Knowledge that Transforms

Until the middle of the 1970's, regulations constrained banks' ability to enter new markets. Over the subsequent 25 years, states gradually lifted these restrictions. This paper tests whether rents fostered by regulation were shared with labor, and whether firms were discriminating by sharing these rents disproportionately with male workers. We find that average compensation and average wages for banking employees fell after states deregulated. Male wages fell by about 12 percent after deregulation, whereas women's wages fell by only 3 percent, suggesting that rents were shared mainly with men. Women's share of employment in managerial positions also increased following deregulation.

I examine the effects of vertical integration between programming and distribution in the cable television industry. I assess the effects of ownership structure on program offerings, prices, and subscriptions, and I compare consumer welfare across integrated and unintegrated markets. The results of this analysis suggest two general conclusions. First, integrated operators tend to exclude rival program services, suggesting that certain program services cannot gain access to the distribution networks of vertically integrated cable system operators. Second, vertical integration does not harm, and may actually benefit, consumers because of the associated efficiency gains.

Where should decision rights be lodged in organizations? Michael C. Jensen and William H. Meckling (1992) argue that moving a decision away from the inherently best-informed party involves costs in communication and garbling but may lodge it with someone who has better incentives to make good decisions. Generally, however, we expect that incentives are part of the organizational design. Why not just provide incentives to those with the best information so that they make the right decisions? One reason is that the available incentive instruments must serve multiple purposes, and designing them to induce better decisions worsens performance against other organizational objectives. Our experience suggests that this is a common situation in actual organizations: the means available to affect one sort of behavior or decision inevitably affect the incentives governing other choices. Then, the design of incentive schemes and the allocation of decision rights become interlinked. This paper looks at this idea in the specific context of a principal’s problem of inducing agents to provide unobservable effort while also motivating the efficient selection of investments. Each of these problems has been extensively studied in isolation (on inducing effort, see e.g., Bengt Holmstrom [1979] and Holmstrom and Paul Milgrom [1991]; on decisions, see e.g., Eugene F. Fama and Jensen [1983], Milgrom and Roberts [1990a, b], Philippe Aghion and Jean Tirole [1997], Matthias Dewatripont and Tirole [1999]). We thus know that motivating effort is done best by rewarding agents on precise measures of their effort, not necessarily on the total value created in the firm. At the same time, it is clear that getting the right investment choices may require that the decision-makers’ rewards be tied to total value created. The difficulty is that the available measures do not allow doing both. The only available performance measures are aggregates whose component pieces cannot be disentangled, while contracts must be written in advance of learning about investment possibilities. Including many contingencies in the contracts ex ante is impossible, and ongoing renegotiation in every ex post eventuality is prohibitively costly. More formally, we assume that it is not possible to contract on investment projects, nor can the principal bargain with the agents over the adoption of these projects once they are identified. Instead, returns to projects are reflected in the performance measures available for use in the effort-incentive contracting. Then the incentives for effort and for decisions are inextricably tied together. In this framework, we explore the interactions among the design of jobs and assignment of individuals to tasks, the shape and intensity of effort incentives, and the allocation of authority over project selection. We argue that it may indeed be optimal to assign decisions rights to someone other than the best-informed party. An authority-based hierarchy then emerges endogenously, with some agents being given the right to make organizational decisions over projects that others discovered. Moreover, as in Herbert Simon (1951), those in authority will make the decisions in a self-interested way. Simon emphasized that this † Discussants: Michael Riordan, Columbia University; Bengt Holmstrom, Massachusetts Institute of Technology; W. Bentley MacLeod, University of Southern California.

State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity by Kathryn L. DeWenter and Paul H. Malatesta. Published in volume 91, issue 1, pages 320-334 of American Economic Review, March 2001

Meyer (1999) has suggested that episodes of heightened uncertainty about the NAIRU may warrant a nonlinear policy response to changes in the unemployment rate. This paper offers a theoretical justification for such a nonlinear policy rule, and provides some empirical evidence on the relative performance of linear and nonlinear rules when there is heightened uncertainty about the NAIRU.

Two modifications are introduced into the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with the observed mean risk-free rate, equity premium, and Sharpe ratio on equity. In addition, its business-cycle implications represent a substantial improvement over the standard model. It accounts for persistence in output, comovement of employment across different sectors over the business cycle, the evidence of “excess sensitivity” of consumption growth to output growth, and the “inverted leading-indicator property of interest rates,” that interest rates are negatively correlated with future output.

Standard econometric analysis incorporates racial classification as an exogenous binary variable. However, econometric specification of racial identity by a simple binary variable masks differences in the meaning and use of racial/ ethnic identity across social groups. Consider an analysis of earnings differences between nonHispanic whites and Hispanics. A white/brown dichotomous variable in the earnings equation is clearly inappropriate since a large fraction of Hispanics either self-identify as white (regardless of how they are seen by others) or have physical features that are indistinguishable from non-Hispanic whites (though they may self

In this paper we investigate how telecommunications infrastructure affects economic growth. We use evidence from 21 OECD countries over a 20-year period to examine the impacts that telecommunications developments may have had. We jointly estimate a micromodel for telecommunication investment with a macro production function. We find evidence of a significant positive causal link, especially when a critical mass of telecommunications infrastructure is present. Interestingly, the critical mass appears to be at a level of telecommunications infrastructure that is near universal service.

Using U.S. Consumer Expenditure Surveys, we estimate “quality Engel curves” for 66 durable goods based on the extent richer households pay more for each good. The same data show that the average price paid rises faster from 1980 to 1996 for goods with steeper quality Engel curves, as if households are ascending these curves. BLS prices likewise increase more quickly for goods with steeper quality Engel curves, suggesting the BLS does not fully net out the impact of quality upgrading. We estimate that annual quality growth averages 3.7 percent for our goods, with 2.2 percent showing up as higher inflation.

Normative judgments embodied in the American legal system mandate that, in certain respects, public policy should treat all members of the population uniformly. Nevertheless, the legal system permits many forms of disparate treatment of the population. The Medicare program provides health-care benefits to persons age 65 and older, but not to younger Americans. The federal welfare-to-work program known as TANF permits states to treat welfare recipients differentially, placing some in job-training and others in basic-skills classes. Judicial sentencing guidelines variously permit or require judges to sentence convicted offenders differentially based on past convictions. Public high schools track students, making class assignments vary with past student achievement. In these and other settings where legal constraints do not preclude disparate treatment, society may choose among many alternative treatment rules. A program could mandate uniform treatment of the population or require that treatment vary in particular ways with observable covariates of the persons treated (e.g., age in the case of Medicare, past convictions in the case of sentencing), or permit agents of society (e.g., judges, welfare case managers, school counselors) to make their own treatment choices, subject to specified constraints. Research on program evaluation can help to inform public policy through efforts to learn the consequences of alternative treatment rules. In particular, evaluation research should seek to characterize how treatment response varies across the population. If we learn that all persons respond to treatment in much the same manner, then the best policy may be one that treats all persons uniformly. However, if we learn that treatment response varies with observable covariates of the persons treated, then society may be able to do better by designing programs in which treatment varies appropriately with these covariates. For example, society may be able to lower recidivism among criminal offenders by sentencing some offenders to prison and others to probation. It may be able to increase the life-cycle earnings of welfare recipients by placing some in job-training and others in basic-skills classes. In these and many other cases, the key to success is to determine which persons should receive which treatments. Regrettably, evaluation research has had little to say about how treatment response varies with observable covariates of the persons treated. A common practice, especially in observational studies, has been to assume that all persons respond to treatment in the same manner. Studies that are sensitive to possible variation in treatment response may report findings by race or gender or age, but they rarely disaggregate the population more finely. As a consequence, policymakers seeking to design programs for heterogeneous populations have to speculate on the consequences of alternative treatment rules. This short article draws on my recent research (Manski, 1997, 2000a, b) to argue that increased attention to observable variation in treatment response would enhance the value of evaluation research.