Knowledge that Transforms

We study dynamic monopoly pricing of storable goods in an environment where demand changes over time. The literature on durables has focused on incentives to delay purchases. Our analysis focuses on a different intertemporal demand incentive. The key force on the consumer side is advance purchases or stockpiling. In the case of storable goods, the stockpiling motive has recently been documented empirically. We show that, in this environment, if the monopolist cannot commit, then prices are higher in all periods, and social welfare is lower, than in the case in which the monopolist can commit. This is in contrast with the analysis in the literature on the Coase conjecture.

The Effects of the 2003 Dividend Tax Cut on Corporate Behavior: Interpreting the Evidence by Raj Chetty and Emmanuel Saez. Published in volume 96, issue 2, pages 124-129 of American Economic Review, May 2006

This paper addresses the question of how traditional institutions interact with the forces of globalization to shape the economic mobility and welfare of particular groups of individuals in the new economy. We explore the role of one such traditional institution—the caste system—in shaping career choices by gender in Bombay using new survey data on school enrollment and income over the past 20 years. We find that male working-class—lower-caste—networks continue to channel boys into local language schools that lead to the traditional occupation, despite the fact that returns to nontraditional white-collar occupations rose substantially in the 1990s, suggesting the possibility of a dynamic inefficiency. In contrast, lower-caste girls, who historically had low labor market participation rates and so did not benefit from the network, are taking full advantage of the opportunities that became available in the new economy by switching rapidly to English schools.

This paper discusses five questions the incoming chairman of the Federal Reserve must ponder as he assumes his new post. How important are monetary rules? Should the Fed adopt inflation targeting? Should he be free with his opinions? Should he be a high-profile public figure? Is it more important to be good or lucky?

This paper analyses the compensatory behavior of smokers. Exploiting data on cotinine concentration--a metabolite of nicotine--measured in a large population of smokers over time, we show that smokers compensate for tax hikes by extracting more nicotine per cigarette. Our study makes two important contributions. First, as smoking a given cigarette more intensively is detrimental to health, our results question the usefulness of tax increases. Second, we develop a model of rational addiction where agents can also adjust their intensity of smoking, and we show that the previous empirical results suffer from estimation biases.

Using data on prices, production, and exports, we are able to identify marginal costs as well as the effectiveness of the Norwegian cement industry cartel. We find that our marginal cost estimates are very much in line with the detailed cost accounting data. We show that the cement cartel has been ineffective because the sharing rule induces “overproduction” and exporting below marginal costs. It is consumers — not firms — who benefit from the sharing rule. The ineffectiveness of the cartel was becoming so large that domestic welfare of a merger to monopoly would be positive around 1968, which is when the merger actually took place! We also show that competition would have resulted in even higher welfare gains over the entire sample.

Exploiting differences across U.S. states, this paper demonstrates that there is a tight link between higher education policies, past enrollment rates, and recent changes in the college wage premium among labor market entrants. The analysis reveals, however, that this relationship is much weaker in states with high private enrollment rates, high levels of interstate mobility, or interstate trade. The within-state estimates of the own-cohort relative supply effect shed some light on the extent to which the U.S. labor market can be characterized as a single national market or a collection of state-specific labor markets.

Incentives and Student Learning: A Natural Experiment with Economics Problem Sets by Wayne A. Grove and Tim Wasserman. Published in volume 96, issue 2, pages 447-452 of American Economic Review, May 2006

Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow.