An Efficient and Incentive Compatible Dynamic Auction for Multiple Complements
Ning Sun and Zaifu Yang
This article proposes an efficient and incentive compatible dynamic auction for selling several complementary goods to finitely many bidders. The goods are traded in discrete quantities. The seller has a reserve price for every bundle of goods and determines which bundles to sell based on current prices. The auctioneer announces a current price for every bundle of goods and a supply set of goods, every bidder subsequently responds with a set of goods demanded at these prices, and then the auctioneer adjusts prices. We prove that even when bidders can exercise their market power strategically, this dynamic auction always induces them to bid truthfully as price-takers, resulting in an efficient allocation, its supporting Walrasian equilibrium price for every bundle of goods, and a generalized Vickrey-Clarke-Groves payment for every bidder.
An Alternative Theory of the Plant Size Distribution, with Geography and Intra- and International Trade
Thomas J. Holmes and John J. Stevens
There is wide variation in the sizes of manufacturing plants, even within the most narrowly defined industry classifications used by statistical agencies. Standard theories attribute such size differences to productivity differences. This paper develops an alternative theory in which industries are made up of large plants making standardized (or primary-segment) goods and small plants making custom (or specialty segment) goods. The paper uses confidential Census data to estimate the parameters of the model, and derives estimates of plant counts in the primary and specialty segments by industry. The estimated model fits the data relatively well compared with estimates based on standard approaches. In particular, the predictions of the model for the effects of a surge in imports from China are consistent with what happened to U.S. manufacturing industries that experienced such a surge over the period 1997-2007. Large-scale primary plants were decimated, while small-scale specialty plants were relatively less affected.
Chiefs: Economic Development and Elite Control of Civil Society in Sierra Leone
Daron Acemoglu, Tristan Reed, and James A. Robinson
We use the colonial organization of chieftaincy in Sierra Leone to study the effect of constraints on chiefs’ power on economic outcomes, citizens’ attitudes and social capital. A paramount chief must come from one of the ruling families originally recognized by British colonial authorities. Chiefs face fewer constraints and less political competition in chiefdoms with fewer ruling families. We show that places with fewer ruling families have significantly worse development outcomes today—in particular, lower rates of educational attainment, child health, non-agricultural employment and asset ownership. We present evidence that variation in the security of property rights in land is a potential mechanism. Paradoxically we also show that in chiefdoms with fewer ruling families the institutions of chiefs’ authority are more highly respected among villagers, and measured social capital is higher. We argue that these results reflect the capture of civil society organizations by chiefs.
Equilibrium Tuition, Applications, Admissions, and Enrollment in the College Market
I develop and estimate a structural equilibrium model of the college market. Students, having heterogeneous abilities and preferences, make college application decisions, subject to uncertainty and application costs. Colleges, observing only noisy measures of student ability, choose tuition and admissions policies to compete for more able students. Tuition, applications, admissions, and enrollment are joint outcomes from a subgame perfect Nash equilibrium. I estimate the structural parameters of the model using data from the National Longitudinal Survey of Youth 1997, via a three-step procedure to deal with potential multiple equilibria. In counterfactual experiments, I use the model first to examine the extent to which college enrollment can be increased by expanding the supply of colleges, and then to assess the importance of various measures of student ability.
Productive Cities: Sorting, Selection, and Agglomeration
Kristian Behrens, Gilles Duranton, and Frederic Robert-Nicoud
Large cities produce more output per capita than small cities. This higher productivity may occur because more talented individuals sort into large cities, because large cities select more productive entrepreneurs and firms, or because of agglomeration economies. We develop a model of systems of cities that combines all three elements and suggests interesting complementarities between them. The model can replicate stylized facts about sorting, agglomeration, and selection in cities. It also generates Zipf's law for cities under empirically plausible parameter values. Finally, it provides a useful framework within which to reinterpret extant empirical evidence.
The Nature of Countercyclical Income Risk
Fatih Guvenen, Serdar Ozkan, and Jae Song
This paper studies the nature of business cycle variation in individual earnings risk using a unique and confidential dataset from the U.S. Social Security Administration, which contains (uncapped) earnings histories for millions of individuals. The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2011. We use these data to decompose individual earnings growth during recessions into “between-group” and “within-group” components. We begin with the behavior of within-group (idiosyncratic) shocks. Contrary to past research, we do not find the variance of idiosyncratic earnings shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses—large upward earnings movements become less likely—whereas the bottom end expands—large drops in earnings become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, risky during recessions. Second, to study between group differences, we group individuals based on several observable characteristics at the time a recession hits. One of these characteristics—the average earnings of an individual at the beginning of a business cycle episode—proves to be a good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (which is not the case during expansions). Finally, we find that the cyclical nature of earnings risk is dramatically different for the top 1 percent compared with all other individuals—even relative to those in the top 2-5 percent.
Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge Massachusetts
David H. Autor, Christopher J. Palmer, andParag A. Pathak
Externalities from the attributes and actions of neighborhood residents onto the value of surrounding properties and neighborhoods are central to the theory of urban economics and the development of efficient housing policy. This paper measures the capitalization of housing market externalities into residential housing values by studying the sudden and largely unanticipated 1995 elimination of stringent rent controls in Cambridge, Massachusetts, which had previously muted landlords’ incentives to invest in their properties and altered the assignment of residents to locations. Pooling administrative data on the universe of assessed values and transacted prices of all Cambridge residential properties between 1988 and 2005, we find that rent decontrol generated substantial, robust price appreciation at decontrolled units and nearby never-controlled units, accounting for an estimated 30 percent of the $7.8 billion in Cambridge residential property appreciation during this period. The majority of this contribution is due to induced appreciation of never-controlled properties, while residential investments can explain only a small fraction of the total.
Jan Eeckhout, Roberto Pinheiro, and Kurt Schmidheiny
We investigate the role of complementarities in production and skill mobility across cities. We propose a general equilibrium model of location choice by heterogeneously-skilled workers, and consider different degrees of complementarities between the skills of workers. The nature of the complementarities determines the equilibrium skill distribution across cities. We prove that with extreme-skill complementarity, the skill distribution has thicker tails in large cities; with top-skill complementarity, there is first-order stochastic dominance. Using the model to back out skills from wage and housing price data, we find robust evidence of thick tails in large cities: large cities disproportionally attract both high and low-skilled workers, while average skills are constant across city size. This pattern of spatial sorting is consistent with extreme-skill complementarity, where the productivity of high-skilled workers and of the providers of low skilled services is mutually enhanced.
Dynamic Inputs and Resource (Mis)Allocation
John Asker, Allan Collard-Wexler, and Jan De Loecker
We investigate the role of dynamic production inputs and their associated adjustment costs in shaping the dispersion of static measures of capital misallocation within industries (and countries). Across 9 datasets, spanning 40 countries, we find that industries exhibiting greater time-series volatility of productivity have greater cross-sectional dispersion of the marginal revenue product of capital. We use a standard investment model with adjustment costs to show that variation in the volatility of productivity across these industries and economies can explain a large share (80-90%) of the cross-industry (and cross-country) variation in the dispersion of the marginal revenue product of capital.
“A” Business by Any Other Name: Firm Name Choice as a Signal of Firm Quality
Ryan C. McDevitt
This paper considers when a firm's deliberately chosen name can signal meaningful information. The average plumbing firm whose name begins with “A” or a number receives five times more service complaints than other firms, and also charges higher prices. Relatedly, plumbers with “A” names advertise more in the Yellow Pages and on Google, and doing so is positively correlated with receiving complaints. As the use of “A” names is more prevalent in larger markets, I reconcile these findings with a simple model in which firms have heterogeneous qualities and consumers have heterogeneous search costs.
The Private Returns to Public Office
Raymond Fisman, Florian Schulz, and Vikrant Vig
We study the wealth accumulation of Indian state politicians using public disclosures required of all candidates. The annual asset growth of winners is 3-5 percent higher than runners-up, a difference that holds also in a set of close elections. The relative asset growth of winners is greater in more corrupt states and for those holding ministerial positions. These results are consistent with a rent-seeking explanation for the relatively high rate of growth in winners' assets.
Communication in Federal Politics: Universalism, Policy Uniformity, and the Optimal Allocation of Fiscal Authority
Anke S. Kessler
The paper presents a positive model of communication in federal legislatures to study the incentives of members to engage in a meaningful exchange of information, and how this shapes policy outcomes. Depending on the type of policy under consideration, communication between delegates generally suffers from a bias that makes truthful revelation difficult and sometimes impossible. This generates inefficient policy choices at the federal level that are often are endogenously characterized by overspending, universalism and uniformity. Building on these findings, I develop a simple theory of fiscal decentralization, which revisits Oates’ (1972) decentralization theorem in a world of incomplete information and strategic communication. Empirical results from a cross section of U.S. municipalities are consistent with the predicted pattern of spending.
Implications of an Economic Theory of Conflict: Hindu-Muslim Violence in India
Anirban Mitra and Debraj Ray
We model inter-group conflict driven by economic changes within groups. We show that if group incomes are low, increasing group incomes raises violence against that group, and lowers violence generated by it. We then apply the model to data on Hindu-Muslim violence in India. Our main result is that an increase in per-capita Muslim expenditures generates a large and significant increase in future religious conflict. An increase in Hindu expenditures has negative or no effect. These findings speak to the origins of Hindu-Muslim violence in post-Independence India.
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.
Implementing the "Wisdom of the Crowd"
Ilan Kremer, Yishay Mansour, and Motty Perry
We study a novel mechanism design model in which agents each arrive sequentially and choose one action from a set of actions with unknown rewards. The information revealed by the principal affects the incentives of the agents to explore and generate new information.
We characterize the optimal disclosure policy of a planner whose goal is to maximize social welfare. One interpretation of our result is the implementation of what is known as the "wisdom of the crowd". This topic has become increasingly relevant with the rapid spread of the Internet over the past decade.
A Nation of Immigrants: Assimilation and Economic Outcomes in the Age of Mass Migration
Ran Abramitzky, Leah Platt Boustan, and Katherine Eriksson
During the Age of Mass Migration (1850-1913), the US maintained an open border, absorbing 30 million European immigrants. Prior cross-sectional work finds that immigrants initially held lower-paid occupations than natives but converged over time. In newly-assembled panel data, we show that, in fact, the average immigrant did not face a substantial occupation-based earnings penalty upon first arrival and experienced occupational advancement at the same rate as natives. Cross-sectional patterns are driven by biases from declining arrival cohort quality and departures of negatively-selected return migrants. We show that assimilation patterns vary substantially across sending countries and persist in the second generation.
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.
Coagglomeration, Clusters, and the Scale and Composition of Cities
Robert W. Helsley and William C. Strange
Cities are neither completely specialized nor completely diverse. However, prior research has focused almost entirely on the polar cases of complete specialization and complete diversity. This paper develops a model that can also generate the intermediate case of cities that feature the coagglomeration of some but not all industries, thus giving theoretical foundations to the analysis of business clusters. The analysis sharply challenges the conventional wisdom that the size and composition of cities are necessarily driven primarily by agglomerative efficiencies.
Disease and Development Revisited
David E. Bloom, David Canning, and Günther Fink
Acemoglu and Johnson (2007) present evidence that improvements in population health do not promote economic growth. We show that their result depends critically on the assumption that initial health has no causal effect on subsequent economic growth. We argue that such an effect is likely, primarily because childhood health affects adult productivity. In our augmented model, which includes initial health, the instrumental variable proposed by Acemoglu and Johnson has no significant predictive power for improvements in health and does not identify the effect of contemporaneous improvements in health on economic growth.
The Signaling Value of a High School Diploma
Damon Clark and Paco Martorell
This paper distinguishes between the human capital and signaling theories by estimating the earnings return to a high school diploma. Unlike most indicators of education (e.g., a year of school), a diploma is essentially a piece of paper hence by itself cannot affect productivity. Any earnings return to holding a diploma must therefore reflect the diploma's signaling value. Using regression discontinuity methods to compare the earnings of workers that barely passed and barely failed high school exit exams–standardized tests that students must pass to earn a high school diploma–we find little evidence of diploma signaling effects.
Efficient Responses to Targeted Cash Transfers
Orazio Attanasio and Valerie Lechene
In this paper, we estimate a collective model of household consumption and test the restrictions of collective rationality using z-conditional demands in the context of a large Conditional Cash Transfer programme in rural Mexico. We show that the model is able to explain the impacts the programme has on the structure of food consumption. We use two plausible and novel distribution factors, that is variables that describe the mechanism by which decisions are reached within the household: the random allocation of a cash transfer to women, and the relative size and wealth of the husband and wife's family networks. We find that the structure we propose does better at predicting the effect of exogenous increases in household income than an alternative, unitary, structure. We cannot reject efficiency of household decisions.
Labor Hiring, Investment, and Stock Return Predictability in the Cross Section
Santiago Bazdresch, Frederico Belo, and Xiaoji Lin
We study the impact of labor market frictions on asset prices in the cross section. In stock return predictability regressions a 10% increase in the firm’s hiring rate is associated with a decrease of 1.3% to 1.8% in the firm’s annual expected stock return. We propose an investment-based asset pricing model with labor and capital stochastic adjustment costs to explain the negative correlation between hiring and risk premiums. Firms with relatively high hiring rates are expanding firms that face high adjustment costs. If the economy experiences a shock that lowers adjustment costs, these firms will benefit the most from these lower costs, allowing these firms to grow faster and make profits more quickly. The corresponding increase in value of these firms during these times is a hedge against adjustment cost shocks which explains the lower expected returns of these firms in equilibrium. With quasi-fixed labor, the model quantitatively matches the predictability of hiring, key properties of the firm-level hiring and investment rates, and other empirical regularities.
A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation
Arnaud Costinot, Guido Lorenzoni, and Iván Werning
We develop a theory of capital controls as dynamic terms-of-trade manipulation. We study an infinite horizon endowment economy with two countries. One country chooses taxes on international capital flows in order to maximize the welfare of its representative agent, while the other country is passive. In this neoclassical benchmark model we show that capital controls are not guided by the absolute desire to alter the intertemporal price of the goods produced in any given period, but rather by the relative strength of this desire between two consecutive periods. Specifically, a country growing faster than the rest of the world has incentives to promote domestic savings by taxing capital inflows or subsidizing capital outflows. Although our theory of capital controls emphasizes interest rate manipulation, the pattern of borrowing and lending, per se, is irrelevant.
Knowledge Growth and the Allocation of Time
Robert E. Lucas, Jr., and Benjamin Moll
We analyze a model economy with many agents, each with a different productivity level. Agents divide their time between two activities: producing goods with the production-related knowledge they already have, and interacting with others in search of new, productivity-increasing ideas. These choices jointly determine the economy’s current production level and its rate of learning and real growth. We construct the balanced growth path for this economy, thereby obtaining a theory of endogenous growth that captures in a tractable way the social nature of knowledge creation. We show, for example, that a fatter right tail of the initial productivity distribution leads to higher individual search effort and higher long-run growth. We also study the allocation chosen by an idealized planner who takes into account and internalizes the external benefits of search, and tax structures that implement an optimal solution. Finally, we provide three examples of alternative learning technologies and show that the properties of equilibrium allocations are quite sensitive to these variations.
Equilibrium Imitation and Growth
Jesse Perla and Christopher Tonetti
The least productive agents in an economy can be vital in generating growth by spurring technology diffusion. We develop an analytically tractable model where growth is created as a positive externality from risk taking by firms at the bottom of the productivity distribution imitating more productive firms. Heterogeneous firms choose to produce or pay a cost and search within the economy to upgrade their technology. Sustained growth comes from the feedback between the endogenously determined distribution of productivity, as evolved by past search decisions, and an optimal forward looking search policy. The growth rate depends on characteristics of the productivity distribution, with a thicker tailed distribution leading to more growth.