Knowledge that Transforms

British Master and Servant law made employee contract breach a criminal offense until 1875. We develop a contracting model generating equilibrium contract breach and prosecutions, then exploit exogenous changes in output prices to examine the effects of labor demand shocks on prosecutions. Positive shocks in the textile, iron, and coal industries increased prosecutions. Following the abolition of criminal sanctions, wages differentially rose in counties that had experienced more prosecutions, and wages responded more to labor demand shocks. Coercive contract enforcement was applied in industrial Britain; restricted mobility allowed workers to commit to risk-sharing contracts with lower, but less volatile, wages.

This paper measures the impact of vertically integrated and exclusive software on industry structure and welfare in the sixth-generation of the US video game industry (2000–2005). I specify and estimate a dynamic model of both consumer demand for hardware and software products, and software demand for hardware platforms. I use estimates to simulate market outcomes had platforms been unable to own or contract exclusively with software. Driven by increased software compatibility, hardware and software sales would have increased by 7 percent and 58 percent and consumer welfare by $1.5 billion. Gains would be realized only by the incumbent, suggesting exclusivity favored the entrant platforms.

We study how two selection systems for public officials, appointment and election, affect policy outcomes, focusing on state court judges and their criminal sentencing decisions. First, under appointment, policy congruence with voter preferences is attained through selecting judges with homogeneous preferences. In contrast, under election, judges face strong reelection incentives, while selection on preferences is weak. Second, the effectiveness of election in attaining policy congruence critically depends on payoffs from the job, which implies that the effectiveness of election may vary substantially across public offices. Third, reelection incentives may discourage judges with significant human capital from holding office.

How large are spatial barriers to transferring knowledge? We analyze the international operations of multinational firms to answer this fundamental question. In our model firms can transfer bits of knowledge to their foreign affiliates in either embodied (traded intermediates) or disembodied form (direct communication). Knowledge transfer costs interact with the knowledge intensity of production to determine the geographic structure of multinationals' input sourcing as well as its competitiveness in foreign markets. The model shows how data on observable trade costs and features of multinationals'global operations reveal the size and nature of knowledge transfer costs. Our empirical analysis confirms the model's predictions using firm-level data, quantifies the aggregate implications of the model for the structure of multinationals' operations, and demonstrates that transfer costs shape the knowledge content of intra-firm trade flows.

Calls for benefit-cost analysis in rule-making, based on the Dodd-Frank Wall Street Reform Act, have revealed a paucity of work on allocative efficiency in financial markets. We propose three principles to help fill this gap. First, we highlight the need for quantifying the statistical cost of a crisis to trade off the risk of a crisis against loss of growth during good times. Second, we propose a framework quantifying the social value of price discovery, and highlighting which arbitrages are over- and under-supplied from a social perspective. Finally, we distinguish between insurance benefits and gambling-facilitation harms of market completion.

We examine characteristics of the 400 wealthiest individuals in the United States over the past three decades as tabulated by Forbes Magazine, and analyze which theories of increasing inequality are most consistent with these data. The people of the Forbes 400 in recent years did not grow up as advantaged as in decades past. They are more likely to have started their businesses and to have grown up upper-middle class, not wealthy. Today's Forbes 400 were able to access education while young, and apply their skills to the most scalable industries: technology, finance, and mass retail. Most of the change occurred by 2001.

We consider two happiness puzzles. First, many studies show that only relative income matters for well-being. Yet the Gallup data for the United States and from the rest of the world show no such result, at least for life evaluation. There may be relative income effects in hedonic well-being though other interpretations are available. Second, more religious people typically report higher experiential well-being but more religious places have worse well-being on average, both across US states and across countries. More religious states and counties in the US also have worse murder rates, deaths from cardiovascular disease and from cancer.

This paper evaluates the effect of estate taxes on labor supply. The analysis decomposes the effect of estate taxation into the substitution effect of relative price changes and the two income effects for which the estate tax is responsible. These two income effects arise from tax burdens on those who leave estates plus tax burdens on those who receive them. Despite the double income burden of the estate tax, existing empirical evidence suggests that the net effect of estate taxation on aggregate labor supply is uncertain.

An agent advises a principal on selecting one of multiple projects or an outside option. The agent is privately informed about the projects' benefits and shares the principal's preferences except for not internalizing her value from the outside option. We show that for moderate outside option values, strategic communication is characterized by pandering: the agent biases his recommendation toward “conditionally better-looking” projects, even when both parties would be better off with some other project. A project that has lower expected value can be conditionally better-looking. We develop comparative statics and implications of pandering. Pandering is also induced by an optimal mechanism without transfers.

Do laboratory subjects correctly perceive the dynamics of a mean-reverting time series? In our experiment, subjects receive historical data and make forecasts at different horizons. The time series process that we use features short-run momentum and long-run partial mean reversion. Half of the subjects see a version of this process in which the momentum and partial mean reversion unfold over 10 periods ('fast'), while the other subjects see a version with dynamics that unfold over 50 periods ('slow'). Typical subjects recognize most of the mean reversion of the fast process and none of the mean reversion of the slow process.