Knowledge that Transforms

Many empirical studies have rejected the law of one price. That prices of a good differ across locations has been explained by differences in product attributes and costs of local inputs, transport costs, trade barriers, and that buyers have imperfect information about prices in different locations; see Penelopi K. Goldberg and Michael M. Knetter (1997) for a survey. We examine the law of one price in situations where none of the mentioned reasons for its failure can be invoked. It has also been suggested that deviations from the law of one price are a consequence of rigid nominal prices and that different countries typically have different currencies. We explore whether this can contribute to our understanding of deviations from the law of one price. Our data are taken from three Scandinavian duty-free outlets, where each product (at the same location) has price tags in at least two currencies. Hence, a consumer has the option to choose between several prices for the same identical good. In such a setting there is a strong prior that the law of one price (LOP hereafter) holds well. However, the potential for arbitrage will arise because nominal prices are not continuously adjusted while exchange rates fluctuate daily. Based on standard tests, we reject LOP at all duty-free outlets. Given that LOP does not hold here, it is less surprising that many previous studies have found that prices of similar products at different locations differ significantly. Nevertheless, the main conclusion of the paper is that in this natural experiment, LOP remains a useful guide to the behavior of relative prices. As deviations become large, nominal prices are adjusted to reduce the deviations from LOP, thereby limiting arbitrage opportunities. The patterns at the duty-free outlets suggest that there is a band of inaction so that small deviations from LOP may persist (for almost a decade in one case), but that large deviations quickly lead firms to adjust relative prices. The findings are consistent with costly arbitrage and fixed costs of adjusting nominal prices.

We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive institutions. These institutions persisted to the present. Exploiting differences in European mortality rates as an instrument for current institutions, we estimate large effects of institutions on income per capita. Once the effect of institutions is controlled for, countries in Africa or those closer to the equator do not have lower incomes. (JEL O11, P16, P51)

We develop a general equilibrium tax model to evaluate the impacts of equal yield base broadening in indirect taxes from high rate narrow based (typically manufactures) taxes to broad based taxes (including services) such as a VAT. We capture differences in choice of mode of supply between market goods, such as manufactures, which cannot be supplied other than through the market, and self-suppliable services and informal sector supplied products. Using this formulation, we are able to provide numerical examples of welfare worsening VAT base broadening, which expands the tax base from market based manufactures, in which there are few (or no) non taxed supply possibilities, to all goods and services where such possibilities exist. We show that the usual presumption that there are welfare benefits from equal yield VAT base broadening breaks down once tax induced increases in self supply of previously non taxed goods and services and in informal sector activity (in small scale construction and other areas) are taken into account. Moreover, since untaxed informal sector supply is typically from lower income to higher income households, they gain as comparable informal sector activity is taxed under the base broadening change. We provide a calibrated version of the model, which captures Canadian base broadening accompanying the introduction of the Canadian VAT (GST) in 1990.

Detailed notes on weekly meetings of the sugar-refining cartel show how communication helps firms collude, and so highlight the deficiencies in the current formal theory of collusion. The Sugar Institute did not fix prices or output. Prices were increased by homogenizing business practices to make price cutting more transparent. Meetings were used to interpret and adapt the agreement, coordinate on jointly profitable actions, ensure unilateral actions were not misconstrued as cheating, and determine whether cheating had occurred. In contrast to established theories, cheating did occur, but sparked only limited retaliation, partly due to the contractual relations with selling agents. (JEL L13, L41)

Over 40 years ago Gary Becker (1957) argued that competition helps mitigate the ability of firms to engage in wage and employment discrimination. Deregulated transportation industries, in particular, provide fertile ground to test the Becker hypothesis. The increase in competition from deregulation should make it increasingly costly for employers to exercise discriminatory preferences. Several studies of the deregulated trucking industry provide support for this hypothesis (Nancy L. Rose, 1987; Peoples and Lisa Saunders, 1993; John S. Heywood and Peoples, 1994). This study also utilizes information on transportation industries to test the Becker hypothesis. It differs from the literature in that one of the transportation industries examined is privatized.1 At question is whether the Becker hypothesis also holds for a publicly owned transportation industry in a privatized environment. This question is addressed by investigating privatization's effect on black-white earnings differentials of public-transit bus drivers. These results are then compared with deregulation's effect on black-white earnings differentials of private for-hire truck drivers. Such a comparison allows for analyzing differences in differential earnings for comparable occupations in privatization and deregulation regimes. I. Transportation Industries

Behind similar unemployment rates in the United States and Portugal hide two very different labor markets. Unemployment duration is three times longer in Portugal than in the United States. Symmetrically, flows of workers into unemployment are three times lower in Portugal. These lower flows come in roughly equal proportions from lower job creation and destruction, and from lower worker flows given job creation and destruction. A plausible explanation is high employment protection in Portugal. High employment protection makes economies more sclerotic; but because it affects unemployment duration and worker flows in opposite directions, the effect on unemployment is ambiguous. (JEL E2, J3, J6)

Racial Differences in Transportation Access to Employment in Chicago and Los Angeles, 1980 and 1990 by Chanjin Chung, Samuel L. Myers and Lisa Saunders. Published in volume 91, issue 2, pages 174-177 of American Economic Review, May 2001

A new data set facilitates study of learning spillovers in World War II shipbuilding. Our results contain two principal but contrasting themes. First, learning spillovers were a significant source of productivity growth, and may have contributed more than conventional learning effects. Second, the size of the learning externalities across yards, as measured by Spence's θ, were small. These findings, which are not mutually inconsistent, suggest an optimistic view of learning spillovers: they are a significant source of productivity growth, but the market failures induced by learning externalities may be modest. (JEL D24, N72, O3)

We examine investment behavior when firms face costs in the access to external funds. We find that despite the existence of liquidity constraints, standard investment regressions predict that cash flow is an important determinant of investment only if one ignores q. Conversely, we also obtain significant cash flow effects even in the absence of financial frictions. These findings provide support to the argument that the success of cash-flow-augmented investment regressions is probably due to a combination of measurement error in q and identification problems. (JEL E22, E44, G31)

We use event-time methodology to study legal insider trading associated with mergers circa 1900. For mergers with “prospective” disclosures similar to today's, we find substantial value gains at announcement, implying participation by “out-side” shareholders despite the absence of insider constraints. Furthermore, preannouncement stock-price runups, relative to total value gain, are no more than those observed for modern mergers. Insider regulation apparently has produced little benefit for outsiders, with the inside information-pricing function and related gains shifting to external “information specialists.” Other results suggest market penalties for nondisclosure; i.e., insider trading is less successful in a restricted information environment. (JEL G3, K2, L5, N2)