Knowledge that Transforms

The Changing Incidence and Severity of Poverty Spells among Female-Headed Families by David Card and Rebecca M. Blank. Published in volume 98, issue 2, pages 387-91 of American Economic Review, May 2008

We examine the impact of liquidity shocks by exploiting cross-bank liquidity variation induced by unanticipated nuclear tests in Pakistan. We show that for the same firm borrowing from two different banks, its loan from the bank experiencing a 1 percent larger decline in liquidity drops by an additional 0.6 percent. While banks pass their liquidity shocks on to firms, large firms—particularly those with strong business or political ties—completely compensate this loss by additional borrowing through the credit market. Small firms are unable to do so and face large drops in overall borrowing and increased financial distress.

The paper provides a model of household consumption and portfolio allocation which incorporates housing as both a consumption good and a component of wealth. Household utility depends, possibly nonseparably, on two goods: nondurable consumption, which is costlessly adjustable, and housing, which is subject to a nonconvex adjustment cost. Households face housing price risk in the sense that the relative price of housing varies over time, and can invest in a wide variety of financial assets in addition to housing. This single, reasonably tractable, model generates testable implications for portfolio allocation, risk aversion, asset pricing, and the dynamics of nondurable consumption.

A classical theme in social analysis views economic class divisions as the main cause of social conflict. Yet many, if not most of the conflicts we observe today appear to be ethnic in nature. It appears that the "vertical" nature of class divisions is often dominated by the "horizontal" antagonisms across groups delineated by noneconomic markers. This paper highlights the perverse synergy of economic inequality within ethnic groups, and its role in the salience of ethnic conflict. In a model of group formation which allows both class and ethnic groupings to emerge, we show that ethnic, as opposed to class, conflict may be focal, and precisely in the presence of economic inequality.

Motherhood and Female Labor Force Participation: Evidence from Infertility Shocks by Jorge M. Aguero and Mindy S. Marks. Published in volume 98, issue 2, pages 500-504 of American Economic Review, May 2008

Exploring the Impact of Financial Incentives on Stereotype Threat: Evidence from a Pilot Study by Roland G. Fryer Jr., Steven D. Levitt and John A. List. Published in volume 98, issue 2, pages 370-75 of American Economic Review, May 2008

The explosion in the 21st century of terrorist activities by Islamic radicals in the United States, Europe and Asia requires reforming the institutions for domestic counterterrorism (CT) and new international relations among individual national CT organizations. This paper discusses the institutional reforms for CT in the United States, focusing particularly on the changes in the FBI. These changes are compared with the way that the British CT activities of the MI5 and MI6 have evolved in response to terrorism in Britain. The paper also discusses the reasons why there is strong cooperation among the CT activities of all the major governments and with the United States in particular, even when those governments do not agree about military cooperation or about the use of economic sanctions.

This paper explores the application of contingent claims analysis (CCA) to two important issues in life-cycle finance: investing for retirement, and deciding when, if ever, to switch careers. Contingent claims analysis is a methodology that grew out of the option pricing theory of Fischer Black, Robert C. Merton, and Myron Scholes. They derived the option pricing model by showing that there is a self-financing dynamic trading strategy that replicates the payoffs from a call option. In the absence of transaction costs, the law of one price and the force of arbitrage imply that the cost of the initial replicating portfolio is the price of the option. That same approach applies to any derivative security or contingent contract based on traded assets. For every dynamic trading strategy, there exists an equivalent contingent contract. In reality, most investors face substantial transactions costs and cannot trade even approximately continuously, as is done in the theoretical models. But in a modern, well-developed financial system, the lowest-cost transactors may have marginal trading costs close to zero, and can trade almost continuously. Thus, the lowest-cost producers of contingent contracts can approximate reasonably well the dynamic trading strategy, and in a competitive environment

Desire for social esteem is a source of prosocial behavior. We develop a model in which actors' utility of esteem depends on the audience. In a principal-agent setting, we show that the model can account for motivational crowding out. Control systems and pecuniary incentives erode morale by signaling to the agent that the principal is not worth impressing. The model also offers an explanation for why agents are motivated by unconditionally high pay and by mission-oriented principals.

The National Assessment of Educational Progress in Economics: Findings for General Economics by William B. Walstad and Stephen Buckles. Published in volume 98, issue 2, pages 541-46 of American Economic Review, May 2008