Knowledge that Transforms

We introduce a new method to measure the temporal discounting of money. Unlike preceding methods, our method requires neither knowledge nor measurement of utility. It is easier to implement, clearer to subjects, and requires fewer measurements than existing methods.

We study the optimal incentive scheme for a multistage project in which the agent privately observes intermediate progress. The optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date—if the agent reports progress at that date, then the principal gives him a relatively short hard deadline to complete the project—if progress is not reported at that date, then a probationary phase begins in which the project is randomly terminated at a constant rate until progress is reported. We explore several variants of the model with implications for optimal project design. In particular, we show that the principal benefits by imposing a small cost on the agent for submitting a progress report or by making the first stage of the project somewhat “harder” than the second.

This paper explores the combined effects of reductions in trade frictions, tariffs, and firing costs on firm dynamics, job turnover, and wage distributions. It uses establishment-level data from Colombia to estimate an open economy dynamic model that links trade to job flows and wages. Counterfactual experiments imply that Colombia's integration with global product markets increased its national income at the expense of higher unemployment, greater wage inequality, and increased firm-level volatility. In contrast, contemporaneous labor market reforms dampened the increase in unemployment and aggregate job turnover. The results speak more generally to the effects of globalization on labor markets.

Numerous studies find that U.S.-born Hispanics differ significantly from non-Hispanic whites on important measures of human capital, including health. Nevertheless, almost all studies rely on subjective measures of ethnic self-identification to identify immigrants' U.S.-born descendants. This can lead to bias due to “ethnic attrition,” which occurs whenever a U.S.-born descendant of a Hispanic immigrant fails to self-identify as Hispanic. This paper shows that Mexican American ethnic attritors are generally more likely to display health outcomes closer to those of non-Hispanic whites. This biases conventional estimates of Mexican American health away from suggesting patterns of assimilation and convergence with non-Hispanic whites.

We show that the Armenter and Koren model's firm-product-country results rely on the assumption that export shipment size is independent of firm size, and this assumption is contradicted by the data. When actual shipment sizes are used in the balls-and-bins model, it cannot reproduce the data on single product/single country exporters. Beyond just showing that the shipment size assumption matters to balls-and-bins outcomes, our results highlight the important fact that shipment size is an economic decision, co-determined with other export choices. For this reason, we argue that a balls-and-bins model cannot be a purely statistical benchmark model.

Many communities rely upon ostracism to enforce cooperation: if an individual shirks in one relationship, her innocent neighbors share information about her guilt in order to shun her, while continuing to cooperate among themselves. However, a strategic victim may herself prefer to shirk, rather than report her victimization truthfully. If guilty players are to be permanently ostracized, then such deviations are so tempting that cooperation in any relationship is bounded by what the partners could obtain through bilateral enforcement. Ostracism can improve upon bilateral enforcement if tempered by forgiveness, through which guilty players are eventually readmitted to cooperative society.

A well-developed theoretical literature - dating back at least to Nordhaus (1969) - has analyzed optimal patent policy design. We re-present the core trade-off of the Nordhaus model and highlight an empirical question which emerges from the Nordhaus framework as a key input into optimal patent policy design: namely, what is the elasticity of R&D investment with respect to the patent term? We then review the - surprisingly small - body of empirical evidence that has been developed on this question over the nearly half century since the publication of Nordhaus's book.

We prove that the ratio of kurtosis to the frequency of price changes is a sufficient statistic for the real effects of monetary shocks, measured by the cumulated output response following the shock. The sufficient statistic result holds in a large class of models which includes Taylor (1980); Calvo (1983); Reis (2006 ); Golosov and Lucas (2007 ); Nakamura and Steinsson (2010); Midrigan (2011); and Alvarez and Lippi (2014). Several models in this class are able to account for the positive excess kurtosis of the size distribution of price changes that appears in the data. We review empirical measures of kurtosis and frequency and conclude that a model that successfully matches the microevidence on kurtosis and frequency produces real effects that are about four times larger than in the Golosov-Lucas model, and about 30 percent below those of the Calvo model. We discuss the robustness of our results to changes in the setup, including small inflation and leptokurtic cost shocks. (JEL, E23, E31)

I study a dynamic relationship where a principal delegates experimentation to an agent. Experimentation is modeled as a one-armed bandit that yields successes following a Poisson process. Its unknown intensity is high or low. The agent has private information, his type being his prior belief that the intensity is high. The agent values successes more than the principal does, so prefers more experimentation. The optimal mechanism is a cutoff rule in the belief space: the cutoff gives pessimistic types total freedom but curtails optimistic types’ behavior. Pessimistic types overexperiment while the most optimistic ones underexperiment. This delegation rule is time consistent.

We examine the link between wage and consumption inequality using a life-cycle model incorporating consumption and family labor supply decisions. We derive analytical expressions for the dynamics of consumption, hours, and earnings of two earners in the presence of correlated wage shocks, nonseparability, progressive taxation, and asset accumulation. The model is estimated using panel data for hours, earnings, assets, and consumption. We focus on family labor supply as an insurance mechanism and find strong evidence of smoothing of permanent wage shocks. Once family labor supply, assets, and taxes are properly accounted for there is little evidence of additional insurance.