Knowledge that Transforms

We consider how a firm dynamically allocates business among several suppliers to motivate them in a relational contract. The firm chooses one supplier who exerts private effort. Output is non-contractible, and each supplier observes only his own relationship with the principal. In this setting, allocation decisions constrain the transfers that can be promised to suppliers in equilibrium. Consequently, optimal allocation decisions condition on payoff-irrelevant past performance to make strong incentives credible. We construct a dynamic allocation rule that attains first-best whenever any allocation rule does. This allocation rule performs strictly better than any rule that depends only on payoff-relevant information.

We propose a measure of systemic risk, Δ CoVaR, defined as the change in the value at risk of the financial system conditional on an institution being under distress relative to its median state. Our estimates show that characteristics such as leverage, size, maturity mismatch, and asset price booms significantly predict Δ CoVaR. We also provide out-of-sample forecasts of a countercyclical, forward-looking measure of systemic risk, and show that the 2006:IV value of this measure would have predicted more than one-third of realized Δ CoVaR during the 2007–2009 financial crisis.

Analysis of the timing of launches of 642 new drugs in 76 countries during 1983–2002 shows that patent and price regulation regimes strongly affect how quickly new drugs become commercially available in different countries. Price regulation delays launch, while longer and more extensive patent rights accelerate it. Health policy institutions and economic and demographic factors that make markets more profitable also speed up diffusion. The estimated effects are generally robust to controlling for endogeneity of policy regimes with country fixed effects and instrumental variables. The results highlight the important role of policy choices in driving the diffusion of new innovations.

We evaluate a tracking program in a large urban district where schools with at least one gifted fourth grader create a separate “gifted/high achiever” classroom. Most seats are filled by non-gifted high achievers, ranked by previous-year test scores. We study the program's effects on the high achievers using (i) a rank-based regres sion discontinuity design, and (ii) a between-school/cohort analysis. We find significant effects that are concentrated among black and Hispanic participants. Minorities gain 0.5 standard deviation units in fourth-grade reading and math scores, with persistent gains through sixth grade. We find no evidence of negative or positive spillovers on nonparticipants.

We study the participation of women in golf, a predominately male social activity, and its influence on their likelihood of serving on a board of directors. Exploiting a novel dataset of all golfers in Singapore, we find that woman golfers enjoy a 54% higher likelihood of serving on a board relative to male golfers. A woman's probability of serving on the board in a large firm or in a predominately male industry increases by 117% to 125% when she plays golf. Joining the boy's informal network appears to facilitate women's entrance or success in the executive labor market.

We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large and strikingly robust to a broad array of checks. These results suggest that menu costs—broadly defined to include physical costs of price adjustment, informational frictions, etc.—are an important factor for nominal price rigidity at the micro level. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models in which firms have heterogeneous price stickiness.

We describe a general equilibrium model in which an agency problem arises because bankers must exert an unobserved and costly effort to perform their task. Suppose aggregate banker net worth is too low to insulate creditors from bad outcomes on their balance sheet. Then, banks borrow too much in equilibrium because there is a pecuniary externality associated with bank borrowing. Social welfare is increased by imposing a binding leverage restriction on banks. We formalize this argument and provide a numerical example.

We explore the in- and out- of sample robustness of tests for choice inconsistencies based on parameter restrictions in parametric models, focusing on tests proposed by Ketcham, Kuminoff and Powers (KKP). We argue that their non-parametric alternatives are inherently conservative with respect to detecting mistakes. We then show that our parametric model is robust to KKP's suggested specification checks, and that comprehensive goodness of fit measures perform better with our model than the expected utility model. Finally, we explore the robustness of our 2011 results to alternative normative assumptions highlighting the role of brand fixed effects and unobservable characteristics.

We study household decisions to acquire energy-using assets in the presence of rising incomes. We develop a theoretical framework to characterize the effect of income growth on asset purchases when consumers face credit constraints. We use large and plausibly exogenous shocks to household income generated by the conditional-cash-transfer program in Mexico, Oportunidades, to show that asset acquisition is nonlinear, depends, as predicted in the presence of credit constraints, on the pace of income growth, and both effects are economically large among beneficiaries. Our results may help explain important worldwide trends in the relationship between energy use and income growth.

Policy might partly shape the English-language acquisition of Hispanics migrating to the U.S. mainland, particularly policies related to limited-English-language disability benefits and immigration reform. Using data from the American Community Survey, we find that island-born Puerto Ricans on the U.S. mainland, as U.S. citizens, may have lower incentives to learn English than Hispanic immigrants because of their higher participation in LEP disability programs. However, among Mexican immigrants, recent immigration reform aimed at interior enforcement might have increased incentives for Mexican immigrants to learn English to reduce their probability of detection, if speaking English proxies for undocumented status.