Knowledge that Transforms

The Economics of Copyright "Fair Use" in a Networked World by Benjamin Klein, Andres V. Lerner and Kevin M. Murphy. Published in volume 92, issue 2, pages 205-208 of American Economic Review, May 2002

Do contributions levels matter endogenous protection or is the existence of a lobby sufficient? Are lobbies’ net benefits from protection identical to their contribution levels, or does the level of protection simply reflect contribution levels of supporters and opponents? We estimate the Influence Driven (Grossman and Helpman, 1994) and the Tariff Function (Findlay and Wellisz, 1982) models within a unified theoretical framework to examine the contrasting implications derived from these two prominent tariff formation models. We find strong evidence that protection is indeed for sale. The important new result is, however, that not only the existence of lobbies matters, but also the relative size of the sectoral pro and anti protection contributions. Using J tests to compare the power of the models directly, we cannot reject the null of correct specification of the Influence Driven model and find evidence of some misspecification in the Tariff Function model.

Do scale economies help to explain international trade flows? Using a large database on output, trade flows, and factor endowments, we find that allowing for the presence of increasing returns to scale in production significantly increases our ability to predict international trade flows. In particular, using trade data, we find that a third of all goods-producing industries are characterized by increasing returns to scale. Thus, scale economies are a quantifiable and important source of comparative advantage.

We use household data from northeast China to examine the link between investment and land tenure insecurity induced by China's system of village-level land reallocation. We quantify expropriation risk using a hazard analysis of individual plot tenures and incorporate the predicted “hazards of expropriation” into an empirical analysis of plot-level investment. Our focus is on organic fertilizer use, which has long-lasting benefits for soil quality. Although we find that higher expropriation risk significantly reduces application of organic fertilizer, a welfare analysis shows that guaranteeing land tenure in this part of China would yield only minimal efficiency gains.

Robert E. Lucas, Jr.:' January 2002 issue of the Atlantic contains an article by Benjamin Schwarz and Christopher Layne called A New Grand Strategy. article deplores the role of the United States in the Middle East, which the authors interpret as derived from a perceived need to ensure the availability of from that region. As the authors observe, America derives most of its from Alaska, Canada, the continental United States, Mexico, and Venezuela. About 25 percent of U.S. petroleum imports come from the Persian Gulf. If the United States adopted a national energy strategy it could free itself from dependence on Persian Gulf oil (p. 37). They go on to advocate doing this, and leaving Middle East politics to other, still dependent powers. They explain: The role the United States has assigned itself in the Persian Gulf has made it-not Japan, not the states of Western Europe, not China-vulnerable to a backlash (p. 38). Schwarz and Layne article is a good example of what W. Lee Hansen et al. (2002 [preceding paper, this issue]) call illiteracy. Its entire argument is based on the market for oil, but the authors do not have even an Economics 101 understanding of what a market is. They construct a vision of a new U.S. foreign policy based on a wholly arbitrary matching up of particular buyers of a homogeneous good with particular sellers of the good. We will exercise hegemony in Mexico and Venezuela, they say, and let the Japanese take care of the Middle East. example illustrates three points emphasized in Use or Lose It: Teaching Literacy in the Economics Principles Course (this issue, preceding paper). First, economic illiteracy often is an affliction of the well-educated: Schwarz and Layne are articulate experts in foreign affairs. Second, economic illiteracy can be dangerous: there is more at stake than bad answers to our exam questions. Third, the ignorance involved is not ignorance of the research tools of technical economics. should not be necessary to be handy with fixed-point theorems in order to avoid mistakes like the one Schwarz and Layne make. Use or Lose It has two main theses. first is that we can and should promote economic literacy by redesigning the first collegelevel economics course (one semester) to teach principles, not methods. second is that we can use a list of 20 Content Standards provided by the National Council on Economic Education to define what it means to teach principles. I have misgivings about both these theses, to which I turn in a moment. I must say at the outset, though, that my criticism will be almost entirely nonconstructive: I agree that introductory economics needs to be reinvented, but I do not claim to know how to do it. In criticizing introductory economics courses and textbooks, the authors lament the increasingly technical nature of the course and cite others who share this view. Nostalgia is expressed (in a quote from McConnell, not a direct statement by these authors) for a 1946 text of Frank Taussig's that predates even my ancient training by 15 years! would be hard to think of a surer way to discourage the most able students from pursuing a career in economics than to offer them a 50-year-old textbook on the grounds that P. J. O'Rourke did not like graphs. Imagine proposing such a thing to an association of physicists or chemists or, for that matter, musicologists! Knowledge is cumulative-a fact that should make us happy, not sad. One of our jobs as teachers is to help our most eager and creative students get to the knowledge frontier as fast as they want to go. In the natural sciences and the arts, introductory courses are professionally oriented basic-training courses on which one can build a creative career. Economics students deserve as much. problem with leaving the matter at this is that introductory science courses tend to be useless for nonmajors. Indeed, levels of physics literacy, chemistry literacy, and musical literacy among well-educated people are in no better shape than economics literacy. This is the classic case against letting each student design his 'Department of Economics, University of Chicago, 1126 East 59th St., Chicago, IL 60637.

All in the Family: A Simultaneous Model of Parenting Style and Child Conduct by Peter Burton, Shelley Phipps and Lori Curtis. Published in volume 92, issue 2, pages 368-372 of American Economic Review, May 2002

An income tax provides implicit insurance by dampening the variability of disposable income and consumption. Using an empirical framework derived from the consumption insurance literature and data from the Panel Study of Income Dynamics we examine the effect of federal income tax reforms of the 1980's on automatic stabilization of consumption. Overall, ERTA and TRA86 reduced consumption stability by about 50 percent. Recently increased EITC generosity restored or enhanced consumption insurance. The welfare cost of moving to the post-TRA86 system is sizable for relatively risk-averse households facing large income risk but is much more modest for the typical household.

the 2002 meetings of the American Economics Association. Governments sometimes bail out banks by recapitalizing them, or offering to insure their liabilities. The government’s goal may be to rescue borrowers, bankers, or depositors – and economists have developed rationales why each of these constituencies may merit protection (e.g., Diamond [2001)). These potential benefits have to be weighed against the costs of a bailout, which are typically thought to be those of the damage to long-run incentives that such intervention engenders. In this paper, we would like to present a different effect of bank bailouts: Bank bailouts alter the availability of aggregate liquidity in the economy. While a well-targeted bailout can help rescue an otherwise collapsing banking system (see Diamond-Rajan [2001a]), a poorly targeted bailout can even tip a banking system into a systemic crisis. This (ex-post crisis) cost of bank bailouts has, to the best of our knowledge, not been examined elsewhere, and is the focus of this paper. The Framework We consider a world with entrepreneurs, investors, and lenders. The economy lasts for two periods and three dates-- date 0 to date 2. There are two kinds of goods in the economy-consumption goods and machinery. Each entrepreneur has a project, requiring 1 unit of

The scope for growth of trade in services is vast. Although services currently make up over 60 percent of world production, they account for only about 20 percent of world trade. A primary reason why international trade in services has been limited is that the performance of many services necessitates physical contact between producers and consumers, a condition that renders service provision to distant locations infeasible. New technology, in particular, the Internet, provides a medium of exchange that overcomes such historical trading hurdles for many services, effectively reducing transport costs from infinity to virtually nothing. There is ample anecdotal evidence that the Internet is having just this sort of an effect on services trade. The accounting firm Netlink maintains the books for 6,000 employees in Reyanosa, Mexico, from their offices in Manhattan. Infosys of India provides softwareconsulting services to international clients, including Apple Computers, Lucent Technologies, and Microsoft. A medical-transcription company in South Africa, ITS, receives digital recordings from abroad electronically and returns a transcribed text file the next day. Still, the question remains as to whether electronic sharing of information is an important enough development to alter significantly the geography of service provision. Indeed, many services need to be tailored to the consumer’s needs and monitored for quality, and these are likely to be more effective if the provider is close by and speaks the same language. In addition, in the event of a dispute, resolution will be less complicated if both parties are subject to the same legal system. Finally, there may be security concerns with allowing foreign access to some documents or systems. Thus, for some services, especially those where familiarity, communication, and non-standardization contribute to quality, the Internet would not be expected to have a large impact on international trade. To determine whether the Internet has significantly affected international service provision in practice, we estimate a general model of services trade across countries and examine whether the inclusion of data on Internet penetration, as measured by the number of Internet hosts in a country, is statistically significant. Overall, our results offer evidence that the Internet is related to growth in services trade. After controlling for GDP and exchange-rate movements, we find that a 10-percent increase in Internet penetration in a foreign country is associated with about a 1.7-percentage-point increase in export growth and a 1.1-percentagepoint increase in import growth. The results are robust to a number of alternative specifications.

A growing empirical and theoretical literature argues in favor of specifying monetary policy in the form of Taylor-type interest rate feedback rules. That is, rules whereby the nominal interest rate is set as an increasing function of inflation with a slope greater than one around an intended inflation target. This paper shows that such rules can easily lead to chaotic dynamics. The result is obtained for feedback rules that depend on contemporaneous or expected future inflation. The existence of chaotic dynamics is established analytically and numerically in the context of calibrated economies. The battery of fiscal policies that has recently been advocated for avoiding global indeterminacy induced by Taylor-type interest-rate rules (such as liquidity traps) are shown to be unlikely to provide a remedy for the complex dynamics characterized in this paper.