Knowledge that Transforms

Socioeconomic Status and Child Health: Why Is the Relationship Stronger for Older Children? by Janet Currie and Mark Stabile. Published in volume 93, issue 5, pages 1813-1823 of American Economic Review, December 2003

This paper extends the standard principal–agent model to allow for subjective evaluation. The optimal contract results in more compressed pay relative to the case with verifiable performance measures. Moreover, discrimination against an individual implies lower pay and performance, suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination. Finally, the optimal contract entails the use of bonus pay rather than the threat of dismissal, hence neither “efficiency wages” nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract.

What is the weak-instruments (WI) problem and what causes it? Universal agreement does not exist on these questions. We define weak instruments by two features: (i) two-stage least squares (2SLS) analysis is badly biased toward the ordinary least-squares (OLS) estimate, and alternative “unbiased” estimators such as limited-information maximum likelihood (LIML) may not solve the problem; and (ii) the standard (first-order) asymptotic distribution does not give an accurate framework for inference. Thus, a researcher may estimate “bad results” and not be aware of the outcome. The cause of WI is often stated to be a low R or F statistic of the reduced-form equation, in the most commonly occurring situation of one right-handside endogenous variable. We find the situation is more complex with an additional factor, the correlation between the stochastic disturbances of the structural equation and the reduced form, that needs to be taken into account. We discuss in this paper a specification test (Hahn and Hausman, 2002a) for WI, a caution against using “no moments” estimators such as LIML in the WI situation, and suggestions for different estimators, an approach to inference of Frank Kleibergen (2002) for WI. We end with a caution of how “small biases” can become “large biases” in the WI situation. We begin with the limited-information structural model under the assumptions of Hausman (1983):

This paper studies a model of random technical progress where technology diffuses at realistically slow rates. It fits smooth trends to the sum of GDP series generated by this model and series representing transitory, or cyclical, fluctuations. Detrended GDP is then largely unrelated to technical progress. The detrending method proposed by Rotemberg (1999) reconstructs cyclical variations somewhat more accurately than the HP filter. With sufficiently slow diffusion it is also more accurate than a method based on VARs fitted to hours and GDP growth. Consistent with the model’s predictions, permanent shocks initially depress both hours and output in these VARs.

This paper provides an analytical characterization of Markov perfect equilibria in a model with repeated voting, where agents vote over distortionary income redistribution. A key result is that the future constituency for redistributive policies depends positively on current redistribution, since this affects both private investments and the future distribution of voters. The model features multiple equilibria. In some equilibria, positive redistribution persists forever. In other equilibria, even a majority of beneficiaries of redistribution vote strategically so as to induce the end of the welfare state next period. Skill-biased technical change makes the survival of the welfare state less likely.

We consider monetary-fiscal interactions when the monetary authority is more conservative than the fiscal. With both policies discretionary, (1) Nash equilibrium yields lower output and higher price than the ideal points of both authorities, (2) of the two leadership possibilities, fiscal leadership is generally better. With fiscal discretion, monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks. But fiscal commitment is not similarly negated by monetary discretion. Second-best outcomes require either joint commitment, or identical targets for the two authorities—output socially optimal and price level appropriately conservative—or complete separation of tasks.

Monetary and Nonmonetary Punishment in the Voluntary Contributions Mechanism by David Masclet, Charles Noussair, Steven Tucker and Marie-Claire Villeval. Published in volume 93, issue 1, pages 366-380 of American Economic Review, March 2003

This paper considers a dynamic model of innovations in which firms can endogenously bias the direction of technological change. Both in a North–North and North–South context, we show that, when globalization triggers an increased threat of technological leapfrogging or imitation, firms tend to respond to that threat by biasing the direction of their innovations towards skilled-labor-intensive technologies. We show that this process of defensive skill-biased innovations generates an increase in wage inequalities in both regions. We then discuss suggestive empirical evidence of the existence of defensive skill-biased technical change.

Historically, the average return on S&P stocks has far exceeded the average return on short-term U.S. government debt. Rajnish Mehra and Prescott (1985), for example, found that the average difference was 6.2 percent per year in the 1889–1978 period. They tried to account for this difference by assuming it is a premium for bearing nondiversi � able aggregate risk but found that risk accounted for only a tiny fraction of the difference. They concluded that there is an “equity premium puzzle.” Here, we reexamine this puzzle, taking into account some factors ignored by Mehra and Prescott (taxes, regulatory constraints, and diversi� cation costs) and focusing on long-term