Knowledge that Transforms

Testing the Mechanisms of Structural Models: The Case of the Mickey Mantle Effect by Hanming Fang, Michael Keane, Ahmed Khwaja, Martin Salm and Dan Silverman. Published in volume 97, issue 2, pages 53-59 of American Economic Review, May 2007

A set of studies conducted over the last 15 years has produced a near consensus that the Social Security Disability Insurance system (SSDI) has substantial disincentive effects on the labor supply of near elderly males, diminishing labor force participation, increasing the sensitivity of labor force exit decisions to adverse economic shocks, and encouraging those nearing retirement to claim disability benefits and subsequently transfer into the Social Security retirement program. Yet, efforts by the Social Security Administration (SSA) to encourage labor supply among the disabled by removing the work disincentives built into SSDI have been almost entirely unsuccessful. Most notably, in 1999, Congress authorized the Ticket to Work program, which provides an array of inducements for current SSDI beneficiaries to take up employment, including permitting a trial work period of up to nine months, providing 7.75 years of ongoing Medicare eligibility following return to work, and providing three years of automatic benefit reinstatement when claimants’ workplace earnings fall below a threshold level. Each of these steps reduces the implicit tax placed on labor supply by the SSDI program. Despite these lures, fewer than 1,400 (0.01 percent) of the 12.2 million tickets issued to date have led to successful workforce integration (Autor and Duggan 2006).

The inclusion of a durable goods sector in sticky-price models has strong and unexpected implications. Even if most prices are flexible, a small durable goods sector with sticky prices may be sufficient to make aggregate output react to monetary policy as though most prices were sticky. In contrast, flexibly priced durables with sufficiently long service lives can undo the implications of standard sticky price models. In a limiting case, flexibly priced durables cause monetary policy to have no effect on aggregate output. Our analysis suggests that durable goods prices are the most relevant data for calibrating price rigidity.

Evaluating the Worker Profiling and Reemployment Services System Using a Regression Discontinuity Approach by Dan A. Black, Jose Galdo and Jeffrey A. Smith. Published in volume 97, issue 2, pages 104-107 of American Economic Review, May 2007

This paper investigates the normative criteria that guide the allocation of a policy task to an elected politician versus an independent bureaucrat. The bureaucrat is preferable for technical tasks for which ability is more important than effort, or if there is great uncertainty about whether the policymaker has the required abilities. The optimal allocation of redistributive tasks is ambiguous, and depends on how the bureaucrat can be instructed. But irrespective of the normative conclusion, the politician prefers not to delegate redistributive policies.

Women Helping Women, Men Helping Women? Same-Gender Mentoring, Initial Job Placements, and Early Career Publishing Success for Economics PhDs by Christiana Hilmer and Michael Hilmer. Published in volume 97, issue 2, pages 422-426 of American Economic Review, May 2007

School choice policies promise to align the incentives of school administrators with the demands of parents, and may therefore lead to more efficient educational production (Milton Friedman 1962; Geoffrey Brennan and James Buchanan 1980; John Chubb and Terry M. Moe 1990). Absent a large-scale school voucher program in the United States, however, this prediction has been difficult to test. Several authors (e.g., Melvin V. Borland and Roy M. Howsen 1992; Clive R. Belfield and Henry M. Levin 2002) have suggested studying the effects of choice, the use of the residential location decision to select among local monopoly education providers. The idea here is that fragmented governance induces competition among school districts analogous to that which would occur among schools with nonresidential choice. In an influential paper, Caroline M. Hoxby (2000) points out that current governance structures are potentially endogenous to school productivity, and proposes that variation in topography, which may have influenced optimal jurisdiction size before modern transportation technologies, provides a source of exogenous variation. She estimates instrumental variables regressions of individual test scores and school spending on a metropolitan-level Tiebout choice index, defined as one minus a Herfindahl concentration index with districts' enrollments as their market shares, using as excluded instruments the number of larger and smaller streams in the area. She reports substantial positive effects of district fragmentation on student test scores and negative effects on spending. This Comment presents a reanalysis of Hoxby's test score results, which form the core of her empirical analysis. These results turn out to be quite sensitive to plausible alterations to Hoxby's specification. In particular, the large, significant effect of choice on achievement obtains

This paper demonstrates theoretically and experimentally that in first-price auctions overbidding with respect to the risk neutral Nash equilibrium might be driven from anticipated loser regret (felt when bidders lose at an affordable price). Different information structures are created to elicit regret: bidders know they will learn the winning bid if they lose (loser regret condition); or the second-highest bid if they win (winner regret condition); or they will receive no feedback regarding the other bids. Bidders in loser regret condition anticipated regret and significantly overbid. However, bidders in the winner regret condition did not anticipate regret.

Empirical studies linking liquidity provision to asset prices follow naturally from inventory models. Liquidity suppliers and market markers profit from providing immediacy to less patient investors, but have limited inventory-carrying and risk-bearing capacity. Similarly, limits to arbitrage arguments rely on certain market participants accommodating buying or selling pressure. These liquidity suppliers/arbitrageurs are willing to accommodate trades—and, therefore, hold suboptimal portfolios—only if they are able to buy (sell) at a discount (premium) relative to future prices. Thus, large liquidity-supplier inventories should coincide with large buying or selling pressure, which causes price movements that subsequently reverse themselves. By identifying and studying the inventories of traders who are central to the trading process and whose primary roll is to provide liquidity—New York Stock Exchange (NYSE) market