Knowledge that Transforms

We provide a new and more complete analysis of the origins of the Dust Bowl of the 1930s, one of the most severe environmental crises in North America in the twentieth century. Severe drought and wind erosion hit the Great Plains in 1930 and lasted through 1940. There were similar droughts in the 1950s and 1970s, but no comparable level of wind erosion. We explain why. The prevalence of small farms in the 1930s limited private solutions for controlling the downwind externalities associated with wind erosion. Drifting sand from unprotected fields damaged neighboring farms. Small farmers cultivated more of their land and were less likely to invest in erosion control than larger farmers. Soil conservation districts, established by the government after 1937, helped coordinate erosion control. This “unitized” solution for collective action is similar to that used in other natural resource/environmental settings.

Alchian and Allen show that a per unit transactions cost lowers the relative price of, and raises the relative demand for, high‐quality goods. We extend their theory, deriving a relationship between per unit and ad valorem trade costs and the quality composition of trade. Detailed international trade data for many importers and exporters are used to test these predictions. Within a narrowly defined commodity classification, exporters charge destination‐varying prices that covary positively with shipping costs and negatively with tariffs. These results provide a clear rejection of the iceberg assumption on transportation costs and a strong confirmation of the classical Alchian‐Allen hypothesis. We show that these results cannot be explained by monopoly pricing‐to‐market behavior.

We propose a general equilibrium model with multiple securities in which investors' risk preferences and expectations of dividend growth are time-varying. While time-varying risk preferences induce the standard positive relation between the dividend yield and expected returns, time-varying expected dividend growth induces a negative relation between them. These offsetting effects reduce the ability of the dividend yield to forecast returns and eliminate its ability to forecast dividend growth, as observed in the data. The model links the predictability of returns to that of dividend growth, suggesting specific changes to standard linear predictive regressions for both. The model's predictions are confirmed empirically.

When parents and children care about each other’s utility, increases in parental income need not always lead to decreases in child labor. Adults raised in poor families make altruistic transfers to their elderly parents, which the parents take as repayment for income lost when their children were young and spent some time in school instead of work. There is some sufficiently high level of parental income at which children cease to believe that parents need a transfer, whereas parents still would like repayment, so both transfers and the hours of extra education that the transfers made possible cease. Child labor rises.

Existing work suggests that black‐white gaps in potential wages are much larger among men than women and further that black‐white differences in patterns of female labor supply are unimportant. However, panel data on wages and income sources demonstrate that the modal young black woman who does not engage in market work is a single mother receiving government aid whereas her white counterpart is a married mother receiving support from a working spouse. The median black‐white gap in log potential wages among young adult women in 1990 was likely at least 60 percent larger than the gap implied by reported earnings and hours worked in the Current Populations Surveys.

A hierarchical structure is a widespread organizational form in many areas. My aim in this paper is to provide a rationale for this fact based on two premises. First, a group organizes itself so as to achieve efficient coordination. Second, efficient coordination is achieved only if subgroups as well as individuals agree to cooperate. Even in situations in which there are gains to coordination, the agreement of each possible subgroup may be impossible to reach, resulting in instabilities. I argue that a hierarchical organization avoids such instabilities by distributing in an optimal way autonomy and blocking power to a restricted set of subgroups. Comparisons with nondirected networks are drawn.

In welfare theory it is standard to pick the consumption stream that maximizes the welfare of the representative agent. We argue against this position, and show that a benevolent social planner will generally place a greater weight on future consumption than does the representative agent. Our analysis has immediate implications for public policy: agents discount the future too much and the government should promote future oriented policies.

In this paper, we exploit new sources of cross-sectional data to estimate a detailed product-level demand system for new passenger vehicles. We use four data sources: on the characteristics of products, on the attributes of the U.S. population of households, on the match between the first and second vehicle choices of the household, and on the match between households attributes and first choice vehicles. We show that these data solve some, but not all, of the traditional problems in estimating differentiated products demand systems and indicate which data sources are important for which problem. The data is rich enough to reveal a rather complex substitution pattern, requiring a quite general modeling framework. Together the data and model make a detailed analysis of industry demand possible. 1 Introduction In Berry, Levinsohn, and Pakes (1995) (BLP) we provide an algorithm for obtaining estimates of demand parameters for a class of differentiated product models. Demand-side models ...

Is individual labor income more risky in recessions? This is a difficult question to answer because existing panel data sets are so short. To address this problem, we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced. Variation in the cross‐sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930, even though our data do not begin until 1968. We implement this estimator using household‐level labor earnings data from the Panel Study of Income Dynamics. We estimate that idiosyncratic risk is (i) highly persistent, with an annual autocorrelation coefficient of 0.95, and (ii) strongly countercyclical, with a conditional standard deviation that increases by 75 percent (from 0.12 to 0.21) as the macroeconomy moves from peak to trough.

We use a unique data set of annuities in the United Kingdom to test for adverse selection. We find systematic relationships between ex post mortality and annuity characteristics, such as the timing of payments and the possibility of payments to the annuitant's estate. These patterns are consistent with the presence of asymmetric information. However, we find no evidence of substantive mortality differences by annuity size. These results suggest that the absence of selection on one contract dimension does not preclude its presence on others. This highlights the importance of considering detailed features of insurance contracts when testing theoretical models of asymmetric information.