Knowledge that Transforms

We build a tractable growth model in which multiproduct incumbents invest in internal innovations to improve their existing products, while new entrants and incumbents invest in external innovations to acquire new product lines. External and internal innovations generate heterogeneous innovation qualities, and firm size affects innovation incentives. We analyze how different types of innovation contribute to economic growth and the role of the firm size distribution. Our model aligns with many observed empirical regularities, and we quantify our framework with Census Bureau and patent data for US firms. Internal innovation scales moderately faster with firm size than external innovation.

We study unanimous decision making under incomplete information. We argue that unanimous decision rules are not all equivalent. We show that majority rules with veto power are (i) Pareto superior to commonly used unanimous rules and (ii) ex ante efficient in a broad class of situations.

We develop an equilibrium life cycle model of education, marriage, labor supply, and consumption in a transferable utility context. Individuals start by choosing their investments in education anticipating returns in the marriage market and the labor market. They then match on the basis of the economic value of marriage and preferences. Equilibrium in the marriage market determines intrahousehold allocation of resources. Following marriage households (married or single) save, supply labor, and consume private and public commodities under uncertainty. Marriage thus has the dual role of providing public goods and offering risk sharing. The model is estimated using the British Household Panel Survey.

Teachers affect a variety of student outcomes through their influence on both cognitive and noncognitive skill. I proxy for students’ noncognitive skill using non–test score behaviors. These behaviors include absences, suspensions, course grades, and grade repetition in ninth grade. Teacher effects on test scores and those on behaviors are weakly correlated. Teacher effects on behaviors predict larger impacts on high school completion and other longer-run outcomes than their effects on test scores. Relative to using only test score measures, using effects on both test score and noncognitive measures more than doubles the variance of predictable teacher impacts on longer-run outcomes.

This paper quantitatively assesses time inconsistency, moral hazard, and political ideology in monopoly regulation of electricity distribution. We specify and estimate a dynamic model of utility regulation featuring investment and moral hazard. We find underinvestment in electricity distribution capital aiming to reduce power outages and use the estimated model to quantify the value of regulatory commitment in inducing greater investment. Furthermore, more conservative political environments grant higher regulated returns but have higher rates of electricity loss. Using the estimated model, we quantify how conservative regulators thus mitigate welfare losses due to time inconsistency but worsen losses from moral hazard.

The increasing availability of data derived from linked consumer financial accounts has the potential to dramatically expand the potential for research. Examining the most comprehensive existing set of linked-account data, consisting of transaction and balance sheet data for millions of Americans, I demonstrate the power and versatility of such sources. I discuss advantages and concerns arising from this type of data and match a range of distributional moments to external sources. As one application, I test consumption elasticities across households with varying levels, and types, of debt. I find that heterogeneity in consumption elasticity can be explained entirely by credit and liquidity.

Auctions were very popular in the early days of internet commerce, but today online sellers mostly use posted prices. We model the choice between auctions and posted prices as a trade-off between competitive price discovery and convenience. Evidence from eBay fits the theory. We then show that the decline in auctions was not driven by compositional shifts in seller experience or items sold, but by changing seller incentives. We estimate the demand facing sellers and document falling sale probabilities and falling relative demand for auctions. Both favor posted prices; our estimates suggest the latter is more important for the auction decline. Survey evidence provides further support.

We study multiproduct firms in the contexts of unregulated monopoly, regulated monopoly, and Cournot oligopoly. Using the concept of consumer surplus as a function of quantities (rather than prices), we present simple formulas for optimal prices and show that Cournot equilibrium exists and corresponds to a Ramsey optimum. We then discuss a tractable class of preferences that involve a generalized form of homotheticity. Profit-maximizing quantities are proportional to efficient quantities. We discuss optimal monopoly regulation when the firm has private information about its cost vector and find situations in which optimal regulation leaves relative price decisions to the firm.

The arrival of global retail chains in developing countries is causing a radical transformation in the way that households source their consumption. This paper draws on a new collection of Mexican microdata to estimate the effect of foreign supermarket entry on household welfare. The richness of the microdata allows us to estimate a general expression for the gains from retail FDI, and to decompose these gains into several distinct channels. We find that foreign retail entry causes large and significant welfare gains for the average household that are mainly driven by a reduction in the cost of living. About one quarter of this price index effect is due to pro-competitive effects on the prices charged by domestic stores, with the remaining three quarters due to the direct consumer gains from shopping at the new foreign stores. In contrast, we find little evidence of significant changes in average municipality-level incomes or employment. We do, however, find evidence of store exit, adverse effects on domestic store profits and reductions in the incomes of traditional retail sector workers. We also show that the gains from retail FDI are on average positive for all income groups but regressive, and quantify the opposing forces that underlie this finding. Finally, we find that the estimated gains are specific to foreign entry, rather than being driven by the entry of modern store formats more generally.

This paper examines the extent to which tariff cooperation is observed among World Trade Organization members. With the help of a simple political economy model, we show that tariffs are positively correlated with the importer’s market power when they are set noncooperatively but negatively correlated when set cooperatively. We use this prediction to empirically identify the extent of cooperation in the WTO and find that more than three-quarters of WTO members’ tariffs are set noncooperatively.