Knowledge that Transforms

Knowledge Spillovers and Patent Citations: Evidence from a Survey of Inventors by Adam B. Jaffe, Manuel Trajtenberg and Michael S. Fogarty. Published in volume 90, issue 2, pages 215-218 of American Economic Review, May 2000

This paper tests for the existence of asymmetric information between the Federal Reserve and the public by examining Federal Reserve and commercial inflation forecasts. It demonstrates that the Federal Reserve has considerable information about inflation beyond what is known to commercial forecasters. It also shows that monetary-policy actions provide signals of the Federal Reserve's information and that commercial forecasters modify their forecasts in response to those signals. These findings may explain why long-term interest rates typically rise in response to shifts to tighter monetary policy.

We consider a market with “red” and “green” workers, where labels are payoff irrelevant. Workers may acquire skills. Skilled workers search for vacancies, while firms search for workers. A unique symmetric equilibrium exists in which color is irrelevant. There are also asymmetric equilibria in which firms search only for green workers, more green than red workers acquire skills, skilled green workers receive higher wages, and the unemployment rate is higher among skilled red workers. Discrimination between ex ante identical individuals arises in equilibrium, and yet firms have perfect information about their workers, and strictly prefer to hire minority workers.

Casual evidence as well as daily experience suggest that many people have a strong aversion against being the 'sucker' in social dilemma situations. As a consequence, those who cooperate may be willing to punish free-riding, even if this is costly for them and even if they cannot expect future benefits from their punishment activities. A main purpose of this paper is to show experimentally that there is indeed a widespread willingness of the cooperators to punish the free-riders. Our results indicate that this holds true even if punishment is costly and does not provide any material benefits for the punisher. In addition, we provide evidence that free-riders are punished the more heavily the more they deviate from the cooperation levels of the cooperators. Potential free-riders, therefore, can avoid or at least reduce punishment by increasing their cooperation levels. This, in turn, suggests that in the presence of punishment opportunities there will be less free riding. Testing this conjecture is the other major aim of our paper.

Analysis of longitudinal data for immigrants presents a more pessimistic portrait of immigrants' economic success. First, the rate of growth of immigrant earnings was overstated in census-based studies. Second, the worsening of immigrant earnings for more recent arrival cohorts is deeper than previously suggested. Against these two negative findings, one must keep in mind an important caveat. The steeper cohort decline in earnings may be a sign of greater human-capital investment by more recent immigrants. Longitudinal data suggest a strong degree of earnings convergence: immigrants who start at lower earnings quickly make up a large part of the deficit relative to their immigrant counterparts.

The strength of incentives used in an organization and the productivity of employees that results from these incentives depend to a large degree on the characteristics of the performance measures available to the organization. Some employees work under high-powered explicit incentive contracts, while others have no explicit incentive contracts at all. The ability of agency theory to predict the pattern of incentive provision in organizations has not been very impressive, and the divergence between the prescriptions of agency theory and the actual practice of firms has been widely noted. This paper (along with both other papers in this session [Edward P. Lazear, 2000; Canice Prendergast, 2000]) attempts to fill some of the gap between theory and practice. I examine the characteristics of performance measures (those data on which explicit incentive contracts are based) to understand how firms use incentive contracting, and to predict the use of incentives in practice.

This paper develops a simple general-equilibrium framework to study the effect of the exchange-rate system on trade and welfare. An important feature of the model is deviations from purchasing-power parity, caused by rigid price setting in buyers' currency. In a benchmark model with separable preferences and only monetary shocks, trade is unaffected by the exchange-rate system, consistent with most evidence. In general, both trade and welfare can be higher under either exchange-rate system, depending on preferences and on the monetary-policy rules followed under each system. There is no one-to-one relationship between the levels of trade and welfare across exchange-rate systems.

This paper explores a monetary-policy model with habit formation for consumers, in which consumers' utility depends in part on current consumption relative to past consumption. The empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous confidence, largely because the habit-formation model captures the gradual hump-shaped response of real spending to various shocks. The paper then embeds the habit-consumption specification in a monetary-policy model and finds that the responses of both spending and inflation to monetary-policy actions are significantly improved by this modification.

We study how diversity evolves at a firm with entry-level and upper-level employees who vary in ability and “type” (gender or ethnicity). The ability of entry-level employees is increased by mentoring. An employee receives more mentoring when more upper-level employees have the same type. Optimal promotions are biased by type, and this bias may favor either the minority or the majority. We characterize possible steady states, including a “glass ceiling,” where the upper level remains less diverse than the entry level. A firm may have multiple steady states, whereby temporary affirmative-action policies have a long-run impact.