Knowledge that Transforms

Economic theory and evidence from a variety of debt markets shed light on current reform proposals concerning emerging market debt. Debt markets, including the U.S. municipal bond market, generally function best when the rights of creditors are protected most effectively.

The general conclusion of the empirical literature is that in-market consolidation generates adverse price changes, harming consumers. Previous studies, however, look only at the short-run pricing impact of consolidation, ignoring effects that take longer to materialize. Using a database that includes detailed information on the deposit rates of individual banks in local markets for different categories of depositors, we investigate the long-run price effects of mergers. We find strong evidence that, although consolidation does generate adverse price changes, these are temporary. In the long run, efficiency gains dominate over the market power effect, leading to more favorable prices for consumers.

Procurement of an innovation often requires substantial effort by potential suppliers. Motivating effort may be difficult if the level of effort and quality of the resulting innovation are unverifiable, if innovators cannot benefit directly by marketing their innovations, and if the buyer cannot extract up-front payments from suppliers. We study the use of contests to procure an innovation in such an environment. An auction in which two suppliers are invited to innovate and then bid their prizes is optimal in a large class of contests. If contestants are asymmetric, it is optimal to handicap the most efficient one.

The Instructional Use and Teaching Preparation of Graduate Students in U.S. Ph.D.-Granting Economics Departments by William B. Walstad and William E. Becker. Published in volume 93, issue 2, pages 449-454 of American Economic Review, May 2003

This paper investigates the effects of lobbying by corporations when investments are irreversible and government cannot commit to tax policies. We show that industries which rely more heavily on sunk capital lobby more vigorously and are generally more successful in obtaining tax breaks. Thus lobbying can mitigate the capital levy problem. Nevertheless, these industries invest less in long-run equilibrium than more flexible ones. We then consider the effects of relaxing legal restrictions on corporate lobbying. When the deadweight costs of lobbying fall, taxes on sunk capital tend to fall, but political contributions may rise, as lobbyists compete more intensively for political favors. On balance, a ban of lobbying may therefore cause investment to rise or fall.(This abstract was borrowed from another version of this item.)

Because of the Depression’s place in both the popular and academic imagination, and the repeated and justifiable emphasis on output that was not produced, income that was not earned, and expenditure that did not take place, it will seem startling to propose the following hypothesis: the years 1929–1941 were, in the aggregate, the most technologically progressive of any comparable period in U.S. economic history.1 The hypothesis entails two primary claims: that during this period businesses and government contractors implemented or adopted on a more widespread basis a wide range of new technologies and practices, resulting in the highest rate of measured peacetime peak-to-peak multifactor productivity growth in the century, and secondly, that the Depression years produced advances that replenished and expanded the larder of unexploited or only partially exploited techniques, thus providing the basis for much of the labor and multifactor productivity improvement of the 1950’s and 1960’s.

What Do We Know About the Risk of Individual Account Pensions? Evidence from Industrial Countries by Gary Burtless. Published in volume 93, issue 2, pages 354-359 of American Economic Review, May 2003

Risk Sharing and Industrial Specialization: Regional and International Evidence by Sebnem Kalemli-Ozcan, Bent E. Sørensen and Oved Yosha. Published in volume 93, issue 3, pages 903-918 of American Economic Review, June 2003

The Industrial Revolution is a topic of renewed interest for growth economists. After the first wave of "new growth" theory that addressed the causes of sustained increases in productivity, more attention has been given to an important additional stylized fact: that rapid growth itself is new in historical terms. A radical discontinuity separates thousands of years of by and large stagnant living standards from the industrial era. Increasingly in the last few years, models have attempted to capture these long-run dynamics to try to explain how the world changed from a state where growth was fleeting and limited to one where it has become permanent and decisive. At the same time, economic historians have re-evaluated changes in living standards during the British Industrial Revolution (the canonical case). The new picture that emerges has become increasingly consistent over the last decade, and it differs drastically from earlier descriptions. This paper briefly summarizes the two literatures, contrasts the results obtained, and makes suggestions for a new set of "stylized facts" that could usefully guide future theoretical and empirical work on the Industrial Revolution.