Knowledge that Transforms

U.S. stock returns are large, predictable over time, and predictable across stocks. The average return on a diversified market portfolio has averaged 8 percent per year more than the return on a short-term treasury bill. The predictability of time variation in returns is modest at high frequencies (about 10 percent of the variation in returns one quarter ahead is predictable) and quite large over longer periods (just under half of the variation in returns over five-year periods is predictable). Finally, portfolios based on the intersection of quintiles of stocks ranked by market value and by the ratio of book value to market value have differences in average annual returns across stocks of several percent per year. The natural explanation for these variations in returns is risk. But variations in consumption risk have done a poor job of explaining these differences in expected returns (see e.g., Sanford J. Grossman and Robert J. Shiller, 1981; Shiller, 1982; Lars Peter Hansen and Kenneth J. Singleton, 1983; N. Gregory Mankiw and Mat

This paper reviews recent randomized evaluations of educational programs in developing countries, including programs to increase school participation, to provide educational inputs, and to reform education. It then extracts some lessons for education policy and for the practice and political economy of randomized evaluations. I. Increasing School Participation Education is widely considered to be critical for development. The internationally-agreed Millennium Development Goals call for universal primary school enrollment by 2015. However, until recently there were no good assessments of how best to achieve this goal or how much it would cost. Some argue that it will be difficult to attract additional children to school, since most children who are not in school are earning income their families need. Others argue that children of primary-school age are not that productive, and modest incentives or improvements in school quality would be sufficient. Some see school fees as essential for ensuring accountability in schools and as a minor barrier to participation, while others argue that eliminating fees would greatly increase school participation. The simplest way to increase school participation is to reduce the cost of school, or even

The economics of hunting and gathering must have driven the biological evolution of human characteristics, since hunter-gatherer societies prevailed for the two million years of human history. These societies feature huge intergenerational resource flows, suggesting that these resource flows should replace fertility as the key demographic consideration. It is then theoretically expected that life expectancy and brain size would increase simultaneously, as apparently occurred during our evolutionary history. The brain here is considered as a direct form of bodily investment, but also crucially as facilitating further indirect investment by means of learning-by-doing.

Estimating the Knowledge-Capital Model of the Multinational Enterprise: Reply by David L. Carr, James R. Markusen and Keith E. Maskus. Published in volume 93, issue 3, pages 995-1001 of American Economic Review, June 2003

An Examination of the Influence of Theory and Individual Theorists on Empirical Research in Microeconomics by Pierre-André Chiappori and Steven D. Levitt. Published in volume 93, issue 2, pages 151-155 of American Economic Review, May 2003

The energy crisis of 1973–1974 coincided with a dramatic decline in U.S. stock market capitalization. Real energy prices jumped by 80 percent from 1973 to 1974. At the same time, the market value of nonfarm, nonfinancial corporations plunged by 40 percent. Because the two events coincided, the energy price hike is often considered a potential explanation for the stock market decline. One of the leading advocates of a causal link, Martin Neal Baily (1981), holds that the jump in energy prices made a substantial fraction of the capital stock obsolete. Energy inefficient machines were shut down, and expected profits of machines in operation declined. The value of existing capital decreased because it was not technologically suited to new economic conditions. This link between rising energy prices and capital obsolescence may explain the low level of stock market prices during that period. Despite the link, there has been no modern general-equilibrium evaluation of the extent to which the energy price shock was responsible for the dramatic drop in the market value of firms in 1974. I construct a dynamic generalequilibrium model with production and capital accumulation to examine the magnitude of the energy price effect. Contrary to the conventional wisdom, I find that an 80-percent increase in the real energy price causes the stock market value to decline by only 2 percent. Labor compensation, not claims to the capital stock, bears the brunt of the energy cost increase. The key element of the model is a putty-clay production technology. The neoclassical production function allows for smooth substitutability between factors after installation and conversion of capital to consumption goods at little cost. By contrast, the putty-clay production technology features ex ante substitutability of production factors, while there is no substitutability across them after machines are installed. Melvyn A. Fuss (1977) provides empirical evidence supporting the notion that capital and energy are complementary in the short run and substitutable in the long run. Because the technology is embodied in the capital stock in a putty-clay framework, changes in factor prices cause capital obsolescence and a decline in the value of capital. As a result, the putty-clay model is particularly suitable for studying the hypothesis put forward by Baily (1981). This paper adapts the putty-clay model developed by Simon Gilchrist and John C. Williams (2000) to include energy as a factor of production. I take the production technology ex ante to be Cobb-Douglas with constant returns to scale, but for capital goods already installed, production possibilities take the Leontief form: there is no substitutability of capital, energy, and labor ex post. An energy price shock affects the market value of firms through three channels. The first channel is the endogenous depreciation of the old vintage machines from both decreases in capacity utilization and declines in expected profits; the second channel is the effect of the energy price shock on investment; and the third channel is the effect on the interest rate. The impact of the fundamental shocks on the securities market depends on the resulting movement of price variables, such as the wage and the interest rate. Only a full general-equilibrium model can sort out all the interactions. * Department of Economics, CB#3305 University of North Carolina at Chapel Hill, Chapel Hill, NC 27599 (e-mail: [email protected]). This paper is based on my Ph.D. dissertation (2001) at Stanford University. I owe a substantial debt to Robert Hall and Thomas Sargent for their invaluable advice and encouragement. Thanks also to Victor Chernozhukov, Tim Cogley, Simon Gilchrist, Kenneth Judd, Hanno Lustig, Sergei Morozov, Beatrix Paal, Michael Salemi, Stijn Van Nieuwerburgh, the Sargent group members, two anonymous referees, and numerous seminar participants. The financial support of the Dissertation Fellowship from the John M. Olin Foundation is gratefully acknowledged. Any errors are my responsibility.

This paper analyzes the relationship between economic reform and the democratic process to ask the following question: Does the likelihood of adoption of an economic reform increase with an increase in the efficiency benefits from that reform? A priori we might expect that this likelihood should increase monotonically, for two reasons. First, economic reform results in an increase in the size of the national pie. If the government has the ability to make compensatory tax-transfers, an increase in each citizen's income is possible. Second, a larger economic reform results in a greater number of winners. This might also be expected to reinforce the political support for economic reform. So we should expect a reform with greater efficiency benefits to a larger population to have a greater chance of adoption by the government. However, in this paper we show that this intuition is mistaken. In particular, we demonstrate that there exists a certain non-monotonicity between the distribution of winners from economic reform and the probability of its adoption. An increase in the number of winners may lower, rather than increase, the likelihood of adoption of economic reform. In particular, even though reforms that benefit a minority or an overwhelming majority are adopted, reforms that benefit a smaller majority are not adopted.

This essay examines interconnections between "race" and economic inequality in the United States, focusing on the case of African-Americans. I will argue that it is crucially important to distinguish between racial discrimination and racial stigma in the study of this problem. Racial discrimination has to do with how blacks are treated, while racial stigma is concerned with how black people are perceived. My view is that what I call reward bias (unfair treatment of persons in formal economic transactions based on racial identity) is now a less significant barrier to the full participation by African-Americans in U.S. society than is what I will call development bias (blocked access to resources critical for personal development but available only via non-market-mediated social transactions). By making these points in the specific cultural and historical context of the black experience in U.S. society, I hope to contribute to a deeper conceptualization of the worldwide problem of race and economic marginality.

Noncooperative game theory combines strategic thinking, best-response, and mutual consistency of beliefs and choices (equilibrium). Hundreds of experiments show that in actual behavior these three forces are limited, even when subjects are highly motivated and analytically skilled (Camerer, 2003). The challenge is to create models that are as general, precise, and parsimonious as equilibrium, but which also use cognitive details to explain experimental evidence more accurately and to predict new regularities. This paper describes three exemplar models of behavior in one-shot games (thinking), learning over time, and how repeated “partner” matching affects behavior (teaching) (see Camerer et al., 2002b).