Knowledge that Transforms

Abstract We formalize a research design to uncover the mechanisms underlying long-term reductions in energy consumption caused by a widely implemented nudge. We consider two channels: technology adoption and habit formation. Using data from 38 natural field experiments, we isolate the role of technology adoption by comparing treatment and control homes after the initial resident moves, which discontinues the treatment for a home. We find that fully half of energy reductions persist in the home after treatment ends and show this persistence is consonant with a technology adoption channel. The role of technology in creating persistent behaviour change has important implications for designing behavioural interventions and evaluating their long-term social impacts.

Abstract Studies have shown that the standard law of belief updating—Bayes’ rule—is descriptively invalid in various settings. In this paper, I introduce and analyse a generalization of Bayes’ rule—Coarse Bayesian updating—accommodating much of the empirical evidence. I characterize the model axiomatically, show how it generates several well-known biases, and derive its main implications in static and dynamic settings. Each axiom expresses a property of Bayes’ rule but, conditional on the others, stops just short of making the agent fully Bayesian. The model employs standard primitives, making it suitable for applications; I demonstrate this by applying it to a standard setting of decision under risk, leading to a close relationship with the Blackwell information ordering and comparative measures of cognitive sophistication and bias.

Abstract Allocative wages—the labor costs considered when deciding to form or dissolve a long-term employment relationship—are more sensitive to cyclical conditions for more educated workers. Specifically, college-educated workers’ allocative wages are highly pro-cyclical, while high school dropouts’ wages exhibit only moderate cyclicality. Further, as education increases, an increasing share of the sensitivity of allocative wages is driven by the persistent scarring effects of the cyclical position at the time of hiring on the wages associated with higher levels of tenure, amounting to more than a third of the overall sensitivity for the college educated. The greater job stability of the more educated—and therefore the exposure to scarring—contributes to these differences. In addition, more significant scarring at each horizon of tenure amplifies the effect. In service of documenting these facts, I develop new methods for inferring the sensitivity of labor costs to shocks when agents are forward-looking and wages may be intertemporally smoothed.

Abstract Over the latest monetary policy tightening cycle, capital has been flowing from low-inflation countries to high-inflation countries. This pattern of capital flows is consistent with the predictions of an open-economy model with nominal rigidities where cost-push shocks generate an inflationary episode and capital flows freely across countries. Yet, by raising demand for domestic non-tradable goods and services, capital inflows cause unwelcome upward pressure on firms’ costs in countries most severely hit by these shocks. We find that a reverse pattern of capital flows would have improved the output-inflation trade-off globally, hence requiring a less aggressive monetary tightening in the most severely hit countries and delivering overall welfare gains.

Abstract I examine the impact of patent term on R&D and innovation in the presence of policy anticipation, common in real-world settings. Using a difference-in-difference design, I exploit quasi-experimental variation in US patent term across technological fields due to the ratification of TRIPs agreements in 1995. Despite a general increase in average patent term, in most fields innovators faced a considerable probability of patent term reduction for future innovations. Three key findings emerge: (1) R&D and innovation accelerate more in fields with a higher probability of patent term reduction, i.e. a shorter average patent term extension, before implementation. (2) This heightened activity persists for at least 5 years postimplementation, driven by indirect effects where the news-related acceleration fosters further innovation through technological externalities linked to cumulative knowledge creation. (3) Conversely, the direct effect of a shorter extension in patent term would stimulate relatively less innovation, absent the indirect effects of anticipation.

Abstract We exploit a panel of city-level data with rich demographic information to estimate the distributional effects of Department of Defense spending and its effects on a range of social outcomes. The income and employment generated by defence spending accrue predominantly to households without a bachelor's degree. These households as well as Black and Hispanic households tend to disproportionately benefit from this spending. Defence spending also promotes a range of beneficial social outcomes that are often targeted by government programs, including reductions in poverty, divorce rates, disability rates, and mortality rates, as well as increases in homeownership rates, health insurance rates, and occupational prestige. We compare the effects of defence spending with the effects of general demand shocks and explore reasons for the differential effects of the shocks.

Abstract Auction models are convenient abstractions of informal price-formation processes that arise in markets for assets or services. These processes involve frictions like bidder recruitment costs for sellers, participation costs for bidders, and limitations on sellers’ commitment abilities. This paper develops an auction model that captures such frictions. We derive novel insights, notably that outcomes are often inefficient, that markets sometimes unravel, and that the observability of competition may have a large effect.

Abstract I study linear panel data models with predetermined regressors (such as lagged dependent variables) where coefficients are individual-specific, allowing for heterogeneity in the effects of the regressors on the dependent variable. I show that the model is not point-identified in a short panel context but rather partially identified, and I characterize the identified sets for the mean, variance, and CDF of the coefficient distribution. This characterization is general, accommodating discrete, continuous, and unbounded data, and it leads to computationally tractable estimation and inference procedures. I apply the method to study lifecycle earnings dynamics among U.S. households using the Panel Study of Income Dynamics (PSID) dataset. The results suggest the presence of unobserved heterogeneity in earnings persistence, implying that households face varying levels of earnings risk which, in turn, contribute to heterogeneity in their consumption and savings behaviours.

Abstract When a policy prioritizes one person over another, is it because they benefit more, or because they are preferred? This paper develops a method to uncover the values consistent with observed allocation decisions. We estimate how much each person benefits from an intervention, and then reconcile the allocation with (i) the welfare weights assigned to different people; (ii) heterogeneous treatment effects of the intervention; and (iii) weights on different outcomes. We demonstrate this approach by analyzing Mexico’s PROGRESA anti-poverty programme. The analysis reveals that while the programme prioritized certain subgroups—such as indigenous households—the fact that those groups benefited more implies that the programme did not actually assign them a higher welfare weight. We also find evidence that the policy valued outcomes differently from households. The PROGRESA case illustrates how the method makes it possible to audit existing policies, and to design future policies that better align with values.

We assess the relationship between the racial diversity of medical providers and racial health disparities in the use of preventive care and in patient outcomes. We use unique data from the Military Health System, where we observe providers as patients so that we can identify their race, and where moves across bases change exposure to provider race in a plausibly exogenous fashion. We consider patients with four chronic, deadly, but manageable illnesses, where the relationship with the provider may have the most direct impact on health. We find striking evidence that provider racial diversity leads to reduced disparities in maintenance of preventive care and mortality.