Knowledge that Transforms

A fast-growing theoretical literature on the political economy of reform has provided a sizable collection of models that have deepened our understanding concerning how distributional conflict manifests itself in the political process and can prevent efficiency-enhancing economic reform from taking place (see e.g., Allan Drazen [2000 Ch. 10, 13] for an insightful review). Unfortunately, systematic empirical work that provides direct tests of the validity and significance of the mechanisms articulated in these models has been limited. As Torsten Persson and Guido Tabellini (2000 p. 481) note in their evaluation of the larger political economy literature, “The gap between theory and evidence is a final weakness of the existing literature. . . . [W]hen there is empirical work, its ties to the underlying theory are often loose . . . [and] are not tied well to the extensive form games or theoretical predictions in theoretical work. Ideally, we would like more empirical work ‘derived from theory’ as opposed to ‘informed by theory.’ ” One reason for the lack of such empirical studies is that most of these (often gametheoretic) models explain policy outcomes as a result of strategic interaction of forward-looking agents. Direct tests of these models using field data are subject to the same difficulties that researchers have faced when testing gametheoretic models in other areas such as industrial organization, since qualitative features of the equilibria often depend sensitively on the specific assumptions of the game structure (see Richard Schmalensee, 1988 pp. 675–76; Gilles Saint-Paul, 2000). In addition, the politicaleconomy literature of reform explains policy outcomes using political variables such as the distribution of voters’ preferences and the nature of political institutions (see e.g., Drazen, 2000; Stephan Haggard, 2000). The time variation of these variables is often limited, leading to a classic identification problem and making direct tests of theoretical models difficult (Saint-Paul, 2000). Laboratory studies allow the researcher to manipulate explanatory variables of a theory as treatment variables, so such studies should be helpful in partially overcoming these difficulties and can complement field empirical work on reform. The study of reform also poses new challenges to experimental economists, and a dialogue between political economists and experimental economists can enable both sides to capture gains from trade. This paper aims to illustrate this using an experimental study of the model in the influential paper by Raquel Fernandez and Dani Rodrik (1991).

The decline in health insurance coverage over the last two decades is a matter of national concern. The vast majority of insured individuals under age 65 obtain coverage from their employer or as dependents of a family member with group-sponsored health insurance. Recent evidence suggests that the decrease in coverage among full-time workers has resulted not so much from declining employer offers but rather from reduced take-up (Henry S. Farber and Helen Levy, 2000). The reasons for this change in employee behavior are not yet understood. Resolving this question is important for public policy because the two most likely explanations (the rise in employee insurance premiums and the increase in coverage of spouses under their own plans over this period) have different policy implications. Table 1 shows these trends by gender for full-time married workers from 1988 to 2001. The proportion of workers paying part or all of total insurance premiums increased nearly 20 percent, and the proportion with spouses covered under their own employer plans increased 30 percent among women and doubled among men. Table 1 also confirms that, while offer and eligibility rates declined somewhat for full-time workers over this period, take-up rates fell substantially among eligible workers. Concern among policymakers has focused on whether rising employee costs have forced workers to opt out of offered coverage. In this case, the number of uncovered individuals and

Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment by Bruce A. Blonigen, Ronald B. Davies and Keith Head. Published in volume 93, issue 3, pages 980-994 of American Economic Review, June 2003

When we leave our closet, and engage in the common affairs of life, (reason's) conclusions seem to vanish, like the phantoms of the night on the appearance of the morning; and 'tis difficult for us to retain even that conviction, which we had attained with difficulty (Hume, 1739/, p 507). we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed rules (of caring intervention to do visible 'good') of the small band or troop, or our families to the (extended order of cooperation through markets), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were to always apply the (noncooperative) rules of the extended order to our more intimate groupings, we would crush them. (Hayek, 1988, p 18). (Italics are his, parenthetical reductions are mine).(This abstract was borrowed from another version of this item.)

The standard analysis of price controls assumes that goods are efficiently allocated, even when there are shortages. But if shortages mean that goods are randomly allocated across the consumers that want them, the welfare costs from misallocation may be greater than the undersupply costs. We develop a framework to empirically test for misallocation. The methodology compares consumption patterns for demographic subgroups in rent-controlled and free-market places. We find that in New York City, which is rent-controlled, an economically and statistically significant fraction of apartments appears to be misallocated across demographic subgroups.

This article investigates the economic effects of conflict, using the terrorist conflict in the Basque Country as a case study. We find that, after the outbreak of terrorism in the late 1960's, per capita GDP in the Basque Country declined about 10 percentage points relative to a synthetic control region without terrorism. In addition, we use the 1998–1999 truce as a natural experiment. We find that stocks of firms with a significant part of their business in the Basque Country showed a positive relative performance when truce became credible, and a negative relative performance at the end of the cease-fire.

A central issue in school choice is the design of a student assignment mechanism. Education literature provides guidance for the design of such mechanisms but does not offer specific mechanisms. The flaws in the existing school choice plans result in appeals by unsatisfied parents. We formulate the school choice problem as a mechanism design problem and analyze some of the existing school choice plans including those in Boston, Columbus, Minneapolis, and Seattle. We show that these existing plans have serious shortcomings, and offer two alternative mechanisms each of which may provide a practical solution to some critical school choice issues.

How Does Globalization Affect the Synchronization of Business Cycles? by M. Ayhan Kose, Eswar S. Prasad and Marco E. Terrones. Published in volume 93, issue 2, pages 57-62 of American Economic Review, May 2003