Knowledge that Transforms

Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet by Austan Goolsbee and Peter J. Klenow. Published in volume 96, issue 2, pages 108-113 of American Economic Review, May 2006

Some recent empirical studies, motivated by Grossman and Helpman's (1994) “protection-for-sale” model, suggest that very few factors (none of them labor related) determine trade protection. This paper reexamines the roles that labor issues play in the determination of trade policy. We introduce collective bargaining, differences in inter industry labor mobility, and trade union lobbying into the protection-for-sale model, and show that the equilibrium protection rate in our model depends upon these labor market variables. We test our model predictions using data from U.S. manufacturing and find that labor market considerations do seem to matter for U.S. trade policy.

I am delighted to be able to present this lecture before so many people. I’m also very happy when I get to work with models inhabited by many people. That is the key to the framework for which Ed Prescott and I were cited by the Nobel Committee: Individuals are introduced explicitly in the models. Their decision problems are fully dynamic—they are forward looking. That is one of the prerequisites for what we ultimately seek, which is a framework we can use to evaluate economic policy. The eminent researcher and 1995 Nobel laureate in economics, Bob Lucas, from whom I have learned a great deal, wrote: “One of the functions of theoretical economics is to provide fully articulated, artificial economic systems that can serve as laboratories in which policies that would be prohibitively expensive to experiment with in actual economies can be tested out at much lower cost ... (Lucas, 1980, p. 696). Our task, as I see it ... is to write a FORTRAN program that will accept specific economic policy rules as ‘input’ and will generate as ‘output’ statistics describing the operating characteristics of time series we care about, which are predicted to result from these policies” (pp. 709–10). The desired environments to which Lucas refers would make use of information on “individual responses [that] can be documented relatively cheaply ... by means of ... censuses, panels [and] other surveys ...” (p. 710). Lucas seems to suggest that economic researchers place people in desired model environments and record how they behave under alternative policy rules. In practice, that is easier said than done. The key tool macroeconomists use is the computational experiment. With its help, the researcher performs exactly what I just described—places the model’s people in the desired environment and records their behavior. But the purpose of the computational experiment is broader than only to evaluate policy rules. The computational experiment is useful for answering a host of quantitative questions, that is, those for which we seek numerical answers. When evaluating government policy, the policy is stated in the form of a rule that specifies how the government will behave—what action to take under various contingencies—today and in the indefinite future. That is one reason it would be so difficult and prohibitively expensive to perform the alternative Lucas mentions, namely, to test the policies in actual economies.

We exploit administrative data on young German workers and their employers to study the long-term effects of an early job loss. To account for non-random sorting of workers into firms with different turnover rates and for selective job mobility, we use changes over time in firm- and age-specific labor demand as an instrument for displacement. We find that wage losses of young job losers are initially 15% but fade to zero within five years. Only workers leaving very large establishments suffer persistent losses. A comparison of estimators implies that initial sorting, negative selection, and voluntary job mobility may have biased previous U.S. studies finding permanent effects of early displacements.

The last two centuries have been characterized by dramatic changes in the distribution of income and population across the globe. While Western European economies have tripled their domination in terms of income per capita over Asian economies, significant resources in Asian countries have been channeled into to doubling their lead over Western Europe in the population dimension. This research argues that the rapid expansion of international trade in the second phase of the industrial revolution has played a major role in the timing of demographic transitions across countries and has thereby been a significant determinant of the distribution of world population and a prime cause of the ‘Great Divergence ’ in income levels across countries in the last two centuries. The analysis suggests that international trade had an asymmetrical effect on the evolution of industrial and non-industrial economies. While in the industrial nations the gains from trade were directed primarily towards investment in education and growth in output per capita, a significant portion of the gains from trade in non-industrial nations was channeled towards population growth. In the second phase of the Industrial Revolution, international trade enhanced the spe-cialization of industrial economies in the production of industrial, skilled intensive, goods. The associated rise in the demand for skilled labor induced an investment in the quality of the population, expediting a demographic transition, stimulating technological progress and fur-ther enhancing the comparative advantage of these industrial economies in the production of skilled intensive goods. In non-industrial economies, in contrast, international trade generated an incentive to specialize in the production of unskilled intensive, non-industrial, goods. The

We provide a first formal analysis of the international rules that govern the use of subsidies to domestic production. Our analysis highlights the impact of the new subsidy disciplines that were added to GATT rules with the creation of the WTO. While GATT subsidy rules were typically viewed as weak and inadequate, our results suggest that the key changes introduced by the WTO subsidy rules may ultimately do more harm than good to the multilateral trading system by undermining the ability of tariff negotiations to serve as the mechanism for expanding market access to more efficient levels.

This paper examines preferences toward particular classes of lottery pairs. We show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries. If preferences are defined in an expectedutility framework with differentiable utility, the direction of preference for a particular class of lottery pairs is equivalent to signing the n th derivative of the utility function. What makes our characterization appealing is its simplicity, which seems particularly amenable to experimentation.

Mixing across racial and ethnic lines could spur understanding or inflame tensions between groups. We find that white students at a large state university randomly assigned African American roommates in their first year were more likely to endorse affirmative action and view a diverse student body as essential for a high-quality education. They were also more likely to say they have more personal contact with, and interact more comfortably with, members of minority groups. Although sample sizes are too small to provide definitive evidence, these results suggest students become more empathetic with the social groups to which their roommates belong.

We analyze a model of participation in elections in which voting is costly and no vote is pivotal. Ethical agents are motivated to participate when they determine that agents of their type are obligated to do so. Unlike previous duty-based models of participation, in our model an ethical agent's obligation to vote is determined endogenously as a function of the behavior of other agents. Our model predicts high turnout and comparative statics that are consistent with strategic behavior.

Matriculation in U.S. Economics Ph.D. Programs: How Many Accepted Americans Do Not Enroll? by T. Aldrich Finegan, Wendy A. Stock and John J. Siegfried. Published in volume 96, issue 2, pages 453-457 of American Economic Review, May 2006