Knowledge that Transforms

This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. In the data, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds rises more than the spread on long-term bonds. We build a dynamic model of international borrowing with endogenous default and multiple debt maturities. Long-term debt provides a hedge against future fluctuations in spreads, whereas short-term debt is more effective at providing incentives to repay. The trade-off between these hedging and incentive benefits is quantitatively important for understanding the maturity structure in emerging markets.

Most new consumer durable goods experience rapid prices declines and quality improvements, suggesting the importance of modeling dynamics. This paper specifies a dynamic model of consumer preferences for new durable goods with persistently heterogeneous consumer tastes, rational expectations, and repeat purchases over time. We estimate the model on the digital camcorder industry using panel data on prices, sales, and characteristics. We find that the 1-year elasticity in response to a transitory industrywide price shock is about 25 percent less than the 1-month elasticity. Standard cost-of-living indices overstate welfare gain in later periods due to a changing composition of buyers.

We construct a marriage market model of matching along multiple dimensions, some of which are unobservable, in which individual preferences can be summarized by a one-dimensional index combining the various characteristics. We show that, under testable assumptions, these indices are ordinally identified and that the male and female trade-offs between their partners’ characteristics are overidentified. Using PSID data on married couples, we recover the marginal rates of substitution between body mass index (BMI) and wages or education: men may compensate 1.3 additional units of BMI with a 1 percent increase in wages, whereas women may compensate two BMI units with 1 year of education.

We study a Condorcet jury model where voters are driven by instrumental and expressive motives. We show that arbitrarily small amounts of expressive motives significantly affect equilibrium behavior and the optimal size of voting bodies. Enlarging voting bodies always reduces accuracy over some region. Unless conflict between expressive and instrumental preferences is very low, information does not aggregate in the limit, and large voting bodies perform no better than a coin flip in selecting the correct outcome. Thus, even when adding informed voters is costless, smaller voting bodies often produce better decisions.

This paper demonstrates that the option to move in and out of the parental home is a valuable insurance channel against labor market risk, which facilitates the pursuit of jobs with the potential for high earnings growth. Using monthly panel data, I document an empirical relationship among coresidence, individual labor market events, and subsequent earnings growth. I estimate the parameters of a dynamic game between youths and parents to show that the option to live at home can account for features of aggregate data for low-skilled young workers: small consumption responses to shocks, high labor elasticities, and low savings rates.

Investors value the liquidity and safety of US Treasuries. We document this by showing that changes in Treasury supply have large effects on a variety of yield spreads. As a result, Treasury yields are reduced by 73 basis points, on average, from 1926 to 2008. Both the liquidity and safety attributes of Treasuries are driving this phenomenon. We document this by analyzing the spread between assets with different liquidity (but similar safety) and those with different safety (but similar liquidity). The low yield on Treasuries due to their extreme safety and liquidity suggests that Treasuries in important respects are similar to money.

Economies with private information provide a rationale for capital taxation. In this paper we ask what the welfare gains from following this prescription are. We develop a method to answer this question in standard general equilibrium models with idiosyncratic uncertainty and incomplete markets. We find that general equilibrium forces are important and greatly reduce the welfare gains. Once these effects are taken into account, the gains are relatively small in our benchmark calibration. These results do not imply that dynamic aspects of social insurance design are unimportant, but they do suggest that capital taxation may play a modest role.

Measures of real consumption based on the ownership of durable goods, the quality of housing, the health and mortality of children, the education of youths, and the allocation of female time in the household indicate that sub-Saharan living standards have, for the past two decades, been growing about 3.4–3.7 percent per year, that is, three and a half to four times the rate indicated in international data sets.