Knowledge that Transforms

We propose a theory of the global production process that focuses on tradeable tasks, and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that typically results from reductions in the cost of trading goods.

Economists have long argued that a strong linkage between compensation and performance is essential for resolving the agency problem created by the separation of ownership and control. In particular Michael C. Jensen and Kevin J. Murphy (1990) were very influential in giving impetus to the view that such incentives were in need of strengthening. Compared to accounting benchmarks, the stock price is more forward looking, and it is responsive to all value-relevant information, including informal and unverifiable items of news. This makes stock and/or option awards an important part of optimal incentives, and constitutes a primary reason for seeking a public listing, as argued by Bengt Holmstrom and Jean Tirole (1993). Until recently, however, theories of optimal executive compensation have generally ignored the possibility that the stock price can be manipulated or falsified. It is becoming increasingly clear that this is an important issue. In a spate of recent scandals, companies have misled the investing public by vastly overstating their profitability and prospects, and substantive restatements of company accounts have become increasingly commonplace. A growing body of empirical evidence suggests that executive pay in its current form may be at least in part responsible. Recent studies finding a link between unusual movements in performance measures (such as accounting yardsticks and publicly disclosed price-sensitive information) and compensation include Daniel Bergstresser and Thomas Philippon (2006), Natasha Burns and Simi Kedia (2006), and Peng and Roell (forthcoming). Thus, the benefits of stock-based incentives should be weighed against their side effects. This paper models optimal executive compensation in a setting where managers are in a position to influence the public perception of Manipulation and Equity-Based Compensation

Due to betrayal aversion, people take risks less willingly when the agent of uncertainty is another person rather than nature. Individuals in six countries (Brazil, China, Oman, Switzerland, Turkey, and the United States) confronted a binary-choice trust game or a risky decision offering the same payoffs and probabilities. Risk acceptance was calibrated by asking individuals their “minimum acceptable probability” (MAP) for securing the high payoff that would make them willing to accept the risky rather than the sure payoff. People's MAPs are generally higher when another person, rather than nature, determines the outcome. This indicates betrayal aversion.

This laboratory experiment explores the extent to which impersonal exchange emerges from personal exchange with opportunities for long-distance trade. We design a three-commodity production and exchange economy in which agents in three geographically separated villages must develop multilateral exchange networks to import a good only available abroad. For treatments, we induce two distinct institutional histories to investigate how past experience with property rights affects the evolution of specialization and exchange. We find that a history of unenforced property rights hinders our subjects' ability to develop the requisite personal social arrangements to support specialization and effectively exploit impersonal long-distance trade.

This paper presents a political economy theory of fiscal policy. Policy choices are made by a legislature that can raise revenues via an income tax and by borrowing. Revenues can be used to finance a public good, whose value is stochastic, and pork-barrel spending. Policymaking cycles between a “business- as-usual” regime in which legislators bargain over pork, and a “responsible policymaking” regime in which policies maximize the collective good. Transitions between regimes are brought about by shocks in the value of the public good. Equilibrium tax rates are too high, public good provision is too low, and debt levels are too high.

This paper exploits the division of Germany after the Second World War and the reunification of East and West Germany in 1990 as a natural experiment to provide evidence for the importance of market access for economic development. In line with a standard new economic geography model, we find that, following division, cities in West Germany close to the East-West German border experienced a substantial decline in population growth relative to other West German cities. We show that the model can account for the quantitative magnitude of our findings and provide additional evidence against alternative possible explanations.

A key issue in monetary policymaking is the appropriate division of labor between the profes? sional staff of the central bank and the appointed policymakers. Lars E. O. Svensson (1999) argues that the appropriate role of a policymaking group, such as the Federal Open Market Com? mittee (FOMC) in the United States, is to make judgments about social welfare, taking as given the likely outcomes of different policies as esti? mated by the staff. In this division, the staff is relied upon to assess current and prospective economic conditions and to forecast the effects of different policies. Policymakers' only role is to decide which of the various options should be chosen.

Recent years have seen substantial prog? ress in our understanding of pricing decisions at the micro level. Access to large-scale data sources on prices of individual products has given us rich information on how frequently prices change, by what magnitude, and how the aggregation of price changes in individual firms maps into aggregate inflation (see, among many others, Mark Bils and Peter J. Klenow 2005). These facts about price movements are a key input in recent quantitative models of the aggre? gate effects of nominal rigidities (e.g., Mikhail Golosov and Robert E. Lucas 2007). In this paper, we use both the new facts and the new quantitative models to revisit an old question, namely, that of quantifying the welfare benefits of low inflation. Our model includes two

Economists have long concerned themselves with environmental influences, such as neighborhood, peers and family on individuals' beliefs and behaviors. However, the impact of children on parents' behavior has been little studied. Parenting daughters, psychologists have shown, increases feminist sympathies. I test the hypothesis that children, much like neighbors or peers, can influence adult behavior. I demonstrate that the propensity to vote liberally on reproductive rights is significantly increasing in a congress person's proportion of daughters. The result demonstrates not only the relevance of child to parent behavioral influence, but also the importance of personal ideology in a legislator's voting decisions as it is not explained away by voter preferences.