Aligning Learning Incentives of Students and Teachers: Results from a Social Experiment in Mexican High Schools
Jere R. Behrman, Susan W. Parker, Petra E. Todd, and Kenneth I. Wolpin
This paper evaluates the impact of three different performance incentives schemes using data from a social experiment that randomized 88 Mexican high schools with over 40,000 students into three treatment groups and a control group. Treatment one provides individual incentives for performance on curriculum-based mathematics tests to students only, treatment two to teachers only and treatment three gives both individual and group incentives to students, teachers and school administrators. Program impact estimates reveal the largest average effects for treatment three, smaller impacts for treatment one and no impact for treatment two.
Estimating the Cream Skimming Effect of School Choice
Joseph G. Altonji, Ching-I Huang, and Christopher R. Taber
We derive a simple formula that may be used to determine the degree to which a school choice program may harm public school stayers by luring the best students to other schools. The formula shows that the “cream-skimming” effect is increasing in the degree of heterogeneity within schools, the school choice take up rate of strong students relative to weak students, and the dependence of school outcomes on student body quality. We use the formula to investigate the cream skimming effect of hypothetical voucher programs on the high school graduation rate and other outcomes of the students who would remain in public school. We employ NELS:88 data to measure the characteristics of public school students, to estimate a model of the private school entrance decision, and to estimate student body effects on graduation. We supplement the econometric estimates with a wide range of alternative assumptions about school choice and student body effects. We find that the cream skimming effect is small and that this result is robust across a wide variety of model specifications and types of modest voucher programs.
Linear Social Interactions Models
Lawrence E. Blume, William A. Brock, Steven N. Durlauf, and Rajshri Jayaraman
This paper provides a systematic analysis of identification in linear social interactions models. This is both a theoretical and an econometric exercise as the analysis is linked to a rigorously delineated model of interdependent decisions. We develop an incomplete information game that describes individual choices in the presence of social interactions. The equilibrium strategy profiles are linear. Standard models in the empirical social interactions literature are shown to be exact or approximate special cases of our general framework, which in turn provides a basis for understanding the microeconomic foundations of those models. We consider identification of both endogenous (peer) and contextual social effects under alternative assumptions regarding the analyst’s a priori knowledge of network structure or access to individual-level or aggregate data. Finally, we discuss potential ramifications for identification of endogenous group selection.
The Generalized Roy Model and the Cost-Benefit Analysis of Social Programs
Philipp Eisenhauer, James J. Heckman, and Edward Vytlacil
The literature on treatment effects focuses on gross benefits from program participation.
We extend this literature by developing conditions under which it is possible to identify parameters measuring the cost and net surplus from program participation. Using the generalized Roy model, we nonparametrically identify the cost, benefit, and net surplus of selection into treatment without requiring the analyst to have direct information on the cost. We apply our methodology to estimate the gross benefit and net surplus of attending college.
A Flying Start? Maternity Leave Benefits and Long Run Outcomes of Children
Pedro Carneiro, Katrine V. Løken, and Kjell G. Salvanes
We study the impact of increasing maternity leave benefits on long run outcomes of children, by examining a reform that increased paid and unpaid maternity leave in Norway as of July 1st 1977. Mothers giving birth before this date were eligible only for 12 weeks of unpaid leave, while those giving birth after were entitled to four months of paid leave and 12 months of unpaid leave. This increased time with the child led to a two percentage points decline in high school dropout rates and a five% increase in wages at age 30. These effects are especially large for children of those mothers who, prior to the reform, would take very low levels of unpaid leave.
How Effective Is the Minimum Wage at Supporting the Poor?
The efficacy of minimum wage policies as an antipoverty initiative depends on which families benefit from the increased earnings attributable to minimum wages and which families pay for these higher earnings. Proponents of these policies contend that employment impacts experienced by low-wage workers are negligible and, therefore, these workers do not pay. Instead proponents typically suggest that consumers pay for the higher labor costs through imperceptible increases in the prices of goods and services produced by low-wage labor. Adopting this “best-case” scenario from minimum-wage advocates, this study projects the consequences of the increase in the national minimum wage instituted in 1996 on the redistribution of resources among rich and poor families. Under this scenario, the minimum wage increase acts like a value-added or sales tax in its effect on consumer prices, a tax that is even more regressive than a typical state sales tax. With the proceeds of this national value-added tax collected to fund benefits, the 1996 increase in the minimum wage distributed the bulk of these benefits to one in four families nearly evenly across the income distribution. Far more poor families suffered reductions in resources than those who gained. As many rich families gained as poor families. These income transfer properties of the minimum wage document its considerable inefficiency as an antipoverty policy.
Robust Comparative Statics in Large Dynamic Economies
Daron Acemoglu and Markin Kaae Jensen
We consider infinite horizon economies populated by a continuum of agents subject to idiosyncratic shocks. This framework contains models of saving and capital accumulation with incomplete markets in the spirit of works by Bewley, Aiyagari, and Huggett, and models of entry, exit and industry dynamics in the spirit of Hopenhayn’s work as special cases. Robust and easy-to-apply comparative statics results are established with respect to exogenous parameters as well as various kinds of changes in the Markov processes. These results complement existing literature’s numerical methods applied to this class of models and are illustrated using a number of examples.
Young, Old, Conservative, and Bold: The Implications of Heterogeneity and Finite Lives for Asset Pricing
Nicolae Garleanu and Stavros Panageas
We study the implications of preference heterogeneity for asset pricing. We use recursive preferences in order to separate risk-aversion heterogeneity from IES heterogeneity, and an overlapping-generations framework to obtain a non-degenerate stationary equilibrium. We solve the model explicitly up to the solutions of ordinary differential equations, and highlight the effects of overlapping generations and each dimension of preference heterogeneity on the market price of risk, interest rates, and the volatility of stock returns. We find that separating IES and risk-aversion heterogeneity can have a substantive impact on the model’s (qualitative and quantitative) ability to address some key asset pricing issues.
Environmental Regulations and Corruption: Automobile Emissions in Mexico City
Emission regulations become more prevalent in developing countries; but they may be compromised by corruption. This paper documents the prevalence of corruption and the effectiveness of vehicle emission regulations in Mexico City. I develop a statistical test for identifying a specific type of cheating that involves bribing center technicians. I also estimate a structural model of car owner retesting and cheating decisions. Results suggest that 9.6 percent of car owners paid 20 U.S. dollars to circumvent the regulation. Eliminating cheating and increasing the cost of retests would reduce emissions by 3,708 tons at a high cost for vehicle owners.
Women and Power: Unpopular, Unwilling, or Held Back?
Pablo Casas-Arce and Albert Saiz
We use Spain’s Equality Law, which mandates a 40 percent female quota on electoral lists, to test for the existence of agency problems between party leaders and their constituents regarding women’s political representation. The law was enacted by the Social-Democratic Party after the surprise parliamentary electoral results following the Madrid terrorist bombings in 2004. It was therefore completely unexpected by local political organizations. The quota only applied to towns with populations above 5,000 and forced heterogeneous growth in the number of female candidates by party. Using pre- and post-quota data by party and municipality, we implement a triple-difference design and find that female quotas resulted in slightly better electoral results for the parties that started out with fewer women, and hence were most affected by the quota.
Our evidence suggests the existence of agency problems that hinder female representation in political institutions, because party leaders were not maximizing electoral results prior to the introduction of the quota.
Josh Lerner and Jean Tirole
A major policy issue in standard setting is that patents that are ex-ante not that important may, by being included into a standard, become standard-essential patents (SEPs). In an attempt to curb the monopoly power that they create, most standard-setting organizations require the owners of patents covered by the standard to make a loose commitment to grant licenses on reasonable terms. Such commitments unsurprisingly are conducive to litigation. This paper builds a framework for the analysis of SEPs, identifies several types of inefficiencies attached to the lack of price commitment, and shows how structured price commitments restore competition and why such commitments may not arise spontaneously in the marketplace.
Comment on the Campbell-Cochrane Habit Model
Lars Ljungqvist and Harald Uhlig
Campbell and Cochrane (1999) formulate a model that successfully explains a wide variety of asset pricing puzzles, by augmenting the standard power utility function with a time-varying “external habit,” that adapts nonlinearly to current and past average consumption in the economy. We demonstrate that their preference specification has the unusual implications that habit can move negatively with consumption, and that reductions in consumption can increase welfare. As a result, government interventions that occasionally destroy part of the aggregate endowment can lead to substantial welfare improvements.
Participation and Duration of Environmental Agreements
Marco Battaglini and Bard Harstad
We analyze participation in international environmental agreements (IEAs) in a dynamic game where countries pollute and invest in green technologies. If complete contracts are feasible, participants eliminate the hold-up problem associated with their investments; however, most countries prefer to free-ride rather than participate. If investments are non-contractible, countries face a hold-up problem every time they negotiate; but the free-rider problem can be mitigated and significant participation is feasible. Participation becomes attractive because only large coalitions commit to long-term agreements that circumvent the hold-up problem. Under well-specified conditions even the first-best outcome is possible when the contract is incomplete. Since real-world IEAs fit in the incomplete contracting environment, our theory may help explaining the rising importance of IEAs and how they should be designed.
Evolving Comparative Advantage and the Impact of Climate Change in Agricultural Markets:
Evidence from 1.7 Million Fields around the World
Arnaud Costinot, Dave Donaldson, and Cory Smith
A large agronomic literature models the implications of climate change for a variety of crops and locations around the world. The goal of the present paper is to quantify the macro-level consequences of these micro-level shocks. Using an extremely rich micro-level dataset that contains information about the productivity—both before and after climate change—of each of 10 crops for each of 1.7 million fields covering the surface of the Earth, we find that the impact of climate change on these agricultural markets would amount to a 0.26% reduction in global GDP when trade and production patterns are allowed to adjust.
Market-Based Emissions Regulation and Industry Dynamics
Meredith Fowlie, Mar Reguant, and Stephen Ryan
We assess the static and dynamic implications of alternative market-based policies limiting greenhouse gas emissions in the US cement industry. Our results highlight two countervailing market distortions. First, emissions regulation exacerbates distortions associated with the exercise of market power in the domestic cement market. Second, emissions \leakage” in trade exposed markets offsets domestic emissions reductions. Taken together, these forces can result in social welfare losses under policy regimes that fully internalize the emissions externality. Market-based policies that incorporate design features to mitigate the exercise of market power and emissions leakage deliver welfare gains when damages from carbon emissions are high.
Political Economy in a Changing World
Daron Acemoglu, Georgy Egorov, and Konstantin Sonin
We provide a general framework for the analysis of the dynamics of institutional change (e.g., democratization, extension of political rights, or repression of different groups), and how these dynamics interact with (anticipated and unanticipated) changes in the distribution of political power and in economic structure. We focus on Markov Voting Equilibria, which require that economic and political changes should take place if there exists a subset of players with the power to implement such changes and who will obtain higher expected discounted utility by doing so. Assuming that economic and political institutions as well as individual types can be ordered, and preferences and the distribution of political power satisfy natural “single crossing” (increasing differences) conditions, we prove the existence of a pure-strategy equilibrium, provide conditions for its uniqueness, and present a number of comparative static results that apply at this level of generality. We then use this framework to study the dynamics of political rights and repression in the presence of radical groups that can stochastically grab power and the dynamics of collective experimentation over institutions.
Uncertainty and Disagreement in Equilibrium Models
Nabil I. Al-Najjar and Eran Shmaya
Leading equilibrium concepts require agents’ beliefs to coincide with the model’s true probabilities and thus be free of systematic errors. This implicitly assumes a criterion that tests beliefs against the observed outcomes generated by the model. We formalize this requirement in stationary environments. We show that there is a tension between requiring that beliefs can be tested against systematic errors, on the one hand, and allowing agents to disagree or be uncertain about the long-run fundamentals. We discuss the application of our analysis to asset pricing, Markov perfect equilibria, and dynamic games.
Economic Effects of Runs on Early “Shadow Banks”: Trust Companies and the Impact of the Panic of 1907
Carola Frydman, Eric Hilt, and Lily Y. Zhou
We use the unique circumstances that led to the Panic of 1907 to analyze its impact on economic activity. The panic was fuelled by runs on the ‘shadow banks’ of the time, New York’s trust companies. But the shock that triggered the runs was unrelated to the nonfinancial corporations affiliated with those institutions. Using newly collected data, we find that small corporations with close ties to the trust companies that lost the most deposits experienced an immediate decline in their stock price of 10.4 percentage points, and performed worse in the years following the panic across a range of outcomes, including their return on equity, which fell 13.1 percent, their dividend rate, which fell 22 percent, and their average interest costs, which rose 8.3 percent, relative to mean prepanic levels. The effect on their investment rate was much greater: it fell by nearly 50 percent. The relative decline in investment induced by affiliations with the worst-affected trust companies alone accounted for at least 18.4 percent of the total decline in corporate investment in the United States in 1908. This effect diminished in magnitude over time but persisted for at least five years following the panic.
Bonus Culture: Competitive Pay, Screening, and Multitasking
Roland Bénabou and Jean Tirole
To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases, then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives, but may generate other distortions.
Poultry in Motion: A Study of International Trade Finance Practices
Pol Antràs and C. Fritz Foley
This paper analyzes the financing terms that support international trade and sheds light on how these terms shape the impact of economic shocks on trade. Analysis of transaction-level data from a U.S.-based exporter of frozen and refrigerated food products, primarily poultry, reveals broad patterns about the use of alternative financing terms. These patterns help discipline a model in which the choice of trade finance terms is shaped by the risk that an importer defaults on an exporter and by the possibility that an exporter does not deliver goods as specified in the contract. The empirical results indicate that cash in advance and open account terms are much more commonly used than letter of credit and documentary collection terms. Transactions are more likely to occur on cash in advance or letter of credit terms when the importer is located in a country with weak contractual enforcement. As an importer develops a relationship with the exporter, transactions are less likely to occur on terms that require prepayment. During the recent crisis, the exporter was more likely to demand cash in advance terms when transacting with new customers, and customers that traded on cash in advance and letter of credit terms prior to the crisis decreased their purchases by 17.3% more than other customers. The model illustrates that these findings can be rationalized if (i) misbehavior on the part of the exporter is of little concern to importers, and (ii) local banks in importing countries are more effective than the exporter in pursuing financial claims against importers.
Self-Control at Work
Supreet Kaur, Michael Kremer, and Sendhil Mullainathan
Workers with self-control problems do not work as hard as they would like. This changes the logic of agency theory by partly aligning the interests of the firm and worker: both now value contracts that elicit more effort in the future. Three findings from a year-long field experiment with data entry workers suggest the quantitative importance of self control at work. First, workers choose dominated contracts—which penalize low output but provide no greater reward for high output—36% of the time to motivate their future selves; use of these contracts increases output by the same amount as an 18% increase in the piece-rate. Second, effort increases as the (randomly assigned) payday gets closer: output rises 8% over the pay week; calibrations show that justifying this would require a 4% daily exponential discount rate. Third, for both findings there is significant and correlated heterogeneity: workers with larger payday effects are both more likely to choose dominated contracts and show greater output increases under them. This correlation grows with experience, consistent with the hypothesis that workers learn about their self-control problems over time. Self-control problems among workers could potentially lead firms to either adopt high-powered incentives or impose work rules to allow monitoring of worker effort.
The Anatomy of French Production Hierarchies
Lorenzo Caliendo, Ferdinando Monte, and Esteban Rossi-Hansberg
We use a comprehensive dataset of French manufacturing firms to study their internal organization. We first divide the employees of each firm into layers using occupational categories. Layers are hierarchical in that the typical worker in a higher layer earns more, and the typical firm occupies less of them. In addition, the probability of adding/dropping a layer is very positively/negatively correlated with value added. We then explore the changes in the wages and number of employees that accompany expansions in layers, or output. The empirical results indicate that reorganization, through changes in layers, is key to understanding how firms expand and contract. For example, we find that firms that expand substantially add layers and pay lower average wages, in part by hiring less experienced employees, in all pre-existing layers. In contrast, firms that expand little and do not reorganize pay higher average wages in all preexisting layers, partly by hiring more educated employees.
Adverse Selection in the Annuity Market and the Role for Social Security
I study the role of social security in providing insurance when there is adverse selection in the annuity market. I calculate welfare gains from mandatory annuitization from the current U.S. social security system using a life-cycle model in which individuals have private information about their mortality. I calibrate the model to the current U.S. social security replacement ratio, the average fraction of retirement wealth that is annuitized and mortality heterogeneity in the Health and Retirement Study. The main findings of the paper are the following: 1) the overall welfare gain from having mandatory annuitization through the current U.S. social security system relative to a laissez-faire benchmark is 0.07 percent of consumption; 2) social security has a large effect on annuity prices because it crowds out demand for annuities by persons who have low survival expectations. This price effect has a negative welfare impact of 0.35 percent of consumption.
Strategic Mass Killings
Joan Esteban, Massimo Morelli, and Dominic Rohner
We provide a model of con.ict and mass killing decisions, to identify the key variables and situations that make mass killings more likely to occur. We predict that mass killings are most likely in countries with large amounts of natural resource rents, polarization, institutional constraints regarding rent sharing, and low productivity of labor. The role of resources like oil, gas, and diamonds and other key determinants of mass killings is confirmed by our empirical results based on country level as well as ethnic group level analysis.
Entrepreneurs, Risk Aversion and Dynamic Firms
Neus Herranz, Stefan Krasa, and Anne P. Villamil
This paper conducts a theoretical and quantitative analysis of how entrepreneurs choose firm size, capital structure, default, and owner consumption to manage firm risk, including how these choices change with risk aversion. We decompose an entrepreneur’s default decision into three elements: the fraction of firm debt; the potential reduction in personal consumption from losing the firm; and the ratio of personal wealth to firm scale, which determines an entrepreneur’s ability to inject personal funds to continue operation. Data from the Survey of Small
Business Finances is used to calibrate the model and estimate entrepreneur risk aversion. We determine the evolution of entrepreneur net worth, consumption, and firm assets over time. We find that many entrepreneurs have lower net worth and consumption than non-entrepreneurs with the same preferences, but the densities of the distributions of consumption and net-worth have wide upper tails. Thus, entrepreneurship can be a path toward great wealth and high consumption for the top quantiles of entrepreneurs.
The Double Power Law in Consumption and Implications for Testing Euler Equations
Alexis Akira Toda and Kieran Walsh
We provide evidence suggesting that the cross-sectional distributions of U.S. consumption and its growth rate obey the power law in both the upper and lower tails, with exponents approximately equal to 4. Consequently, high order moments are unlikely to exist, and the generalized method of moments estimation of Euler equations that employs cross-sectional moments may be inconsistent. Through bootstrap studies, we find that the power law appears to generate spurious non-rejection of heterogeneous-agent asset pricing models in explaining the equity premium. Dividing households into age groups, we propose an estimation approach which appears less susceptible to fat tail issues.
Production vs. Revenue Efficiency with Limited Tax Capacity: Theory and Evidence from Pakistan
Michael Carlos Best, Anne Brockmeyer, Henrik Jacobsen Kleven, Johannes Spinnewijn, and Mazhar Waseem
To fight evasion, many developing countries resort to production-inefficient tax policies.
This includes minimum tax schemes whereby firms are taxed on either profits or turnover, depending on which tax liability is larger. Such schemes create non-standard kink points, which allow for eliciting evasion responses to switches between profit and turnover taxes using a bunching approach. Using administrative tax records on corporations in Pakistan, we estimate that turnover taxes reduce evasion by up to 60-70% of corporate income. Incorporating this in a calibrated optimal tax model, we find that switching from profit to turnover taxation increases revenue by 74% without reducing aggregate profits, despite the production inefficiency that it introduces.
Explaining Cross-Country Productivity Differences in Retail Trade
Many macroeconomists argue that productivity is low in developing countries because of frictions that impede the adoption of modern technologies. I argue that in the retail trade sector, which employs just under twenty percent of the workforce on average, developing countries rationally choose technologies with low measured labor productivity. My theory is that the adoption of modern retail technologies is optimal only when household ownership of complementary durable goods, such as cars, is widespread. Because income is low in the developing world, households own few such durables; hence, retail trade is dominated by traditional technologies with low measured productivity. I show that an implication of this theory is that policies that lead to large increases in measured retail productivity do not necessarily lead to large increases in welfare.
Carbon Taxes, Path Dependency and Directed Technical Change: Evidence from the Auto Industry
Philippe Aghion, Antoine Dechezleprêtre, David Hemous, Ralf Martin, and John Van Reenen
Can directed technical change be used to combat climate change? We construct new firm-level panel data on auto industry innovation distinguishing between “dirty” (internal combustion engine) and “clean” (e.g. electric and hybrid) patents across 80 countries over several decades. We show that firms tend to innovate relatively more in clean technologies when they face higher tax-inclusive fuel prices. Furthermore, there is path dependence in the type of innovation both from aggregate spillovers and from the firm’s own innovation history. Using our model we simulate the increases in carbon taxes needed to allow clean technologies to overtake dirty technologies.
Transition to Clean Technology
Daron Acemoglu, Douglas Hanley, Ufuk Akcigit, and William Kerr
We develop an endogenous growth model where clean and dirty technologies compete in production. Research can be directed to either technology. If dirty technologies are more advanced, the transition to clean technology can be difficult. Carbon taxes and research subsidies may encourage production and innovation in clean technologies, though the transition will typically be slow. We estimate the model using microdata from the US energy sector. We then characterize the optimal policy path which heavily relies on both subsidies and taxes. Finally we evaluate various alternative policies. Relying only on carbon taxes or delaying intervention have significant welfare costs.
Life and Growth
Charles I. Jones
Some technologies save lives—new vaccines, new surgical techniques, safer highways. Others threaten lives—pollution, nuclear accidents, global warming, and the rapid global transmission of disease. How is growth theory altered when technologies involve life and death instead of just higher consumption? This paper shows that taking life into account has first-order consequences. Under standard preferences, the value of life may rise faster than consumption, leading society to value safety over consumption growth. As a result, the optimal rate of consumption growth may be substantially lower than what is feasible, in some cases falling all the way to zero.
Those Who Know Most: Insider Trading in 18th-Century Amsterdam
This paper studies how private information is incorporated into prices, using a unique setting from the 18th century that, in many dimensions, is simpler and closer to stylized models of price discovery than modern-day markets. Specifically, the paper looks at a number of English securities that were traded in both London and Amsterdam. Relevant information about these securities originated in London and was sent to Amsterdam on board official mail packet boats. Anecdotal evidence suggests that these ships carried both public news and private information. They sailed only twice a week, and in adverse weather could not sail at all. The paper exploits periods of exogenous market segmentation to identify the impact of private information. The evidence is consistent with a Kyle (1985) model in which informed agents trade strategically. Most important, the speed of information revelation in Amsterdam depended on how long insiders expected it would take for the private signal to become public. As a result of this strategic behavior, private information was only slowly revealed to the market as a whole. This price discovery was economically important: private signals had almost as much impact on prices as public information shocks.
Self-Targeting: Evidence from a Field Experiment in Indonesia
Vivi Alatas, Abhijit Banerjee, Rema Hanna, Benjamin A. Olken, Ririn Purnamasari, and Matthew Wai-Poi
We conduct a randomized experiment within Indonesia’s Conditional Cash Transfer program that compares two methods of targeting welfare programs: in one, beneficiaries first need to apply for the program, and then an enumerator visits them at home and determines their eligibility based on an asset test; in the other, they are visited directly by the enumerator and automatically enrolled if they qualify based on the same test. On net, the villages where applications were required have a much poorer group of beneficiaries than automatic screening villages. However, marginally increasing the cost of applying by increasing the distance to the application site does not to improve targeting. An estimated model of the decision to apply implies that our results are largely driven by the non-poor forecasting that they are unlikely to pass the asset test, and therefore not bothering to apply. The estimated model implies that the combination of the small cost and the final check yields substantially larger reductions in poverty than automatic screening, without imposing onerous ordeals on program beneficiaries.
An Endowment Effect for Risk: Experimental Tests of Stochastic Reference Points
Recent models of reference-dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies. A subset of such expectations-based models predicts an “endowment effect for risk”: that risk attitudes differ when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminating often-discussed confounds, I demonstrate both between and within-subjects such an endowment effect for risk. These results provide needed separation between expectations based reference-dependent models, allow for evaluation of recent theoretical extensions, and may help to close a long-standing debate in decision science on inconsistency between utility elicitation methodologies.
A Measure of Rationality and Welfare
Jose Apesteguia and Miguel A. Ballester
Evidence showing that individual behavior often deviates from the classical principle of preference maximization has raised at least two important questions: (i) How serious are the deviations? and (ii) What is the best way to analyze choice behavior in order to extract information for the purpose of welfare analysis? This paper addresses these questions by proposing a new way to identify the preference relation which is closest, in terms of welfare loss, to the revealed choice.
Bonus Culture: Competitive Pay, Screening, and Multitasking
Roland Bénabou and Jean Tirole
To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases, then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives, but may generate other distortions.
Heterogeneity in the Production of Human Capital
Solomon W. Polachek, Tirthatanmoy Das, and Rewat Thamma-Apiroam
We derive a tractable nonlinear earnings function which we estimate separately individual-by-individual using the NLSY79 data. These estimates yield five important parameters for each individual: three ability measures (two representing the ability to learn and one the ability to earn), a rate of skill depreciation, and a time discount rate. In addition, we obtain a population wide estimate of the rental rate of human capital. To illustrate heterogeneity in the production of human capital, we plot the distribution of these parameters along with NLSY79 reported AFQT scores. By utilizing these parameters, we are able to verify a number of heretofore untested theorems relating to human capital investments. In addition, we are able to show how these human capital production function parameters relate to cognitive ability, personality traits, and family background. Further, accounting for this individual specific heterogeneity dramatically reduces estimates of population-wide persistence of (unit-root) permanent and (mean-reverting) transitory shocks.
Booms and Banking Crises
Frédéric Boissay, Fabrice Collard, and Frank Smets
Banking crises are rare events that break out in the midst of credit intensive booms and bring about particularly deep and long-lasting recessions. This paper attempts to explain these phenomena within a textbook DSGE model that features a non-trivial banking sector. In the model, banks are heterogeneous with respect to their intermediation skills, which gives rise to an interbank market. Moral hazard and asymmetric information in this market may lead to sudden interbank market freezes, banking crises, credit crunches and, ultimately, severe “financial” recessions. In our model, the typical financial recessions are very different from other types of recessions. They follow credit booms and are not triggered by an especially large negative exogenous shock. Simulations of a calibrated version of the model indicate that it can mimic the main dynamic patterns of financial recessions.
Shopping Externalities and Self-Fulfilling Unemployment Fluctuations
Greg Kaplan and Guido Menzio
We propose a novel theory of self-fulfilling unemployment fluctuations. When a firm increases its workforce, it increases the demand facing other firms—as employed workers spend more than unemployed workers—and decreases the extent of competition facing other firms—as employed workers have less time to search for low prices than unemployed workers. In turn, the increase in demand and the decline in competition induces other firms to hire more labor in order to scale-up their presence in the product market. The feedback between employment and product market conditions generates multiple equilibria—and the possibility of self-fulfilling fluctuations—if the differences in the shopping behavior of employed and unemployed workers are large enough. Empirical evidence on spending, shopping and prices paid suggests that this is the case.
Alberto Alesina, Stelios Michalopoulos, and Elias Papaioannou
This study explores the consequences and origins of between-ethnicity inequality for a large sample of countries. First, combining satellite images of nighttime luminosity with the homelands of ethnolinguistic groups, we construct measures of ethnic inequality. Second, we uncover a strong inverse association between ethnic inequality and contemporary development above and beyond its relationship with cross-region and cross-administrative unit inequality. Third, we establish that differences in geographic endowments across ethnic homelands explain a sizable fraction of the variation in economic disparities across groups. Fourth, we show that inequality in geographic endowments across ethnic homelands is a negative correlate of development.
Teamwork and Moral Hazard: Evidence from the Emergency Department
David C. Chan
I investigate how teamwork may reduce moral hazard by joint monitoring and management. I study two organizational systems differing in the extent to which physicians may mutually manage work: Physicians are assigned patients in a “nurse-managed” system but divide patients between themselves in a “self-managed” system. The self-managed system increases throughput productivity by reducing a “foot-dragging” moral hazard, in which physicians prolong patient stays as expected future work increases. I find evidence that physicians in the same location have better information about each other and that, in the self-managed system, they use this information to assign patients.
The Social Effects of Ethnic Diversity at the Local Level: A Natural Experiment with Exogenous Residential Allocation
Yann Algan, Camille Hémet, and David Laitin
This paper demonstrates the effects of ethnic diversity on social relationships and the quality of public goods at a very finite neighborhood level. We use detailed block level data on diversity and housing quality from a representative survey on housing in France. We show how and to what extent diversity within a neighborhood can directly affect household well-being and the quality of the common spaces, whereas the previous literature looks at more aggregate outcomes through voting channels. Our identification strategy to address the bias from endogenous residential sorting relies on the exogeneity of public housing allocations with respect to ethnic characteristics in France. Diversity is shown to have a negative effect on the quality of local public goods, either due to vandalism, not deterred by other-regarding preferences and social policing, or due to collective action failure to ensure effective property management. However, we find that diversity has no robust effect on public safety at a local level and, if anything, is more related to social anomie.
Johannes Hörner and Andrzej Skrzypacz
A Firm considers hiring an Agent who may be competent for a potential project or not. The Agent can prove her competence, but faces a hold-up problem. We propose a model of persuasion and show how gradualism helps mitigate the hold-up problem. We show when it is optimal to give away part of the information at the beginning of the bargaining, and sell the remainder in dribs and drabs. The Agent can only appropriate part of the value of information. Introducing a third-party allows her to extract the maximum surplus.
Capabilities,Wealth, and Trade
John Sutton and Daniel Trefler
This paper reexplores the relation between a country’s level of wealth and the mix of products it exports. We argue that both are simultaneously determined by countries’ capabilities, i.e., by countries’ productivity and quality levels for each good. Our theoretical setup has two features. (1) Some goods have fewer high-quality producers/countries than others, i.e., there is Ricardian comparative advantage. (2) Imperfect competition allows high- and low-quality producers to coexist, which we refer to as “product ranges.” These two features generate a very particular nonmonotonic, general equilibrium relationship between a country’s export mix and its GDP per capita. We show that this nonmonotonicity permeates the international data on trade and GDP per capita.
The Medium-Term Impacts of High-Achieving Charter Schools
Will Dobbie and Roland G. Fryer, Jr.
Using survey data from the Promise Academy in the Harlem Children’s Zone, collected for the purposes of this study, we estimate the effects of high-performing charter schools on human capital, risky behaviors, and health outcomes. Six years after the random admissions lottery, youth offered admission to the Promise Academy middle school score 0.279 (0.073) standard deviations higher on academic achievement outcomes, 0.067 (0.076) standard deviations higher on an index of academic attainment, and 0.313 (0.091) standard deviations higher on a measure of “on-time” benchmarks. Admitted females are 10.1 percentage points less likely to be pregnant in their teens, and males are 4.4 percentage points less likely to be incarcerated. We find little impact of the Promise Academy on self-reported health. These effects are larger than those expected from test score increases alone, implying that high achieving charter schools alter more than cognitive ability.