Knowledge that Transforms

It is hard to believe that factor-endowments theory could offer an adequate explanation of international trade patterns. While the theory adequately predicts Saudi Arabian oil exports, it hardly seems appropriate for explaining the revolutionary impact of new technologies on world trade. Yet to take this position is to misunderstand the thrust of recent empirical research in international trade, research that is giving shape to a new generation of Heckscher-Ohlin-Vanek (HOV) thinking. The core of this new thinking is a class of HOV predictions that allow for international differences in technology and choice of techniques. The literature is in the process of rapid evolution. As a result, the key questions tend to get lost. There have been three of them. First, what empirical regularities account for the poor performance of the HOV model? Second, are there alternative assumptions about technology that lead to better test results for the model? Both of these are interesting questions, but they hardly constitute an end point for understanding the impacts of international trade. As Edward E. Leamer (1993 p. 439) pointed out, [E]conomists ought to abandon the idea that models are either true or false in favor of the notion that models are sometimes useful and sometimes misleading. The third and most important question is whether the HOV model provides a useful framework for thinking about international technology differences. In spite of the defects of the model, the answer is a definite ''yes.9

Direct measures of labor-force quality from international mathematics and science test scores are strongly related to growth. Indirect specification tests are generally consistent with a causal link: direct spending on schools is unrelated to student performance differences; the estimated growth effects of improved labor-force quality hold when East Asian countries are excluded; and, finally, home-country quality differences of immigrants are directly related to U.S. earnings if the immigrants are educated in their own country but not in the United States. The last estimates of micro productivity effects, however, introduce uncertainty about the magnitude of the growth effects. (JEL O40, I20, J24)

Employee involvement (EI) programs are the leading-edge form of personnel and labor relations in the United States. While many managers believe that these programs raise productivity and profits, the statistical evidence that EI improves the performance of firms is equivocal. The coefficients on measures of EI in production functions are usually positive but often insignificant or small (Commission on the Future of Worker–Management Relations, 1994 Ch. 2; Peter Cappelli and David Neumark, 1999) or contingent on other factors (Sandra E. Black and Lisa M. Lynch, 1997; Casey Ichniowski et al., 1997). A detailed case study of EI has further confirmed these small effects that were found in large data sets (Kleiner et al., 1999). If EI programs do not greatly affect productivity, why does business think so highly of them? In this study, we argue that the main beneficiaries of EI are workers and managers. We estimate the effects of EI on productivity using panel data on firms and the effects of EI on workers using a survey of employees and find that EI barely affects firm productivity but substantially improves worker well-being. We offer two explanations for this result.

We develop a competitive model of trade between countries with similar aggregate factor endowments. The trade pattern reflects differences in the distribution of talent across the labor forces of the two countries. The country with a relatively homogeneous population exports the good produced by a technology with complementarities between tasks. The country with a more diverse workforce exports the good for which individual success is more important. Imperfect observability of talent strengthens the forces of comparative advantage. Finally, we examine the effects of trade on income distribution and the composition of firms in each industry. (JEL F11, D51)

The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes: Comment by Clemens J. M. Kool and Alex Lammertsma. Published in volume 90, issue 1, pages 312-315 of American Economic Review, March 2000

Two previous surveys used to measure the welfare implications of Christmas gift-giving in the United States have reached opposite conclusions. Joel Waldfogel (1993) finds a welfare reduction of 13 percent or more associated with Christmas giving. Curiously, Sara J. Solnick and David Hemenway’s (1996) (henceforth, SH) replication of Waldfogel’s survey turns up just the opposite result: a 214-percent welfare gain. We design a series of controlled laboratory experiments to determine why the two papers arrive at opposite conclusions. We do not produce our own estimate of the deadweight loss of gift-giving; rather, our aim is to understand how, and which among, the differences in methodology between the two studies account for their divergent findings. Waldfogel (1993) surveyed 58 students enrolled in an intermediate microeconomics class about specific gifts they had received for Christmas. He asked recipients to estimate the amount paid by the giver for each gift received. Recipients were then asked to place a value on each gift they received. Respondents were instructed to estimate the value of a gift as the “...amount of cash such that you are indifferent between the gift and the cash, not counting the sentimental value of the gift” (p. 1331). Waldfogel measures the welfare yield of a gift as the difference between the recipient’s valuation and her cost estimate of the gift. Based on 278 gifts reported, Waldfogel finds that gifts have an average yield of 87.1 percent, indicating that gifts lose about 13 percent of their value in the exchange from giver to receiver. When cash gifts are excluded, the average yield falls further to 83.9 percent. SH were intrigued enough by Waldfogel’s results to replicate his study. Contrary to Waldfogel, SH find that gift-giving is actually welfare improving with an average yield of 214 percent (median yield 111 percent). They claim that a broader subject pool than that questioned by Waldfogel explains the reversal. Concerned that undergraduates in an intermediate microeconomics class may be unrepresentative, SH administered their survey to members of the general public at train stations and airports and to staff and graduate students enrolled in a biostatistics or an economics class at the Harvard School of Public Health. They also altered the question used to elicit respondents’ valuations of gifts received. Their survey question reads as follows (p. 1300): “Aside from any sentimental value, if, without the giver ever knowing, you could receive an amount of money instead of the gift, what is the minimum amount of money that would make you equally happy?” The change in wording from “the amount of cash such that you are indifferent” to the “amount of money that would make you equally happy” was prompted by a concern that “indifference” is a technical word familiar only to economists. It remains to be seen whether SH’s “equally happy” question is substantially equivalent to the “indifference” version of the question or whether they have introduced a greater change than they realize. An additional methodological concern is that the cost estimates always precede respondents’ valuations in both studies. Order effects are well documented in the social psychology literature: cost estimates may influence valuations. In particular, costs may serve as a judgmental anchor upon which to base value estimates. Reversing the order of the questions is a technique common to survey and experimental methods in the social sciences to balance the researcher’s design and offset possible order effects. * Ruffle: Department of Economics, Ben Gurion University, P.O.B. 653, Beer Sheva, 84105, Israel (e-mail: [email protected]); Tykocinski: Department of Behavioral Sciences, Ben Gurion University, Beer Sheva, 84105, Israel (e-mail: [email protected]). We thank Tomer Bakalash for research assistance and Sara Solnick, Todd Kaplan, three anonymous referees of this journal, and seminar participants at Ben Gurion University, Universite Louis Pasteur, and the 1998 ESA meetings in Mannheim for comments. 1 Howard Schuman and Stanley Presser (1981) provide a good starting point in this literature.

Who sets CEO pay? Our standard answer to this question has been shaped by principal agent theory: shareholders set CEO pay. They use pay to limit the moral hazard problem caused by the low ownership stakes of CEOs. Through bonuses, options, or long term contracts, shareholders can motivate the CEO to maximize firm wealth. In other words, shareholders use pay to provide incentives, a view we refer to as the contracting view. An alternative view, championed by practitioners such as Crystal (1991), argues that CEOs set their own pay. They manipulate the compensation committee and hence the pay process itself to pay themselves what they can. The only constraints they face may be the availability of funds or more general fears, such as not wanting to be singled out in the Wall Street Journal as being overpaid. We refer to this second view as the skimming view. In this paper, we investigate the relevance of these two views.