Knowledge that Transforms

We study the information sensitivity of government debt denominated in domestic versus foreign currency: the former is subject to inflation risk and the latter to default. Default only affects sophisticated bond traders, whereas inflation concerns a larger and less informed group. Within a two- period Bayesian trading game, differential information manifests itself in the secondary market, and we display conditions under which debt prices are more resilient to bad news even in the primary market, where only sophisticated players operate. Our results can explain debt prices across countries following the 2008 financial crisis, and also provide a theory of “original sin.”

Jones (2014 ) examines development accounting with imperfect substitutability between different types of skills in the production of output. He finds that human capital variation can account for the totality of the variation in income across countries. We show that this finding is entirely due to an assumption that the relative wage of skilled workers is solely determined by attributes of workers (once the supply of skilled workers is accounted for). If skill premia are predominantly determined by technology, institutions, and other features of the economic environment, human capital differences explain none of the variation in income per worker.

We conduct laboratory experiments that explore how gender stereotypes shape beliefs about ability of oneself and others in different categories of knowledge. The data reveal two patterns. First, men’s and women’s beliefs about both oneself and others exceed observed ability on average, particularly in difficult tasks. Second, overestimation of ability by both men and women varies across categories. To understand these patterns, we develop a model that separates gender stereotypes from misestimation of ability related to the difficulty of the task. We find that stereotypes contribute to gender gaps in self-confidence, assessments of others, and behavior in a cooperative game.

In many cases, buyers are not informed about their valuations and rely on experts, who are informed but biased for overbidding. We study auction design when selling to such “advised buyers.” We show that a canonical dynamic auction, the English auction, has a natural equilibrium that outperforms standard static auctions in expected revenues and allocative efficiency. The ability to communicate as the auction proceeds allows for more informative communication and gives advisors the ability to persuade buyers into overbidding. The same outcome is the unique equilibrium of the English auction when bidders can commit to contracts with their advisors.

This paper studies alcohol consumption among low-income workers in India. In a 3-week field experiment, the majority of 229 cycle-rickshaw drivers were willing to forgo substantial monetary payments in order to set incentives for themselves to remain sober, thus exhibiting demand for commitment to sobriety. Randomly receiving sobriety incentives significantly reduced daytime drinking while leaving overall drinking unchanged. I find no evidence of higher daytime sobriety significantly changing labor supply, productivity, or earnings. In contrast, increasing sobriety raised savings by 50 percent, an effect that does not appear to be solely explained by changes in income net of alcohol expenditures.

This paper develops a new approach to test for downward wage rigidity by examining transitory shocks to labor demand (i.e., rainfall) across 600 Indian districts. Nominal wages rise during positive shocks but do not fall during droughts. In addition, transitory positive shocks generate ratcheting: after they have dissipated, wages do not adjust back down. Ratcheting reduces employment by 9 percent, indicating that rigidities distort employment levels. Inflation, which is unaffected by local rainfall, enables downward real wage adjustments—offering causal evidence for its labor market effects. Surveys suggest that individuals believe nominal wage cuts are unfair and lead to effort reductions.

We analyze how separations responded to arbitrary differences in own and peer wages at a large US retailer. Regression-discontinuity estimates imply large causal effects of own-wages on separations, and on quits in particular. However, this own-wage response could reflect comparisons either to market wages or to peer wages. Estimates using peer-wage discontinuities show large peer-wage effects and imply the own-wage separation response mostly reflects peer comparisons. The peer effect is driven by comparisons with higher-paid peers—suggesting concerns about fairness. Separations appear fairly insensitive when raises are similar across peers—suggesting search frictions and monopsony are relevant in this low-wage sector.

This paper studies how the durability of assets affects financing. We show that more durable assets require larger down payments making them harder to finance, because durability affects the price of assets and hence the overall financing need more than their collateral value. Durability affects technology adoption, the choice between new and used capital, and the rent versus buy decision. Constrained firms invest in less durable assets and buy used assets. More durable assets are more likely to be rented. Economies with weak legal enforcement invest more in less durable, otherwise dominated assets and are net importers of used assets.

We study the impact of a personalized technology-aided after-school instruction program in middle-school grades in urban India using a lottery that provided winners with free access to the program. Lottery winners scored 0.37 σ higher in math and 0.23 σ higher in Hindi over just a 4.5-month period. IV estimates suggest that attending the program for 90 days would increase math and Hindi test scores by 0.6 σ and 0.39 σ respectively. We find similar absolute test score gains for all students, but much greater relative gains for academically-weaker students. Our results suggest that well-designed, technology-aided instruction programs can sharply improve productivity in delivering education.

A principal specifies time paths of effort provision, task allocation, and knowledge transfer for a cash-constrained apprentice, who is free to walk away at any time. In the optimal contract the apprentice pays for training by working for low or no wages and by working inefficiently hard. The apprentice can work on both knowledge-complementary and knowledge-independent tasks. We study the optimal time path of effort distortions and their impact on the knowledge transfer, and analyze the effect of regulatory limits on the length of apprenticeships and on how much effort apprentices are allowed to provide.