Knowledge that Transforms

While freer trade, or “openness” in trade, is now widely regarded as economically benign, in the sense that it increases the size of the pie, the recent anti-globalization critics have suggested that it is socially malign on several dimensions, among them the question of poverty. Their contention is that trade accentuates not ameliorates, deepens not diminishes, poverty in both the rich and the poor countries. The theoretical and empirical analysis of the impact of freer trade on poverty in the rich and in the poor countries is not symmetric, of course. We focus here therefore only on the latter. But in doing so, we distinguish between two different strands of argumentation: static and dynamic. In the former case, we treat the resources and technology to be given and then ask: how does freer trade affect poverty in this static framework. In the latter case, we admit growth effects that impact on the state of poverty over time.

this paper, we use new data from the Panel Study of Income Dynamics which includes information on bankruptcy filings to estimate a model of households' bankruptcy decisions.

Japan has been in a slump for the past decade. After GDP had been growing by on average 4 percent during the 1980’s, the growth rate dropped to 1 percent in the 1990’s. Asset prices also fluctuated significantly: capital gains on stocks and real estate in the 1980’s, followed by capital losses in the 1990’s, were both on the order of a few years’ worth of GDP, even after taking inflation into account. Together with production and asset prices, the fraction of nonperforming loans fluctuated substantially. These are by no means all bank loans. For the nonfinancial corporate sector in Japan, the ratio of financial assets to total assets is about 40 percent, much higher than in the United States. Such financial assets include loans to and securities of other private agents. That is, nonfinancial institutions simultaneously borrow from and lend to each other on a significant scale. Many nonperforming loans are interlocked, paralyzing the financial system. It is important to recognize that these swings have been experienced by almost all sectors of the Japanese economy. Yet in other countries, comparable movements in asset prices have had less widespread consequences. For example, the recent fluctuations in the NASDAQ index in the United States have been no smaller than those of asset prices in Japan, but the damage appears to be contained to closely related sectors. Although U.S. equity-holders, particularly pension funds, have lost value, the level of nonperforming loans is relatively limited up to now. The question is: Why does there appear to be more contagion in some countries than in others? Has contagion anything to do with the nature of financing or the extent to which there are inter-locking loans? In this theoretical paper, we examine two different mechanisms by which contagion may occur. In both cases, propagation is through balancesheet effects. First, through the indirect effects that fluctuations in asset prices have on collateral values. Second, through the direct effects that default on or postponement of debt repayments have when there are chains of credit.

In simple economic models, it is relatively easy to describe how to impose a value-added tax at a uniform rate on all consumption goods, and to demonstrate that this tax is equivalent to a proportional labor-income tax, plus a tax on existing assets. The equivalence involves little more than the national income identity relating the sources and uses of income. Once one attempts to incorporate the costs of financial intermediation, however, tax analysis becomes more complicated. In attempting to determine how a VAT should treat financial transactions, various authors have attempted to apply results from simpler models. Unfortunately, these results can lead to conflicting, ambiguous, and misleading prescriptions. In this paper, we argue that one needs to rely more on the fundamental objectives of a VAT to decide how it should treat financial transactions. Adopting this approach, we find that, in principle, the VAT should apply to resources devoted to financial transactions in the same manner that it does in other sectors. However, as discussed below, there are real problems in implementing such a tax on the financial sector which we do not attempt to address in this paper.

Despite their influence on the careers of economists, the production and pricing of scholarly journals have received scant attention from the profession. By contrast, the issue of journal quality and scholarly research productivity have been studied in far greater detail (a search in the EconLit database using the term “journal” generates several dozen papers on this topic). Although there may be a number of reasons for this “imbalance,” it is likely that the tenure process, combined with the low (if not zero) effective cost of journals on campuses have influenced our research agenda. In other words, while professors worry about their job security (publish well, or perish), others—their librarians—are charged with maintaining “free” access to all relevant journals. Of course, this pattern is observed not just in economics but across academic disciplines. In recent years, however, easy access to journals has been threatened. Beset by persistent journal price inflation (especially in the socalled STM fields, or science, technology, and medicine) and stagnant budgets, many university libraries have been forced to reallocate dollars from monographs to journals, to postpone the purchase of new journal titles, and in some cases, to cancel titles. As a consequence, libraries often relied on interlibrary loans to satisfy faculty demands. This situation and its possible causes has been studied at great length in the library science literature. With few exceptions, a consensus has evolved there which focuses on the growing importance of commercial publishers in the market for scholarly journals: Over the past decade or more, commercial firms have aggressively raised prices at a rate disproportionate to any increase in costs or quality. This appears to be especially true for the largest commercial firms. Although the analysis underlying these conclusions is generally not of the multivariate sort, it is suggestive enough to warrant further investigation. * School of Economics, Georgia Institute of Technology, 781 Marietta Street NW, Atlanta, GA 30318 (e-mail: [email protected]). I would like to thank many of my former colleagues at the Department of Justice, including Craig Conrath, Renata Hesse, Aaron Hoag, Russ Pittman, David Reitman, Dan Rubinfeld, and Greg Werden, as well as Jonathan Baker, Cory Capps, George Deltas, Luke Froeb, Jeffrey Mackie-Mason, Roger Noll, Dan O’Brien, Richard Quandt, Lars-Hendrik Roller, Steve Salop and Margaret Slade; seminar participants at the Federal Trade Commission, Georgia Tech, North Carolina State University, SUNY Stony Brook, and Wissenschaft Zentrum Berlin; and participants at the meetings of the American Economic Association, the European Association of Research in Industrial Economics, the Southern Economics Association, and Western Economics Association. The Association of Research Libraries and its members, the National Library of Medicine, the Georgia Tech Library, and the Georgia Tech Foundation have provided invaluable assistance. Expert data support was provided by a large group of individuals, including Deena Bernstein, Claude Briggs, Pat Finn, Doug Heslep, and Steve Stiglitz. Finally, I would like to thank the dozens of librarians and publishers who have provided me with important insights. 1 The exceptions are Janusz A. Ordover and Robert D. Willig (1978), Lisa Lieberman et al. (1992), George A. Chressanthis and June D. Chressanthis (1994), McCabe (2000), and Theodore C. Bergstrom (2001) . Ordover and Willig model the pricing of a single title to institutional and individual subscribers; Bergstrom’s paper discusses the differences between commercial and nonprofit economics journals. The other three papers are discussed below. 2 Increasingly, journals are available in both print and digital versions, and for some new titles only a digital format is available. See Carol Tenopir and Donald King (2000 Ch. 15). Starting in 1998, commercial publishers began placing their content online. Although major research libraries have generally responded by adding digital access, this shift is still in its early stages, especially in cases where library collections are more specialized, e.g., the typical biomedical library. For this reason, as well as the fact that more than two-thirds of the sample period occurred in a print-only environment, the emphasis of this paper is on the behavior of publishers and libraries in a print environment. The economic implications of digital access are considered briefly at the conclusion of the paper and are a subject of ongoing research. 3 See Martha Kyrillidou (1999). 4 See Tenopir and King (2000 Ch. 13), for a review of this literature. An alternative explanation for journal price inflation has been offered by Lieberman et al. (1992). They argue that entry by new titles over time has lowered circulation for existing journals, forcing the latter to raise prices to cover fixed costs.

Citizens of two groups may engage in crime, depending on their legal earning opportunities and on the probability of being audited. Police audit citizens. Police behavior is fair if both groups are policed with the same intensity. We provide exact conditions under which forcing the police to behave more fairly reduces the total amount of crime. These conditions are expressed as constraints on the quantile-quantile plot of the distributions of legal earning opportunities in the two groups. We also investigate the definition of fairness when the cost of being searched reflects the stigma of being singled out by police.

We consider the distribution of economic activity within a country in light of three leading theories—increasing returns, random growth, and locational fundamentals. To do so, we examine the distribution of regional population in Japan from the Stone Age to the modern era. We also consider the Allied bombing of Japanese cities in WWII as a shock to relative city sizes. Our results support a hybrid theory in which locational fundamentals establish the spatial pattern of relative regional densities, but increasing returns help to determine the degree of spatial differentiation. Long-run city size is robust even to large temporary shocks.

The welfare effects of PTAs are most directly linked to changes in trade prices, i.e., the terms of trade. This paper employs a simple strategic pricing game in segmented markets to measure the effects of MERCOSUR on the pricing of “nonmember” exports to Brazil: As Brazil exempts its MERCOSUR partners from tariffs, the resulting competitive pressure leads other exporters to reduce their prices. Working with detailed data on unit values and tariffs we find that the creation of MERCOSUR was associated with significant declines in the prices of nonmembers' exports to the region.

We investigate the ability of expected utility theory to account for simultaneous gambling and insurance. Contrary to a previous claim that borrowing and lending in perfect capital markets removes the demand for gambles, we show expected utility theory with nonconcave utility functions can explain gambling. When the rates of interest and time preference are equal, agents seek to gamble unless income falls in a finite set of values. When they differ, there is a range of incomes where gambles are desired. Different borrowing and lending rates can account for persistent gambling provided the rates span the rate of time preference.