Knowledge that Transforms

This article estimates worker switching costs and how much the employer switching of experienced engineers responds to outside wage offers. I use data on engineers across Swedish private sector firms to estimate the relative importance of employer wage policies and switching costs in a dynamic programming, discrete choice model of employer choice. The differentiated firms are modeled in employer characteristic space, and each firm has its own age‐wage profile. A majority of engineers have moderately high switching costs and a minority of experienced workers are responsive to outside wage offers. Younger workers are more sensitive to outside wage offers.

We study “investment tournaments,” a class of decision problems involving gradual allocation of investment among several alternatives whose values are subject to shocks. The decision maker’s payoff is determined by the final values of the alternatives. An important example of such tournaments is the career choice problem, since a person typically starts by investing in learning several professions. We show that in many cases it is optimal for the decision maker to allocate all resources to the most promising alternative in each time period. We also show that in promotion tournaments the workers optimally exert higher efforts at an early stage in order to capture a larger share of employer’s investment, such as mentoring.

We study the compensation and productivity of more than 2,000 Methodist ministers in a 43‐year panel data set. The church appears to use pay‐for‐performance incentives for its clergy, as their compensation follows a sharing rule by which pastors receive approximately 3% of the incremental revenue from membership increases. Ministers receive the strongest rewards for attracting new parishioners who switch from other congregations within their denomination. Monetary incentives are weaker in settings where ministers have less control over their measured performance.

We present a dynamic model of individuals’ educational investments that allows us to explore alternative modeling strategies for forecasting future wage distributions. The key innovation we propose is an approach to forecasting that relies only on the information that would be available at the actual time decisions are made and which incorporates the role of parameter uncertainty into the decision‐making process. We compare the performance of our method with alternative models of forecasting behavior, based on CPS data over the period 1964–2004.

This article provides estimates on how long it takes for released inmates to find a job and, when they find a job, how less likely they are to be incarcerated. An on‐the‐job search model with crime is used to model criminal behavior, derive the estimation method, and analyze policies including a job placement program. The results show that the unemployed are incarcerated twice as fast as the employed and take on average 6 months to find a job. The article demonstrates that reducing the average unemployment spell of previously incarcerated criminals by 3 months reduces crime and recidivism by more than 5%.

We examine the relationship between information technology (IT), productivity, and organization using a new panel data set of police departments that covers 1987–2003. When considered alone, increases in IT are not associated with reductions in crime rates, increases in clearance rates, or other productivity measures, and computing technology that increases reported crime actually generates the appearance of lower productivity. These results persist across various samples, specifications, and IT measures. IT investments are, however, linked to improved productivity when they are complemented with particular organizational and management practices, such as those associated with the Compstat program.

There is ample evidence that incentive‐pay structures, such as tournaments, result in increased performance. Is this due to selection or increased individual effort, and is any increased individual effort caused by pecuniary incentives or merely thirst for the thrill of victory (TOV)? Prior literature has not separated the different effects. We look at performance in horse and dog racing and find that only horses, controlled by jockeys during the race, exhibit performance corresponding to pecuniary incentives, while both respond to selection and TOV. The results show that pay structures do matter.

We use unique longitudinal data to provide direct evidence about interracial friendships at different stages of college and to provide new evidence about some of the reasons for the observed patterns of interaction. We find that, while much sorting exists at all stages of college, black and white students are, in reality, very compatible as friends; randomly assigned roommates of different races are as likely to become friends as randomly assigned roommates of the same race. Further, we find that, in the long run, being (randomly) assigned a black roommate significantly increases the number of other black friends a white student has.

This article constructs and estimates a model of wage bargaining with on‐the‐job search to explore three different components of wages: general human capital, match‐specific capital, and outside options. As the workers find better job opportunities, the current employer has to compete with outside firms to retain them. This between‐firm competition results in wage growth even when productivity remains the same. The model is estimated by a simulated minimum distance estimator and data from the 1979 National Longitudinal Study of Youth. The results indicate that the improved value of the outside option raises wages by 14%–16% in the first 5 years.