Knowledge that Transforms

US airlines have lost nearly $60 billion ($2009) in domestic markets since the 1978 deregulation, most of it in the last decade. The dismal financial record challenges the economics of deregulation. I examine some of the common explanations among industry participants and researchers—including high taxes and fuel costs, weak demand, and competition from lower-cost airlines. Major drivers seem to be the demand downturn after 9/11—demand remains much weaker today than in 2000—and the large cost differential between legacy and low-cost carriers, which has persisted even as the price differential between them has greatly declined.

Using data from the 2003 New Immigrant Survey, this paper examines whether stratification as reflected by skin shade exists among newly legalized Mexican immigrants in the US. While we do not find evidence that skin color directly related to employment probabilities, complexion appeared to play a role in the likelihood of owning a home, having a bank account, and occupational status. As these outcomes partly reflect immigrants' pre-migration experiences, our findings suggest that the social stratification structure in Mexico might be sustained in the US among Mexican-origin populations.

In this paper we propose a systematic way of examining the importance of the extensive and the intensive margins of labor supply in order to explain the overall movements in total hours of work over time. We show how informative bounds can be developed on each of these margins. We apply this analysis to the evolution of hours of work in the US, the UK, and France and show that both the extensive and intensive margins matter in explaining changes in total hours.

Recent research shows that health at birth is affected by many factors, including maternal education, behaviors, and participation in social programs. In turn, endowments at birth are predictive of adult outcomes, and of the outcomes of future generations. Exposure to environmental pollution is one potential determinant of health at birth that has received increasing attention. A large literature outside of economics advocates for Environmental Justice, and argues that poor and minority families are disproportionately exposed to environmental hazards. I provide new evidence on this question, showing that children born to less educated and minority mothers are more likely to be exposed to pollution in utero and that white, college educated mothers are particularly responsive to changes in environmental amenities. I estimate that differences in exposure to toxic releases may explain 6% of the gap in incidence of low birth weight between infants of white college educated mothers and infants of black high school dropout mothers.

We show that political institutions affect corruption levels. We use audit reports in Brazil to construct new measures of political corruption in local governments and test whether electoral accountability affects the corruption practices of incumbent politicians. We find significantly less corruption in municipalities where mayors can get reelected. Mayors with reelection incentives misappropriate 27 percent fewer resources than mayors without reelection incentives. These effects are more pronounced among municipalities with less access to information and where the likelihood of judicial punishment is lower. Overall our findings suggest that electoral rules that enhance political accountability play a crucial role in constraining politician's corrupt behavior.

The macroeconomic implications of downward nominal wage rigidities are analyzed via a dynamic stochastic general equilibrium model featuring aggregate and idiosyncratic shocks. A closed-form solution for a long-run Phillips curve relates average output gap to average wage inflation: it is virtually vertical at high inflation and flattens at low inflation. Macroeconomic volatility shifts the curve outwards and reduces output. The results imply that stabilization policies play an important role, and that optimal inflation may be positive and differ across countries with different macroeconomic volatility. Results are robust to relaxing the wage constraint, for example, when large idiosyncratic shocks arise.

This paper uses data on all house transactions in Massachusetts over the last 20 years to show that houses sold after foreclosure, or close in time to the death or bankruptcy of a seller, are sold at lower prices than other houses. Foreclosure discounts are on average at 27 percent of the value of a house. Moreover, foreclosures that take place within small local geographies of a house lower the price at which it is sold. Our preferred estimate is that a foreclosure at a distance of 0.05 miles lowers the price of a house by about 1 percent. JEL: D14, R31

Reinhard Selten and Thorsten Chmura (2008) recently reported laboratory results for completely mixed 2 X 2 games used to compare Nash equilibrium with four other stationary concepts: quantal response equilibrium, action-sampling equilibrium, payoff-sampling equilibrium, and impulse balance equilibrium. We reanalyze their data, correct some errors, and find that Nash clearly fits worst while the four other concepts perform about equally well. We also report new analysis of other previous experiments that illustrate the importance of the loss aversion hardwired into impulse balance equilibrium: when the other non-Nash concepts are augmented with loss aversion, they outperform impulse balance equilibrium.

Abba Lerner's paper in the Review of Economic Studies (1934) is the source of what is now referred to as the Lerner Index of monopoly power. The Lerner Index has become the standard measure of monopoly power and one of the most widely cited indexes in the discipline of economics. This paper traces the origins of the index, sets out its strengths and weaknesses, and examines its role in antitrust enforcement. The Index is a better indicator of a firm's price-setting discretion than its ability to sustain monopoly prices.

I present a model of optimal learning for creativity generation in a field. The field is defined as a knowledge structure. A creative contribution is based on combining two previously unconnected elements, generating a new element. Individuals may possess private information/intuition about new combinations. Individuals contribute the maximum creative contribution they are able to produce based on the set of elements they have learned. In equilibrium individuals learn different elements, with some degree of overlap, effectively pursuing distinct creative interests. The model illustrates a general approach for analyzing the creative development of fields and, in a broader sense, cultural innovation.