Knowledge that Transforms

We study the departure time decisions of commuters traversing a traffic network with the goal of arriving at a common destination at a specified time. There are costs associated with arriving either too early or too late, and with delays experienced at bottlenecks. Our main hypothesis, based on the Nash equilibrium distribution of departure times, implies that, for certain parameter values, expanding the capacity of an upstream bottleneck can increase the total travel costs in the network. We report the results of a large-group laboratory experiment, which are strongly supportive of this counterintuitive hypothesis, and we discuss the implications.

In settings ranging from office suite software to online auctions, casual empiricism suggests a strong tendency for markets where platforms compete to tip to a single dominant player. But which platform will prevail? One might hope that the better platform will be selected. Theory, however, offers no such comfort. Standard models suggest that tipping to any platform—even an inferior one—comprises an equilibrium. Paul A. David (1985) suggests that getting stuck in a bad equilibrium is not merely a theoretical possibility, but a good description of what happened in the typewriter keyboard market. He argues that the QWERTY arrangement prevailed (and continues to prevail) despite its inferiority to the DVORAK arrangement. The essence of David’s argument is that, by virtue of its head start in the market, users expected QWERTY to prevail and these expectations were selffulfilling. As a consequence, the superior platform, DVORAK, was never adopted. The idea that self-fulfilling expectations can lead an inferior platform to triumph in the face of better alternatives has now become standard in the economics literature and features prominently in many textbooks (see, for instance, Luis M. B. Cabral, 2000). Yet, despite the long passage of time since David’s piece was first published, the datedness of the examples illustrating this idea is striking. Most textbooks, including Cabral’s, are content to focus on QWERTY as well as the competition between Betamax and VHS some thirty years ago. We thank Dylan Minor and Xingtian Zhu for excellent research assistance. We gratefully

Sanctioning institutions are of utmost importance for overcoming free-riding tendencies and enforcing outcomes that maximize group welfare in social dilemma situations. We investigate, theoretically and experimentally, the endogenous formation of institutions in public goods provision. Our theoretical analysis shows that players may form sanctioning institutions in equilibrium, including those governing only a subset of players. The experiment confirms that institutions are formed and that it positively affects cooperation and group welfare. However, the data also shows that success is not guaranteed. Players are unwilling to implement equilibrium institutions in which some players have the opportunity to free ride. Our results emphasize the role of fairness in the institution formation process.

The United States is currently engulfed in the most severe financial crisis since the Great Depression. The crisis was triggered by the crash in the real estate “bubble” and amplified by the extreme concentration of risk in a highly leveraged financial sector. Conventional wisdom is that both the bubble and the risk concentration were the result of mistakes in regulatory policy: an expansionary monetary policy during the boom period of the bubble, and failure to reign in the practices of unscrupulous lenders. In this paper we argue that, while correct in some dimensions, this story misses two key structural factors behind the securitization process that supported the real estate boom and the corresponding lever age. First, over the last decade, the US has experienced large and sustained capital inflows from foreigners seeking US assets to store value (Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas 2008 ). Second, especially after the NASDAQ/tech bubble and bust, excess world savings have looked predominantly for safe debt investments. This should not be surprising because a large amount of the capital flow into the US has been from foreign central banks and governments that are not expert investors and are merely looking for a store of value (Krishnamurthy and Annette Vissing-Jorgenson 2008). In this paper we develop a stylized model that captures the essence of this environment. The model accounts for three facts observed during the boom and bust phases of the current crisis. First, during a period of good shocks— which we interpret as the period up to the end

Jan Eeckhout (2004) reports that the empirical city size distribution is lognormal, consistent with Gibrat's Law. We show that for the top 0.6 percent of the largest cities, the empirical distribution is dramatically different from the lognormal, and follows a power law. This top part is extremely important as it accounts for more than 23 percent of the population. The empirical hybrid lognormal-power-law distribution revealed may be characteristic of other key distributions, such as the wealth distribution and the income distribution. This distribution is not consistent with a simple Gibrat proportionate effect process, and its origin presents a puzzle yet to be answered.

Recent research in international trade emphasizes the importance of firms’ extensive margins for understanding overall patterns of trade as well as how firms respond to specific events such as trade liberalization. In this paper, we use detailed U.S. trade statistics to provide a broad overview of how the margins of trade contribute to variation in U.S. imports and exports across trading partners, types of trade (i.e. arm’s-length versus related-party) and both short and long time horizons. Among other results, we highlight the differential behaviour of related-party and arm’s-length trade in response to the 1997 Asian financial crisis.

The Labor Supply of Immigrants in the United States: The Role of Changing Source Country Characteristics by Mary Lopez and Fernando Antonio Lozano. Published in volume 99, issue 2, pages 35-40 of American Economic Review, May 2009

This paper argues for efficient environmental regulations that equate the marginal damage of pollution to marginal abatement costs across space. The paper estimates the source-specific marginal damages of air pollution and calculates the welfare gain from making the current sulfur dioxide allowance trading program for power plants more efficient. The savings from using trading ratios based on marginal damages are between $310 and $940 million per year. The potential savings from setting aggregate emissions efficiently and from including more sources of air pollution are many times higher.

Policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models faces two challenges: estimation of parameters that are relevant for policy trade-offs, and treatment of the deviations from the cross-equation restrictions. Using post-1982 US data, we study the robustness of the policy prescriptions from a state-of-the-art DSGE model with respect to two approaches to model misspecification pursued in the recent literature: (i) adding shocks to the DSGE model and/or generalizing the processes followed by these shocks; and (ii) explicit modeling of deviations from cross-equation restrictions (DSGE-VAR).

The development of national accounts is one of the greatest innovations in economics. These accounts are the mainstay of macroeconomic analysis and economic policy and have been cited as one of the reasons for post-WWII stability in the United States and other developed economies. The national income and product accounts (NIPAs) in the United States and the national accounts of other countries were created in the aftermath of a major financial collapse and the Great Depression. However, they have focused on measuring growth and fluctuations in gross domestic product (GDP) or national income with limited linkages to financial flows and balance sheets. Despite the postwar explosion of theoretical, empirical, and policy work on the sources of economic growth, the national accounts have failed to develop integrated production accounts with inputs as well as outputs in current and constant prices. In addition, there has been little progress on linking national accounts to expanded measures of production. These would cover household production and the use of natural resources and the environment. Similarly, expanded measures of investment would cover R&D, intangibles, human capital, and other near-market goods and services. This paper presents a comprehensive and consistent macroeconomic framework, which we DATA WATCH: IMPLEMENTATION OF A NEW ARCHITECTURE FOR THE US NATIONAL ACCOUNTS