal policies have a role to play: in our model savings are underutilized in slumps because of the limited debt capacity of potential investors. Therefore, the government should issue public debt during recessions in order to absorb those idle savings and enance investment subsidies or tax cuts for investors. The most important single fact about saving and investment activities is that in our industrial society they are generally done by different people and for different reasons. (. . .) For years there might tend to be too little investment, leading to deeation, losses, excess capacity and unemployment. For other years, there might tend to be too much investment, leading to periods of chronic ineation—unless prudent and proper public policies in the escal and monetary eelds are followed [Paul A. Samuelson, Economics 8th edition, 1970, pp. 196‐198].
TL;DR: In this paper, the authors test the validity of this criticism for Mexico's privatization program, one of the world's largest case-by-case programs, and find that these firms quickly close the gap with their peers in the private sector.
Abstract: Critics of privatization often argue that its benefits come at a high cost to society. The authors test the validity of this criticism for Mexico's privatization program, one of the world's largest case-by-case programs. Assessing the performance of newly privatized firms in such areas as profitability and efficiency, they find that these firms quickly close the gap with their peers in the private sector. Their findings suggest that the firms' profit gains come from productivity gains (52 percent), layoffs (33 percent), and higher prices (15 percent).
TL;DR: The authors found that there is a robust and statistically significant association between the extent of democracy and the level of manufacturing wages in a country and that nonnegligible wage improvements result from the enhancement of democratic institutions: average wages in Mexico would increase by 10 to 40 percent if Mexico were to attain a level of democracy comparable to that prevailing in the United States.
Abstract: Controlling for labor productivity, income levels, and other possible determinants, there is a robust and statistically significant association between the extent of democracy and the level of manufacturing wages in a country. The association exists both across countries and over time within countries. The coefficient estimates suggest that nonnegligible wage improvements result from the enhancement of democratic institutions: average wages in a country like Mexico would be expected to increase by 10 to 40 percent if Mexico were to attain a level of democracy comparable to that prevailing in the United States. Political competition and participation seem to be the driving force behind the result.
TL;DR: In this article, the authors examine how principals should design incentives to induce time-inconsistent procrastinating agents to complete tasks efficiently, and they show that second-best optimal incentives for procrastinators typically involve an increasing punishment for delay as time passes.
Abstract: We examine how principals should design incentives to induce time-inconsistent procrastinating agents to complete tasks efficiently. Delay is costly to the principal, but the agent faces stochastic costs of completing the task, and efficiency requires waiting when costs are high. If the principal knows the task-cost distribution, she can always achieve first-best efficiency. If the agent has private information, the principal can induce first-best efficiency for time-consistent agents, but often cannot for procrastinators. We show that second-best optimal incentives for procrastinators typically involve an increasing punishment for delay as time passes.
TL;DR: In this paper, the authors study inefficiencies arising in contracting between one principal and N agents when the utility of each agent depends on all agents' trades with the principal and show that when N is large, each agent can be treated as non-pivotal, provided that appropriate continuity assumptions are satisfied.
Abstract: The paper studies inefficiencies arising in contracting between one principal and N agents when the utility of each agent depends on all agents' trades with the principal. When the principal commits to a set of publicly observable bilateral contract offers, the arising inefficiency is due entirely to the externalities imposed on non-signers. In contrast, when the principal's offers are privately observed, the distortion is due to the externalities given agents' equilibrium trades. Comparison of the two externalities determines the relative efficiency of the two contracting regimes. In both cases, we show that when N is large, each agent can be treated as non-pivotal, provided that appropriate continuity assumptions are satisfied. We also study the case in which the principal can condition each agent's trade on other agents' messages. We characterize the set of such mechanisms in which each agent's participation is voluntary. When the principal can commit to any such mechanism, she implements the first-best outcome, while threatening each deviator with the harshest possible punishment. However, in the presence of noise that goes to zero slower than N goes to infinity, in the limit we obtain a (generally inefficient) outcome in which each agent feels non-pivotal.
TL;DR: The authors proposed a model in which forecasters have common information, confer actively, and thus know the true pdf of future outcomes, and make a range of projections that mimics the true probability distribution of the forecast variable.
Abstract: Do professional forecasters provide their true unbiased estimates, or do they behave strategically? In our model, forecasters have common information, confer actively, and thus know the true pdf of future outcomes. Intensive users of economic forecasts monitor forecasters' performance closely; occasional users are drawn to the forecaster who fared best in the previous period. In the resulting Nash equilibrium, even though economists have identical expectations, they make a range of projections that mimics the true probability distribution of the forecast variable. Those whose wages depend most on publicity produce forecasts that differ most from the consensus. Empirical evidence supports the model.