Knowledge that Transforms

While English auctions are the most common in practice, their rules typically lack sufficient structure to yield a tractable theoretical model without significant abstractions. Rather than relying on one stylized model to provide an exact interpretation of the data, we explore an incomplete model based on two simple assumptions: bidders neither bid more than their valuations nor let an opponent win at a price they would be willing to beat. Focusing on the symmetric independent private values paradigm, we show that this limited structure enables construction of informative bounds on the distribution function characterizing bidder demand, on the optimal reserve price, and on the effects of observable covariates on bidder valuations. If the standard theoretical model happens to be the true model, our bounds collapse to the true features of interest. In contrast, when the true data†generating process deviates in seemingly small ways from that implied by equilibrium in the standard theoretical model, existing methods can yield misleading results that need not even lie within our bounds. We report results from Monte Carlo experiments illustrating the performance of our approach and comparing it to others. We apply our approach to U.S. Forest Service timber auctions to evaluate reserve price policy.

When parents are more educated, their children tend to receive more schooling as well. Does this occur because parental ability is passed on genetically or because more educated parents provide a better environment for children to flourish? Using an intergenerational sample of families, we estimate on the basis of a comparison of biological and adopted children that about 55–60 percent of the parental ability is genetically transmitted.

We analyze a banking system in which the class of feasible deposit contracts, or mechanisms, is broad. The mechanisms must satisfy a sequential service constraint, but partial or full suspension of convertibility is allowed. Consumers must be willing to deposit, ex ante. We show, by examples, that under the so‐called “optimal contract,” the postdeposit game can have a run equilibrium. Given a propensity to run, triggered by sunspots, the optimal contract for the full predeposit game can be consistent with runs that occur with positive probability. Thus the Diamond‐Dybvig framework can explain bank runs as emerging in equilibrium under the optimal deposit contract.

I develop a factor content of trade prediction for the Heckscher‐Ohlin‐Vanek model (HOV) that relates bilateral differences in country endowments to bilateral differences in factor contents. The results are striking. In comparisons of North‐South factor contents or factor contents of countries with very different endowments (e.g., with very different capital‐labor ratios), there is clear support for an HOV sign prediction. Thus countries with dissimilar endowment ratios also have very different factor content of trade differences as predicted by the HOV model.

We analyze a simple stochastic environment in which policy makers can be threatened by “nasty” interest groups. In the absence of these groups, the policy maker’s desire for reelection guarantees that good policies are implemented for every realization of the shock. When pressure groups can harass the policy maker, good policies will be chosen for only a subset of states of nature. Hence, honest and able leaders might implement bad policies, and needed reforms could be delayed. In order to make good policies more likely, the public will want to increase the cost of exerting pressure for “nasty groups” and provide rents to those in power. This last result can be used to explain the existence of political parties. They play a role resembling that of the supervisor in the literature on collusion in hierarchical agency. A rational public may also choose to ignore negative media reports on a politician’s personal life and, in general, elect “strong” political leaders. The prevalence of coercive methods of influence helps explain why countries may get to be governed by “inept politicians.”

The classical model of balance of payments crises implicitly assumes that the central bank sits passively as international reserves dwindle. In practice, however, central banks typically defend pegs aggressively by raising short‐term interest rates. This paper analyzes the feasibility and optimality of raising interest rates to delay a potential BOP crisis. Interest rate policy works through two distinct channels. By raising demand for domestic, interest‐bearing liquid assets, higher interest rates tend to delay the crisis. Higher interest rates, however, increase public debt service and imply higher future inflation, which tends to bring forward the crisis. We show that, under certain conditions, it is feasible to delay the crisis, but raising interest rates beyond a certain point may actually hasten the crisis. A similar nonmonotonic relationship emerges between welfare and the increase in interest rates. It is thus optimal to engage in some active interest rate defense but only up to a certain point. In fact, there is a whole range of interest rate increases for which it is feasible to delay the crisis but not optimal to do so.

Because estate tax liability usually depends on how long one lives, it implicitly provides annuity income. In the absence of annuity markets, lump‐sum estate taxation may be used to achieve the first‐best solution for individuals with a sufficiently strong bequest motive. Calculations of the annuity embedded in the U.S. estate tax show that people with $10 million of assets may be effectively receiving more than $100,000 a year financed at actuarially fair rates by their tax payments. According to my calibrations, the insurance effect reduces the marginal cost of funds (MCF) for the estate tax by as much as 30 percent, and the resulting MCF is within the range of estimates for the MCF for the income tax.

We construct a dynamic general equilibrium production economy to explicitly link expected stock returns to firm characteristics such as firm size and the book-to-market ratio. Stock returns in the model are completely characterized by a conditional capital asset pricing model (CAPM). Size and book-to-market are correlated with the true conditional market beta and therefore appear to predict stock returns. The cross-sectional relations between firm characteristics and returns can subsist even after one controls for typical empirical estimates of beta. These findings suggest that the empirical success of size and book-to-market can be consistent with a single-factor conditional CAPM model.

In this paper, we find that the age-adjusted elasticity of child wealth with respect to parental wealth is 0.37 before the transfer of bequests. Lifetime income and asset ownership jointly explain nearly two-thirds of the wealth elasticity. Education, past parental transfers, and expected future bequests account for little of the remaining elasticity. Survey measures of risk correlate strongly between parents and children. However, they explain little of the intergenerational similarity in the propensity to own different assets, suggesting that children's savings propensities are determined by mimicking their parents' behavior, or the inheritance of preferences not related to risk tolerance. Our results imply that while parents do pass on human capital and saving propensities to their children, the level of intergenerational fluidity is much greater than that suggested by recent accounts in the popular press.

I apply features of the economics of conflict and spatial competition in developing a model of the emergence of land ownership in hunter‐gatherer societies. Tenure regimes are the result of interactions between those seeking to defend claims to land and those seeking to infringe on those claims. The model highlights the dependence of land ownership on ecological parameters, such as resource density and predictability, and allows for situational ownership, in which the nature of ownership changes as realized ecological conditions change. The paper concludes with a comparative assessment of tenure across a representative sample of hunter‐gatherer peoples.