Knowledge that Transforms

This paper exploits the variation in the legal minimum working age across states in 1920 America in order to identify households' labor supply responses to exogenous changes in children's labor force participation. Using micro data on urban households from the U.S. Census, I find evidence that as a child moves to the labor market his siblings are less likely to work and more likely to attend school. I find no significant effect on parents' labor supply.

This paper develops a simple duopoly model in which investments in R&D and patents are inputs in the production of firm rents. Patents are necessary to appropriate the returns to the firm?s own R&D, but patents also create potential claims against the rents of rival firms. Analysis of the model reveals a general necessary condition for the existence of a positive correlation between the firm?s R&D intensity and the number of patents it obtains. When that condition is violated, changes in exogenous parameters that induce an increase in firms? patenting can also induce a decline in R&D intensity. Such a negative relationship is more likely when (1) there is sufficient overlap in firms? technologies so that each firm?s inventions are likely to infringe the patents of another firm, (2) firms are sufficiently R&D intensive, and (3) patents are cheap relative to both the cost of R&D and the value of final output. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.)

Despite much work, economists have not been able to quantitatively account for the differences in the Japanese and U.S. saving rates after World War II. In this paper, we show that the use of actual Japanese total factor productivity growth rates in a standard growth model generates saving rates that are reasonably similar to the Japanese data between 1956 and 2000.

This paper uses data from a randomized social experiment in Mexico to estimate and validate a dynamic behavioral model of parental decisions about fertility and child schooling, to evaluate the effects of the PROGRESA school subsidy program, and to perform a variety of counterfactual experiments of policy alternatives. Our method of validation estimates the model without using post-program data and then compares the model’s predictions about program impacts to the experimental impact estimates. The results show that the model’s predicted program impacts track the experimental results. Our analysis of counterfactual policies reveals an alternative subsidy schedule that would induce a greater impact on average school attainment at similar cost to the existing program.

We propose a framework for understanding episodes of vigorous economic expansion and extreme asset valuations. We interpret this phenomenon as a high-valuation equilibrium with a low cost of capital based on optimism about future funding. The key ingredient for such equilibrium is feedback from increased growth to a decline in the long-run cost of capital. This feedback arises when an expansion comes with technological progress in the capital sector, when fiscal rules generate procyclical fiscal surpluses, when the rest of the world has lower expansion potential or high saving needs, and when financial constraints are relaxed by the expansion itself.

We develop a model of currency crises, in which traders are heterogeneously informed, and interest rates are endogenously determined in a noisy rational expectations equilibrium. In our model, multiple equilibria result from distinct roles an interest rate plays in determining domestic asset market allocations and the devaluation outcome. Except for special cases, this finding is not affected by the introduction of noisy private signals. We conclude that the global games results on equilibrium uniqueness do not apply to market-based models of currency crises.

Using questions expressly added to the Consumer Expenditure Survey, we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income hypothesis. We exploit the unique, randomized timing of rebate receipt across households. Households spent 20 to 40 percent of their rebates on nondurable goods during the three-month period in which their rebates arrived, and roughly two-thirds of their rebates cumulatively during this period and the subsequent three-month period. The implied effects on aggregate consumption demand are substantial. Consistent with liquidity constraints, responses are larger for households with low liquid wealth or low income.

Crises are volatile times when endogenous sources of information are closely monitored. We study the role of information in crises by introducing a financial market in a coordination game with imperfect information. The asset price aggregates dispersed private information acting as a public noisy signal. In contrast to the case with exogenous information, our main result is that uniqueness may not obtain as a perturbation from perfect information: multiplicity is ensured with small noise. In addition, we show that: (a) multiplicity may emerge in the financial price itself; (b) less noise may contribute toward nonfundamental volatility even when the equilibrium is unique; and (c) similar results obtain for a model where individuals observe one another?s actions, highlighting the importance of endogenous information more generally.

This paper summarizes key aspects of China’s exchange rate policy, outlines the problems it creates for both China and the global economy, and proposes a feasible policy compromise. China’s Currency Regime On July 21, 2005, China announced a 2.1 percent appreciation of the Renminbi (RMB) against the US dollar, a move to a managed float, and a number of other “reforms. ” Most of these “reforms ” simply reiterated long-standing arrangements: since 1994 China has identified its currency regime as a managed float and has set a 0.3 percent per day fluctuation limit (in either direction) for the RMB against the dollar (vis-à-vis the central parity). The July 21 st announcement, however, did pledge two potentially important alterations: (i) the RMB was henceforth to be managed “with reference to a basket of currencies ” rather than being pegged to the dollar; and (ii) the exchange rate was to become “more flexible, ” with its value based more on “market supply and demand.” In practice, the July 21 st reforms have so far had little visible effect. As of mid-