Knowledge that Transforms

We explore the relation between a country’s income and the mix of products it exports. Both are simultaneously determined by countries’ capabilities, that is, by countries’ productivity and quality levels for each good. Our theoretical setup has two features. (1) Some goods have fewer high-quality producers/countries than others, meaning that there is comparative advantage. (2) Imperfect competition allows high- and low-quality producers to coexist. These two features generate an inverted-U, general equilibrium relationship between a country’s export mix and its GDP per capita. We show that this inverted-U permeates the international data on trade and GDP per capita.

Some technologies save lives—new vaccines, new surgical techniques, safer highways. Others threaten lives—pollution, nuclear accidents, global warming, and the rapid global transmission of disease. How is growth theory altered when technologies involve life and death instead of just higher consumption? This paper shows that taking life into account has first-order consequences. Under standard preferences, the value of life may rise faster than consumption, leading society to value safety over consumption growth. As a result, the optimal rate of consumption growth may be substantially lower than what is feasible, in some cases falling all the way to zero.

We measure the effects of debt dilution on sovereign default risk and study debt covenants that could mitigate these effects. We calibrate a baseline model with endogenous debt duration and default risk (in which debt can be diluted) using data from Spain. We find that debt dilution accounts for 78 percent of the default risk in the baseline economy and that eliminating dilution increases the optimal duration of sovereign debt by almost 2 years. Eliminating dilution also increases consumption volatility but still produces welfare gains. The debt covenants we study could help enforcing fiscal rules.

This paper develops a price-theoretic framework for matching markets with heterogeneous preferences. The model departs from the Gale and Shapley model by assuming that a finite number of agents on one side (colleges) are matched to a continuum of agents on the other side (students). We show that stable matchings correspond to solutions of supply and demand equations, with the selectivity of each college playing a role similar to that of prices. We apply the model to an analysis of how competition induced by school choice gives schools incentives to invest in quality and to asymptotics of school choice mechanisms.

This paper analyzes the inefficiencies arising from the combination of fixed exchange rates, nominal rigidity, and free capital mobility. We document that nominal wages are downwardly rigid in emerging countries. We develop an open-economy model that incorporates this friction. The model predicts that the combination of a currency peg and free capital mobility creates a negative externality that causes overborrowing during booms and high unemployment during contractions. Optimal capital controls are shown to be prudential. For plausible calibrations, they reduce unemployment by around 5 percentage points. The optimal exchange rate policy eliminates unemployment and calls for large devaluations during crises.

A large agronomic literature models the implications of climate change for a variety of crops and locations around the world. The goal of the present paper is to quantify the macro-level consequences of these micro-level shocks. Using an extremely rich micro-level data set that contains information about the productivity—both before and after climate change—of each of 10 crops for each of 1.7 million fields covering the surface of the earth, we find that the impact of climate change on these agricultural markets would amount to a 0.26 percent reduction in global GDP when trade and production patterns are allowed to adjust. Since the value of output in our 10 crops is equal to 1.8 percent of world GDP, this corresponds to about one-sixth of total crop value.

Maternal mortality was the second-largest cause of death for women in childbearing years until the mid-1930s in the United States. For each death, 20 times as many mothers suffered pregnancy-related conditions, which made it hard for them to engage in market work. Between 1930 and 1960 there was a remarkable improvement in maternal health. We argue that this development, by enabling women to reconcile work and motherhood, was essential for the joint rise in women’s labor force participation and fertility over this period. We also show that the diffusion of infant formula played an important auxiliary role.

This paper shows that adding a small application cost to a transfer program can substantially improve targeting through self-selection. Our village-level experiment in Indonesia finds that requiring beneficiaries to apply for benefits results in substantially poorer beneficiaries than automatic enrollment using the same asset test. Marginally increasing application costs on an experimental basis does not further improve targeting. Estimating a model of the application decision implies that the results are largely driven by the nonpoor, who make up the bulk of the population, forecasting that they are unlikely to pass the asset test and therefore not bothering to apply.

We study decentralized college admissions with uncertain student preferences. Colleges strategically admit students likely to be overlooked by competitors. Highly ranked students may receive fewer admissions or have a higher chance of receiving no admissions than those ranked below. When students’ attributes are multidimensional, colleges avoid head-on competition by placing excessive weight on school-specific attributes such as essays. Restricting the number of applications or wait-listing alleviates enrollment uncertainty, but the outcomes are inefficient and unfair. A centralized matching via Gale and Shapley’s deferred acceptance algorithm attains efficiency and fairness but may make some colleges worse off than under decentralized matching.

We assess the static and dynamic implications of alternative market-based policies limiting greenhouse gas emissions in the US cement industry. Our results highlight two countervailing market distortions. First, emissions regulation exacerbates distortions associated with the exercise of market power in the domestic cement market. Second, emissions “leakage” in trade-exposed markets offsets domestic emissions reductions. Taken together, these forces can result in social welfare losses under policy regimes that fully internalize the emissions externality. Market-based policies that incorporate design features to mitigate the exercise of market power and emissions leakage deliver welfare gains when damages from carbon emissions are high.