Knowledge that Transforms

By 2015, global oil consumption will reach 90 million barrels per day. In part, this high level of consumption reflects the fact that many countries provide subsidies for gasoline and diesel. This paper examines global fuel subsidies using the latest available data from the World Bank, finding that road-sector subsidies for gasoline and diesel totaled $110 billion in 2012. Pricing fuels below cost is inefficient because it leads to overconsumption. Under baseline assumptions about supply and demand elasticities, the total annual deadweight loss worldwide is $44 billion. Incorporating external costs increases the economic costs substantially.

India's coal-fired generating capacity doubled between 1990 and 2010 and currently accounts for 70 percent of electricity produced. Despite this, thermal efficiency at state-owned coal-fired power plants in India is significantly lower than at plants in the United States. When matched on age and capacity, heat input per kWh was 8 percent higher at Indian plants between 1997 and 2009. This can only partly be explained by the lower heat content of Indian coal. Electricity sector restructuring in the United States improved thermal efficiency at investor-owned plants; however, electricity sector restructuring in India has yet to improve thermal efficiency at state-owned coal-fired power plants.

We show that isolated capital cities are robustly associated with greater levels of corruption across US states, in line with the view that this isolation reduces accountability. We then provide direct evidence that the spatial distribution of population relative to the capital affects different accountability mechanisms: newspapers cover state politics more when readers are closer to the capital, voters who live far from the capital are less knowledgeable and interested in state politics, and they turn out less in state elections. We also find that isolated capitals are associated with more money in state-level campaigns, and worse public good provision.

We study the determinants of differences in farm size across countries and their impact on agricultural and aggregate productivity using a quantitative sectoral model featuring a distribution of farms. Measured aggregate factors (capital, land, economy-wide productivity) account for one-quarter of the observed differences in farm size and productivity. Policies and institutions that misallocate resources across farms have the potential to account for the remaining differences. Exploiting within-country variation in crop-specific price distortions and their correlation with farm size, we construct a cross-country measure of farm-size distortions which together with aggregate factors accounts for one-half of the cross-country differences in size and productivity.

During the downturn of 2008-2009, output and hours fell significantly, but labor productivity rose. These facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven, at least in part, by fluctuations in total factor productivities of firms. We show that once investment in intangible capital is included in the analysis, there is no inconsistency. Measured labor productivity rises if the fall in output is underestimated; this occurs when there are large unmeasured intangible investments. Microevidence suggests that these investments are large and cyclically important.

Historical accounts suggest that Jewish migrs from Nazi Germany revolutionized U.S. science. To analyze the migrs' effects on chemical innovation in the U.S. we compare changes in patenting by U.S. inventors in research fields of migrs with fields of other German chemists. Patenting by U.S. inventors increased by 31 percent in migr fields. Regressions that instrument for migr fields with pre-1933 fields of dismissed German chemists confirm a substantial increase in U.S. invention. Inventorlevel data indicate that migrs encouraged innovation by attracting new researchers to their fields, rather than by increasing the productivity of incumbent inventors.

The dynamics of house prices, sales, construction, and population growth in response to city-specific income shocks are characterized for 106 US cities. A dynamic model of search in the housing market in which construction, the entry of buyers, house prices, and sales are determined in equilibrium is then developed. The theory generates dynamics qualitatively consistent with the observations and a version calibrated to match key features of the US housing market offers a substantial quantitative improvement over models without search. In particular, variation in the time it takes to sell induces transaction prices to exhibit serially correlated growth.

The cross-sectional dispersion of firm-level investment rates is procyclical. This makes investment rates different from productivity, output, and employment growth, which have countercyclical dispersions. A calibrated heterogeneous-firm business cycle model with nonconvex capital adjustment costs and countercyclical dispersion of firm-level productivity shocks replicates these facts and produces a correlation between investment dispersion and aggregate output of 0.53, close to 0.45 in the data. We find that small shocks to the dispersion of productivity, which in the model constitutes firm risk, suffice to generate the mildly procyclical investment dispersion in the data but do not produce serious business cycles.

We develop a dynamic equilibrium model of asset markets with adverse selection. There exists a unique equilibrium in which better quality assets trade at higher prices but with a lower price-dividend ratio in less liquid markets. Sellers of high-quality assets signal quality by accepting a lower trading probability. We show how the distribution of sellers' private information affects an asset's price and liquidity, how a change in that distribution can cause a fire sale and a flight to quality, and how asset purchase and subsidy programs may raise prices and liquidity and reverse the flight to quality.

I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for “leaning against the wind” monetary policies.