Knowledge that Transforms

Consider an investor who fears ruin when facing investments that satisfy no-arbitrage. Before investing he can purchase information about the state of nature as an information structure. Given his prior, information structure α investment dominates information structure β if, whenever he is willing to buy β at some price, he is also willing to buy α at that price. We show that this informativeness ordering is complete and is represented by the decrease in entropy of his beliefs, regardless of his preferences, initial wealth, or investment problem. We also show that no prior-independent informativeness ordering based on similar premises exists.

There is a strong, positive, and well-documented correlation between education and health outcomes. In this paper, we attempt to understand to what extent this relationship is causal. Our approach exploits two changes to British compulsory schooling laws that generated sharp across-cohort differences in educational attainment. Using regression discontinuity methods, we find the reforms did not affect health although the reforms impacted educational attainment and wages. Our results suggest caution as to the likely health returns to educational interventions focused on increasing educational attainment among those at risk of dropping out of high school, a target of recent health policy efforts.

We estimate a spatial model of liquor demand to analyze the impact of government-controlled retailing on entry patterns. In the absence of the Pennsylvania Liquor Control Board, the state would have roughly 2.5 times the current number of stores, higher consumer surplus, and lower payments to liquor store employees. With just over half the number of stores that would maximize welfare, the government system is instead best rationalized as profit maximization with profit sharing. Government operation mitigates, but does not eliminate, free entry's bias against rural consumers. We find only limited evidence of political influence on entry.

The effects of courses on student achievement are studied using 2006 data from the National Assessment of Educational Progress (NAEP) in economics. A regression analysis showed expected and significant achievement differences by course, with the highest scores in advanced economics, followed by general economics. Courses in business and personal finance were not substitutes for advanced or general economics courses. A probit analysis showed that students taking economics courses relative to personal finance courses are significantly more likely to think their courses helped them understand the US economy, the international economy, and current events--but not how to manage personal finances.

We assess the empirical importance of changes in income and relative prices for structural transformation in the postwar United States. We explain two natural approaches to the data: sectors may be categories of final expenditure or value added; e.g., the service sector may be the final expenditure on services or the value added from service industries. We estimate preferences for each approach and find that with final expenditure income effects are the dominant force behind structural transformation, whereas with value-added categories price effects are more important. We show how the input-output structure of the United States can reconcile these findings.

Has government spending raised income and employment since 2008? I use new data on state pension returns during the Great Recession to recover exogenous changes in spending. Instrumenting with these return shocks, I estimate that each dollar of windfall-financed spending raised local incomes by $1.43 and every additional $22,011 of spending created one contemporaneous job. These estimates are similar to those found in Shoag (2010) despite the non-overlapping datasets. Unlike Shoag (2010), however, the bulk of the employment increase post-2008 stems from decreases in unemployment rather than increased labor force participation.

Using data from the American Time Use Survey between 2003 and 2010, we document that home production absorbs roughly 30 percent of foregone market work hours at business cycle frequencies. Leisure absorbs roughly 50 percent of foregone market work hours, with sleeping and television watching accounting for most of this increase. We document significant increases in time spent on shopping, child care, education, and health. Job search absorbs between 2 and 6 percent of foregone market work hours. We discuss the implications of our results for business cycle models with home production and non-separable preferences.

In Fall 2009, Chicago authorities abandoned a school assignment mechanism midstream, citing concerns about its vulnerability to manipulation. Nonetheless, they asked thousands of applicants to re-rank schools in a new mechanism that is also manipulable. This paper introduces a method to compare mechanisms by their vulnerability to manipulation. Our methodology formalizes how the old mechanism is at least as manipulable as any other plausible mechanism, including the new one. A number of similar transitions took place in England after the widely popular Boston mechanism was ruled illegal in 2007. Our approach provides support for these and other recent policy changes.

Why do workers earn so much more in the United States than in India? This study compares the earnings of workers in the two countries in a unique setting. The product is perfectly tradable (software), technology differences are nil (they are members of the same work team), and the workers are identical in expectation (those who enter the United States are chosen by natural randomization). The results suggest that output tradability, technology, and human capital together explain much less than half of the earnings gap. Location itself may have large effects on individual workers' wages and productivity, for reasons poorly understood.

This paper axiomatizes a utility function for social preferences under risk. In the model, a single parameter captures a preference for equality of opportunity (i.e., equality of exante expected payoffs) relative to equality of outcome (i.e., equality of ex-post payoffs). In a deterministic environment, the model reduces to the model of Fehr and Schmidt (1999). The model is consistent with recent experiments on probabilistic dictator games.