Knowledge that Transforms

Economic models for hedonic markets characterize the pricing of bundles of attributes and the demand and supply of these attributes under different assumptions about market structure, preferences and technology. (See Jan Tinbergen, 1956, Sherwin Rosen, 1974 and Dennis Epple, 1987, for contributions to this literature). While the theory is well formulated, and delivers some elegant analytical results, the empirical content of the model is under debate. It is widely believed that hedonic models fit in a single market are fundamentally underidentified and that any empirical content obtained from them is a consequence of arbitrary functional form assumptions. The problem of identification in hedonic models is a prototype for the identification problem in a variety of economic models in which agents sort on unobservable (to the economist) characteristics: models of monopoly pricing (Michael Mussa and Sherwin Rosen, 1978; Robert Wilson, 1993) and models for taxes and labor supply (James Heckman, 1974). Sorting is an essential feature of econometric models of social interactions. (See William Brock and Steven Durlauf, 2001). In this paper we address the sorting problem in hedonic models. Nesheim (2001) extends this analysis to a model with peer effects. In this paper we note that commonly used linearization strategies made to simplify estimation and justify the application of instrumental variables methods, produce identification problems. The hedonic model is generically nonlinear. It is the linearization of a fundamentally nonlinear model that produces the form of the identification problem that dominates discussion in the applied literature. Linearity is an arbitrary and misleading functional form when applied to empirical hedonic models. Our research establishes that even though sorting equilibrium in a single market implies no exclusion restrictions, the hedonic model is generically nonparametrically identified. Instrumental variables and transformation model methods identify economically relevant parameters even 1 without exclusion restrictions. Multimarket data, widely viewed as the most powerful source of identification, achieves this result only under implausible assumptions about why hedonic functions vary across markets.

Policy-Driven Productivity in Chile and Mexico in the 1980's and 1990's by Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe and Raimundo Soto. Published in volume 92, issue 2, pages 16-21 of American Economic Review, May 2002

Does Increasing Women's Schooling Raise the Schooling of the Next Generation? by Jere R. Behrman and Mark R. Rosenzweig. Published in volume 92, issue 1, pages 323-334 of American Economic Review, March 2002

For most homeowners, the house is the single most important consumption good appearing as an argument of the utility function, and, at the same time, the dominant asset in the portfolio. This paper uses a mean-variance efficiency framework to examine the household’s optimal portfolio problem when owner-occupied housing is included in the list of available assets. Housing differs from stocks and bonds in a crucial way: since the household’s ownership of residential real estate determines the level of its consumption of housing services, the household’s demand for real estate is “overdetermined” in the sense that the level of real estate ownership which is optimal from the point of view of the consumption of housing services may differ from the optimal level of housing assets from a portfolio point of view. With rental markets for housing, a household can, in principle, divorce the size of its holdings of real estate assets from the level of housing services it consumes. However, rental housing is by no means a perfect substitute for owner-occupied housing. We assume, instead, that the preferential tax treatment of owner-occupied housing and the transactions costs and agency costs involved in the rental market for housing create frictions large enough to effectively constrain the household to include in its asset portfolio the level of housing consistent with its consumption of housing services. The paper focuses on the impact of the portfolio constraint imposed by the consumption demand for housing on the household’s optimal holdings of financial assets. Section II of the paper is similar in spirit to a recent paper by Jan K. Brueckner (1997), which analyzes the interaction between the consumption demand and the investment demand for housing in a mean-variance portfolio model. Brueckner considers a general covariance matrix and mean vector of returns and a general utility function, and derives analytical results. In contrast, our implementation of the meanvariance framework is quantitative. That is, we estimate the covariance matrix and vector of expected returns for housing and financial assets and solve for the efficient frontiers and optimal portfolios numerically. The risk characteristics of housing are estimated using two distinct sources: data from the Panel Study of Income Dynamics (PSID) and data from Karl E. Case and Robert J. Shiller (1989) based on repeat sales transactions prices for four U.S. cities. Both data sources indicate that housing prices have a large idiosyncratic component; the standard deviation of the return to housing, at the level of the individual house, is about 0.14. In addition to housing, the portfolio can include nonnegative amounts of Treasury bills, Treasury bonds, and stocks. The household can borrow only in the form of a mortgage, which is limited to 100 percent of the value of the house. Using the estimated vector of expected returns and covariance matrix of asset returns, we plot the constrained meanvariance efficient frontiers for various values of the household’s ratio of house value to wealth, h (the “housing constraint”). The housing constraint has an enormous effect on the risk and return trade-off available to the household. Young households, which typically have large holdings of real estate relative to their net worth, are highly leveraged and therefore forced into a situation of high risk (and return). As a result, these young households have a strong incentive to reduce the risk of their portfolio by using their net worth to either pay down their * Flavin: Department of Economics, University of California, San Diego, CA 92093, and National Bureau of Economic Research (e-mail: [email protected]); Yamashita: Department of Economics, University of Nevada, Las Vegas, NV 89154 (e-mail: [email protected]). We thank Elena Bisagni, Jan Brueckner, Wouter den Haan, James Hamilton, Bruce Lehmann, Greg Mankiw, and the referees for comments, and Robert Shiller for providing the house price transactions data. 1 The implications of the dual role of housing (as both a consumption good and an investment good) for tenure decisions of households were first analyzed by J. Vernon Henderson and Yannis M. Ioannides (1983).

We examine the impact of a large number of Japanese government-sponsored research consortia on the research productivity of participating firms by measuring their patenting in the targeted technologies before, during, and after participation. Consistent with the predictions of the theoretical literature on research consortia, we find consortium outcomes are positively associated with the level of potential R&D spillovers within the consortium and (weakly) negatively associated with the degree of product market competition among consortium members. Furthermore, our evidence suggests that consortia are most effective when they focus on basic research.

In Caselli and Coleman (2000) we developed a framework that separately identifies the efficiency units embodied in unskilled labor, skilled labor, and capital in a country’s aggregate production function. Applying that framework to cross-country data, we showed that countries where unskilled labor is relatively abundant are those with the most efficient unskilled workers, while countries where skilled labor and capital are abundant are the most efficient users of these inputs. We interpreted these findings as evidence of appropriatetechnology adoption: in each country firms choose from a menu of technologies; different technologies imply different combinations of values for the efficiency units embodied in the three factors of production; in each country the technology is chosen that makes the most of the most abundant factors. In this paper we apply the same framework to time-series data from the United States over the period 1963–1992. We find that throughout this period the efficiencies of skilled labor and capital have risen. The efficiency of unskilled labor has risen in tandem with those of the other factors in the early part of the sample, but surprisingly, it has been falling since sometime in the 1970’s (the exact turning point depends somewhat on some parametric assumptions). In analogy with the cross-country evidence, these changes are closely associated with changes in the relative abundance of skilled labor and capital, which increased rather dramatically. In this sense, the recent history of technologies in use by U.S. firms may mimic the choice of technologies around the world today: as skills and capital become more abundant, technologies are chosen that maximize the efficiency of these inputs. As we discuss below, however, in the U.S. context the converse story (relative labor supplies adjusting to exogenous changes in technology) is also consistent with the data. Besides its relevance to models of technology adoption, this evidence also sheds new light on the widely documented recent increase in the skilled wage premium in the United States. Lawrence F. Katz and Kevin M. Murphy (1992) and David H. Autor et al. (1998) used the relative wage and the relative labor supply series to show that the efficiency of unskilled labor relative to skilled labor must have declined over time. Our framework allows us to go further and show that, indeed, the absolute efficiency of unskilled labor has fallen (after 1970), while the efficiency of skilled labor and capital have increased. A similar result was obtained with different techniques by Marta Ruiz Arranz (2001).

A staunch neoclassical economist, Rosen drew inspiration from Adam Smith's Wealth of Nations, particularly his theory of compensating wage differentials, which Rosen felt was central to all economic problems involving product differentiation and spatial considerations. The main theme of his collection is how markets handle diversity, including the determination of value in the presence of diversity, the allocation of idiosyncratic buyers to specialized sellers, and the effects of heterogeneity and sorting on inequality

The U.S. and U.K. Great Depressions Through the Lens of Neoclassical Growth Theory by Harold L. Cole and Lee E. Ohanian. Published in volume 92, issue 2, pages 28-32 of American Economic Review, May 2002

This paper offers new evidence on the sources of cross-country income differences. It exploits the idea that observing immigrant workers from different countries in the same labor market provides an opportunity to estimate their human-capital endowments. These estimates suggest that human and physical capital account for only a fraction of cross-country income differences. For countries below 40 percent of U.S. output per worker, less than half of the output gap relative to the United States is attributed to human and physical capital.