Showing papers in "The American Economic Review in 2005"

The Cyclical Behavior of Equilibrium Unemployment and Vacancies

Abstract: This paper argues that the textbook search and matching model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies in response to shocks of a plausible magnitude. In the United States, the standard deviation of the vacancy-unemployment ratio is almost 20 times as large as the standard deviation of average labor productivity, while the search model predicts that the two variables should have nearly the same volatility. A shock that changes average labor productivity primarily alters the present value of wages, generating only a small movement along a downward-sloping Beveridge curve (unemploymentvacancy locus). A shock to the separation rate generates a counterfactually positive correlation between unemployment and vacancies. In both cases, the model exhibits virtually no propagation. (JEL E24, E32, J41, J63, J64)

House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle

Abstract: I develop a general equilibrium model with sticky prices, credit constraints, nominal loans and asset prices. Changes in asset prices modify agents’ borrowing capacity through collateral value; changes in nominal prices affect real repayments through debt deflation. Monetary policy shocks move asset and nominal prices in the same direction, and are amplified and propagated over time. The “financial accelerator” is not constant across shocks: nominal debt stabilises supply shocks, making the economy less volatile when the central bank controls the interest rate. I discuss the role of equity, debt indexation and household and firm leverage in the propagation mechanism. Finally, I find that monetary policy should not target asset prices as a means of reducing output and inflation volatility.

Estimation and Inference of Impulse Responses by Local Projections

Abstract: This paper introduces methods to compute impulse responses without specification and estimation of the underlying multivariate dynamic system The central idea consists in estimating local projections at each period of interest rather than extrapolating into increasingly distant horizons from a given model, as it is done with vector autoregressions (VAR) The advantages of local projections are numerous: (1) they can be estimated by simple regression techniques with standard regression packages; (2) they are more robust to misspecification; (3) joint or point-wise analytic inference is simple; and (4) they easily accommodate experimentation with highly non-linear and flexible specifications that may be impractical in a multivariate context Therefore, these methods are a natural alternative to estimating impulse responses from VARs Monte Carlo evidence and an application to a simple, closed-economy, new-Keynesian model clarify these numerous advantages

The Variety and Quality of a Nation's Exports

Abstract: Large economies export more in absolute terms than do small economies. We use data on shipments by 126 exporting countries to 59 importing countries in 5,000 product categories to answer the question: How? Do big economies export larger quantities of each good (the intensive margin), a wider set of goods (the extensive margin), or higher-quality goods? We find that the extensive margin accounts for around 60 percent of the greater exports of larger economies. Within categories, richer countries export higher quantities at modestly higher prices. We compare these findings to some workhorse trade models. Models with Armington national product differentiation have no extensive margin, and incorrectly predict lower prices for the exports of larger economies. Models with Krugman firm-level product differentiation do feature a prominent extensive margin, but overpredict the rate at which variety responds to exporter size. Models with quality differentiation, meanwhile, can match the price facts. Finally, models with fixed costs of exporting to a given market might explain the tendency of larger economies to export a given product to more countries.

Deception: The Role of Consequences

Abstract: Deception is part of many economic interactions. Business people, politicians, diplomats, lawyers, and students in the experimental laboratory who make use of private information do not always do so honestly. This observation indicates that behavior often rejects the moral approach to deception. As St. Augustine wrote, “To me, however, it seems certain that every lie is a sin. . . ” (St. Augustine, 421). Later, philosophers like Immanuel Kant (1787) again adopted this uncompromising moral stance when arguing against lying. At the other extreme, economic theory is built on the assumption of “homo economicus,” a figure who acts selfishly and is unconcerned about the well-being of others. An implication of this assumption is that lies will be told whenever it is beneficial for the liar, regardless of their effect on the other party. Another implication is that there is no negative outcome associated with lying per se. This assumption is very useful in many economic models. Consider contract theory, where it is assumed that without an explicit contract, neither side will fulfill its respective obligations. For example, George Akerlof’s (1970) paper on asymmetric information and the market for lemons assumes that sellers of used cars will always lie if it is in their benefit to do so. In the mechanism design literature (e.g., Bengt Holmstrom, 1979), the standard assumption is that people will tell the truth only if this is incentive-compatible given material outcomes. In the literature on tax evasion, the choice of whether to avoid paying taxes is considered a decision under uncertainty; cost is treated as a product of the probability of being caught and the cost of punishment, whereas benefit is simply the money saved by avoiding payment. However, there is no cost associated with the very act of lying (Michael Alingham and Agnar Sandmo, 1972). Another example is the game theoretic treatment of “cheap talk” (Crawford and Joel Sobel, 1982). An intermediate approach is taken by utilitarian philosophers (e.g., Jeremy Bentham, 1789). Utilitarianism prescribes that, when choosing whether to lie, one should weigh benefits against harm, and happiness against unhappiness. As Martin Luther stated, “What harm would it do, if a man told a good strong lie for the sake of the good and for the Christian church. . . a lie out of necessity, a useful lie, a helpful lie, such lies would not be against God, he would accept them.” Similarly to the economic theory approach, this type of calculation implies that lies, apart from their resultant harm and benefit, are in themselves neutral. A lie and a truthful statement that achieve the same monetary payoffs (for both sides) are considered * Graduate School of Business, University of Chicago, 5807 South Woodlawn Avenue, Chicago, IL 60637 (e-mail: uri.gneezy.gsb.uchicago.edu). I thank Douglas Bernheim and two anonymous reviewers for insightful comments that considerably improved the paper. I also thank Andreas Blume, Gary Charness, Rachel Croson, Martin Dufwenberg, Georg Kirchsteiger, David Levine, Muriel Niederle, Yuval Rottenstreich, Maurice Schweitzer, Richard Thaler, George Wu, and seminar participants at numerous universities for their comments and suggestions. Ira Leybman provided valuable help in running the experiment. I became interested in deception when my father was terminally ill and his physicians created in him a belief that they considered to be untrue. I dedicate this paper to his memory. 1 Important deviations from this assumption in economic modeling are found in Kenneth Arrow’s (1972) discussion of trust, Gary Becker’s (1976) modeling of altruistic preferences, and Akerlof’s (1982) study of the fair-wage hypothesis. For a general discussion, see Becker (1993): “The economic approach I refer to does not assume that individuals are motivated solely by selfishness or material gain. It is a method of analysis, not an assumption about particular motivations. Along with others, I have tried to pry economists away from narrow assumptions about self-interest. Behavior is driven by a much richer set of values and preferences” (p. 385). 2 Note that this does not mean that a completely selfish person will always lie. There may be strategic reasons not to lie. For example, see the David Kreps and Robert Wilson (1982) discussion of reputation and imperfect information; see also Vincent P. Crawford (2003). 3 Cited by his secretary, in a letter in Max Lenz, ed., Briefwechsel Landgraf Phillips des Grossmuthigen von Hessen mit Bucer, Vol. 1.

Employment Fluctuations with Equilibrium Wage Stickiness

Abstract: Following a recession, the aggregate labor market is slack-employment remains below normal and recruiting efforts of employers, as measured by help-wanted advertising and vacancies, are low. A model of matching friction explains the qualitative responses of the labor market to adverse shocks, but requires implausibly large shocks to account for the magnitude of observed fluctuations. The incorporation of wage stickiness vastly increases the sensitivity of the model to driving forces. I develop a new model of the way that wage stickiness affects unemployment. The stickiness arises in an economic equilibrium and satisfies the condition that no worker-employer pair has an unexploited opportunity for mutual improvement. Sticky wages neither interfere with the efficient formation of employment matches nor cause inefficient job loss. Thus the model provides an answer to the fundamental criticism previously directed at sticky-wage models of fluctuations.

Ethnic Polarization, Potential Conflict, and Civil Wars

Abstract: The increasing incidence of ethnic conflicts, and the much-publicized consequences of these conflicts, have attracted the interest of many researchers in the social sciences. Many studies have addressed directly the issue of ethnic diversity and its effects on social conflicts and civil wars. Political scientists have stressed the importance of institutions in the attenuation or intensification of social conflict in ethnically divided societies. Recently economists have connected ethnic diversity with important economic phenomena like investment, growth, or the quality of government (William Easterly and Ross Levine, 1997; Alberto Alesina et al., 2003; Rafael La Porta et al., 1999). The number of papers dealing with the effects of ethnic diversity on issues of economic interest is growing rapidly. In this respect, it is common in recent work to include as a regressor in empirical growth estimations an index of ethnic fractionalization. There are several reasons to include such an indicator. First, some authors have argued that ethnically diverse societies have a higher probability of ethnic conflicts, which may lead to civil war. The political instability caused by potential ethnic conflicts has a negative impact on investment and, indirectly, on growth. Second, ethnic diversity may generate a high level of corruption which, in turn, could deter investment. Finally it has been argued that in heterogeneous societies the diffusion of technological innovations is more difficult, especially when there is ethnic conflict among groups in a country. Business as usual is not possible in a society with a high level of potential ethnic conflict, since this situation affects all levels of economic activity. Trade may be restricted to individuals of the same ethnic group; public infrastructure may have an ethnic bias; government expenditure may favor some ethnic groups, etc. The common element in all these mechanisms is the existence of an ethnic conflict which, through social and political channels, spreads to the economy. However, many empirical studies find no relationship between ethnic fractionalization, ethnic conflict, and civil wars. There are at least three alternative explanations for this. First, it could be the case that the classification of ethnic groups in the Atlas Nadorov Mira (henceforth ANM), source of the traditional index of ethnolinguistic fractionalization (ELF), is not properly constructed. Some authors have used other sources to construct datasets of ethnic groups for a large sample of countries. In general, the correlation between the index of fractionalization obtained using these alternative data sources is very high (over 0.8). Second, James D. Fearon (2003) has argued that it is important to measure the “ethnic distance” across groups in order to obtain indicators of cultural diversity. He measures these distances in terms of the proximity in a tree diagram of the families of languages of different countries. As in the case of alternative data sources, the correlation of the index of ethnic fractionalization, using these distances, with the original ELF index is very high, 0.82. * Montalvo: Department of Economics, Universitat Pompeu Fabra, C/Ramon Trias Fargas 25-27, Barcelona 08005 Spain, and Instituto Valenciano de Investigaciones Economicas (e-mail: montalvo@upf.es); Reynal-Querol: the World Bank, 1818 H Street, NW, Washington, DC 20433 (e-mail: mreynalquerol@worldbank.org). We are grateful for comments by Antonio Villar, Joan Esteban, Paul Collier, Tim Besley, and two anonymous referees. We thank the participants of seminars at the World Bank, Institut de la Mediterranea, Toulouse, Brown University, the European Economic Association Meetings, and the Winter Meetings of the Econometric Society. We would like to thank Sergio Kurlat, William Easterly, and Anke Hoeffler for sharing their data. Financial support from the BBVA Foundation and the Spanish Secretary of Science and Technology (SEC2003-04429) is kindly acknowledged. Jose G. Montalvo thanks the Public Services Group of the Research Department (DECRG) of the World Bank, where most of the revision of this paper was done, for their hospitality. The conclusions of this paper are not intended to represent the views of the World Bank, its executive directors, or the countries they represent. 1 Measured by the ELF index using the data of the Atlas Nadorov Mira. 2 Montalvo and Reynal-Querol (2000), Alesina et al. (2003), or Fearon (2003). 3 See also Francesco Caselli and W. John Coleman (2002).

Bond Risk Premia

Abstract: We study time variation in expected excess bond returns. We run regressions of one-year excess returns on initial forward rates. We find that a single factor, a single tent-shaped linear combination of forward rates, predicts excess returns on one- to five-year maturity bonds with R2 up to 0.44. The return-forecasting factor is countercyclical and forecasts stock returns. An important component of the returnforecasting factor is unrelated to the level, slope, and curvature movements described by most term structure models. We document that measurement errors do not affect our central results. (JEL GO, G1, EO, E4) We study time-varying risk premia in U.S. government bonds. We run regressions of oneyear excess returns-borrow at the one-year rate, buy a long-term bond, and sell it in one year- on five forward rates available at the beginning of the period. By focusing on excess returns, we net out inflation and the level of interest rates, so we focus directly on real risk premia in the nominal term structure. We find R2 values as high as 44 percent. The forecasts are statistically significant, even taking into account the small-sample properties of test statistics, and they survive a long list of robustness checks. Most important, the pattern of regression coefficients is the same for all maturities. A single "return-forecasting factor," a single linear combination of forward rates or yields, describes time-variation in the expected return of all bonds.

The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth

Abstract: The rise of Western Europe after 1500 is due largely to growth in countries with access to the Atlantic Ocean and with substantial trade with the New World, Africa, and Asia via the Atlantic. This trade and the associatedcolonialism affected Europe not only directly, but also indirectly by inducing institutional change. Where "initial" political institutions (those established before 1500) placed significant checks on the monarchy, the growth of Atlantic trade strengthened merchant groups by constraining the power of the monarchy, and helped merchants obtain changes in institutions to protect property rights. These changes were central to subsequent economic growth.

Competition and Incentives with Motivated Agents

Abstract: A unifying theme in the literature on organizations such as public bureaucracies and private nonprofits is the importance of mission, as opposed to profit, as an organizational goal. Such mission-oriented organizations are frequently staffed by motivated agents who subscribe to the mission. This paper studies incentives in such contexts and emphasizes the role of matching the mission preferences of principals and agents in increasing organizational efficiency. Matching economizes on the need for high-powered incentives. It can also, however, entrench bureaucratic conservatism and resistance to innovations. The framework developed in this paper is applied to school competition, incentives in the public sector and in private nonprofits, and the interdependence of incentives and productivity between the private for-profit sector and the mission-oriented sector through occupational choice. (JEL D23, D73, H41, L31) The late twentieth century witnessed a historic high in the march of market capitalism, with unbridled optimism in the role of the profit motive in promoting welfare in the production of private goods. Moreover, this generated a broad consensus on the optimal organization of private good production through privately owned competitive firms. When it comes to the provision of collective goods, no such consensus has emerged.' Debates about the relative merits of public and private provision still dominate. This paper suggests a contracting approach to the provision of collective goods. It focuses on two key issues: how to structure incentives, and the role of competition between providers. At its heart is the idea that organizations that provide collective goods cohere around a mission.2 Thus production of collective goods can be viewed as mission-oriented.

The Market for News

Abstract: We investigate the market for news under two assumptions: that readers hold beliefs which they like to see confirmed, and that newspapers can slant stories toward these beliefs. We show that, on the topics where readers share common beliefs, one should not expect accuracy even from competitive media: competition results in lower prices, but common slanting toward reader biases. On topics where reader beliefs diverge (such as politically divisive issues), however, newspapers segment the market and slant toward extreme positions. Yet in the aggregate, a reader with access to all news sources could get an unbiased perspective. Generally speaking, reader heterogeneity is more important for accuracy in media than competition per se.

The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models

Abstract: Current macroeconomic models provide appealing, succinct descriptions of business cycle dynamics in the United States and other countries, but less is known about the extent to which these models accurately replicate the economy’s long-run characteristics. In part, this reflects that economists have far fewer observations about long-run behavior, given the limited sample sizes available. But while less is known about the long-run characteristics of the economy, many macroeconomic models impose very strong assumptions about this behavior— that the long-run levels of inflation and the real interest rate are constant over time and perfectly known by all economic agents. This paper empirically tests those assumptions and proposes alternative ones. Specifically, we focus on the effects of macroeconomic and monetary policy surprises on the term structure of interest rates. In many standard macroeconomic models, short-term interest rates tend to return relatively quickly to a deterministic steady state after a macroeconomic or monetary policy shock, so that these shocks have only transitory effects on the future path of interest rates. As a result, one would expect only a limited response of long-term interest rates to these disturbances. Putting this prediction in terms of forward rates, one would expect virtually no reaction of far-ahead forward rates to such shocks. The behavior of the U.S. yield curve appears, however, to contrast sharply with these predictions. In particular, we demonstrate that longterm forward rates move significantly in response to the unexpected components of many macroeconomic data releases and monetary policy announcements. We interpret these findings as indicating that an assumption made in these models—that the long-run expectations of economic agents are precise and time-invariant—is violated. In particular, our empirical results are all consistent with a model that we present in which private agents’ views of long-run inflation are not strongly anchored.

History, institutions and economic performance : the legacy of colonial land tenure systems in India

Abstract: We analyze the colonial land revenue institutions set up by the British in India, and show that differences in historical property rights institutions lead to sustained differences in economic outcomes Areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-independence period than areas in which these rights were given to the cultivators These areas also have significantly lower investments in health and education These differences are not driven by omitted variables or endogeneity problems; they probably arise because differences in historical institutions lead to very different policy choices

Matching with Contracts

Abstract: We develop a model of matching with contracts which incorporates, as special cases, the college admissions problem, the Kelso-Crawford labor market matching model, and ascending package auctions. We introduce a new "law of aggregate demand" for the case of discrete heterogeneous workers and show that, when workers are substitutes, this law is satisfied by profit-maximizing firms. When workers are substitutes and the law is satisfied, truthful reporting is a dominant strategy for workers in a worker-offering auction/matching algorithm. We also parameterize a large class of preferences satisfying the two conditions.,

Do rural banks matter? Evidence from the indian social banking experiment

Abstract: Lack of access to finance is often cited as a key reason why poor people remain poor. This paper uses data on the Indian rural branch expansion program to provide empirial evidence on this issue. Between 1977 and 1990, the Indian Central Bank mandated that a commercial bank can open a branch in a location with one or more bank branches only if it opens four in locations with no bank branches. We show that between 1977 and 1990 this rule caused banks to open relatively more rural branches in Indian states with lower initial financial development. The reverse is true outside this period. We exploit this fact to identify the impact of opening a rural bank on poverty and output. Our estimates suggest that the Indian rural branch expansion program significantly lowered rural poverty, and increased non-agricultural output.

Does Britain or the United States Have the Right Gasoline Tax

Abstract: This paper develops an analytical framework to assess the second-best optimal level of gasoline taxation taking into account unpriced pollution, congestion, and accident externalities, as well as interactions with the broader fiscal system. We provide calculations of the optimal taxes for the US and the UK under a variety of parameter scenarios. Under our central parameter values, the second-best optimal gasoline tax is $1.01/gal for the US and $1.34/gal for the UK. Current tax rates are much lower than this in the US and higher in the UK. The calculations are moderately sensitive to alternative parameter assumptions. The congestion externality is the largest component in both nations; revenue-raising needs also play a significant role, as do accident externalities and local air pollution. Potential welfare gains from reducing the current UK tax rate are estimated at nearly one-fourth the production cost of all gasoline used in the UK. Even larger gains could be achieved by switching to a tax on vehicle miles with equal revenue yield. For the US, the welfare gains from optimizing the gasoline tax are smaller, but those from switching to an optimal tax on vehicle miles are very large.

The Economics of Governance

Abstract: The economics of governance is an effort to implement the “study of good order and workable arrangements,” where good order includes both spontaneous order in the market, which is a venerated tradition in economics (Adam Smith, 1776; Friedrich Hayek, 1945; Kenneth A. Arrow and Gerard Debreu, 1954), and intentional order, of a “conscious, deliberate, purposeful” kind (Chester Irving Barnard, 1938 p. 9). Also, I interpret workable arrangements to mean feasible modes of organization, all of which are flawed in comparison with a hypothetical ideal (Avinash Dixit, 1996 pp. 4–9). The object is to work out the efficiency logic for managing transactions by alternative modes of governance—principally spot markets, various long-term contracts (hybrids), and hierarchies. Interest among social scientists, economists included, in the study and practice of good order and workable arrangements has been steadily growing. In contrast with the orthodox lens of choice (prices and output, supply and demand), the economics of governance is a lens of contract construction, broadly in the spirit of James Buchanan’s (2001 p. 29) observation that “mutuality of advantage from voluntary exchange ... is the most fundamental of all understandings in economics.” The economics of governance, as herein described, is principally an exercise in bilateral private ordering, by which I mean that the immediate parties to an exchange are actively involved in the provision of good order and workable arrangements. To be sure, the need for private ordering varies with the rules of the game as provided by the state. Distinctions between lawlessness where the state provides limited or unreliable protection for property and contract (Dixit, 2004) and lawfulness, where the state undertakes to protect property and enforce contracts in a principled way, are pertinent. The first of these applies mainly to primitive and transition economies. The second is commonly associated with Western democracies. Recourse to private ordering under conditions of lawlessness is altogether understandable: given the absence of state support, the * Walter A. Haas School of Business, University of California, Berkeley, CA 94720-1900. The paper has benefited from workshop presentations at the University of California–Berkeley, the University of Valencia, INSEAD (Fountainebleau), and the 2004 annual conference of the International Society for New Institutional Economics. An abbreviated version was also given as the Horst Claus Recktenwald Lecture at Nuremburg on 4 November 2004. Comments and suggestions from Fred Balderston, Ernesto Dalbo, Avinash Dixit, Robert Gibbons, Witold Henisz, Ian Larkin, Steven Tadelis, and Dean Williamson are especially acknowledged. 1 Lon Fuller’s (1954 p. 477) definition of “eunomics” as “the science, theory, or study of good order and workable arrangements” is very much in the spirit of what I refer to as governance. 2 One of the immediate ramifications of insistently comparing feasible alternatives, all of which are flawed, is that the purported inefficiencies that are ascribed to failures to achieve “first best” optimality are not dispositive, but invite the query “As compared with what?” I return to this issue in Section IV. 3 Excluding “corporate governance,” the numbers of articles that used the word “governance” during the period 1998–2000 as compared with the period 1977–1979 in selected economics, business/management, sociology/organization, and political science journals were 60 vs. 1, 76 vs. 4, 79 vs. 18, and 60 vs. 25, where the journals surveyed were: the American Economic Review, Journal of Political Economy, Quarterly Journal of Economics, Rand Journal of Economics, and Journal of Economic Perspectives in economics; Strategic Management Journal, Management Science, Academy of Management Journal, and Academy of Management Review in business/management; Administrative Science Quarterly, Organization Science, American Journal of Sociology, American Sociological Review, and Annual Review of Sociology in sociology/organization; and American Political Science Review, Political Science Quarterly, Journal of Politics, and Political Research Quarterly in political science. Combining these four categories, articles using the word governance increased from 48 to 275 over this 20-year interval. Dixit (2004 pp. 149–50) reports that the number of web pages that turn up under the search for “governance” is huge.

The New York City High School Match

Abstract: We assisted the New York City Department of Education (NYCDOE) in designing a mechanism to match over 90,000 entering students to public high schools each year. This paper makes a very preliminary report on the design process and the first year of operation, in academic year 2003–2004, for students entering high school in fall 2004. In the first year, only about 3,000 students had to be assigned to a school for which they had not indicated a preference, which is only 10 percent of the number of such assignments the previous year. New York City has the largest public school system in the country, with over a million students. In 1969 the system was decentralized into over 30 community school districts. In the 1990s, the city began to take more centralized control (Mark Schneider et al., 2000), and in 2002, a newly reorganized NYCDOE began to reform many aspects of the school system. In May 2003, Jeremy Lack, then the NYCDOE Director of Strategic Planning, contacted one of us for advice on designing a new high-school matching process. The NYCDOE was aware of the matching process for American physicians, the National Resident Matching Program (Roth, 1984; Roth and E. Peranson, 1999). They wanted to know if it could be appropriately adapted to the city’s schools. The three authors of the present paper (and, at several crucial junctures, also Tayfun Sonmez) advised (and often convinced) Lack, his colleagues (particularly Elizabeth Sciabarra and Neil Dorosin), and the DOE’s software vendor, about the design of the match. I. The Prior (2002–2003) New York City Matching Procedure

Using experimental economics to measure social capital and predict financial decisions

Abstract: Economic theory suggests that market failures arise when contracts are difficult to enforce or observe. Social capital can help solve these failures. The more individuals trust each other, the more able they are to contract with each other.1 Hence, many believe trust is a critical input for both macro- and microeconomic outcomes. The Trust game has become a popular tool, with many researchers conducting it in both university laboratories and field locations in developing countries (Abigail M. Barr, 2003, Joyce E. Berg et al., 1995, Edward L. Glaeser et al., 2000). These studies have found that behaviors in the Trust game correlate intuitively with individual attitudes and the relationships between players. However, these are not outcomes of real interest, but rather proxies (or correlates) for the ability to overcome market failures and complete otherwise difficult to enforce contracts.

The Political Economy of Corporate Governance

Abstract: The paper analyzes the political decision that determines the degree of investor protection. We show that entrepreneurs and workers can strike a political agreement by which low investor protection is exchanged for high employment protection. This “corporatist” agreement is feasible if the political system favors the formation of coalition governments. In contrast, “non-corporatist” countries will feature high investor protection and low employment protection. The model also shows that the more diffused is share ownership, the higher the chosen degree of shareholder protection. Finally, the model predicts the frequency of mergers and acquisitions to be negatively correlated with employment protection. These predictions are shown to be consistent with OECD evidence.

Does Increasing Women's Schooling Raise the Schooling of the Next Generation?

Abstract: The positive cross-sectional relationship between the schooling of mothers and their children is substantially biased upward due to correlations between schooling and heritable ability as well as assortative mating. An increase in the schooling of women would not have beneficial effects in terms of the schooling of children. Increased maternal schooling leads to reduced home time for mothers. Anticipating the consequences of investing in women's schooling requires attention to the role that schooling plays in the marriage market as well as to opportunities in the labor market for women.

Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic Approach

Abstract: Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic Approach. Wolfram Schlenker, W. Michael Hanemann, and Anthony C. Fisher ∗ There has been a lively debate about the potential impact of global climate change on U.S. agriculture. Most of the early agro-economic studies predict large damages (see, for example, Richard M. Adams, 1989; Harry M. Kaiser et al., 1993; and Adams et al., 1995). In an innovative paper Robert Mendelsohn, William D. Nordhaus and Daigee Shaw (1994) - hereafter MNS - propose a new approach: using the variation in temperature and precipitation across U.S. counties to estimate a reduced form hedonic equation with the value of farmland as the dependent variable. A change in temperature and/or precipitation is then associated with a change in farmland value which can be interpreted as the impact of climate change. Adams et al. (1998) characterize the hedonic approach as a spatial analogue approach, and acknowledge that ”the strength of the spatial analogue approach is that structural changes and farm responses are implicit in the analysis, freeing the analyst from the burden of estimating the effects of climate change on particular region-specific crops and farmer responses.” On the other hand, one of the potential disadvantages of the hedonic approach is that it is a partial equilibrium analysis, i.e., agricultural prices are assumed to remain constant. 1 While year-to-year fluctuations in annual weather conditions certainly have the potential to impact current commodity prices, especially for crops produced only in a relatively localized area, (such as citrus fruits which are grown mainly in California and Florida), changes in long-run weather patterns (i.e., changes in climate) might have a smaller effect on commodity prices because of the greater potential for economic adaptation, particularly shifts in growing regions. 2 The hedonic approach as implemented by MNS predicts that existing agricultural land on average might be more productive and hence result in benefits for U.S. farmers. 3 The hedonic approach has received considerable attention in our judgment in part because the conclusions are at variance with those of some other studies

Patent Citations and the Geography of Knowledge Spillovers: A Reassessment: Comment

Abstract: Adam B. Jaffe, Manuel Trajtenberg, and Rebecca Henderson (1993) developed a matching method to study the geography of knowledge spillovers using patent citations, and found that knowledge spillovers are strongly localized. Their method matches each citing patent to a non-citing patent intended to control for the pre-existing geographic concentration of production. We show how the method of selecting the control group may induce spurious evidence of localized spillovers. This paper reassesses their findings using control patents selected under different criteria. Doing so eliminates evidence of strong intra-national localization effects at the state and metropolitan levels, but leaves largely unaffected evidence of international localization effects. A revival of interest in economic geography during the last decade has renewed efforts at measuring location-specific externalities. These efforts have largely been guided by Alfred Marshall’s (1920) three explanations for agglomeration economies: labor market pooling, scale economies in the provision of intermediate goods and services, and localization of knowledge spillovers. Perhaps because, as Paul R. Krugman (1991, p. 53) has argued, “knowledge flows. . . are invisible; they leave no paper trail by which they may be measured and tracked,” the measurement of knowledge spillovers has proved the most challenging task. The challenge was taken up most prominently by Jaffe et al. (1993, hereafter JTH), who pointed out that knowledge spillovers may well leave a paper trail in the citations to prior art recorded in patents. Moreover, because patents record the residence of the inventors, they are an invaluable resource for studying how knowledge flows are affected by geography. JTH undertook the considerable task of constructing a large dataset of patents and matching the locations of their inventors to the locations of inventors of all patents that subsequently cited them as prior art. Of course, such an exercise would be futile unless one could also control for the existing geographic distribution of production. Patents linked by citation presumably not only share a technology, but are often developed by inventors working in a common industry. Patents linked by citation are therefore much more likely to share a geographic location than are a pair of patents drawn at random from the entire pool, but the observation tells us nothing about knowledge flows. JTH’s important innovation was to construct a control group to mimic the existing geography of production. JTH constructed three patent samples: a set of originating patents, a set of citing patents which referenced one of the originating patents, and a set of control patents matched to each citing patent. Each control patent shared the same technology class and (approximate) application date as its matched citing patent, but did not reference the matched originating patent. JTH’s experiment compared the probabilities that the citing patent, and its matched control patent, were filed by inventors living in the same geographic location as the originating patent. The experiment yielded remarkable evidence that * Thompson: Department of Economics, Florida International University, Miami, FL 33199 (e-mail: peter. thompson2@fiu.edu); Fox-Kean: Department of Economics, University of Houston, Houston, TX, 77204-5882 (e-mail: mefox@mail.uh.edu). We have benefited from insightful comments from three anonymous referees. This research was supported by the National Science Foundation under Grant No. SBR-0296192. 1 Or perhaps this is because Marshall himself seemed less than convinced that knowledge spillovers would be localized: “Many of those economies in the use of specialized skill and machinery which are commonly regarded as within the reach of very large establishments do not depend on the size of individual factories. Some depend on the aggregate volume of production of the kind in the neighborhood; while others again, especially those connected with the growth of knowledge and the progress of the industrial arts, depend chiefly on the aggregate volume of production in the whole civilized world” (Marshall, 1920, Book IV, p. 220).

The Boston Public School Match

Abstract: After the publication of “School Choice: A Mechanism Design Approach” by Abdulkadiroglu and Sonmez (2003), a Boston Globe reporter contacted us about the Boston Public Schools (BPS) system for assigning students to schools. The Globe article highlighted the difficulties that Boston’s system may give parents in strategizing about applying to schools. Briefly, Boston tries to give students their firstchoice school. But a student who fails to get her first choice may find her later choices filled by students who chose them first. So there is a risk in ranking a school first if there is a chance of not being admitted; other schools that would have been possible had they been listed first may also be filled. Valerie Edwards, then Strategic Planning Manager at BPS, and her colleague Carleton Jones invited us to a meeting in October 2003. BPS agreed to a study of their assignment system and provided us with micro-level data sets on choices and characteristics of students in the grades at which school choices are made (K, 1, 6, and 9), and school characteristics. Based on the pending results of this study, the Superintendent has asked for our advice on the design of a new assignment mechanism. This paper describes some of the difficulties with the current mechanism and some elements of the design and evaluation of possible replacement mechanisms. School choice in Boston has been partly shaped by desegregation. In 1974, Judge W. Arthur Garrity ordered busing for racial balance. In 1987, the U.S. Court of Appeals freed BPS to adopt a new, choice-based assignment plan. In 1999 BPS eliminated racial preferences in assignment and adopted the current mechanism.

The Quantity and Quality of Life and the Evolution of World Inequality

Abstract: GDP per capita is usually used to proxy for the quality of life of individuals living in different countries. Welfare is also affected by quantity of life, however, as represented by longevity. This paper incorporates longevity into an overall assessment of the evolution of cross-country inequality and shows that it is quantitatively important. The absence of reduction in cross-country inequality up to the 1990s documented in previous work is in stark contrast to the reduction in inequality after incorporating gains in longevity. Throughout the post–World War II period, health contributed to reduce significantly welfare inequality across countries. This paper derives valuation formulas for infra-marginal changes in longevity and computes a "full" growth rate that incorporates the gains in health experienced by 96 countries for the period between 1960 and 2000. Incorporating longevity gains changes traditional results; countries starting with lower income tended to grow faster than countries starting with higher income. We estimate an average yearly growth in "full income" of 4.1 percent for the poorest 50 percent of countries in 1960, of which 1.7 percentage points are due to health, as opposed to a growth of 2.6 percent for the richest 50 percent of countries, of which only 0.4 percentage points are due to health. Additionally, we decompose changes in life expectancy into changes attributable to 13 broad groups of causes of death and three age groups. We show that mortality from infectious, respiratory, and digestive diseases, congenital, perinatal, and “ill-defined” conditions, mostly concentrated before age 20 and between ages 20 and 50, is responsible for most of the reduction in life expectancy inequality. At the same time, the recent effect of AIDS, together with reductions in mortality after age 50--due to nervous system, senses organs, heart and circulatory diseases--contributed to increase health inequality across countries.

Explaining the Short Careers of High-Achieving Teachers in Schools with Low-Performing Students

Abstract: Low-achieving students often are taught by the least-qualified teachers. These disparities begin when teachers take their first jobs, and in urban areas they are worsened by teachers’ subsequent decisions to transfer and quit. Such quits and transfers increase disparities in at least two ways. First, more qualified teachers are substantially more likely to leave schools having the lowest-achieving students. For example, of the new teachers hired in New York City’s lowest-achieving schools in 1996–1998, 28 percent scored in the lowest quartile on the general-knowledge certification exam. Of those remaining in the same schools five years later, 44 percent had scores in the lowest quartile. In contrast, 22 percent of the new teachers in the higher-achieving schools were in the lowest quartile, which only increased to 24 percent for those remaining after five years. Second, the generally high teacher turnover in lowerperforming schools disadvantage students in those schools since the effectiveness of teachers increases over the first few years of their careers. Twenty-seven percent of first-year teachers in New York City’s lower-performing schools do not return the following year, compared to 15 percent in the quartile of schools having the relatively highest student achievement. In this paper we examine New York City elementary school teachers’ decisions to stay in the same school, transfer to another school in the district, transfer to another district, or leave teaching in New York State during the first five years of their careers. Our model allows us to go beyond past research in three important ways: examining how transfer and quit behavior is influenced by (i) interactions between teacher qualifications and school-level student achievement, (ii) unobserved heterogeneity in teachers’ responses to school-level student attributes, and (iii) the distance from new teachers’ prior homes to their initial job. Many factors influence teacher transfers and quits. Teachers respond positively to increased salary, although the variation in salary across districts often is not large enough to strongly affect teacher sorting. Non-pecuniary job characteristics such as class size, preparation time, facilities, student characteristics, and school leadership also can affect teacher decisions, and differences in these characteristics can be great across schools, especially in large urban areas (see Eric Hanushek et al., 1999; Loeb et al., 2005). In addition, teachers prefer schools and districts similar and geographically close to those they attended in high school (Boyd et al., 2004, 2005). Several recent state-specific studies have considered student characteristics. Benjamin Scafidi et al. (2003) use a competing-risk model and find that Georgia elementary teachers move from schools with higher proportions of minority students and from low-performing schools, but the latter is explained by teacher preferences for fewer minority students. Hanushek et al. (2004), using a similar model and Texas data, find that teachers prefer higher-achieving students even after controlling for student racial composition. Both studies interact teacher race * Boyd, Lankford, and Wyckoff: University at Albany, Albany, NY 12222; Loeb: Stanford University, Stanford, CA 94305. We are grateful to Richard Murnane for comments and to the Smith Richardson Foundation and the U.S. Department of Education for financial support. We also appreciate assistance with data from the New York State Education Department. None of these organizations necessarily supports the views expressed in this paper. Any errors are attributable to the authors. 1 School performance is based on the 4th-grade English Language Arts exam. 2 The 28 versus 22 percent comparison for entering (mostly certified) teachers understates the actual difference in the qualifications of new teachers across schools. For example, approximately half of the new teachers in the lowest-achieving schools were not certified, compared to 20 percent in the higher-achieving schools. 3 Recent studies include Peter Dolton and Wilbert van der Klaauw (1999) and Todd Stinebrickner (2000).

Are Two Heads Better Than One? Team versus Individual Play in Signaling Games

Abstract: We compare individuals with two-person teams in signaling game experiments. Teams consistently play more strategically than individuals and generate positive synergies in more difficult games, beating a demanding “truth-wins” norm. The superior performance of teams is most striking following changes in payoffs that change the equilibrium outcome. Individuals play less strategically following the change in payoffs than inexperienced subjects playing the same game. In contrast, the teams exhibit positive learning transfer, playing more strategically following the change than inexperienced subjects. Dialogues between teammates are used to identify factors promoting strategic play.

Do Democratic Transitions Produce Bad Economic Outcomes

Abstract: Several influential commentators have suggested recently that democratization in developing countries produces political instability, ethnic conflict, and poor economic outcomes. For instance, Robert D. Kaplan (2000) states that “If a society is not in reasonable health, democracy can be not only risky but disastrous” (p. 62). Fareed Zakaria (2003) points out that “although democracy has in many ways opened up African politics and brought people liberty, it has also produced a degree of chaos and instability that has actually made corruption and lawlessness worse in many countries.” Amy Chua (2003) argues that: “... in the numerous countries around the world with a market-dominant minority, ... [a]dding democracy to markets has been a recipe for insability, upheaval, and ethnic conflagration.” (p. 124).

Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan

Abstract: We examine the misallocation of credit in Japan associated with the perverse incentives faced by banks to provide additional credit to the weakest firms. Firms are more likely to receive additional bank credit if they arein poor financial condition, because troubled Japanese banks have an incentive to allocate credit to severely impaired borrowers in order to avoid the realization of losses on their own balance sheets. This "evergreening" behavior is more prevalent among banks that have reported capital ratios close to the required minimum, and is compounded by the incentives arising from extensive corporate affiliations.