Knowledge that Transforms

The assumption that one of a set of prediction models is a literal description of reality formally underlies many formal econometric methods, including Bayesian model averaging and most approaches to model selection. Prediction pooling does not invoke this assumption and leads to predictions that improve on those based on Bayesian model averaging, as assessed by the log predictive score. The paper shows that the improvement is substantial using a pool consisting of a dynamic stochastic general equilibrium model, a vector autoregression, and a dynamic factor model, in conjunction with standard US postwar quarterly macroeconomic time series.

In spite of the common wisdom that poverty breeds terrorism, econometric tests usually find that terrorism is influenced by population and various measures of democratic freedom, but not per capita GDP. Unlike previous studies, we use a data set containing separate measures of domestic and transnational terrorism and estimate models allowing for a nonlinear relationship between terrorism and poverty. When we account for the nonlinearities in the data and distinguish between the two types of terrorist events, we find that poverty has as a very strong influence on domestic terrorism and a small, but significant, effect on transnational terrorism.

The rise of offshoring of intermediate inputs raises important questions for commercial policy. Do the distinguishing features of offshoring introduce novel reasons for trade policy intervention? Does offshoring create new problems of global policy cooperation whose solutions require international agreements with novel features? In this paper we provide answers to these questions, and thereby initiate the study of trade agreements in the presence of offshoring. We argue that the rise of offshoring will make it increasingly difficult for governments to rely on traditional GATT/WTO concepts and rules—such as market access, reciprocity and non-discrimination—to solve their trade-related problems. (JEL F12, F13, L24)

It is widely recognized that the 2006 Massachusetts health reforms served as a blueprint for national reform under the 2010 Affordable Care Act (ACA). As such, there is interest in using the Massachusetts experience to understand how insurance premiums might change under the ACA. In this paper, we analyze changes in private insurance premiums in Massachusetts between 2002 and 2010. In contrast to earlier estimates from Massachusetts (Cogan, Hubbard and Kessler 2010), we find no statistical evidence of changes in group premiums. By contrast, we find large reductions in non-group premiums in Massachusetts relative to the rest of the U.S.

Over the past half-century there have been over three hundred instances of nation building initiatives, episodes where countries jointly give military and economic aid to a country embroiled in conflict. Despite the prevalence and expense of this foreign policy, little research has explored the potential growth effects from these operations. This project uses a standard growth regression framework to quantify the effects of nation building on GDP per capita growth of the recipient nation. The research considers how the characteristics of conflict zones and the interaction of diverse types of both military and economic aid impact the development process.

Can heuristic information processing affect important product markets? Analyzing over 22 million wholesale used-car transactions, we find evidence of left-digit bias in the processing of odometer values, whereby individuals focus on the number's leftmost digits. The bias leads to discontinuous drops in sale prices at 10,000-mile odometer thresholds, along with smaller drops at 1,000-mile thresholds. These findings reveal that information-processing heuristics matter even in markets with large stakes and easily observed information. We model left-digit bias in an inattention framework and structurally estimate the inattention parameter. Empirical patterns suggest the results are driven by final customers rather than professional agents. (JEL D12, D44, D83, L81)

Alfred Kahn was a major force behind regulatory reform that initially benefited air travelers and subsequently consumers in other industries by placing greater reliance on markets than on regulators to allocate resources. Kahn also believed that effective governance was important for deregulation's success. In this paper, I argue that such governance has not occurred in practice and that problems that persist in partially deregulated industries are more likely to be solved by full deregulation and, if necessary, privatization than by government intervention.

This paper shows how competition for land may lead firms to optimally innovate in spite of the market being perfectly competitive. When bidding for a location, firms can enhance their bid by investing in innovations that make the land more valuable. Firms are willing to innovate because the non-replicability of land implies that they will not be undercut by some other producer leading to losses as in the standard theory. In the absence of spillovers over space and over time, firms will optimally innovate. Empirical evidence from U.S. metropolitan areas supports the predictions of the theory.

We propose a collective labor supply model with household production that generalizes a model of Blundell, Chiappori and Meghir (2005). Adults'preferences not only depend on own leisure and individual private consumption of market goods. They also depend on the consumption of domestic goods, which are produced by combining market goods with individuals'time. A new identification result, which uses production shifters, is developed. We apply our model to unique data on Dutch couples with children. Our application uses a novel estimation strategy that builds upon the familiar two-stage allocation representation of the collective model.

Many business cycle models use a flat short-run Phillips curve, due to time-dependent pricing and strategic complementarities, to explain fluctuations in real output. But, in doing so, these models predict unrealistically high persistence and stability of US inflation in recent decades. We calculate “reset price inflation”—based on new prices chosen by the subsample of price changers—to dissect this discrepancy. We find that the models generate too much persistence and stability both in reset price inflation and in the way reset price inflation is converted into actual inflation. Our findings present a challenge to existing explanations for business cycles. (JEL E31, E52)