Showing papers in "Quarterly Journal of Economics in 2005"

Competition and Innovation: an Inverted-U Relationship

Abstract: This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model—that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck—are both supported by the data.

Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market

Abstract: Corruption by the politically connected is often blamed for economic ills, particularly in less developed economies. Using a loan-level data set of more than 90,000 …rms that represents the universe of corporate lending in Pakistan between 1996 and 2002, we investigate rents to politically connected …rms in banking. Classifying a …rm as “political”if its director participates in an election, we examine the extent, nature, and economic costs of political rent provision. We …nd that political …rms borrow 45 percent more and have 50 percent higher default rates. Such preferential treatment occurs exclusively in government banks - private banks provide no

Neighbors as Negatives: Relative Earnings and Well-Being

Abstract: This paper investigates whether individuals feel worse off when others around them earn more. In other words, do people care about relative position, and does “lagging behind the Joneses” diminish well-being? To answer this question, I match individual-level data containing various indicators of well-being to information about local average earnings. I find that, controlling for an individual’s own income, higher earnings of neighbors are associated with lower levels of self-reported happiness. The data’s panel nature and rich set of measures of well-being and behavior indicate that this association is not driven by selection or by changes in the way people define happiness. There is suggestive evidence that the negative effect of increases in neighbors’ earnings on own well-being is most likely caused by interpersonal preferences, that is, people having utility functions that depend on relative consumption in addition to absolute consumption.

Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach

Abstract: Structural vector autoregressions (VARs) are widely used to trace out the effect of monetary policy innovations on the economy. However, the sparse information sets typically used in these empirical models lead to at least two potential problems with the results. First, to the extent that central banks and the private sector have information not reflected in the VAR, the measurement of policy innovations is likely to be contaminated. A second problem is that impulse responses can be observed only for the included variables, which generally constitute only a small subset of the variables that the researcher and policymaker care about. In this paper we investigate one potential solution to this limited information problem, which combines the standard structural VAR analysis with recent developments in factor analysis for large data sets. We find that the information that our factor-augmented VAR (FAVAR) methodology exploits is indeed important to properly identify the monetary transmission mechanism. Overall, our results provide a comprehensive and coherent picture of the effect of monetary policy on the economy.

The More the Merrier? The Effect of Family Size and Birth Order on Children's Education

Abstract: There is an extensive theoretical literature that postulates a tradeoff between child quantity and quality within a family. However, there is little causal evidence that speaks to this theory. Using a rich dataset on the entire population of Norway over an extended period of time, we examine the effects of family size and birth order on the educational attainment of children. While we find a negative correlation between family size and children's education, when we include indicators for birth order and/or use twin births as an instrument, family size effects become negligible. In addition, birth order has a significant and large negative effect on children's education. We also study adult earnings, employment, and teenage childbearing, and find strong evidence for birth order effects with these outcomes, particularly among women. These findings suggest the need to revisit economic models of fertility and child "production", focusing not only on differences across families but differences within families as well.

The Effect of Financial Development on Convergence: Theory and Evidence

Abstract: We introduce imperfect creditor protection in a multi-country version of Schumpeterian growth theory with technology transfer. The theory predicts that the growth rate of any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run growth rate. The theory also predicts that in a country that converges to the frontier growth rate, financial development has a positive but eventually vanishing effect on steady-state per-capita GDP relative to the frontier. We present cross-country evidence supporting these two implications. In particular, we find a significant and sizeable effect of an interaction term between initial per-capita GDP (relative to the United States) and a financial intermediation measure in an otherwise standard growth regression, implying that the likelihood of converging to the U.S. growth rate increases with financial development. We also find that, as predicted by the theory, the direct effect of financial intermediation in this regression is not significantly different from zero. These findings are robust to alternative conditioning sets, estimation procedures and measures of financial development.

A Measure of Media Bias

Abstract: In this paper we estimate ADA (Americans for Democratic Action) scores for major media outlets such as the New York Times, USA Today, Fox News Special Report, and all three network television news shows. Our estimates allow us to answer such questions as Is the average article in the New York Times more liberal than the average speech by Tom Daschle? or Is the average story on Fox News more conservative than the average speech by Bill Frist? To compute our measure, we count the times that a media outlet cites various think tanks and other policy groups. We compare this with the times that members of Congress cite the same groups in their speeches on the floor of the House and Senate. By comparing the citation patterns we construct an ADA score. As a simplified example, imagine that there were only two think tanks, and suppose that the New York Times cited the first think tank twice as often as the second. Our method asks: What is the typical ADA score of members of Congress who exhibit the same frequency (2:1) in their speeches? This is the score that we would assign to the New York Times. Our results show a strong liberal bias. All of the news outlets except Fox News Special Report and the Washington Times received a score to the left of the average member of Congress. Consistent with many conservative critics, CBS Evening News and the New York Times received a score far left of center. Outlets such as USA Today, NPRs Morning Edition, NBCs Nightly News and ABCs World News Tonight were moderately left. The most centrist outlets (but still left-leaning) by our measure were the Newshour with Jim Lehrer, CNNs NewsNight with Aaron Brown, and ABCs Good Morning America. Fox News Special Report, while right of center, was closer to the center than any of the three major networks evening news broadcasts. All of our findings refer strictly to the news stories of the outlets. That is, we omitted editorials, book reviews, and letters to the editor from our sample.

Neighborhood Effects on Crime for Female and Male Youth: Evidence from a Randomized Housing Voucher Experiment

Abstract: The Moving to Opportunity (MTO) demonstration assigned housing vouchers via random lottery to public housing residents in five cities. We use the exogenous variation in residential locations generated by MTO to estimate neighborhood effects on youth crime and delinquency. The offer to relocate to lower-poverty areas reduces arrests among female youth for violent and property crimes, relative to a control group. For males the offer to relocate reduces arrests for violent crime, at least in the short run, but increases problem behaviors and property crime arrests. The gender difference in treatment effects seems to reflect differences in how male and female youths from disadvantaged backgrounds adapt and respond to similar new neighborhood environments.

International Trade and Macroeconomic Dynamics with Heterogeneous Firms

Abstract: We develop a stochastic, general equilibrium, two-country model of trade and macroeconomic dynamics. Productivity differs across individual, monopolistically competitive firms in each country. Firms face a sunk entry cost in the domestic market and both fixed and per-unit export costs. Only relatively more productive firms export. Exogenous shocks to aggregate productivity and entry or trade costs induce firms to enter and exit both their domestic and export markets, thus altering the composition of consumption baskets across countries over time. In a world of flexible prices, our model generates endogenously persistent deviations from PPP that would not exist absent our microeconomic structure with heterogeneous firms. It provides an endogenous, microfounded explanation for a HarrodBalassa-Samuelson effect in response to aggregate productivity differentials and deregulation. Finally, the model successfully matches several moments of U. S. and international business cycles.

Do Leaders Matter? National Leadership and Growth Since World War II

Abstract: Economic growth within countries varies sharply across decades. This paper examines one explanation for these sustained shifts in growth— changes in the national leader. We use deaths of leaders while in office as a source of exogenous variation in leadership, and ask whether these plausibly exogenous leadership transitions are associated with shifts in country growth rates. We find robust evidence that leaders matter for growth. The results suggest that the effects of individual leaders are strongest in autocratic settings where there are fewer constraints on a leader’s power. Leaders also appear to affect policy outcomes, particularly monetary policy. The results suggest that individual leaders can play crucial roles in shaping the growth of nations.

Social Preferences and the Response to Incentives: Evidence from Personnel Data

Abstract: We present evidence on whether workers have social preferences by comparing workers' productivity under relative incentives, where individual effort imposes a negative externality on others, with their productivity under piece rates, where it does not. We find that the productivity of the average worker is at least 50 percent higher under piece rates than under relative incentives. We show that this is due to workers partially internalizing the negative externality their effort imposes on others under relative incentives, especially when working alongside their friends. Under piece rates, the relationship among workers does not affect productivity. Further analysis reveals that workers internalize the externality only when they can monitor others and be monitored. This rules out pure altruism as the underlying motive of workers' behavior.

Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity

Abstract: Analyzing 210 developing country private equity investments, we find that transactions vary with nations’ legal enforcement, whether measured directly or through legal origin. Investments in high enforcement and common law nations often use convertible preferred stock with covenants. In low enforcement and civil law nations, private equity groups tend to use common stock and debt, and rely on equity and board control. Transactions in high enforcement countries have higher valuations and returns. While relying on ownership rather than contractual provisions may help to alleviate legal enforcement problems, these results suggest that private solutions are only a partial remedy.

Owner-Occupied Housing as a Hedge Against Rent Risk

Abstract: The conventional wisdom that homeownership is very risky ignores the fact that the alternative, renting, is also risky. Owning a house provides a hedge against fluctuations in housing costs, but in turn introduces asset price risk. In a simple model of tenure choice with endogenous house prices, we show that the net risk of owning declines with a household's expected horizon in its house and with the correlation in housing costs in future locations. Empirically, we find that both house prices, relative to rents, and the probability of homeownership increase with net rent risk.

The Costs of Low Birth Weight

Abstract: Birth weight has emerged as the leading indicator of infant health and welfare and the central focus of infant health policy. This is because low birth weight (LBW) infants experience severe health and developmental difficulties that can impose enormous costs on society. But would the prevention of LBW generate equally sizable cost savings and health improvements? Estimates of the return to LBWprevention from cross-sectional associations may be biased by omitted variables that cannot be influenced by policy, such as genetic factors. To address this, we compare the hospital costs, health at birth, and infant mortality rates between heavier and lighter infants from all twin pairs born in the United States. We also examine the effect of maternal smoking during pregnancy – the leading risk factor for LBW in the United States – on health among singleton births after controlling for detailed background characteristics. Both analyses imply substantially smaller effects of LBW than previously thought, suggesting two possibilities: 1) existing estimates overstate the true costs and consequences of LBW by at least a factor of four and by as much as a factor of 20; or 2) different LBW-preventing interventions have different health and cost consequences, implying that policy efforts that presume a single return to reducing LBW will necessarily be suboptimal.

Air Pollution and Infant Health: What Can We Learn from California's Recent Experience?

Abstract: We examine the impact of air pollution on infant death in California over the 1990s. Our work offers several innovations: First, many previous studies examine populations subject to far greater levels of pollution. In contrast, the experience of California in the 1990s is clearly relevant to current debates over the regulation of pollution. Second, many studies examine a few routinely monitored pollutants in isolation, generally because of data limitations. We examine four criteria' pollutants in a common framework. Third, we develop an identification strategy based on within zip code variation in pollution levels that controls for potentially important unobserved characteristics of high pollution areas. Fourth, we use rich individual-level data to investigate effects of pollution on infant mortality, fetal deaths, low birth weight and prematurity in a common framework. We find that the reductions in carbon monoxide (CO) and particulates (PM10) over the 1990s in California saved over 1,000 infant lives. However, we find little consistent evidence of pollution effects on fetal deaths, low birth weight or short gestation.

An Economic Analysis of “Acting White”

Abstract: This paper formalizes a widely discussed peer eect entitled 'acting white'. 'Acting White'is modeled as a two audience signaling quandary: signals that induce high wages can be signals that induce peer group rejection. Without peer eects, equilibria involve all ability types choosing dierent levels of education. 'Acting White'alters the equilibrium dramatically: the (possibly empty) set of lowest ability individuals and the set of highest ability individuals continue to reveal their type through investments in education; ability types in the middle interval pool on a common education level. Only those in the lower intervals are accepted by the group. The model's predictions …t many stylized facts in the anthropology and sociology literatures regarding social interactions among minority group members.

Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut

Abstract: This paper analyzes the effects of dividend taxation on corporate behavior using the large tax cut on individual dividend income enacted in 2003. We document a 20 percent increase in dividend payments by nonfinancial, nonutility publicly traded corporations following the tax cut. An unusually large number of firms initiated or increased regular dividend payments in the year after the reform. As a result, the number of firms paying dividends began to increase in 2003 after a continuous decline for more than two decades. Firms with high levels of nontaxable institutional ownership did not change payout policies, supporting the causality of the tax cut in increasing aggregate dividend payments. The response to the tax cut was strongest in firms with strong principals whose tax incentives changed (those with large taxable institutional owners or independent directors with large share holdings), and in firms where agents had stronger incentives to respond (high share ownership and low options ownership among top executives). Hence, principal-agent issues appear to play an important role in corporate responses to taxation.

A Model of Add-On Pricing

Abstract: This paper examines competitive price discrimination with horizontal and vertical taste differences. Consumers with higher valuations for quality are assumed to have stronger brand preferences. Two models are considered: a standard competitive price discrimination model in which consumers observe all prices; and an "add-on pricing" game in which add-on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add-ons at high unadvertised prices. In the standard game price discrimination is self-reinforcing: the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not. The analysis of the add-on pricing game focuses on the Chicago-school argument that profits earned on add-ons will be competed away via lower prices for advertised goods. A conclusion is that add-on practices can raise equilibrium profits by creating an adverse selection problem that makes price-cutting unappealing. Although profitable when jointly adopted, using add-on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising. Several models that could account for add-on pricing are discussed.

Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm

Abstract: We develop a simple model of international outsourcing and apply it to processing trade in China. Export processing involves a foreign firm contracting with a Chinese factory manager to assemble intermediate inputs into a final product. Whether the same or different parties should have ownership of the processing factory and control over input purchases depends on parameters of the model, which we estimate. We find that multinational firms engaged in export processing in China tend to split factory ownership and input control with local managers: the most common outcome is to have foreign factory ownership but Chinese control over input purchases. Consistent with our model, this pattern is especially prevalent in the southern coastal provinces, where export markets are thickest and contracting costs are lowest.

PPP Strikes Back: Aggregation And the Real Exchange Rate

Abstract: We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics. Established time series and panel methods fail to control for this. Using Eurostat data, we find that when heterogeneity is taken into account, the estimated persistence of real exchange rates falls dramatically. Its half-life, for instance, may fall to as low as eleven months, significantly below the "consensus view" of three to five years.

The Politics of Bank Failures: Evidence from Emerging Markets

Abstract: This paper studies large private banks in 21 major emerging markets in the 1990s. It first demonstrates that bank failures are very common in these countries: about 25 percent of these banks failed during the seven-year sample period. The paper also shows that political concerns play a significant role in delaying government interventions to failing banks. Failing banks are much less likely to be taken over by the government or to lose their licenses before elections than after. This result is robust to controlling for macroeconomic and bank-specific factors, a new party in power, early elections, outstanding loans from the IMF, as well as country-specific, time-independent factors. This finding implies that much of the within-country clustering in emerging market bank failures is directly due to political concerns.

Which Countries Have State Religions

Abstract: Among 188 countries, 72 had no state religion in 2000,1970, and 1900; 58 had a state religion throughout; and 58 had 1 or 2 transitions. We use a Hotelling spatial competition model to analyze the likelihood that the religion market would be monopolized. Similar forces influence a government's decision to establish a state religion. Consistent with the model, the probability of state religion in 1970 and 2000 is increasing with the adherence rate to the main religion, has a nonlinear relation with population, and has little relation with per capita GDP. The probability of state religion decreases sharply under Communism, but lagged Communism has only a weak effect. With costly adjustment for institutions, the probability of state religion in 1970 or 2000 depends substantially on the status in 1900. This persistence is much stronger for countries with no major regime change than for countries with such a change.

The Political Economy of Hatred

Abstract: This paper develops a model of the interaction between the supply of hate-creating stories from politicians and the willingness of voters to listen to hatred. Hatred is fostered with stories of an out-group's crimes, but the impact of these stories comes from repetition not truth. Hate-creating stories are supplied by politicians when such actions help to discredit opponents whose policies benefit an out-group. Egalitarians foment hatred against rich minorities; opponents of redistribution build hatred against poor minorities. Hatred relies on people accepting, rather than investigating, hate-creating stories. Hatred declines when there is private incentive to learn the truth. Increased economic interactions with a minority group may provide that incentive. This framework is used to illuminate the evolution of anti-black hatred in the United States South, episodes of anti-Semitism in Europe, and the recent surge of anti-Americanism in the Arab world.

The Shape of Production Functions and the Direction of Technical Change

Abstract: This pai>er views the standard production function in macroeconomics as a reduced form and derives its properties from microfoundations. The shape of this production function is governed by the distribution of ideas. If that distribution is Pareto, then two results obtain: the global production function is Cobb-Douglas, and technical change in the long run is labor-augmenting. Kortum showed that Pareto distributions are necessary if search-based idea models are to exhibit steady-state growth. Here we show that this same assumption delivers the additional results about the shape of the production function and the direction of technical change.

The Gift of the Dying: The Tragedy of AIDS and the Welfare of Future African Generations

Abstract: This paper simulates the impact of the AIDS epidemic on future living standards in South Africa. I emphasize two competing effects. On the one hand, the epidemic is likely to have a detrimental impact on the human capital accumulation of orphaned children. On the other hand, widespread community infection lowers fertility, both directly, through a reduction in the willingness to engage in unprotected sexual activity, and indirectly, by increasing the scarcity of labor and the value of a woman's time. I find that even with the most pessimistic assumptions concerning reductions in educational attainment, the fertility effect dominates. The AIDS epidemic, on net, enhances the future per capita consumption possibilities of the South African economy.

Profit Sharing and the Role of Professional Partnerships

Abstract: When it is hard to assess service quality, firms will suboptimally hire low ability workers. We show that organizing as a profit-sharing partnership can alleviate these problems. Our theory explains the relative scarcity of partnerships outside of professional service industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting. It also sheds light on features of partnerships such as up-or-out promotion systems, the use of noncompete clauses, and recent trends in professional service industries.

Love and Money: A Theoretical and Empirical Analysis of Household Sorting and Inequality

Abstract: This paper examines the interactions between household formation, inequality, and per capita income. We develop a model in which agents decide to become skilled or unskilled and form households. We show that the equilibrium sorting of spouses by skill type (their correlation in skills) is an increasing function of the skill premium. In the absence of perfect capital markets, the economy can converge to different steady states, depending upon initial conditions. The degree of marital sorting and wage inequality is positively correlated across steady states and negatively correlated with per capita income. We use household surveys from 34 countries to construct several measures of the skill premium and of the degree of correlation of spouses’ education (marital sorting). For all our measures, we find a positive and significant relationship between the two variables. We also find that sorting and per capita GDP are negatively correlated and that greater discrimination against women leads to more sorting, in line with the predictions of our model.

Partisan Competition, Growth, and the Franchise

Abstract: We present an argument for changes in the franchise in which an elite split along economic interests uses the suffrage to influence implemented policies. Through the influence of these policies on the character of industrialization, we analyze the effects of franchise changes on economic growth. We identify in the social structure of society an explanation for the connection between enfranchisement and growth: when (1) there exists an economic conflict among the elite, (2) landed classes are not politically strong, and (3) there exists a critical mass of industrial workers, we observe both growth and democratization. The lack of conditions (1) or (2) resolves in stagnant autocracies while the absence of condition (3) drives growth-deterring democratic expansions. We provide historical support for our argument by analyzing the experience of eleven countries.

Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis

Abstract: Modigliani and Cohn hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has implications for the pricing of risky stocks relative to safe stocks. Simultaneously examining the pricing of Treasury bills, safe stocks, and risky stocks allows us to distinguish money illusion from any change in the attitudes of investors toward risk. Our empirical results support the hypothesis that the stock market suffers from money illusion.

Sexually Transmitted Infections, Sexual Behavior, and the HIV/AIDS Epidemic

Abstract: Forty million people are infected with HIV worldwide; twenty-five million of them are in Sub-Saharan Africa. This paper addresses the question of why Africa has been so heavily affected by HIV and what explains the variation within Africa. I present a model that decomposes epidemic level into differences in sexual behavior and differences in viral transmission rates. I argue using evidence drawn from the existing medical literature that Africa has very high HIV transmission rates likely due to high rates of other untreated sexually transmitted infections while transmission rates in the United States are low. The difference in transmission rates is large enough to explain the observed difference in prevalence between the United States and Sub-Saharan Africa. The model also provides a good fit to cross-country data within Africa and suggests that in contrast to the intracontinental results differences within that continent can be attributed to differences in sexual behavior and epidemic timing. The results suggest that cost-effective policy interventions would focus on decreasing transmission rates within Africa possibly by treating other untreated sexually transmitted infections. (authors)