Knowledge that Transforms

In a recent provocative paper in this journal, Mark J. Kamstra et al. (2000) test and reject the hypothesis that the mean weekend return following changes in daylight saving time equals the mean weekend return throughout the rest of the year. The authors report that the average Friday-to-Monday return on daylight-saving weekends is 200–500 percent larger than the average negative return for the other weekends of the year. The Ž nding appears to hold not only in the United States and Canada where daylightsaving date patterns are similar, but also in the United Kingdom, whose patterns ostensibly differ from those in North America. The results also appear robust to alternative statistical methods based on time-varying conditional heteroscedasticity and/or bootstrapping. This paper provides further robustness tests of the results reported by Kamstra et al. I show that the difference between mean weekend returns for daylight-saving and non-daylightsaving weekends is signiŽ cant only for fall changes in daylight saving time and that the fall difference is driven by two outliers associated with international stock market crises. Two separate adjustments for the heteroscedasticity these outliers induce cause the signiŽ cance of the fall difference to vanish. The total sample (spring plus fall) difference remains marginally signiŽ cant for some indexes after heteroscedasticity adjustments with classical Ž xed-level hypothesis tests. However, Bayesian sample-size adjustments produce posterior odds ratios that consistently favor the null hypothesis of no daylight-saving anomaly over the alternative that the anomaly exists. I also fail to reject the hypothesis that daylight-saving and nondaylight-saving weekend returns have equal distributions. For these reasons, I question the robustness of the Ž ndings reported by Kamstra et al. (2000). Section I presents more details of my tests, and Section II summarizes my Ž ndings and discusses their interpretation.

Using Electoral Cycles in Police Hiring to Estimate the Effects of Police on Crime: Reply by Steven D. Levitt. Published in volume 92, issue 4, pages 1244-1250 of American Economic Review, September 2002

This paper seeks to understand the behavior of Greenspan's Federal Reserve in the late 1990s. Some authors suggest that the Fed followed a simple "Taylor rule," while others argue that it deviated from such a rule because it recognized that the "New Economy" permitted an easing of policy. We find that a Taylor rule based on inflation and unemployment does break down in the late 1990s. However, the Fed's behavior appears stable once one accounts for the falling NAIRU of the period. A rule based on inflation and the deviation of unemployment from the NAIRU captures the Fed's behavior through the entire period from 1987 to 2000.

This paper examines the role of bequests and inter vivos gifts in the U.S. economy, considering their importance in determining (i) the economy’s aggregate capital stock, (ii) the distribution of private net worth, and (iii) public policy outcomes and options. It focuses on several recent calibrated simulations.(This abstract was borrowed from another version of this item.)

James Buchanan avers that “mutuality of advantage from voluntary exchange is…the most fundamental of all understandings in economics ” (2001, p. 29). He further contends that this fundamental understanding is better realized by examining economics through the lens of contract rather than the lens of choice (1975). Because the latter has been the reigning paradigm in economics during the 20th century (Robbins, 1932; Reder, 1999), the lens of contract is (understandably) less fully developed. Interest in contractual approaches has nevertheless been building up, whence the gap between these two has been closing. This paper sketches some of these developments, with emphasis on private ordering. I begin with a brief discussion of the lenses of choice and contract. I then argue that the contractual approach is responsive to a growing sense of unease with orthodoxy. The rudiments of the private ordering approach to comparative economic organization, with emphasis on ex post governance, are then set out. Fully formal theories of contract are briefly discussed. Concluding remarks follow.

Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say? by Kevin J. Stiroh. Published in volume 92, issue 5, pages 1559-1576 of American Economic Review, December 2002

The Risk Premium for Equity: Implications for the Proposed Diversification of the Social Security Fund by Simon Grant and John Quiggin. Published in volume 92, issue 4, pages 1104-1115 of American Economic Review, September 2002

Critics of foreign aid programs argue that these funds often support corrupt governments and inefficient bureaucracies. Supporters argue that foreign aid can be used to reward good governments. This paper documents that there is no evidence that less corrupt governments receive more foreign aid. On the contrary, according to some measures of corruption, more corrupt governments receive more aid. Also, we could not find any evidence that an increase in foreign aid reduces corruption.

This paper shows how competition generates reputation-building behavior in repeated interactions when the product quality observed by consumers is a noisy signal of firms' effort level. There are two types of firms and “good” firms try to distinguish themselves from “bad” firms. Although consumers get convinced that firms which are repeatedly successful in providing high quality are good firms, competition endogenously generates the outside option inducing disappointed consumers to leave firms. This threat of exit induces good firms to choose high effort, allowing good reputations to be valuable, but its uncompromising execution forces good firms out of the market.

On the Demographic Composition of Colleges and Universities in Market Equilibrium by Dennis Epple, Richard Romano and Holger Sieg. Published in volume 92, issue 2, pages 310-314 of American Economic Review, May 2002