Knowledge that Transforms

In this paper we tie together the two literatures of durable goods monopoly and exhaustible resource pricing. We show that the intertemporal no‐arbitrage condition that arises if the durable good monopolist seller can commit to a price path mirrors the intertemporal no‐arbitrage condition if the monopsonist buyer of an exhaustible resource can commit to a price path. The intuition is that the durable good monopolist initially announces high future prices to get high‐valuation buyers to buy early and subsequently lowers the price to attract additional buyers. On the other hand, the monopsonist buyer of the exhaustible resource initially announces low future prices to encourage sellers to supply their units early and subsequently, as the stock of the resource declines, raises the price to call forth additional supply. As the period of commitment shrinks to zero, the durable good’s price drops to its marginal cost and the exhaustible resource’s price jumps to its choke level, all in a twinkling of the eye, as Coase hypothesized.

In 1987 the federal government permitted states to raise the speed limit on their rural interstate roads, but not on their urban interstate roads, from 55 mph to 65 mph. Since the states that adopted the higher speed limit must have valued the travel hours they saved more than the fatalities incurred, this institutional change provides an opportunity to estimate an upper bound on the public’s willingness to trade off wealth for a change in the probability of death. Our estimates indicate that the adoption of the 65‐mph limit increased speeds by approximately 4 percent, or 2.5 mph, and fatality rates by roughly 35 percent. Together, the estimates suggest that about 125,000 hours were saved per lost life. When the time saved is valued at the average hourly wage, the estimates imply that adopting states were willing to accept risks that resulted in a savings of $1.54 million (1997 dollars) per fatality, with a sampling error roughly one‐third this value. We set out a simple model of states' decisions to adopt the 65‐mph limit that turns on whether their savings exceed their value of a statistical life. The empirical implementation of this model supports the claim that $1.54 million is an upper bound, but it provides imprecise estimates of the value of a statistical life.

We present a model of the market for a used durable in which agents face fixed costs of adjustment, the magnitude of which depends on the degree of adverse selection in the secondary market. We find that, unlike typical models, the sS bands in our model contract as the variance of the shock increases. We also analyze a dynamic version of the model in which agents are allowed to make decisions that are conditional on the age of the durable. We find that, as the durable ages, the lemons problem tends to decline in importance, and the sS bands contract.

This paper provides a case study of the effect of labor relations on product quality. We consider whether a long, contentious strike and the hiring of replacement workers at Bridgestone/Firestone’s Decatur, Illinois, plant in the mid‐1990s contributed to the production of defective tires. Using several independent data sources and looking before and after the strike and across plants, we find that labor strife at the Decatur plant closely coincided with lower product quality. Monthly data suggest that defects were particularly high around the time concessions were demanded and when large numbers of replacement workers and returning strikers worked side by side.

I show that among women likely to use welfare, movers move to higher‐benefit states. I also find that the probability likely welfare users will move at all is lower in higher‐benefit states. This effect is concentrated early in the life cycle, as theory predicts. I construct a theoretical framework to measure the impact of welfare migration on optimal state benefits. Simulation results suggest little impact in higher‐benefit states, but possibly a more substantial impact in other states. Finally, evidence suggests little reason for concern (due to welfare migration) in using cross‐state variation in welfare generosity to identify incentive effects of the welfare system on other outcome variables.

As firms switch from defined-benefit plans to defined-contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this be-havior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocat-ing a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has We are grateful to Brian Tarbox for implementing the Save More Tomorrow plan and for sharing the data with us. We would also like to thank many people at the following

We present a North‐South model of international trade in which differentiated products are developed in the North. Sectors are populated by final‐good producers who differ in productivity levels. On the basis of productivity and sectoral characteristics, firms decide whether to integrate into the production of intermediate inputs or outsource them. In either case they have to decide from which country to source the inputs. Final‐good producers and their suppliers must make relationship‐specific investments, both in an integrated firm and in an arm’s‐length relationship. We describe an equilibrium in which firms with different productivity levels choose different ownership structures and supplier locations. We then study the effects of within‐sectoral heterogeneity and variations in industry characteristics on the relative prevalence of these organizational forms.

The propensity to become a business owner is a nonlinear function of wealth. The relationship between wealth and entry into entrepreneurship is essentially flat over the majority of the wealth distribution. It is only at the top of the wealth distributionafter the ninety-fifth percentilethat a positive relationship can be found. Segmenting businesses into industries with high and lowstarting capital requirements, we find no evidence that wealth matters more for businesses requiring higher initial capital. When using inheritances as an instrument for wealth, we find that both past and future inheritances predict current business entry, showing that inheritances capture more than simply liquidity. We further exploit the regional variation in house prices and find that households that lived in regions in which housing prices appreciated strongly were no more likely to start a business than households in other regions.

We investigate whether political jurisdictions form in response to the trade‐off between economies of scale and the costs of a heterogeneous population. We consider heterogeneity in income, race, ethnicity, and religion, and we test the model using American school districts, school attendance areas, municipalities, and special districts. We find strong evidence of a trade‐off between economies of scale and racial heterogeneity; we also find evidence of a trade‐off between economies of scale and income heterogeneity. Conversely, we find little evidence that ethnic or religious heterogeneity shapes jurisdictions. To clarify the direction of causality between heterogeneity and jurisdictions, we exploit shocks to racial heterogeneity generated by the two world wars.

This paper provides one of the few successful demonstrations of the efficiency of certain types of restrictions in the context of a joint venture. The joint venture we examine is the National Hockey League (NHL) in the 1980s, which was then composed of 21 separately owned teams. (It now has 30 teams.) The restriction we analyze is the NHL rule on franchise relocation. Before one can fully understand the effect of the restriction, one must understand the theory of how sports leagues operate and whether sports leagues have any market power that can be enhanced by such a restriction. After providing such a theory, we empirically test the effect of the NHL restriction on franchise relocation. Aside from data availability, the advantage of our time period is that television was then an unimportant source of revenue for the NHL. Thus we are able to isolate a particular externality arising from how the NHL finances teams.