Knowledge that Transforms

The theory of two-sided matching markets has interested researchers for its theoretical appeal and relevance to real-life applications. The matching of medical residents and hospitals in the United States has been studied extensively by Alvin E. Roth (1984) and others. The National Resident Matching Program (NRMP), the matching authority in the US hospital-resident matching market, runs a centralized matching mechanism that is a variant of the deferred acceptance algorithm of David Gale and Lloyd S. Shapley (1962), redesigned by Roth and Elliott Peranson (1999). A recent antitrust case against the NRMP charged that the centralized matching mechanism suppressed wages of residents. Although the lawsuit itself was dismissed, it sparked discussion about the effect of centralized matching on wages and efficiency. Jeremy Bulow and Jonathan Levin (2006, BL henceforth) investigate a matching market with price competition where each firm can hire only one worker and show that (a) the average wage is lower, (b) profit of each firm is higher, (c) wages are more compressed, and (d) the resulting matching is slightly less efficient in the presence of the matching mechanism than in any competitive equilibrium. Although BL declare “we have chosen our assumptions for analytical simplicity and transparency, not as the most realistic possible model of the residency match” (654), these results were often interpreted as an argument against the NRMP and led to discussion about potential changes of the matching mechanism. Vincent P. Crawford (forthcoming), for instance, proposes the “Flexible-Salary Match,” in which hospitals are allowed to indicate several levels of possible wages, and medical students are allowed to express preferences over pairs of hospitals and wages. We show that conclusions (a) and (b) above do not necessarily hold when firms may hire more than one worker and the number of workers in different firms are different. More specifically, we present an example with multiple positions in which the average worker wage is higher in the equilibrium with the matching mechanism than in a competitive equilibrium; and profit of each firm is lower in the equilibrium with the matching mechanism than in a competitive equilibrium. Our findings may explain why some of the results of BL disagree with empirical findings of Muriel Niederle and Roth (2003, 2004), who find little or no effect of the centralized matching on wages in some medical matching markets in the United States. Note that different firms hire different numbers of workers in many labor markets like the NRMP. There are other reasons why the conclusions and policy implications of BL may not be applicable to markets like the NRMP. For example, a competitive equilibrium may not be a

What Does Performance in Graduate School Predict? Graduate Economics Education and Student Outcomes by Susan Athey, Lawrence F. Katz, Alan B. Krueger, Steven Levitt and James Poterba. Published in volume 97, issue 2, pages 512-520 of American Economic Review, May 2007

With the use of French and US data, new and systematic evidence is provided about the rapid location changes of industries across cities (the fast). Cities are also slowly moving up and down the urban hierarchy (the slow), while the size distribution of cities is skewed to the right and very stable (the still). The model proposed here reproduces these three features. Small, innovation-driven shocks lead to the churning of industries across cities. Then, cities slowly grow or decline following net gains or losses of industries. These changes occur within a stable distribution. The quantitative implications of the model are also explored.

This paper develops an infinite horizon model of public spending and taxation in which policy decisions are determined by legislative bargaining. The policy space incorporates both productive and distributive public spending and distortionary taxation. The productive spending is investing in a public good that benefits all citizens (e.g., national defense) and the distributive spending is district-specific transfers (e.g., pork-barrel spending). Investment in the public good creates a dynamic linkage across policymaking periods. The analysis explores the dynamics of legislative policy choices, focusing on the efficiency of the steady-state level of taxation and allocation of spending.

Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies appreciate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk.

We examine how countries' incentives to go to war depend on the “political bias” of their pivotal decision makers. This bias is measured by a decision maker's risk/reward ratio from a war compared to that of the country at large. If there is no political bias, then there are mutually acceptable transfers from one country to the other that will avoid a war in the presence of commitment or enforceability of peace treaties. There are cases with a strong enough bias on the part of one or both countries where war cannot be prevented by any transfer payments. Our results shed some new light on the uneven contender paradox and the interpretation of the “democratic peace.” We examine countries' choices of the bias of their leaders and show that when transfers are possible, at least one country will choose a biased leader, as that leads to a strong bargaining position and extraction of transfers.

Models are the venue for much of the work of the economics profession. We use them to express, compare and evaluate alternative ways of addressing important questions. Applied econometricians are called upon to engage in these exercises using data and, often, formal methods whose properties are understood in decision-making contexts. This is true of work in other sciences as well. There is an enormous literature on alternative formal approaches to these tasks, and in particular on the relative advantages of Bayesian and frequentist methods. By “Bayesian ” I mean statistical inference that reaches a conclusion by means of a conditional distribution of unknown quantities given known quantities and model specifications. This conditional distribution follows from applying Bayes’s theorem to the joint distribution of known and unknown quantities in the model specifications. Known quantities, including data, are treated as observed values of random variables. Unknown quantities, including functions of parameters and as yet unobserved data, are treated as unobserved random variables. Formal methods of model expression, comparison and evaluation that do not have these attributes are non-Bayesian. By “frequentist ” I mean a particular

The Effect of Child Gender on Parents' Labor Supply: An Examination of Natives, Immigrants, and their Children by Sabrina Wulff Pabilonia and Jennifer Ward-Batts. Published in volume 97, issue 2, pages 402-406 of American Economic Review, May 2007

A core question in the contemporary debate on distributive justice is how to understand fairness in situations involving production. Important theories of distributive justice, such as strict egalitarianism, liberal egalitarianism, and libertarianism, provide different answers to this question. This paper presents the results from a dictator game where the distribution phase is preceded by a production phase. Each player's contribution is a result of a freely chosen investment level and an exogenously given rate of return. We estimate simultaneously the prevalence of three principles of distributive justice among the players and the distribution of the weight they attach to fairness.