Knowledge that Transforms

We present new evidence on trends in intergenerational mobility in the United States using administrative earnings records. We find that percentile rank-based measures of intergenerational mobility have remained extremely stable for the 1971-1993 birth cohorts. For children born between 1971 and 1986, we measure intergenerational mobility based on the correlation between parent and child income percentile ranks. For more recent cohorts, we measure mobility as the correlation between a child's probability of attending college and her parents' income rank. We also calculate transition probabilities, such as a child's chances of reaching the top quintile of the income distribution starting from the bottom quintile. Based on all of these measures, we find that children entering the labor market today have the same chances of moving up in the income distribution (relative to their parents) as children born in the 1970s. However, because inequality has risen, the consequences of the “birth lottery” - the parents to whom a child is born - are larger today than in the past.

How sensitive to business cycles are the earnings of top earners? And, how does the business cycle sensitivity of top earners vary by industry? We use a confidential dataset on earnings histories of US males from the Social Security Administration. On average, individuals in the top 1 percent of the earnings distribution are slightly more cyclical than the population average. But there are large differences across sectors; top earners in Finance, Insurance, and Real Estate (FIRE) and Construction face substantial business cycle volatility, whereas those in Services (who make up 40 percent of individuals in the top 1 percent) have earnings that are less cyclical than the average worker.

We define the empirical content of an economic theory as the least restrictive observationally equivalent theory. We show that the empirical content of a theory is captured by a certain kind of axiomatization, with axioms that are universal negations of conjunctions of atomic formulae.

In reviewing the Challenger tragedy, Richard Feynman identified a flawed O-Ring as the proximate cause and NASA's flawed safety culture as a deeper cause. There has been no similar investigation of the mortgage mess, which has been baptized rather than understood. In part, this is due to committed ideological views in the public and press that eliminate the call for expert analysis and reform. Broader and deeper policy problems are identified and illustrated using NASA's past behavior and FHA's ongoing behavior. The Columbia tragedy sounds an ominous warning on the future stability of housing finance markets.

We investigate Schelling's hypothesis that payoff-irrelevant labels (“cues”) can influence the outcomes of bargaining games with communication. In our experimental games, players negotiate over the division of a surplus by claiming valuable objects that have payoff-irrelevant spatial locations. Negotiation occurs in continuous time, constrained by a deadline. In some games, spatial cues are opposed to principles of equality or efficiency. We find a strong tendency for players to agree on efficient and minimally unequal payoff divisions, even if spatial cues suggest otherwise. But if there are two such divisions, cues are often used to select between them, inducing distributional effects.

We study the impact of a public school choice lottery in Charlotte-Mecklenburg schools on college enrollment and degree completion. We find a significant overall increase in college attainment among lottery winners who attend their first choice school. Using rich administrative data on peers, teachers, course offerings and other inputs, we show that the impacts of choice are strongly predicted by gains on several measures of school quality. Gains in attainment are concentrated among girls. Girls respond to attending a better school with higher grades and increases in college-preparatory course-taking, while boys do not.

Every year housing markets in the United Kingdom and the United States experience systematic above-trend increases in prices and transactions during the spring and summer (“hot season”) and below-trend falls during the autumn and winter (“cold season”). House price seasonality poses a challenge to existing housing models. We propose a search-and-matching model with thick-market effects. In thick markets, the quality of matches increases, rising buyers' willingness to pay and sellers' desire to transact. A small, deterministic driver of seasonality can be amplified and revealed as deterministic seasonality in transactions and prices, quantitatively mimicking seasonal fluctuations in UK and US markets.

In January 1995, US President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the eurozone crises can end.

Firms' incentives to manufacture biased user reviews impede review usefulness. We examine the differences in reviews for a given hotel between two sites: Expedia.com (only a customer can post a review) and TripAdvisor.com (anyone can post). We argue that the net gains from promotional reviewing are highest for independent hotels with single-unit owners and lowest for branded chain hotels with multiunit owners. We demonstrate that the hotel neighbors of hotels with a high incentive to fake have more negative reviews on TripAdvisor relative to Expedia; hotels with a high incentive to fake have more positive reviews on TripAdvisor relative to Expedia.

Public transit accounts for 1 percent of US passenger miles traveled but attracts strong public support. Using a simple choice model, we predict that transit riders are likely to be individuals who commute along routes with severe roadway delays. These individuals' choices thus have high marginal impacts on congestion. We test this prediction with data from a strike in 2003 by Los Angeles transit workers. Estimating a regression discontinuity design, we find that average highway delay increases 47 percent when transit service ceases. We find that the net benefits of transit systems appear to be much larger than previously believed.