Knowledge that Transforms

As the Indonesian economy went into a downward spiral in the latter half of 1997, there was much speculation and debate as to the reasons behind the sudden decline. Most explanations gave at least some role to investor panic, which had led to a massive outflow of foreign capital. At the root of this hysteria, however, were concerns that the capital that had flowed into Indonesia and elsewhere in Southeast Asia had not been used for productive investments. Much of this discussion focused on the role of political connections in driving investment. The claim was that in Southeast Asia, political connectedness, rather than fundamentals such as productivity, was the primary determinant of profitability and that this had led to distorted investment decisions. Obviously, the degree to which this type of problem was truly responsible for the Asian collapse depends very much on the extent to which connectedness really was a primary determinant of firm value. In making the argument that this was in fact the case, anecdotes about the business dealings of President Suharto’s children were often cited as evidence. Such stories suggest that the value of some firms may have been highly dependent on their political connections. However, investigations in this area have not progressed beyond the level of case study and anecdote. That is, there has been no attempt to estimate the degree to which firms rely on connections for their profitability. There are numerous difficulties that would

Survey data suggest that cropsharing contracts exhibit a much higher degree of uniformity than is warranted by economic fundamentals. We propose a dynamic model of contract choice to explain this phenomenon. Landowners and tenants recontract periodically, taking into account expected returns as well as conformity with local practice. The resulting stochastic dynamical system is studied using techniques from statistical mechanics. The most likely states consist of patches where contractual terms are nearly uniform, separated by boundaries where the terms shift abruptly. These and other predictions of the model are borne out by survey data on agricultural contracts in Illinois.

Firms that entered the stock market in the 1990s were younger than any earlier cohort since World War I. Surprisingly, however, firms that IPO'd at the close of the 19th century were just as young as the companies that are entering today. We argue here that the electrification-era and the IT-era firms came in young because the technologies that they brought in were too productive to be kept out very long. The model assumes that the stage before IPO is a learning period during which the firm refines the idea before committing to it at the IPO stage. The better the idea, the higher is the opportunity cost of a delay in its implementation, and the earlier the firm will have its IPO.

(i) It does not always keep the normative analysis of decision-making distinct from its descriptive analysis, losing sight of the fact that these methods are appealing shortcut approximations, not improvements on, decision-making based on the Savage axioms. (ii) In all the existing applications to monetary policy it analyzes uncertainty about relatively unimportant aspects of models, while making strong, but actually uncertain, assumptions about other, more important aspects.

Market Trade in Patents and the Rise of a Class of Specialized Inventors in the 19th-Century United States by Naomi R. Lamoreaux and Kenneth L. Sokoloff. Published in volume 91, issue 2, pages 39-44 of American Economic Review, May 2001

One of the basic motives for saving is the accumulation of wealth to insure future welfare. Both introspection and extant research on consumption insurance find that people face substantial risks that they do not fairly pool. In theory, the consumption and wealth accumulation of price-taking households in an economy with incomplete markets differs substantially from the behavior of these same households in the equivalent economy with complete-markets. The question we address in this article is whether we find this difference to be large in practice. What is the empirical importance of precautionary saving? We provide a simple decomposition that characterizes the importance of precautionary saving in the U.S. economy. We use this decomposition as an organizing framework to present four main findings: (a) the concavity of the consumption policy rule, (b) the importance of precautionary saving for life-cycle saving and wealth accumulation, (c) the contribution of changes in risk to fluctuations in aggregate consumption and (d) the significant impact of incomplete markets on aggregate fluctuations in calibrated general equilibrium models. We conclude with directions for future research.

The value of a firm's securities measures the value of the firm's productive assets. If the assets include only capital goods and not a permanent monopoly franchise, the value of the securities measures the value of the capital. Finally, if the price of the capital can be measured or inferred, the quantity of capital is the value divided by the price. A standard model of adjustment costs enables the inference of the price of installed capital. Data from U.S. corporations over the past 50 years imply that corporations have formed large amounts of intangible capital, especially in the past decade.

Empirical Strategies in Contract Economics: Information and the Boundary of the Firm by George Baker and Thomas N. Hubbard. Published in volume 91, issue 2, pages 189-194 of American Economic Review, May 2001

How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment by Tracy R. Lewis and David E. M. Sappington. Published in volume 91, issue 3, pages 724-730 of American Economic Review, June 2001