Knowledge that Transforms

Beginning with Wilfred J. Ethier (1979, 1982), an important current of research has emphasized gains to trade from the greater availability of intermediate inputs, as opposed to the greater availability of consumption goods emphasized by Paul R. Krugman (1979) and others. It has been standard in this literature to model input varieties as symmetric, differentiated horizontally but not vertically. In contrast, anecdotal accounts, especially from developing countries, often stress the importance of gaining access to high-quality inputs on the import market. In theoretical discussions, the need to distinguish between the number of inputs and the quality of those inputs can be avoided by treating different qualities of a good as distinct varieties (see, e.g., Paul Romer 1994) or by redefining units of measurement. But in empirical work, one inherits the product categories and units in the data, and typically one must specify whether the availability-of-inputs mechanism is expected to operate through an increase in the number of input categories or through an increase in the quality of inputs within categories. Because of data constraints—in particular because of a lack of information on input and output prices in standard plant-level datasets—it has been difficult to investigate the role of input-quality differences, and recent empirical work, notably by Christian Broda, Joshua Greenfield, and David Weinstein (2006) and Pinelopi K. Goldberg et al. (2008), has tended to focus more on changes in the number of input categories than on quality differences within those categories. In this short paper, we draw on rich product level information from the Colombian manufacturing census to present a new set of facts about importing plants and input prices. The dataset is unique in that it contains detailed, representative, consistently measured information on the unit values of all inputs and outputs of plants. For the 1982–1988 period, the dataset also contains unit values separately for domestic and imported purchases of each input. As we discuss in more detail below, we interpret the new facts as suggesting that Colombian plants purchase higher-quality inputs on the import market than on the domestic market, within narrow product categories. Our empirical work has been guided in part by a theoretical framework from a related paper, Kugler and Verhoogen (2008). In that paper, we hypothesize a complementarity between input quality and plant productivity in generating output quality, and extend the model of Marc J. Melitz (2003) to accommodate it. The model predicts that, in equilibrium, more-productive plants are larger, use higher-quality inputs, produce higher-quality outputs, and are more likely to enter the export market than less-productive plants in the same industry. Using the Colombian plant census, we show that the cross-sectional correlations between a number of observable variables—output prices, input prices, plant size, and export status—as well as differences in those correlations across sectors,—are consistent with our theoretical framework and difficult to reconcile with alternative models that impose symmetry of either inputs or outputs. The distinctive aspect of the current paper is the focus on the distinction between imported and domestic inputs.

Online search as well as keyword-based contextual advertising on third-party publishers is primarily priced using pay-per-click (PPC): advertisers pay only when a consumer clicks on the advertisement. Slots for advertisements are auctioned, and per-click bids are weighted by the probability of a click given that the advertisement is displayed (the “click-through rate”) in addition to other factors. The PPC method allows the advertising platform (e.g. Google) to bundle together otherwise heterogeneous items (impressions on different positions on a search page, on different search phrases sharing common “keywords,” and on different publishers) into more homogeneous units, simplifying the advertiser's bidding problem. However, PPC pricing has some drawbacks. First, all clicks are not created equal: clicks on a Paris, France hotel website that is displayed on a search for Paris Hilton may result in lower profit conditional on the click. Second, for infrequently searched phrases on search engines or small content providers, it is difficult for the advertiser to accurately estimate conversion rates, increasing the risk and monitoring costs for the advertiser and diminishing their incentives to advertise broadly (indeed, on contextual networks, the advertising platform may not even provide the advertiser with sufficient accounting data about where the advertisements were displayed to allow the advertiser to distinguish sources of clicks, and the publisher mix may change on an ongoing basis.) Third, the problem of click fraud is fairly pervasive: when publishers receive a share of advertising revenue, advertisers place a single bid applying to many publishers, and revenue

Post-1980 US data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semielasticity below 2. Integrating under this money demand curve yields estimates of the welfare costs of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule.

We show that any decision maker who “narrowly brackets” (evaluates decisions separately) and does not have constant-absolute-risk-averse preferences will make a first-order stochastically dominated combined choice in some simple pair of independent binary decisions. We also characterize the preference-contingent monetary cost from this mistake. Empirically, in a real-stakes laboratory experiment that replicates Tversky and Kahneman's (1981) experiment, 28 percent of participants choose dominated combinations. In a representative survey eliciting hypothetical large-stakes choices, higher proportions do so. Violation rates vary little with personal characteristics. Average preferences are prospect-theoretic, with an estimated 89 percent of people bracketing narrowly.

We propose a distinction between active and passive waste as determinants of the cost of public services. Active waste entails utility for the public decision maker, whereas passive waste does not. We analyze purchases of standardized goods by Italian public bodies and exploit a policy experiment associated with a national procurement agency. We find that: (i) some public bodies pay systematically more than others for equivalent goods; (ii) differences are correlated with governance structure; (iii) the variation in prices is principally due to variation in passive rather than active waste; and (iv) passive waste accounts for 83 percent of total estimated waste.

I use data on the hospital networks offered by managed care health insurers to estimate the expected division of profits between insurers and providers. I include a simple profit-maximization framework and an additional effect: hospitals that can secure demand without contracting with all insurers (e.g., those most attractive to consumers and those that are capacity constrained) may demand high prices that some insurers refuse to pay. Hospital mergers may also affect price bargaining. I estimate that all three types of hospitals capture higher markups than other providers. These results provide information on the hospital investment incentives generated by bargaining.

We study minority representation in the workplace when employers engage in optimal sequential search and minorities convey noisier signals of ability than mainstream job candidates. The greater signal noise makes it harder for minorities to change employers' prior beliefs. When employers are selective, this leads to minority underrepresentation in the workplace. Diversity improves when the cost of interviewing, the average skill level of candidates, or the opportunity cost of not hiring increases. Reducing the cost of firing also increases minority representation. When employers are sufficiently unselective, the rigidity of employers' beliefs leads to overrepresentation of minorities.

This comment addresses a point raised in Russell Cooper and Jonathan Willis (2003, 2004), which discusses whether the “gap approach” is appropriate to describe the adjustment of production factors. They show that this approach to labor adjustment as applied in Ricardo J. Caballero, Eduardo Engel, and John C. Haltiwanger (1997) and Caballero and Engel (1993) can falsely generate evidence in favor of nonconvex adjustment costs, even if costs are quadratic. Simulating a dynamic model of firm-level employment decisions with quadratic adjustment costs and estimating a gap model from the simulated data, they identify two factors producing this spurious evidence: approximating dynamic adjustment targets by static ones, and estimating the static targets themselves. This comment reassesses whether the first factor indeed leads to spurious evidence in favor of fixed adjustment costs. We show that the numerical approximation of the productivity process is pivotal for Cooper and Willis's finding. With more precise approximations of the productivity process, it becomes rare to falsely reject the quadratic adjustment cost model due to the approximation of dynamic targets by static ones.

We study an allocation problem where a set of objects needs to be allocated to agents arriving over time. The basic model is of the private, independent values type. The dynamically efficient allocation is implementable if the distribution of agents' values is known. Whereas lack of knowledge about the distribution is inconsequential in the static case, endogenous informational externalities arise if the designer gradually learns about the distribution by observing present values. These externalities may prevent the implementation of the dynamically efficient allocation. We provide necessary and sufficient conditions for the efficient allocation to be implementable.

Food choice decisions are not the same as intake volume decisions. The former determine what we eat (soup or salad); the latter determine how much we eat (half of the bowl or all of it). Large amounts of money, time, and intelligence have been invested in understanding the physiological mechanisms that influence food choice (James O. Hill, forthcoming). Much less has been invested in understanding how and why our environment influences food consumption volume. Yet environmental factors (such as package size, plate shape, lighting, variety, or the presence of others) affect our food consumption volume far more than we realize (Wansink 2006). Whereas people can acknowledge that environmental factors influence others, they wrongly believe they are unaffected. Perhaps they are influenced at a basic level of which they are not aware. A better understanding of these drivers of consumption volume will have immediate implications for research, policy, and personal interventions. There are three objectives of this paper: (1) explain why environmental factors may unknowingly influence food consumption; (2) identify resulting myths that may lead to is specified models or misguided policy recommendations; and (3) offer clear direction for future research, policy, and personal dietary efforts.