Showing papers in "Quarterly Journal of Economics in 2008"

Why has CEO Pay Increased So Much

Abstract: This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large fi rms explains many of the patterns in CEO pay, across firms, over time, and between countries. (JEL D2, D3, G34, J3)

Estimating Trade Flows: Trading Partners and Trading Volumes

Abstract: We develop a simple model of international trade with heterogeneous firms that is consistent with a number of stylized features of the data. In particular, the model predicts positive as well as zero trade flows across pairs of countries, and it allows the number of exporting firms to vary across destination countries. As a result, the impact of trade frictions on trade flows can be decomposed into the intensive and extensive margins, where the former refers to the trade volume per exporter and the latter refers to the number of exporters. This model yields a generalized gravity equation that accounts for the self-selection of firms into export markets and their impact on trade volumes. We then develop a two-stage estimation procedure that uses an equation for selection into trade partners in the first stage and a trade flow equation in the second. We implement this procedure parametrically, semiparametrically, and nonparametrically, showing that in all three cases the estimated effects of trade frictions are similar. Importantly, our method provides estimates of the intensive and extensive margins of trade. We show that traditional estimates are biased and that most of the bias is due not to selection but rather due to the omission of the extensive margin. Moreover, the effect of the number of exporting firms varies across country pairs according to their characteristics. This variation is large and particularly so for trade between developed and less developed countries and between pairs of less developed countries.

Five Facts about Prices: A Reevaluation of Menu Cost Models

Abstract: are price decreases. (3) The frequency of price increases covaries strongly with inflation, whereas the frequency of price decreases and the size of price increases and price decreases do not. (4) The frequency of price change is highly seasonal: it is highest in the first quarter and then declines. (5) We find no evidence of upwardsloping hazard functions of price changes for individual products. We show that the first, second, and third facts are consistent with a benchmark menu-cost model, whereas the fourth and fifth facts are not.

The Developing World is Poorer than We Thought, But No Less Successful in the Fight Against Poverty

Abstract: A new data set on national poverty lines is combined with new price data and almost 700 household surveys to estimate absolute poverty measures for the developing world We find that 25% of the population lived in poverty in 2005, as judged by what “poverty” typically means in the world's poorest countries This is higher than past estimates Substantial overall progress is still indicated—the corresponding poverty rate was 52% in 1981—but progress was very uneven across regions The trends over time and regional profile are robust to various changes in methodology, though precise counts are more sensitive

Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector

Abstract: This paper proposes a new mechanism linking trade and wage inequality in developing countries – the quality-upgrading mechanism – and investigates its empirical implications in panel data on Mexican manufacturing plants. In a model with heterogeneous plants and quality-differentiated goods, only the most productive plants in a country like Mexico enter the export market, they produce higher-quality goods to appeal to richer Northern consumers, and they pay high wages to attract and motivate a high-quality workforce. An exchange-rate devaluation leads initially more-productive, higher-wage plants to increase exports, upgrade quality, and raise wages relative to initially less-productive, lower-wage plants within each industry. Using the late-1994 peso crisis as a source of variation and a variety of proxies for plant productivity, I find that initially more-productive plants increased the export share of sales, white-collar wages, blue-collar wages, the relative wage of white-collar workers, and ISO 9000 certification more than initially less-productive plants during the peso crisis period, and that these differential changes were greater than in periods without devaluations before and after the crisis period. A factor-analytic strategy that relies more heavily on the theoretical structure and avoids the need to construct proxies finds similar results. These findings support the hypothesis that differential quality upgrading induced by the exchange rate shock tended to increase within-industry wage inequality.

The Scope of Cooperation: Values and Incentives

Abstract: What explains the range of situations in which individuals cooperate? This paper studies a model where individuals respond to incentives but are also influenced by norms of good conduct inherited from earlier generations Parents rationally choose what values to transmit to their offspring, and this choice is influenced by the spatial patterns of external enforcement and of likely future transactions The equilibrium displays strategic complementarities between values and current behavior, which reinforce the effects of changes in the external environment Values evolve gradually over time, and if the quality of legal enforcement is chosen under majority rule, there is path dependence: adverse initial conditions may lead to a unique equilibrium where legal enforcement remains weak and individual values discourage cooperation

Exposing Corrupt Politicians: The Effects of Brazil's Publicly Released Audits on Electoral Outcomes

Abstract: This paper examines the extent to which access to information enhances political accountability. Based upon the results of Brazil’s recent anti-corruption program that randomly audits municipal expenditures of federally-transferred funds, it estimates the effect of the disclosure of local government corruption practices upon the re-election success of incumbent mayors in municipal elections. Comparing municipalities which were randomly audited before the elections with those audited after, the analysis shows that the disclosure of audit results had a significant impact on the re-election rates of mayors found to be corrupt. For a one standard deviation increase in reported corruption, the audit policy reduced the incumbent’s likelihood of re-election by 25 percent. This effect is more pronounced in municipalities where radio stations are present and higher levels of corruption are identified. These findings highlight the value of information and the role of the media in reducing informational asymmetries in the political process, thus enabling voters to not only hold corrupt politicians accountable but also to reward non-corrupt politicians.

Tipping and the Dynamics of Segregation

Abstract: Schelling (“Dynamic Models of Segregation,” Journal of Mathematical Sociology 1 (1971), 143–186) showed that extreme segregation can arise from social interactions in white preferences: once the minority share in a neighborhood exceeds a “tipping point,” all the whites leave. We use regression discontinuity methods and Census tract data from 1970 through 2000 to test for discontinuities in the dynamics of neighborhood racial composition. We find strong evidence that white population flows exhibit tipping-like behavior in most cities, with a distribution of tipping points ranging from 5% to 20% minority share. Tipping is prevalent both in the suburbs and near existing minority enclaves. In contrast to white population flows, there is little evidence of nonlinearities in rents or housing prices around the tipping point. Tipping points are higher in cities where whites have more tolerant racial attitudes.

The Long-term Effects of Africa's Slave Trades

Abstract: Can part of Africa’s current underdevelopment be explained by its slave trades? To explore this question, I use data from shipping records and historical documents reporting slave ethnicities to construct estimates of the number of slaves exported from each country during Africa’s slave trades. I find a robust negative relationship between the number of slaves exported from a country and current economic performance. To better understand if the relationship is causal, I examine the historical evidence on selection into the slave trades, and use instrumental variables. Together the evidence suggests that the slave trades have had an adverse effect on economic development.

Missing Women and the Price of Tea in China: The Effect of Sex-Specific Earnings on Sex Imbalance

Abstract: Economists have long argued that the sex imbalance in developing countries is caused by underlying economic conditions. This paper uses exogenous increases in sex-specific agricultural income caused by post-Mao reforms in China to estimate the effects of total income and sex-specific income on sex-differential survival of children. Increasing female income, holding male income constant, improves survival rates for girls, whereas increasing male income, holding female income constant, worsens survival rates for girls. Increasing female income increases educational attainment of all children, whereas increasing male income decreases educational attainment for girls and has no effect on boys' educational attainment.

Contracts as Reference Points

Abstract: We argue that a contract provides a reference point for a trading relationship: more precisely, for parties' feelings of entitlement. A party's ex post performance depends on whether he gets what he is entitled to relative to outcomes permitted by the contract. A party who is shortchanged shades on performance. A flexible contract allows parties to adjust their outcomes to uncertainty but causes inefficient shading. Our analysis provides a basis for long-term contracts in the absence of noncontractible investments and elucidates why "employment" contracts, which fix wages in advance and allow the employer to choose the task, can be optimal.

Information, School Choice, and Academic Achievement: Evidence from Two Experiments

Abstract: We examine a natural experiment and a field experiment that provided direct information on school test scores to lower-income families in a public school choice plan. Receiving information significantly increases the fraction of parents choosing higher-performing schools. Parents with high-scoring alternatives nearby were more likely to choose nonguaranteed schools with higher test scores. Using random variation from each experiment, we find that attending a higher-scoring school increases student test scores. The results imply that school choice will most effectively increase academic achievement for disadvantaged students when parents have easy access to test score information and good options from which to choose.

State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?

Abstract: In the 1988-2004 micro data collected by the U.S. Bureau of Labor Statistics for the CPI, price changes are frequent (every 4-7 months, depending on the treatment of sale prices) and large in absolute value (on the order of 10%). The size and timing of price changes varies considerably for a given item, but the size and probability of a price change are unrelated to the time since the last price change. Movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price, due to offsetting movements in the fraction of price increases and decreases. Neither leading time-dependent models (Taylor or Calvo) nor 1 st generation state-dependent models match all of these facts. Some 2 nd generation state-dependent models, however, appear broadly consistent with the empirical patterns.

Occupational Choice and the Spirit of Capitalism

Abstract: The British Industrial Revolution triggered a socioeconomic transformation whereby the landowning aristocracy was replaced by industrial capitalists rising from the middle classes as the economically dominant group. We propose a theory of preference formation under financial market imperfections that can account for this pattern. Parents shape their children’s preferences in response to economic incentives. Middle-class families in occupations requiring effort, skill, and experience develop patience and a work ethic, whereas upper-class families relying on rental income cultivate a refined taste for leisure. These class-specific attitudes, which are rooted in the nature of preindustrial professions, become key determinants of success once industrialization transforms the economic landscape. I. INTRODUCTION The Industrial Revolution was more than capital accumulation and growth. It also set off a social and political transformation that redefined hierarchies in society and reshaped the distribution of income and wealth. Before the onset of industrialization in eighteenth-century Britain, wealth and political power were associated with the possession of land. Over the course of the nineteenth century, a new class of entrepreneurs and businessmen emerged as the economic elite. For the most part, the members of this class rose from humble beginnings and had their social origins in the urban middle classes. The landed elite was left behind and eventually lost its political and economic predominance. Many observers of the time linked this reversal in economic fortunes to differences in values, attitudes, and ultimately preferences across social classes. There are countless examples, both in scholarly and in fictional writing, of portrayals of members of the landowning class as averse to work, unwilling to save, ill-disposed tocommercialactivity,andunabletoconsidermoneyassomething

Betting on Hitler—The Value of Political Connections in Nazi Germany

Abstract: This paper examines the value of connections between German industry and the Nazi movement in early 1933. Drawing on previously unused contemporary sources about management and supervisory board composition and stock returns, we find that one out of seven firms, and a large proportion of the biggest companies, had substantive links with the National Socialist German Workers’ Party. Firms supporting the Nazi movement experienced unusually high returns, outperforming unconnected ones by 5% to 8% between January and March 1933. These results are not driven by sectoral composition and are robust to alternative estimators and definitions of affiliation.

Selection, Investment, and Women's Relative Wages Over Time

Abstract: In theory, growing wage inequality within gender should cause women to invest more in their market productivity and should differentially pull able women into the workforce Our paper uses Heckman's two-step estimator and identification at infinity on repeated Current Population Survey cross sections to calculate relative wage series for women since 1970 that hold constant the composition of skills We find that selection into the female full-time full-year workforce shifted from negative in the 1970s to positive in the 1990s, and that the majority of the apparent narrowing of the gender wage gap reflects changes in female workforce composition We find the same types of composition changes by measuring husbands' wages and National Longitudinal Survey IQ data as proxies for unobserved skills Our findings help to explain why growing wage equality between genders coincided with growing inequality within gender

Women's Suffrage, Political Responsiveness, and Child Survival in American History

Abstract: Women’s choices appear to emphasize child welfare more than those of men. This paper presents new evidence on how suffrage rights for American women helped children to benefit from the scientific breakthroughs of the bacteriological revolution. Consistent with standard models of electoral competition, suffrage laws were followed by immediate shifts in legislative behavior and large, sudden increases in local public health spending. This growth in public health spending fueled large-scale door-to-door hygiene campaigns, and child mortality declined by 8-15% (or 20,000 annual child deaths nationwide) as cause-specific reductions occurred exclusively among infectious childhood killers sensitive to hygienic conditions.

Coarse Thinking and Persuasion

Abstract: We present a model of uninformative persuasion in which individuals “think coarsely”: they group situations into categories and apply the same model of inference to all situations within a category. Coarse thinking exhibits two features that persuaders take advantage of: (i) transference, whereby individuals transfer the informational content of a given message from situations in a category where it is useful to those where it is not, and (ii) framing, whereby objectively useless information influences individuals’ choice of category. The model sheds light on uninformative advertising and product branding, as well as on some otherwise anomalous evidence on mutual fund advertising.

Does Hazardous Waste Matter? Evidence from the Housing Market and the Superfund Program

Abstract: This paper uses the housing market to develop estimates of the local welfare impacts of Superfund-sponsored cleanups of hazardous waste sites. We show that if consumers value the cleanups, then the hedonic model predicts that they will lead to increases in local housing prices and new home construction, as well as the migration of individuals that place a high value on environmental quality to the areas near the improved sites. We compare housing market outcomes in the areas surrounding the first 400 hazardous waste sites chosen for Superfund cleanups to the areas surrounding the 290 sites that narrowly missed qualifying for these cleanups. We find that Superfund cleanups are associated with economically small and statistically insignificant changes in residential property values, property rental rates, housing supply, total population, and types of individuals living near the sites. These findings are robust to a series of specification checks, including the application of a regression discontinuity design based on knowledge of the selection rule. Overall, the preferred estimates suggest that the local benefits of Superfund cleanups are small and appear to be substantially lower than the $43 million mean cost of Superfund cleanups.

How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines

Abstract: This paper examines how incumbents respond to the threat of entry of competitors, as distinguished from their response to competitors’ actual entry. It uses a case study from the passenger airline industry—specifically, the evolution of Southwest Airlines’ route network—to identify particular routes where the probability of future entry rises abruptly. When Southwest begins operating in airports on both sides of a route but not the route itself, this dramatically raises the chance they will start flying that route in the near future. We examine the pricing of the incumbents on threatened routes in the period surrounding such events. We find that incumbents cut fares significantly when threatened by Southwest’s entry into their routes. This is true even after controlling in several ways for airport-specific operating costs. The response of incumbents seems to be limited only to the threatened route itself, and not to routes out of nearby competitor airports where Southwest does not operate (e.g., fares drop on routes from Chicago Midway but not Chicago O’Hare). The largest responses appear to be restricted to routes that were concentrated beforehand. Incumbents do experience short-run increases in their passenger loads concurrent with these fare cuts. This is consistent with theories implying incumbents will try to generate some longer-term loyalty among current customers before the entry of a new competitor. We examine evidence relating this demand-building motive to frequent flyer programs and find suggestive evidence in favor of this notion. There is only weak evidence that incumbents increase capacity on the routes.

Systemic Crises and Growth

Abstract: In this paper, we document the fact that countries that have experienced occasional financial crises have on average grown faster than countries with stable financial conditions. We measure the incidence of crisis with the skewness of credit growth, and find that it has a robust negative effect on GDP growth. This link coexists with the negative link between variance and growth typically found in the literature. To explain the link between crises and growth we present a model where weak institutions lead to severe financial constraints and low growth. Financial liberalization policies that facilitate risk-taking increase leverage and investment. This leads to higher growth, but also to a greater incidence of crises. Conditions are established under which the costs of crises are outweighed by the benefits of higher growth.

Investigating Inflation Persistence Across Monetary Regimes

Abstract: Under inflation, targeting estimates of the indexation parameter in hybrid New Keynesian Phillips curves are either equal to zero, or very low, in the United Kingdom, Canada, Sweden, and New Zealand. Analogous results hold for the Euro area under the European Monetary Union, and for Switzerland under the new monetary regime: under stable regimes with clearly defined nominal anchors, inflation appears to be purely forward-looking. These results question the notion that the intrinsic inflation persistence found in post-WWII U.S. data is structural in the sense of Lucas (Carnegie-Rochester Conference Series on Public Policy, 1 [1976], 19–46), and suggest that "hardwiring" inflation persistence in macroeconomic models is potentially misleading.

The Church Versus the Mall: What Happens When Religion Faces Increased Secular Competition?

Abstract: Recently economists have begun to consider the causes and consequences of religious participation. An unanswered question in this literature is the effect upon individuals of changes in the opportunity cost of religious participation. In this paper we identify a policy-driven change in the opportunity cost of religious participation based on state laws that prohibit retail activity on Sunday, known as "blue laws." Many states have repealed these laws in recent years, raising the opportunity cost of religious participation. We use a variety of data sets to show that when a state repeals its blue laws religious attendance falls and that church donations and spending fall as well. These results do not seem to be driven by declines in religiosity prior to the law change, nor do we see comparable declines in membership in or giving to nonreligious organizations after a state repeals its laws. We then assess the effects of changes in these laws on drinking and drug use behavior in the NLSY. We find that repealing blue laws leads to an increase in drinking and drug use and that this increase is found only among the initially religious individuals who were affected by the blue laws. The effect is economically significant; for example, the gap in heavy drinking between religious and nonreligious individuals falls by about half after the laws are repealed.

First Do No Harm? Tort Reform and Birth Outcomes

Abstract: In the 1980s and 1990s many states adopted tort reforms. It has been argued that these reforms have reduced the practice of defensive medicine arising from excess tort liability. We find that this does not appear to be true for a large and important class of cases—childbirth in the United States. Using data from national vital statistics natality files on millions of individual births from 1989 to 2001, we ask whether specific tort reforms affect the types of procedures that are performed, and the health outcomes of mothers and their infants. We find that reform of the Joint and Several Liability rule (or the "deep pockets rule") reduces complications of labor and procedure use, whereas caps on noneconomic damages increase them. We show that these results are consistent with a model of tort reform that explicitly allows for variations in patient condition.

Preschool Television Viewing and Adolescent Test Scores: Historical Evidence from the Coleman Study

Abstract: We use heterogeneity in the timing of television’s introduction to different local markets to identify the effect of preschool television exposure on standardized test scores during adolescence. Our preferred point estimate indicates that an additional year of preschool television exposure raises average adolescent test scores by about 0.02 standard deviations. We are able to reject negative effects larger than about 0.03 standard deviations per year of television exposure. For reading and general knowledge scores, the positive effects we find are marginally statistically significant, and these effects are largest for children from households where English is not the primary language, for children whose mothers have less than a high school education, and for nonwhite children.

Does regionalism affect trade liberalization toward non-members ?

Abstract: We examine the effect of regionalism on unilateral trade liberalization using industry-level data on applied most-favored nation (MFN) tariffs and bilateral preferences for ten Latin American countries from 1990 to 2001. We find that preferential tariff reduction in a given sector leads to a reduction in the external (MFN) tariff in that sector. External liberalization is greater if preferences are granted to important suppliers. However, these “complementarity effects” of preferential liberalization on external liberalization do not arise in customs unions. Overall, our results suggest that concerns about a negative effect of preferential liberalization on external trade liberalization are unfounded.

Does Job Testing Harm Minority Workers? Evidence from Retail Establishments

Abstract: Because minorities typically fare poorly on standardized tests, job testing is thought to pose an equality-efficiency trade-off: testing improves selection but reduces minority hiring. We develop a conceptual framework to assess when this trade-off is likely to apply and evaluate the evidence for such a trade-off using hiring and productivity data from a national retail firm whose 1,363 stores switched from informal to test-based worker screening over the course of one year. We document that testing yielded more productive hires at this firm—raising mean and median tenure by 10% or more. Consistent with prior research, minorities performed worse on the test. Yet, testing had no measurable impact on minority hiring, and productivity gains were uniformly large among minority and nonminority hires. These results suggest that job testing raised the precision of screening without introducing additional negative information about minority applicants, most plausibly because both the job test and the informal screen that preceded it were unbiased.

Cross-Border Returns Differentials

Abstract: Were the U.S. to persistently earn substantially more on its foreign investments (“U.S. claims”) than foreigners earn on their U.S. investments (“U.S. liabilities”), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, we find that the returns differential of U.S. claims over U.S. liabilities is far smaller than previously reported and, importantly, is near zero for portfolio equity and debt securities. For portfolio securities, we confirm our finding using a separate dataset on the actual foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors; in the context of equity and bond portfolios we find no evidence that the U.S. can count on earning more on its claims than it pays on its liabilities. Finally, we reconcile our finding of a near zero returns differential with observed patterns of cumulated current account deficits, the net international investment position, and the net income balance. JEL codes: F3

The Limits of Equality: Insights from the Israeli Kibbutz

Abstract: What limits the capacity of society to redistribute? What determines the structure of compensation in organizations striving for income equality? This paper addresses these questions by investigating the economic and sociological forces underlying the persistence of the Israeli kibbutzim, communities based on the principle of income equality. To do this, I exploit newly assembled data on kibbutzim and a financial crisis in the late 1980s that affected them differentially. The main findings are that (1) productive individuals are the most likely to exit and a kibbutz's wealth serves as a lock-in device that increases the value of staying; (2) higher wealth reduces exit and supports a high degree of income equality; and (3) ideology facilitates income equality. Using a simple model, I show that these findings are consistent with a view of the kibbutz as providing optimal insurance when members have the option of leaving. More generally, these findings contribute to an understanding of how mobility limits redistribution, and to an understanding of the determinants of the sharing rule in other types of organizations, such as professional partnerships, cooperatives, and labor-managed firms.

Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines

Abstract: How do liquidation values affect financial contract renegotiation? While the "incomplete-contracting" theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors, there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining. This paper attempts to fill this gap. We develop an incomplete-contracting model of financial contract renegotiation and estimate it using data on the airline industry in the United States. We find that airlines successfully renegotiate their lease obligations downward when their financial position is sufficiently poor and when the liquidation value of their fieet is low. Our results show that strategic renegotiation is common in the airline industry. Moreover, the results emphasize the importance of the incomplete contracting perspective to real-world financial contract renegotiation.