Knowledge that Transforms

We study decentralized mechanisms for allocating firms into search pools. The pools are created in response to noisy preference signals provided by consumers, who then browse the pools via costly random sequential search. Surplus-maximizing search pools are implementable in symmetric Nash equilibrium. Full extraction of the maximal surplus is implementable if and only if the distribution of consumer types satisfies a set of simple inequalities, which involve the relative fractions of consumers who like different products and the Bhattacharyya coefficient of similarity between their conditional signal distributions. The optimal mechanism can be simulated by a keyword auction with broad matching. (JEL C78, D44, D82)

This comment assesses the claim of The Rise and Fall of American Growth that for coming decades, growth in US TFP will continue the disappointing pace of the last decade. While predicting future technological advance is difficult, there are indications that Gordon may actually be too optimistic on future TFP growth. The share of output from manufacturing, which still generates the majority of R&D expenditures, and has historically more rapid TFP growth, will continue to fall. There are substantial obstacles to rapid TFP advance in much of the rest of the economy: construction, transport, health care and other services.

Angus Deaton delivered his Prize Lecture on Tuesday 8 December 2015, at the Aula Magna, Stockholm University. These are the lecture slides.

US government bonds are considered to be the world's safe store of value, especially during periods of economic turmoil such as the events of 2008. But what makes US government bonds “safe assets”? We highlight coordination among investors, and build a model in which two countries with heterogeneous sizes issue bonds that may be chosen as safe asset. Our model illustrates the benefit of a large absolute debt size as safe asset investors have “nowhere else to go” in equilibrium, and the large country's bonds are chosen as the safe asset. Moreover, the effect becomes stronger in crisis periods.

When an agent chooses between prospects, noise in information processing generates an effect akin to the winner's curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception pattern exhibits a key feature of prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events). This bias arises to correct for the winner's curse effect. (JEL D11, D81, D82, D83)

Administrative income tax data indicate that U.S. top income and wealth shares are both substantial and larger than shares observed in household surveys. However, these estimates are sensitive to the unit of analysis, the income concept measured in tax records, and, in the case of wealth, to assumptions about the correlation between income and wealth. We constrain a household survey--the Survey of Consumer Finances--to be conceptually comparable to tax records and are able to reconcile the much of the difference between the survey and administrative estimates. Wealth estimates from administrative income tax data are sensitive to model parameters.

Women are underrepresented in science and engineering, with the underrepresentation increasing in career stage. We analyze gender differences at critical junctures in the STEM pathway--graduate training and the early career--using UMETRICS administrative data matched to the 2010 Census and W-2s. We find strong gender separation in teams, although the effects of this are ambiguous. While no clear disadvantages exist in training environments, women earn 10% less than men once we include a wide range of controls, most notably field of study. This gap disappears once we control for women's marital status and presence of children.

A common view is that bailouts of firms by governments are needed to cure inefficiencies in private markets. We propose an alternative view: even when private markets are efficient, costly bankruptcies will occur and benevolent governments without commitment will bail out firms to avoid bankruptcy costs. Bailouts then introduce inefficiencies where none had existed. Although granting the government orderly resolution powers which allow it to rewrite private contracts improves on bailout outcomes, regulating leverage and taxing size is needed to achieve the relevant constrained efficient outcome, the sustainably efficient outcome. This outcome respects governments' incentives to intervene when they lack commitment. (JEL D86, E32, G33, H81, L51)

We develop a dynamic multicountry general equilibrium model to investigate forces acting on the global economy during the Great Recession and ensuing recovery. Our multisector framework accounts completely for countries' trade, investment, production, and GDPs in terms of different sets of shocks. Applying the model to 21 countries, we investigate the 29 percent drop in world trade in manufactures during the period 2008–2009. A shift in final spending away from tradable sectors, largely caused by declines in durables investment efficiency, accounts for most of the collapse in trade relative to GDP. Shocks to trade frictions, productivity, and demand play minor roles. (JEL E3, F1, F4)

The old age provisions of the Medicaid program were designed to insure retirees against medical expenses. We estimate a structural model of savings and medical spending and use it to compute the distribution of lifetime Medicaid transfers and Medicaid valuations across currently single retirees. Compensating variation calculations indicate that current retirees value Medicaid insurance at more than its actuarial cost, but that most would value an expansion of the current Medicaid program at less than its cost. These findings suggest that for current single retirees, the Medicaid program may be of the approximately right size.