Knowledge that Transforms

Many price indices must be constructed without quantity data at the elementary level. The paper shows that for some consumer goods in the United States and other countries, one can approximate expenditure shares using weights derived from the retail distribution of sellers. These weights are based on the share of outlets selling an item, or the share of outlets adjusted by the total number of items sold in each. Relative to using no weights, the paper finds that using such imputed weights substantially reduces bias in the frequency of price changes, in annual inflation, and in price comparisons across countries. (JEL E31, L11, L81, O11, O14)

I briefly review the emergence of “ design-based” research methods in labor economics in the 1980s and early 1990s. These methods were seen as a partial solution to the problems of credible inference identified by Ashenfelter (1974), Leamer (1978), Hendry (1980), and others. Designed-based studies typically use a simplified one-equation model of the outcome of interest—in contrast to model-based studies that specify a data generating process for all factors determining the outcome. I discuss some of the strengths and weaknesses of the design-based approach and the value of such research in the field. (JEL C20, J01, J24, J31, J38, J51, J53)

Identifying high-growth microentrepreneurs in low-income countries remains a challenge due to a scarcity of verifiable information. With a cash grant experiment in India we demonstrate that community knowledge can help target high-growth microentrepreneurs; while the average marginal return to capital in our sample is 9.4 percent per month, microentrepreneurs reported in the top third of the community are estimated to have marginal returns to capital between 24 percent and 30 percent per month. Further we find evidence that community members distort their predictions when they can influence the distribution of resources. Finally, we demonstrate that simple mechanisms can realign incentives for truthful reporting. (JEL D82, G21, I38, L25, L26, O12, O16)

We provide testable conditions under which the cost of acquiring information is given by the expected reduction of a measure of uncertainty (e.g., entropy). The assumption, under the name of posterior separability, is nearly universal in the literature of rational inattention; yet, a testable characterization has been lacking. In applications to experimental data, we indicate situations in which posterior separability is—and is not—a compelling assumption for the cost of information; we propose a generalization to address some of its shortcomings. We also show how to identify and estimate nonparametrically the cost of information from observable choice behavior. (JEL C91, D11, D12, D81, D91)

This paper evaluates the role of rising income inequality in explaining observed growth in college tuition. We develop a competitive model of the college market, in which college quality depends on instructional expenditure and the average ability of admitted students. An innovative feature of our model is that it allows for a continuous distribution of college quality. We find that observed increases in US income inequality can explain more than half of the observed rise in average net tuition since 1990 and that rising income inequality has also depressed college attendance. (JEL D31, I22, I23, I24)

Information plays a crucial role in mechanism design problems. A potential complication is that buyers may be inattentive, and so their information may endogenously and flexibly depend on the offered mechanism. I show that it is without loss of generality to consider contour mechanisms, which comprise triplets of allocation probabilities, prices, and beliefs, and are uniquely determined by a single such point. The mechanism design problem then reduces to Bayesian persuasion along the optimal contour. This reduction has significant implications for both the implementation of the optimal mechanism and the revenues that can be achieved. (JEL C11, D11, D82, D83)

We study supply and demand shocks in a disaggregated model with multiple sectors, multiple factors, input-output linkages, downward nominal wage rigidities, credit-constraints, and a zero lower bound. We use the model to understand how the COVID-19 crisis, an omnibus supply and demand shock, affects output, unemployment, and inflation, and leads to the coexistence of tight and slack labor markets. We show that negative sectoral supply shocks are stagflationary, whereas negative demand shocks are deflationary, even though both can cause Keynesian unemployment. Furthermore, complementarities in production amplify Keynesian spillovers from supply shocks but mitigate them for demand shocks. This means that complementarities reduce the effectiveness of aggregate demand stimulus. In a stylized quantitative model of the United States, we find supply and demand shocks each explain about one-half of the reduction in real GDP from February to May 2020. Although there was as much as 6 percent Keynesian unemployment, this was concentrated in certain markets. Hence, aggregate demand stimulus is one quarter as effective as in a typical recession where all labor markets are slack. (JEL E12, E23, E24, E31, E32, E62, I12)

Laboratory evidence shows that when people have to argue for a given position, they persuade themselves about the position’s factual and moral superiority. Such self-persuasion limits the potential of communication to resolve conflict and reduce polarization. We test for this phenomenon in a field setting, at international debating competitions that randomly assign experienced and motivated debaters to argue one side of a topical motion. We find self-persuasion in factual beliefs and confidence in one’s position. Effect sizes are smaller than in the laboratory, but robust to a one-hour exchange of arguments and a tenfold increase in incentives for accuracy. (JEL C93, D12, D72, D83, D91, I23)

We develop a dynamic model of political competition between two groups that differ in their subjective model of the data generating process for a common outcome. One group has a simpler model than the other group as they ignore some relevant policy variables. We show that policy cycles must arise and that simple world views—which can be interpreted as populist world views—imply extreme policy choices. Periods in which those with a more complex model govern increase the specification error of the simpler world view, leading the latter to overestimate the positive impact of a few extreme policy actions. (JEL D72, D83, K42)

Low liquidity and a high marginal propensity to consume are tightly linked. This paper analyzes this link in the context of income tax withholding and refunds. A theory of rational cash management with income uncertainty endogenizes the relationship between illiquidity and the marginal propensity to consume, and can explain the finding that households tend to spend tax refunds as if they valued liquidity, yet do not act to increase liquidity by reducing their withholding. The theory is supported by individual-level evidence based on financial account records, including a positive correlation between the size of tax refunds and the marginal propensity to consume out of those refunds. (JEL E21, G51, H24, H31)