Knowledge that Transforms

An important class of active labor market policy has received little impact evaluation: immigration barriers intended to raise wages and employment by shrinking labor supply. Theories of endogenous technical advance raise the possibility of limited or even perverse impact. We study a natural policy experiment: the exclusion of almost half a million Mexican bracero farm workers from the United States to improve farm labor market conditions. With novel labor market data we measure state-level exposure to exclusion, and model the absent changes in technology or crop mix. We fail to reject zero labor market impact, inconsistent with this model. (JEL J15, J18, J22, J31, J43, J61, O33)

We study the effects of asymmetric information and imperfect competition in the market for small business lines of credit. We estimate a structural model of credit demand, loan use, pricing, and firm default using matched firm-bank data from Italy. We find evidence of adverse selection in the form of a positive correlation between the unobserved determinants of demand for credit and default. Our counterfactual experiments show that while increases in adverse selection increase prices and defaults on average, reducing credit supply, banks’ market power can mitigate these negative effects. (JEL D22, D82, G21, G32, L13, L25)

A large and growing literature has documented the importance of peer effects in education. However, there is relatively little evidence on the long-run educational and labor market consequences of childhood peers. We examine this question by linking administrative data on elementary school students to subsequent test scores, college attendance and completion, and earnings. To distinguish the effect of peers from confounding factors, we exploit the population variation in the proportion of children from families linked to domestic violence, who have been shown to disrupt contemporaneous behavior and learning. Results show that exposure to a disruptive peer in classes of 25 during elementary school reduces earnings at age 24 to 28 by 3 percent. We estimate that differential exposure to children linked to domestic violence explains 5 percent of the rich-poor earnings gap in our data, and that each year of exposure to a disruptive peer reduces the present discounted value of classmates’ future earnings by $80,000. (JEL I21, I26, J13, J24, J31)

Persson and Rossin-Slater (2018) find that prenatal exposure to family ruptures affects childhood and adult mental health, as well as infant physical health. We compare children whose relatives die within 280 days post-conception to children whose relatives die in the year after birth. Matsumoto correctly notes that defining the control group using actual birth dates can bias our estimates. Here, we redefine our control group using expected birth dates. The effects on mental health in childhood and adulthood are statistically indistinguishable from those in our original paper. The infant health impacts are attenuated, but statistically significant in our main specifications. (JEL I12, J12, J13)

We consider inference in regression discontinuity designs when the running variable only takes a moderate number of distinct values. In particular, we study the common practice of using confidence intervals (CIs) based on standard errors that are clustered by the running variable as a means to make inference robust to model misspecification (Lee and Card 2008). We derive theoretical results and present simulation and empirical evidence showing that these CIs do not guard against model misspecification, and that they have poor coverage properties. We therefore recommend against using these CIs in practice. We instead propose two alternative CIs with guaranteed coverage properties under easily interpretable restrictions on the conditional expectation function. (JEL C13, C51, J13, J31, J64, J65)

We provide a theory of rational stock price bubbles in production economies with infinitely-lived agents. Firms meet stochastic investment opportunities and face endogenous credit constraints. They are not fully committed to repaying debt. Credit constraints are derived from incentive constraints in optimal contracts which ensure default never occurs in equilibrium. Stock price bubbles can emerge through a positive feedback loop mechanism and cannot be ruled out by transversality conditions. These bubbles command a liquidity premium and raise investment by raising the debt limit. Their collapse leads to a recession and a stock market crash. (JEL D25, E22, E32, E44, G12, G14)

Medical care represents an important component of workers' compensation benefits with the potential to improve health and post-injury labor outcomes, but little is known about the relationship between medical care spending and the labor outcomes of injured workers. We exploit the 2003--2004 California workers' compensation reforms which reduced medical spending disproportionately for workers incurring low back injuries. We link administrative claims data to earnings records for injured workers and their uninjured coworkers. We find that workers with low back injuries experienced a 7.6 percent post-reform decline in medical care, and an 8.1 percent drop in post-injury earnings relative to other injured workers.

Competitive elections are essential to establishing the political legitimacy of democratizing regimes. We argue that insurgents undermine the state’s mandate through electoral violence. We study insurgent violence during elections using newly declassified microdata on the conflict in Afghanistan. Our data track insurgent activity by hour to within meters of attack locations. Our results suggest that insurgents carefully calibrate their production of violence during elections to avoid harming civilians. Leveraging a novel instrumental variables approach, we find that violence depresses voting. Collectively, the results suggest insurgents try to depress turnout while avoiding backlash from harming civilians. Counterfactual exercises provide potentially actionable insights for safeguarding at-risk elections and enhancing electoral legitimacy in emerging democracies. (JEL D72, D74, O17)

The gains from insurance arise from the transfer of income across states. Yet, by requiring that the premium be paid up front, standard insurance products also transfer income across time. We show that this intertemporal transfer can help explain low insurance demand, especially among the poor, and in a randomized control trial in Kenya we test a crop insurance product which removes it. The product is interlinked with a contract farming scheme: as with other inputs, the buyer of the crop offers the insurance and deducts the premium from farmer revenues at harvest time. The take-up rate for pay-at-harvest insurance is 72 percent, compared to 5 percent for the standard pay-up-front contract, and the difference is largest among poorer farmers. Additional experiments and outcomes provide evidence on the role of liquidity constraints, present bias, and counterparty risk, and find that enabling farmers to commit to pay the premium just 1 month later increases demand by 21 percentage points. (JEL G22, I32, O13, O16, Q12, Q14)

A central question in the debate over privatized Medicare is whether increased government payments to private Medicare Advantage (MA) plans generate lower premiums for consumers or higher profits for producers. Using difference‑in‑differences variation brought about by a sharp legislative change, we find that MA insurers pass through 45 percent of increased payments in lower premiums and an additional 9 percent in more generous benefits. We show that advantageous selection into MA cannot explain this incomplete pass‑through. Instead, our evidence suggests that market power is important, with premium pass‑through rates of 13 percent in the least competitive markets and 74 percent in the most competitive.