Knowledge that Transforms

What caused the financial crisis that is sweeping across the world? What keeps asset prices and lending depressed? What can be done to remedy matters? While it is too early to arrive at definite answers to these questions, it is certainly time to offer informed conjectures, and these are the focus of this paper.

This paper studies household beliefs dur ing the recent US housing boom. The first part presents evidence from the Michigan Survey of Consumers. To characterize the heterogeneity in households’ views about housing and the econ omy, we perform a cluster analysis on survey responses at different stages of the boom. The estimation always finds a small cluster of house holds that believe it is a good time to buy a house because house prices will rise further. The size of this “momentum” cluster strongly increased toward the end of the boom. The second part of the paper provides a simple search model of the housing market to show how a small number of optimistic investors can have a large effect on prices without buying a large share of the housing stock. The raw survey data suggest that the housing boom had two distinct phases. During the early boom years 2002–2003, a large and increasing fraction of households believed that the time for buying a house was good. This fraction peaked at 85.2 percent in 2003:II. The most important reason—cited by up to 72 percent of house

We develop a general equilibrium model in which stock prices of innovative firms exhibit “bubbles” during technological revolutions. In the model, the average productivity of a new technology is uncertain and subject to learning. During technological revolutions, the nature of this uncertainty changes from idiosyncratic to systematic. The resulting bubbles in stock prices are observable ex post but unpredictable ex ante, and they are most pronounced for technologies characterized by high uncertainty and fast adoption. We find empirical support for the model's predictions in 1830–1861 and 1992–2005 when the railroad and Internet technologies spread in the United States.

New ideas, products, and practices take time to diffuse, a fact that is often attributed to some form of heterogeneity among potential adopters. This paper examines three broad classes of diffusion models—contagion, social influence, and social learning—and shows how to incorporate heterogeneity into each at a high level of generality without losing analytical tractability. Each type of model leaves a characteristic “footprint” on the shape of the adoption curve which provides a basis for discriminating empirically between them. The approach is illustrated using the classic study of Ryan and Gross (1943) on the diffusion of hybrid corn.

This paper exploits biological fertility shocks as instrumental variables to estimate the effect of motherhood delay on the cognitive ability of the next generation. Using detailed panel data on women in the NLSY79 and their first-born children aged 5 to 14, we find a year of delay leads to significant increases in math and reading scores: a 7 year delay produces gains on par with the black-white score difference. These results reveal a potential weakness of pro-natalist policies promoting early motherhood. While such policies may increase total period fertility rates, they will be less effective at increasing total human capital.

I describe how search engines sell ad space using an auction. I analyze advertiser behavior in this context using elementary price theory and derive a simple way to estimate the producer surplus generated by online search advertising. It appears that the estimated value of online advertising tends to be between 2 and 2.3 times advertising expenditures. JEL: D44 (Auctions), D21 (Firm Behavior)

People are getting fat. The rise in obesity rate has been particularly pronounced in the United States since the middle of the 1970s, but has by now extended into many other areas of the world. Several sources of technological change have been singled out as potential explanations for why people have been gaining so much weight. Increased productivity in agriculture has lowered the relative price of food (Darius Lakdwalla, Tomas Philipson, and Jayanta Bhattacharya 2005) while innovations in food processing have reduced the time cost of preparing food (David M. Cutler, Edward L. Glaeser, and Jesse M. Shapiro 2003). Technological change has also affected how people spend their time, in a way that may systematically have reduced calories expended. First, physically less demanding jobs in the service sector have replaced physically more demanding jobs in agriculture and manu facturing. Second, the allocation of time across different activities has changed dramatically over the last few decades: people are spending less time working (decline in labor market work for men, decline in home production work for women) and more time in mainly sedentary forms of leisure, such as watching TV (Mark Aguiar and Erik Hurst 2007). While the focus so far has been on the rela tionship between how people spend their time and how many calories they expend, we argue in this piece that there might also be an inter esting relationship between how people spend their time and how many calories they consume. Motivating this question is a (at first glance) rather counterintuitive finding from the time use surveys: the fact that people, in the United States

A representative-consumer model with Epstein-Zin-Weil preferences and i.i.d. shocks, including rare disasters, accords with observed equity premia and risk-free rates if the coefficient of relative risk aversion equals 3–4. If the intertemporal elasticity of substitution exceeds one, an increase in uncertainty lowers the price-dividend ratio for equity, and a rise in the expected growth rate raises this ratio. Calibrations indicate that society would willingly reduce GDP by around 20 percent each year to eliminate rare disasters. The welfare cost from usual economic fluctuations is much smaller, though still important, corresponding to lowering GDP by about 1.5 percent each year.

This paper explores a general model of the evolution and adaption of hedonic utility. It is shown that optimal utility will be increasing strongly in regions where choices have to be made often and decision mistakes have a severe impact on fitness. Several applications are suggested. In the context of intertemporal preferences, the model offers an evolutionary explanation for the existence of conflicting short- and long-run interests that lead to dynamic inconsistency. Concerning attitudes toward risk, an evolutionary explanation is given for S-shaped value functions that adjust to the decision maker's environment.