Knowledge that Transforms

Dramatic changes in the volatility of output occurred in the U.S. auto industry in the early 1980s. Namely, output volatility declined, the covariance of inventory investment and sales grew more negative, and adjustments to production schedules, which in earlier decades stemmed primarily from plants hiring and laying off workers, were more often accomplished with changes in average hours per worker after the mid-1980s. Using a linear quadratic inventory model with intensive and extensive labor adjustments, we show how all of these changes could have stemmed from one underlying factor—a decline in the persistence of motor vehicle sales.

This paper challenges the notion that on-the-job training investments are quantitatively important for workers' welfare and argues that on-the-job training may not increase lifetime income by more than 1 percent. I argue that it is very difficult to reconcile the slowdown in wage growth late in a worker's career with optimizing behavior unless the technology for learning on the job is such that it generates very low gains from training. The analysis is based on a nonparametric methodology for estimating the learning technology from wage profiles; the results are arrived at by comparing the lifetime income when the worker optimally invests in his human capital to the one where he does not make any investments.

A decade has passed since the salvos from Mexico’s Tequila Crisis of 1994–1995 echoed around the financial world. Since then, many more crises have taken place in emerging market economies (EMs). Furthermore, crises have tended to bunch together, bringing to the forefront the systemic nature of these events. True, every new crisis has its own idiosyncratic features, but useful policy lessons must be derived from robust, empirical regularities. This is the research strategy we have pursued in the last few years. We will report on two types of regularities that strike us as highly robust across EM crises: (a) Sudden Stops (of capital inflows) and (b) Phoenix Miracles. A Sudden Stop is a sharp fall in capital inflows relative to their past trajectory. Sudden Stops are not a common feature in developed economies and display a large degree of temporal bunching, suggesting that global capital market turmoil acts as a coordinating factor external to EMs. As shown in Section I, however, balance-sheet effects—namely, the interaction of large changes in the real exchange rate during Sudden Stops and Liability Dollarization (i.e., foreign-exchange-denominated debts)—are key in influencing the likelihood of a Sudden Stop. Thus, even though the initial shock is, in principle, exogenous to the economy, whether or not it materializes into a Sudden Stop depends on domestic financial vulnerabilities. On the other hand, a Phoenix Miracle is defined as a case in which output recovers relatively quickly from a sharp collapse with virtually no recovery in credit or capital inflows, and a very weak recovery in investment— hence the reference to the mythical bird “rising from the ashes.” The existence of phoenix-like recoveries suggests that financial frictions play a key role in pushing economies to the abyss from which, in some way or another, they can crawl back to safe ground by means less than apparent to the conventional observer looking for standard “fundamentals” and, thus, may appear miraculous. Interestingly, the Great Depression of the 1930s shares some of the key features of Phoenix Miracles in EMs, but shows salient differences as well that suggest nominal labor market rigidities are not crucial in explaining output collapse in EMs. Understanding these regularities could, and we believe does, shed light on policies aimed at preventing crises and attenuating their effects.

Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiments: Comment by Gary E. Bolton and Axel Ockenfels. Published in volume 96, issue 5, pages 1906-1911 of American Economic Review, December 2006

I use data from chief executive officer (CEO) successions to examine the impact of inherited control on firms' performance. I find that firms where incoming CEOs are related to the departing CEO, to a founder, or to a large shareholder by either blood or marriage underperform in terms of operating profitability and market-to-book ratios, relative to firms that promote unrelated CEOs. Consistent with wasteful nepotism, lower performance is prominent in firms that appoint family CEOs who did not attend “selective” undergraduate institutions. Overall, the evidence indicates that nepotism hurts performance by limiting the scope of labor market competition.

When to Exit a Product: Evidence from the U. S. Motion-Picture Exhibition Market by Darlene C. Chisholm and George Norman. Published in volume 96, issue 2, pages 57-61 of American Economic Review, May 2006

In his recent paper in the American Economic Review, Jensen (1997) argues that delegation of monetary policy to an independent central bank, which acts as an agent for the government, does not mitigate the problem of time-inconsistency, but merely relocates it. ∗We acknowledge with thanks support for this work provided through ESRC research grant L138251003 “Imperfect Financial Markets, Business Cycles, and Growth”, which forms part of the programme on Understanding the Evolving Macroeconomy (UEM). We are grateful to participants at the Money, Macro and Finance (MMF), and UEM Conference 2002 for their helpful comments. We thank also the editors and referees of this journal for their advice and suggestions. An Appendix containing details of algebraic derivations in Section 4 of this paper can be found on the AER web site and on the authors’ site at www.econ.bbk.ac.uk/faculty/driffill 1 He examines a government that delegates monetary policy to an in-dependent central bank, and that faces costs if it interferes in the policy decisions of the bank by appointing a new central banker to obtain a preferred result. He shows that delegation makes it more dif-ficult to sustain the credibility of optimal monetary policy. We show here that this result emerges because Jensen examines a restricted range of policy actions for the government. When this restriction is lifted, the result is reversed. By means of suitable announcements of contracts for the central bank, combined with appropriate actually implemented contracts, delegated policy enables zero inflation to pre-vail in economies in which it could not do so without delegated policy. These economies are ones that have relatively low discount factors.

What are the mechanisms by which societal discrimination affects individual achievement, and why do the effects of past discrimination endure once legal barriers are removed? We report the findings of two experiments in village India that suggest that the mechanisms of discrimination operate, in part, within the individuals who are members of the groups who have been discriminated against. We demonstrate that publicly revealing an individual’s membership in such a group alters his behavior in ways that make the effects of past discrimination persist over time. A growing literature in social psychology on stereotype threat finds that stereotyped-based expectations affect individual performance in the domain of the stereotype. A study by Jeff Stone et al. (1999) is illustrative. When college students were asked to perform a task described as diagnostic of “natural athletic ability,” blacks—stereotyped as better athletes, but worse students than whites—performed better than whites. When the same test was presented as diagnostic of “sports intelligence,” the performance of blacks declined, that of whites improved, and the racial gap was reversed. Evidence suggests that a mediating factor in stereotype threat is a change in self confidence (Mara Cadinu et al., 2005) In our studies, we investigated whether the public revelation of social identity (caste) affects cognitive task performance and responses to economic opportunities by young boys in village India. Subjects were sixth and seventh graders drawn from the two ends of the caste hierarchy. We asked subjects to learn and then perform a task under incentives, and we manipulated whether their peers in the experimental session knew their caste. Caste is well-suited to this manipulation because, unlike race, gender, and ethnicity, there are no unambiguous outward markers of caste among young boys. Six subjects, generally from six different villages, participated in each experimental session. In the control condition, the subjects were anonymous within the six-person group. In the experimental conditions, the experimenter publicly revealed subjects’ names and caste. In the task—solving mazes—in which performance was studied here, the low-caste subjects in the anonymous condition did not perform significantly differently from high-caste subjects; but when caste identity was publicly revealed in a mixed caste group, a significant caste gap emerged. The caste gap was due to a 20 percent decline in the average number of mazes solved by the low caste. The study shows that publicly revealing the social identity of an individual can change his behavior even when that information is irrelevant to payoffs. Our results are a generalization of the literature on stereotype threat. Like that literature, we find that individuals’ performance is more in accordance with the stereotype of the group when group membership is made salient in some way. Unlike that literature, salience in our experiments depends on the public revelation of social identity and more importantly, we do not argue that the domain of the tasks undertaken by † Discussants: Rachel Croson, University of Pennsylvania; Iris Bohnet, Harvard University; Stefano DellaVigna, University of California-Berkeley.