Knowledge that Transforms

Unwanted children may be more subject to child abuse and neglect by their parents or care-takers than are desired children, in part because such children may be born and raised in less favorable circumstances that foster maltreatment. In addition, parents may be more likely to maltreat unwanted children; sociological and medical studies suggest a link between unplanned births and subsequent child abuse (Susan J. Zuravin, 1987). Child abuse and neglect may be linked to abortion availability if reduced access to abortion providers leads to more births of unwanted or unplanned children and to maltreatment of some of these children, a possibility investigated in this paper. A variety of evidence suggests that abortion availability affects fertility behavior and child outcomes. Increased abortion availability leads to lower birth rates and higher abortion rates (see e.g., Phillip Levine et al., 1999). In addi- tion, abortion legalization appears to have led to an improvement in the average living condi- tions of children by reducing the number of children who would have lived in single-parent families, lived in poverty, received welfare, and died as infants (Jonathan Gruber et al., 1999). The improvement in child outcomes appears to be primarily due to changes in the composition of women who give birth, with the largest fertility declines occurring among young, unmarried, or nonwhite women. Such nonrandom selection may lead to less maltreatment of children if abortion access reduces births among groups where maltreatment is more prevalent. Alternatively, abortion availability may reduce the number of unwanted children born to all women, leading to lower rates of child abuse and neglect. We use data on the number of reports of child abuse and child neglect to examine the rela- tionship between abortion legalization, post- legalization restrictions on abortions, and child maltreatment rates. The results suggest that le- galization lowered total reported rates of child maltreatment. The effect of Medicaid funding restrictions, parental involvement laws, and mandatory waiting periods is unclear in our results.

R&D Cooperation and Spillovers: Some Empirical Evidence from Belgium by Bruno Cassiman and Reinhilde Veugelers. Published in volume 92, issue 4, pages 1169-1184 of American Economic Review, September 2002

The nature of monetary policy during the 1970s is evaluated through the lens of a forward-looking Taylor rule based on perceptions regarding the outlook for inflation and unemployment at the time policy decisions were made. The evidence suggests that policy during the 1970s was essentially indistinguishable from a systematic, activist, forward-looking approach such as is often identified with good policy advice in theoretical and econometric policy evaluation research. This points to the unpleasant possibility that the policy errors of the 1970s occurred despite the use of a seemingly desirable policy approach. Though the resulting activist policies could have appeared highly promising, they proved, in retrospect, counterproductive.

Can historical wealth distributions affect long-run output and inequality despite “rational” saving, convex technology and no externalities? We consider a model of equilibrium short-period financial contracts, where poor agents face credit constraints owing to moral hazard and limited liability. If agents have no bargaining power, poor agents have no incentive to save: poverty traps emerge and agents are polarized into two classes, with no interclass mobility. If instead agents have all the bargaining power, strong saving incentives are generated: the wealth of poor and rich agents alike drift upward indefinitely and “history” does not matter eventually.

The last few years have seen a significant re-evaluation of the models used to analyze crises in emerging markets. Recent models typically stress financial constraints or distorted financial incentives. While this certainly represents progress, these models share a weakness with the earlier work: neither is uniquely about emerging markets. Adaptations of the Mundell-Fleming model represent Argentina as a Belgium with larger external shocks. Likewise, emerging market models of financial constraints are adaptations of developed economy ones with tighter financial constraints. In our work, we have advocated a model which distinguishes between the financial constraints affecting borrowing and lending among agents within an emerging economy, and those affecting borrowing from foreign lenders. This 'dual liquidity' model offers a parsimonious description of the behavior of firms, governments, and asset prices during financial crises. It also provides prescriptions for optimal policy responses to these crises.

Economic models of incentives in employment relationships are based on a specific theory of motivation: employees are “rational cheaters,” who anticipate the consequences of their actions and shirk when the marginal benefits exceed costs. We investigate the “rational cheater model” by observing how experimentally induced variation in monitoring of telephone call center employees influences opportunism. A significant fraction of employees behave as the “rational cheater model” predicts. A substantial proportion of employees, however, do not respond to manipulations in the monitoring rate. This heterogeneity is related to variation in employee assessments of their general treatment by the employer.

In an earlier paper (Holmstrom and Tirole, 1998) we offered a simple model of aggregate liquidity shortages. Because firms cannot pledge their full income stream to investors, the collateral base of the economy may be too small to support an optimal long-term production plan. Firms want liquidity as insurance against future credit rationing, but in the case of aggregate liquidity shocks, the financial assets of the productive sector do not allow consumers (or their representatives) to offer the desired liquidity. There is too little collateral to back up promises of future financing. We argued that the government could play a useful role as an intermediary between consumers and firms to the extent that it can make commitments on behalf of (future) consumers. Publicly supplied liquidity, however, is costly due to tax distortions. Foreign investors may be in a better position to provide liquidity services, particularly when country shocks are idiosyncratic. The purpose of this paper is to explore how the introduction of a foreign supply of liquidity affects our earlier analysis of liquidity management. How should a country optimally make use of its limited access to foreign and domestic insurance opportunities?

During the 1980's, theories were developed to explain the striking correlation between real exchange rates and foreign direct investment (FDI). However, this relationship broke down for Japanese FDI in the 1990's, as the real exchange rate appreciated while FDI plummeted. We propose the relative access to credit hypothesis and show that unequal access to credit by Japanese firms contributes to the explanation of declining Japanese FDI. Using bank-level and firm-level data sets, we find that financial difficulties at banks were economically and statistically important in reducing the number of FDI projects by Japanese firms into the United States.