Knowledge that Transforms

We provide an empirical assessment of the comparative advantage gains from trade argument. We use Japan’s nineteenth-century opening up to world commerce as a natural experiment to answer the following counterfactual: “By how much would real income have had to increase in Japan during its final autarky years of 1851–1853 to afford the consumption bundle the economy could have obtained if it were engaged in international trade during that period?” Using detailed historical data on trade flows, autarky prices, and Japan’s real GDP, we obtain upper bounds on the gains from trade of about 8 to 9 percent of Japan’s GDP.

We analyze stock trades made by individuals holding stock in both taxable and tax-deferred accounts. By comparing trades across these two types of accounts, we uncover a capital gains lock-in effect in taxable accounts. The lock-in effect is more pronounced for large stock transactions and for stocks held for at least 12 months. Over shorter horizons, the disposition effect outweighs the lock-in effect. Comparison of loss realizations in taxable and tax-deferred accounts yields evidence of tax-loss selling throughout the year. Effective accrual tax rates for stocks that experience substantial appreciation are substantially below the statutory tax rate on long-term gains.

I examine the implications of employer learning and statistical discrimination for initial employment rates, wages, and occupational attainment and for wage growth and occupational change over a career using a model in which the sensitivity of productivity to worker skill is increasing in the skill requirements of the job and in which employers learn about worker skill more rapidly in high skill jobs. I show that statistical discrimination influences initial employment rates, wage levels and job type, and that employers' initial estimate of productivity influences wage growth even in an environment in which access to training is not an issue. The implication is that the market may be slow to learn that a worker is highly skilled if worker's best early job opportunity given the information available to employers is a low skill level job that reveals little about the worker's talent.

We study herd behavior in a laboratory financial market. Subjects receive private information on the fundamental value of an asset and trade it in sequence with a market maker. The market maker updates the asset price according to the history of trades. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon not accounted for by the theory. In some cases, subjects decide not to use their private information and choose not to trade. In other cases, they ignore their private information to trade against the market (contrarian behavior).

We analyze a general equilibrium model in which there is both adverse selection of, and moral hazard by, banks. The regulator can screen banks prior to giving them a licence, audit them ex post to learn the success probability of their projects, and impose capital adequacy requirements. Capital requirements combat moral hazard when the regulator has a strong screening reputation, and they otherwise substitute for screening ability. Crises of confidence can occur only in the latter case, and contrary to conventional wisdom, the appropriate policy response may be to tighten capital requirements to improve the quality of surviving banks.

We investigate the occurrence of bubble-crash pricing patterns in laboratory financial markets with a mixture of experienced and inexperienced traders. We find that even with a minority of experienced traders, bubbles are substantially abated.

Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance by Amy Finkelstein, Kathleen McGarry and Amir Sufi. Published in volume 95, issue 2, pages 224-228 of American Economic Review, May 2005

Accepted Manuscript

We are helping a task force of the American Gastroenterology Association to evaluate the current state of the (decentralized) market for gastroenterology fellows, and to assess the prospects of reorganizing it via a suitably designed centralized clearinghouse, a "match." This market used a match from 1986 until the late 1990s. Starting in 1996, participation in the match declined precipitously, and it was formally abandoned after 1999. Consequently, the experience of this market when the match was in place, in comparison to the periods before and since, allows an assessment of the effects of the match. An analysis of how the match failed in the 1990s yields insights into the prospects for success of a new match. These events offer economists a rare window on how decentralized labor markets clear, and on how market clearinghouses succeed and fail.