Knowledge that Transforms

This paper asks how a household should choose between a fixed-rate (FRM) and an adjustable-rate (ARM) mortgage. In an environment with uncertain inflation a nominal FRM has a risky real capital value, whereas an ARM has a stable real capital value but short-term variability in required real payments. Numerical solution of a life-cycle model with borrowing constraints and income risk shows that an ARM is generally attractive, but less so for a risk-averse household with a large mortgage, risky income, high default cost, or low moving probability. An inflation-indexed FRM can improve substantially on standard nominal mortgages.

This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-firm matched panel data set which enables us to track the top managers across different firms over time. We find that manager fixed effects matter for a wide range of corporate decisions. A significant extent of the heterogeneity in investment, financial, and organizational practices of firms can be explained by the presence of manager fixed effects. We identify specific patterns in managerial decision-making that appear to indicate general differences in "style" across managers. Moreover, we show that management style is significantly related to manager fixed effects in performance and that managers with higher performance fixed effects receive higher compensation and are more likely to be found in better governed firms. In a final step, we tie back these findings to observable managerial characteristics. We find that executives from earlier birth cohorts appear on average to be more conservative; on the other hand, managers who hold an MBA degree seem to follow on average more aggressive strategies.

This paper provides new evidence on the substitutability between private and pension wealth by exploiting the Italian pension reform of 1992. We use a difference-in-difference estimator that exploits the differential effects of the reform on individuals belonging to several year-of-birth cohorts and different occupational groups. We find convincing evidence that saving rates increase as a result of a reduction in pension wealth. By allowing for the possibility that substitutability changes with age, we find that substitutability is particularly high (and precisely estimated) for workers between 35 and 45.

Product and labor market deregulation reduce and redistribute rents, leading economic players to adjust to this new distribution. It typically comes with distribution and dynamic effects. To study these effects, we build a macroeconomic model on two central assumptions: monopolistic competition in the goods market, which determines the size of rents; and bargaining in the labor market, which determines the distribution of rents. Product market regulation determines entry costs and the degree of competition. Labor market regulation determines the bargaining power of workers. We show the effects of deregulation. We then use our results to discuss the political economy of deregulation, and recent macroeconomic evolutions in Europe.

We apply an understanding of what computers do to study how computerization alters job skill demands. We argue that computer capital (1) substitutes for workers in performing cognitive and manual tasks that can be accomplished by following explicit rules; and (2) complements workers in performing nonroutine problem-solving and complex communications tasks. Provided that these tasks are imperfect substitutes, our model implies measurable changes in the composition of job tasks, which we explore using representative data on task input for 1960 to 1998. We find that within industries, occupations, and education groups, computerization is associated with reduced labor input of routine manual and routine cognitive tasks and increased labor input of nonroutine cognitive tasks. Translating task shifts into education demand, the model can explain 60 percent of the estimated relative demand shift favoring college labor during 1970 to 1998. Task changes within nominally identical occupations account for almost half of this impact.

We develop an algorithm for detecting teacher cheating that combines information on unexpected test score fluctuations and suspicious patterns of answers for students in a classroom. Using data from the Chicago public schools, we estimate that serious cases of teacher or administrator cheating on standardized tests occur in a minimum of 4–5 percent of elementary school classrooms annually. The observed frequency of cheating appears to respond strongly to relatively minor changes in incentives. Our results highlight the fact that high-powered incentive systems, especially those with bright line rules, may induce unexpected behavioral distortions such as cheating. Statistical analysis, however, may provide a means of detecting illicit acts, despite the best attempts of perpetrators to keep them clandestine.

What motivated men to risk death in the most horrific war in U. S. history when pay was low and irregular and military punishment strategies were weak? In such a situation creating group loyalty by promoting social capital is of paramount importance and in the Civil War was the cement of both armies. We find that individual and company socioeconomic and demographic characteristics, ideology, and morale were important predictors of group loyalty in the Union Army. Company characteristics were more important than ideology or morale. Soldiers in companies that were more homogeneous in ethnicity, occupation, and age were less likely to shirk.

In six experiments we show that initial valuations of familiar products and simple hedonic experiences are strongly inuenced by arbitrary “anchors ” (some-times derived from a person’s social security number). Because subsequent valua-tions are also coherent with respect to salient differences in perceived quality or quantity of these products and experiences, the entire pattern of valuations can easily create an illusion of order, as if it is being generated by stable underlying preferences. The experiments show that this combinationof coherent arbitrariness (1) cannot be interpreted as a rational response to information, (2) does not decrease as a result of experience with a good, (3) is not necessarily reduced by market forces, and (4) is not unique to cash prices. The results imply that demand curves estimated from market data need not reveal true consumer preferences, in any normatively signicant sense of the term. Economic theories of valuation generally assume that prices of commodities and assets are derived from underlying “funda-mental ” values. For example, in nance theory, asset prices are believed to reect the market estimate of the discounted present value of the asset’s payoff stream. In labor theory, the supply of labor is established by the trade-off between the desire for con-sumption and the displeasure of work. Finally, and most impor-tantly for this paper, consumer microeconomics assumes that the demand curves for consumer products—chocolates, CDs, movies, vacations, drugs, etc.—can be ultimately traced to the valuation of pleasures that consumers anticipate receiving from these products. Because it is difcult, as a rule, to measure fundamental values directly, empirical tests of economic theory typically ex-amine whether the effects of changes in circumstances on valua-tions are consistent with theoretical prediction—for example, whether labor supply responds appropriately to a change in the wage rate, whether (compensated) demand curves for commodi-

This paper analyzes a randomized experiment to shed light on the role of information and social interactions in employees' decisions to enroll in a Tax Deferred Account (TDA) retirement plan within a large university. The experiment encouraged a random sample of employees in a subset of departments to attend a benefits information fair organized by the university, by promising a monetary reward for attendance. The experiment multiplied by more than five the attendance rate of these treated individuals (relative to controls), and tripled that of untreated individuals within departments where some individuals were treated. TDA enrollment five and eleven months after the fair was significantly higher in departments where some individuals were treated than in departments where nobody was treated. However, the effect on TDA enrollment is almost as large for individuals in treated departments who did not receive the encouragement as for those who did. We provide three interpretations—differential treatment effects, social network effects, and motivational reward effects—to account for these results.