Knowledge that Transforms

This paper argues that a principal cause of the 1997 Asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems. The expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in Asia. We articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises. We present empirical evidence in support of the key assumptions underlying our interpretation of the crisis.

This paper analyzes the role of private information in U.S. Forest Service timber auctions. In these auctions, firms bid a per unit price for each timber species. Total bids are computed by multiplying these prices by Forest Service volume estimates, but payments depend on actual volumes harvested. We develop an equilibrium theory for these auctions. We then relate (ex post) data about volume to (ex ante) bids. We show that bidders have private information about volumes of species and use it as predicted by theory. Differences in bidder estimates appear to affect the allocation of tracts, but competition limits information rents.

We present a joint study of the U.S. structural transformation (the decline of agriculture as the dominating sector) and regional convergence (of southern to northern average wages). We find empirically that most of the regional convergence is attributable to the structural transformation: the nationwide convergence of agricultural wages to nonagricultural wages and the faster rate of transition of the southern labor force from agricultural to nonagricultural jobs. Similar results describe the Midwest's catch-up to the Northeast (but not the relative experience of the West). To explain these observations, we construct a model in which the South (Midwest) has a comparative advantage in producing unskilled laborintensive agricultural goods. Thus it starts with a disproportionate share of the unskilled labor force and lower per capita incomes. Over time, declining education/training costs induce an increasing proportion of the labor force to move out of the (unskilled) agricultural sector and into the (skilled) nonagricultural sector. The decline in the agricultural labor force leads to an increase in relative agricultural wages. Both effects benefit the South (Midwest) disproportionately since it has more agricultural workers. With the addition of a less than unit income elasticity of demand for farm goods and faster technological progress in farming than outside of farming, this model successfully matches the quantitative features of the U.S. structural transformation and regional convergence, as well as several other stylized facts on U.S. economic growth in the last century. The model does not rely on frictions on interregional labor and capital mobility, since in our empirical work we find this channel to be less important than the compositional effects the model emphasizes.

Economists explain the positive relationship between parental income and children’s outcomes using an investment model. Building on work in psychology and sociology, this paper emphasizes the importance of child‐rearing practices, which vary with income. I argue that parents’ ability to mold their children’s behavior through pecuniary incentives is limited at low incomes, leading to lower outcomes and increased reliance on nonpecuniary mechanisms such as corporal punishment. My model generates a positive relationship between parental income and children’s outcomes especially at low incomes and endogenously produces a relationship between parental income and child‐rearing practices. Empirical work confirms these implications.

I study the earnings structure and the equilibrium assignment of workers when workers exert intrafirm spillovers on each other. I allow for arbitrary spillovers provided that output depends on some aggregate index of workers’ skill. Despite the possibility of increasing returns to skills, equilibrium typically exists. I show that equilibrium will typically be segregated and that the skill space can be partitioned into a set of segments and any firm hires from only one segment. Next, I apply the model to analyze the effect of information technology on segmentation and the distribution of income. There are two types of human capital, productivity and creativity, that is, the ability to produce ideas that may be duplicated over a network. Under plausible assumptions, inequality rises and then falls when network size increases, and the poorest workers cannot lose. I also analyze the impact of an improvement in worker quality and of an increased international mobility of ideas.

Applying a geographic lens to mutual fund performance, this study finds that fund managers earn substantial abnormal returns in nearby investments. These returns are particularly strong among funds that are small and old, focus on few holdings, and operate out of remote areas. Furthermore, we find that while the average fund exhibits only a modest bias toward local stocks, certain funds strongly bias their holdings locally and exhibit even greater local performance. Finally, we demonstrate that the extent to which a firm is held by nearby investors is positively related to its future expected return. Our results suggest that investors trade local securities at an informational advantage and point toward a link between such trading and asset prices.

This paper estimates a dynamic model of schooling attainment to investigate the sources of racial and ethnic disparity in college attendance. Parental income in the child's adolescent years is a strong predictor of this disparity. This is widely interpreted to mean that credit constraints facing families during the college-going years are important. Using NLSY data, we find that it is the long-run factors associated with parental background and family environment, and not credit constraints facing prospective students in the college-going years, that account for most of the racial-ethnic college-going differential. Policies aimed at improving these long-term family and environmental factors are more likely to be successful in eliminating college attendance differentials than short-term tuition reduction and family income supplement policies aimed at families with college age children.

Consider the possible biological origin of the expected utility criterion. On the one hand, if individuals possess a utility function stemming from the rate of production of expected offspring, they can rapidly adapt to arbitrary unknown distributions in a bandit problem. Embedding such a utility function in a simple rule of thumb involving no beliefs about probabilities leads to evolutionary optimality. On the other hand, if any rule whatever yields evolutionary optimality for all distributions, this precise utility function must be implicit, in a revealed preference sense.

Suppose that n buyers each want one unit and m sellers each have one or more units of a good. Sellers post prices, and then buyers choose sellers. In symmetric equilibrium, similar sellers all post one price, and buyers randomize. Hence, more or fewer buyers may arrive than a seller can accommodate. We call this frictions. We solve for prices and the endogenous matching function for finite n and m and consider the limit as n and m grow. The matching function displays decreasing returns but converges to constant returns. We argue that the standard matching function in the literature is misspecified and discuss implications for the Beveridge curve.

We study the relationship between welfare benefits and the time to first marriage and time to next birth among initially unwed mothers. We use twin births to generate random within‐state variation in benefits, effectively controlling for unobservables that may confound the relationship between welfare payments and behavior. Higher base welfare benefits (1) lead unwed white mothers to forestall their eventual marriage and (2) lead unwed black mothers to hasten their next birth. The magnitudes of these effects are fairly modest. Moreover, we find no evidence that the marginal benefit paid at the birth of an additional child—the focus of the family cap debate—affects fertility.