Economies of Scale and Constant Returns to Capital: A Neglected Early Contribution to the Theory of Economic Growth by Edmund S. Cannon. Published in volume 90, issue 1, pages 292-295 of American Economic Review, March 2000
Everyone has observed people invoking fair-ness arguments in defense of their opinions or actions, and it is not uncommon for such argu-ments to be wielded on both sides of an issue about which views conflict. For example, dur-ing a televised debate Representative Charles B. Rangel said, “I think [Affirmative Action] has to involve a search for fairness, ” whereas com-mentator Avi Nelson opined that “you promote more unfairness than fairness when you depart from the basic criterion, which is that individ-uals should be treated as individuals ” (Annen-
A Theory of Rigid Extremists and Flexible Moderates with an Application to the U.S. Congress by S. Brock Blomberg and Joseph E. Harrington. Published in volume 90, issue 3, pages 605-620 of American Economic Review, June 2000
The paper takes the search and matching model of the aggregate labor market to the data. It tests the model's empirical validity and employs structural estimation to generate a characterization of the optimal behavior of firms and workers. The model is applied to Israeli data that are uniquely suited for this kind of empirical investigation. The structural estimates are used to quantify the frictions embodied in the model, including the costs of search, the congestion and trading externality effects, and the matching process. A calibration-simulation analysis then studies the effect of several key variables on equilibrium unemployment.
Does Culture Matter in Economic Behavior? Ultimatum Game Bargaining among the Machiguenga of the Peruvian Amazon by Joseph Henrich. Published in volume 90, issue 4, pages 973-979 of American Economic Review, September 2000
In a world of trade restrictions, large countries enjoy economic benefits, because political boundaries determine the size of the market. Under free trade and global markets even relatively small cultural, linguistic or ethnic groups can benefit from forming small, homogeneous political jurisdictions. This paper provides a formal model of the relationship between openness and the equilibrium number and size of countries, and successfully tests two implications of the model. Firstly, the economic benefits of country size are mediated by the degree of openness to trade. Secondly, the history of nation-state creations and secessions is influenced by the trade regime.
In an influential paper, David S. Scharfstein and Jeremy C. Stein (1990) modeled sequential investment by agents concerned about their reputation as good forecasters. Consider an agent who acts after observing the behavior of another ex ante identical agent. Scharfstein and Stein argue that reputational herding requires that better agents have more correlated signals conditionally on the state of the world. They claim that without correlation the second agent would have no incentive to attempt to manipulate the market inference about ability by imitating the behavior of the first agent. In this Note we show that in their model, correlation is not necessary for herding, other than in degenerate cases. Our clarification exploits a parallel with statistical herding, introduced by Abhijit V. Banerjee (1992) and Sushil Bikhchandani et al. (1992) (henceforth, BHW). BHW feature investors who maximize expected profits in a common-value environment and have access to conditionally independent private signals of bounded precision, while still observing the behavior of others. Eventually, the evidence accumulated from observing earlier decisions is sufficiently strong to swamp the private information of a single decision maker. Thereafter, everyone rationally copies the prevailing behavior. We notice that payoffs have a common-value nature in both the statistical and the reputational model. The observed behavior of other agents possibly affects the probability belief attached to different states of the world as well as the payoff conditional on each state. Herding arises from the interaction of these two channels affecting the expected payoff, be it physical or reputational. Positive differential conditional correlation of signals in the reputational model is tantamount to the introduction of positive payoff externalities in the statistical model. This reinforces the tendency to herd already present with independence. The fact that differential conditional correlation is not needed for herding is a clear strength of the reputational herding model. It is not necessary to assume common unpredictable components of returns at the individual level in order to rationalize the empirical findings that individual prediction errors of security analysts are correlated. After setting up Scharfstein and Stein’s model in Section I, we summarize their findings in Section II and provide a unified definition of herd behavior in Section III. Section IV contains our critique of their line of argument and clarifies the role of differential conditional correlation. In Section V we propose alternative robust scenarios where herding would indeed be driven by correlation. Section VI concludes.
In the wake of the Mexican, Asian, and other crises of recent years, calls for a “new international financial architecture” have been heard from many quarters. While other questions, such as the wisdom of the International Monetary Fund (IMF) practice of long-term support for low-income countries, have also been raised, the central issue is the role that the IMF should play in reducing the likelihood of crises and in handling them once they arise, and it is this issue that is addressed in this paper. Of the other important questions, only one needs to be mentioned here. That is, in recent years, the IMF has begun paying attention to issues such as poverty alleviation, income distribution, and other questions which are not only far away from its traditional competence, but which also detract seriously from its capacity to handle macroeconomic crises, where it has possessed competence. The IMF’s ability to deal satisfactorily with the central concerns discussed here will be significantly impaired if it continues to take on these other issues. Turning then to crisis management, many suggestions have been made for changes in the IMF role. These range from its abolition to large-scale expansion of IMF resources, with many others in between. Prescription should follow diagnosis. I start, therefore, with a diagnosis as to what happened in many of the crisis countries. On that basis, I argue that there are two distinct lines along which changes could be made, and that many of the apparently conflicting demands placed upon the IMF reflect either failure to diagnose the nature of the problem or an unwillingness to come to grips with the central dilemma. Thereafter, some of the proposals currently being aired are evaluated in light of the diagnosis. The key to understanding the issues surrounding crises of the type that occurred in East Asia in 1998 lies in the proposition that most, but not all (Brazil, for example, is an exception) of the “crisis countries” of recent years have really experienced two crises almost simultaneously. They have had a balance-of-payments crisis and a financial crisis. The balance-of-payments crisis has come about as countries have been unable to maintain their obligations to foreign creditors and their commitments to maintain an exchange-rate regime. Balance-of-payments crises are familiar from earlier years, when the IMF routinely supported stabilization programs. Two characteristics of these “traditional” crises should be noted. First, efforts to defend an exchange rate and a commitment to service foreign-currency-denominated debt have almost always been precipitating factors in balance-ofpayments crises, and the solution has almost always entailed adjustment of the nominal exchange rate, if not abandonment of a fixedexchange-rate regime and adoption of a floating exchange rate. Second, key economic policymakers in the crisis country and IMF staff typically had several months in which to work out adjustment programs. In the case of the highly publicized Mexican announcement of inability to maintain debt-servicing in August 1982, for example, an IMF program was not agreed upon until many months later. Financial crises, like balance-of-payments crises, have occurred frequently in the postWorld War II period. A financial crisis comes about when the banking system is threatened with insolvency. It can occur (as in Japan in the 1990’s and in Sweden in 1992) without a balance-of-payments crisis. It is usually centered in the banking system, although the United States savings-and-loan crisis demonstrated that it can arise elsewhere in the financial system. Generally, financial crises are characterized by a large proportion of nonperforming loans (recognized or otherwise) in a country’s banks or the insolvency of other key financial institutions. * Department of Economics, Landau Building, Stanford University, Stanford, CA 94305. I am indebted to Jeffrey Frankel, Nicholas Hope, and Aaron Tornell for helpful comments on an earlier draft of this paper.
This paper introduces a new cost dataset for a commercial aircraft firm and uses this data to analyze the dynamics of learning in commercial aircraft production. This dataset is found to be inconsistent with the simple learning hypothesis, and particularly the prediction that a firm's unit cost must decline with its cumulative production. Instead, strong support is found for the hypothesis of organizational forgetting, a more general learning model where unit costs are similarly dependent on a firm's past production experience, but where that experience depreciates over time. Additionally, it is found that some, but not all, of a firm's production experience transfers from one generation of an aircraft to the next. This evidence adds to our understanding of productivity in industries with learning and thus has implications to many fields of economics.