Knowledge that Transforms

We consider an economy where individuals face uninsurable risks to their human capital accumulation and analyze the optimal level of linear taxes on capital and labor income together with the optimal path of government debt. We show that in the presence of such risks, it is beneficial to tax both labor and capital and to issue public debt. We also assess the quantitative importance of these findings, and show that the benefits of government debt and capital taxes both increase with the magnitude of idiosyncratic risks and the degree of relative risk aversion. (JEL D52, H21, H24, H25, H63, J24)

Both under- and over-treatment of communicable diseases are public bads. But efforts to decrease one run the risk of increasing the other. Using rich experimental data on household treatment-seeking behavior in Kenya, we study the implications of this trade-off for subsidizing life-saving antimalarials sold over-the-counter at retail drug outlets. We show that a very high subsidy (such as the one under consideration by the international community) dramatically increases access, but nearly one-half of subsidized pills go to patients without malaria. We study two ways to better target subsidized drugs: reducing the subsidy level, and introducing rapid malaria tests over-the-counter. (JEL D12, D82, I12, O12, O15)

Mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in the languages of words as opposed to symbols, and between statements with theoretical as opposed to empirical content. Because it is difficult to distinguish mathiness from mathematical theory, the market for lemons tells us that the market for mathematical theory might collapse, leaving only mathiness as entertainment that is worth little but cheap to produce.

How does globalization affect economic growth? We discuss mechanisms that link international integration to the incentives for knowledge accumulation and the efficacy of that process. First, integration facilitates the flow of knowledge across national borders. Second, integration affords innovators a larger potential market even as it subjects them to additional competition from foreign rivals. Third, integration encourages specialization according to comparative advantage. Finally, integration affects the incentives for technological diffusion. Taken together, the literature offers many theoretical insights. Some progress has also been made on the empirical side, although data and methodological impediments have left assessment and measurement lagging behind.

Using an innovative survey measure of management practices on over 15,000 firms, we find private equity firms are better managed than government, family, and privately owned firms, and have similar management to publicly listed firms. This is true both in developed and developing countries. Looking at management practices in detail we find that private equity owned firms have strong people management practices (hiring, firing, pay, and promotions), but even stronger monitoring management practices (lean manufacturing, continuous improvement, and monitoring). Plant managers working in private equity owned firms also report greater autonomy from headquarters over sales, marketing, and new product introduction.

We analyze strategic speculators’ incentives to trade on information in a model where firm value is endogenous to trading, due to feedback from the financial market to corporate decisions. Trading reveals private information to managers and improves their real decisions, enhancing fundamental value. This feedback effect has an asymmetric effect on trading behavior: it increases (reduces) the profitability of buying (selling) on good (bad) news. This gives rise to an endogenous limit to arbitrage, whereby investors may refrain from trading on negative information. Thus, bad news is incorporated more slowly into prices than good news, potentially leading to overinvestment. (JEL D83, G12, G14)

Organizations depend on members' “loyalty” for their success. Studying a cooperative's attempt to increase deliveries by members, we show that the threat of sanctions leads to highly heterogeneous response among members. Despite the cooperative not actually enforcing the threatened sanctions, positive effects for some members persist for several months. Other members “exit,” stopping delivering altogether. Among non-compliant members we document substantial heterogeneity in beliefs about the legitimacy of the sanctions. This lack of common understanding highlights the role played by managers in organizations and provides a candidate explanation for lack of sanctions enforcement documented by Ostrom (1990) and other studies.

Four explanations for secular stagnation are distinguished: a rise in global saving, slow population growth that makes investment less attractive, adverse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of the last of these four views.

Using historical data on the size of state-specific Mexican birth cohorts and geographic migration networks between Mexican states and US metropolitan areas, I construct an instrumental variable that predicts decadal migration from Mexico to the United States. The intuition behind this identification strategy is that larger historical birth cohorts in Mexico yield more potential migrants once each birth cohort reaches prime migration age. I report evidence that Mexican immigration is associated with a decline in property crimes and an increase in aggravated assaults. The available evidence suggests that this is not an artifact of reduced crime reporting among immigrants.

The well-known double marginalization problem understates the inefficiencies arising from vertical relations in consumer search markets where consumers are uninformed about the wholesale prices charged by manufacturers to retailers. Consumer search provides a monopoly manufacturer with an additional incentive to increase its price, worsening the double marginalization problem and lowering the manufacturer's profits. Nevertheless, manufacturers in more competitive wholesale markets may not have an incentive to reveal their prices to consumers. We show that retail prices decrease in search cost, and so both industry profits and consumer surplus increase in search cost. (JEL D11, D42, D83, L12, L25, L60, L81)