Knowledge that Transforms

Announcement Get access The Quarterly Journal of Economics, Volume 114, Issue 1, February 1999, Page iii, https://doi.org/10.1162/003355399555909 Published: 01 February 1999

This paper presents an approximate analytical solution to the optimal consumption and portfolio choice problem of an infinitely lived investor with Epstein-Zin-Weil utility who faces a constant riskless interest rate and a time-varying equity premium. When the model is calibrated to U. S. stock market data, it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by investors whose risk-aversion coefficients exceed one. The optimal portfolio policy also involves timing the stock market. Failure to time or to hedge can cause large welfare losses relative to the optimal policy.

Recently, several central banks have lost their bank supervisory responsibilities, in part because it has not been shown that supervisory authority improves the conduct of monetary policy. This paper finds that confidential bank supervisory information could help the Board staff more accurately forecast important macroeconomic variables and is used by FOMC members to guide monetary policy. These findings suggest that the complementarity between supervisory responsibilities and monetary policy should be an important consideration when evaluating the structure of the central bank.

We investigate stock option exercise decisions by over 50,000 employees at seven corporations. Controlling for economic factors, psychological factors influence exercise. Consistent with psychological models of beliefs, employees exercise in response to stock price trends—exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons. Consistent with psychological models of values that include reference points, employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year.

If economic growth relies upon the extent-of-the-market, then openness will decrease the connection between initial income and later growth. Alternatively, learning-by-doing models suggest that wealth will be more positively correlated with growth in open economies, because trade causes advanced economies to specialize in products with more opportunities for learning. We examine twentieth century less developed countries and nineteenth century U. S. states. In both data sets, there is a much stronger correlation between growth and initial wealth among closed economies. These findings support the importance of the extent-of-the-market, and aggregate demand in fostering growth.

We present a model that links heterogeneity of preferences across ethnic groups in a city to the amount and type of public goods the city supplies. We test the implications of the model with three related data sets: U. S. cities, U. S. metropolitan areas, and U. S. urban counties. Results show that the shares of spending on productive public goods—education, roads, sewers and trash pickup—in U. S. cities (metro areas/urban counties) are inversely related to the city's (metro area's/county's) ethnic fragmentation, even after controlling for other socioeconomic and demographic determinants. We conclude that ethnic conflict is an important determinant of local public finances.

This paper analyzes the interplay between social norms and economic incentives in the context of work decisions in the modem welfare state. We assume that to live off one's own work is a social norm, and that the larger the population share adhering to this norm, the more intensely it is felt by the individual. Individuals face two choices: one economic, whether to work or live off public transfers; and one political, how large the transfer should be. The size of the transfer and the intensity of the social norm are determined endogenously in equilibrium.

Output per worker varies enormously across countries. Why? On an accounting basis our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker—we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language.

We examine the impact of increased abortion availability on the average living standards of children through a selection effect. Would the marginal child who was not born have grown up in different circumstances than the average child? We use variation in the timing of abortion legalization across states to answer this question. Cohorts born after legalized abortion experienced a significant reduction in a number of adverse outcomes. We find that the marginal child would have been 40–60 percent more likely to live in a single-parent family, to live in poverty, to receive welfare, and to die as an infant.