Knowledge that Transforms

We examine how the speed of learning and best-response processes depends on homophily: the tendency of agents to associate disproportionately with those having similar traits. When agents' beliefs or behaviors are developed by averaging what they see among their neighbors, then convergence to a consensus is slowed by the presence of homophily but is not influenced by network density (in contrast to other network processes that depend on shortest paths). In deriving these results, we propose a new, general measure of homophily based on the relative frequencies of interactions among different groups. An application to communication in a society before a vote shows how the time it takes for the vote to correctly aggregate information depends on the homophily and the initial information distribution.

In this article, we analyze the 1920s Ku Klux Klan, those who joined it, and its social and political impact by combining a wide range of archival data sources with data from the 1920 and 1930 U.S censuses. We find that individuals who joined the Klan in some cities were more educated and more likely to hold professional jobs than the typical American. Surprisingly, we find little evidence that the Klan had an effect on black or foreign-born residential mobility or vote totals. Rather than a terrorist organization, the 1920s Klan is best described as social organization with a very successful multilevel marketing structure fueled by an army of highly incentivized sales agents selling hatred, religious intolerance, and fraternity in a time and place where there was tremendous demand.

In 2008, a group of uninsured low-income adults in Oregon was selected by lottery to be given the chance to apply for Medicaid. This lottery provides an opportunity to gauge the effects of expanding access to public health insurance on the health care use, financial strain, and health of low-income adults using a randomized controlled design. In the year after random assignment, the treatment group selected by the lottery was about 25 percentage points more likely to have insurance than the control group that was not selected. We find that in this first year, the treatment group had substantively and statistically significantly higher health care utilization (including primary and preventive care as well as hospitalizations), lower out-of-pocket medical expenditures and medical debt (including fewer bills sent to collection), and better self-reported physical and mental health than the control group.

Consumers need information to compare alternatives for markets to function efficiently. Recognizing this, public policies often pair competition with easy access to comparative information. The implicit assumption is that comparison friction—the wedge between the availability of comparative information and consumers' use of it—is inconsequential because when information is readily available, consumers will access this information and make effective choices. We examine the extent of comparison friction in the market for Medicare Part D prescription drug plans in the United States. In a randomized field experiment, an intervention group received a letter with personalized cost information. That information was readily available for free and widely advertised. However, this additional step—providing the information rather than having consumers actively access it—had an impact. Plan switching was 28% in the intervention group, versus 17% in the comparison group, and the intervention caused an average decline in predicted consumer cost of about $100 a year among letter recipients—roughly 5% of the cost in the comparison group. Our results suggest that comparison friction can be large even when the cost of acquiring information is small and may be relevant for a wide range of public policies that incorporate consumer choice.

Growing concerns about low awareness and take-up rates for government support programs like college financial aid have spurred calls to simplify the application process and enhance visibility. We present results from a randomized field experiment in which low-income individuals receiving tax preparation help were also offered immediate assistance and a streamlined process to complete the Free Application for Federal Student Aid (FAFSA) for themselves or their children. Treated participants were also provided with aid estimates that were compared against tuition cost amounts for nearby colleges. The combined assistance and information treatment substantially increased FAFSA submissions and ultimately the likelihood of college attendance, persistence, and aid receipt. In particular, high school seniors whose parents received the treatment were 8 percentage points more likely to have completed two years of college, going from 28% to 36%, during the first three years following the experiment. Families who received aid information but no assistance with the FAFSA did not experience improved outcomes. The findings suggest many other opportunities for using personal assistance to increase participation in programs that require filling out forms to become eligible.

In 2003, a new law required that 40% of Norwegian firms' directors be women—at the time only 9% of directors were women. We use the prequota cross-sectional variation in female board representation to instrument for exogenous changes to corporate boards following the quota. We find that the constraint imposed by the quota caused a significant drop in the stock price at the announcement of the law and a large decline in Tobin's Q over the following years, consistent with the idea that firms choose boards to maximize value. The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance.

This paper develops a model that speaks to the goals and methods of financial-stability policies. There are three main points. First, from a normative perspective, the model defines the fundamental market failure to be addressed, namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short-term debt and leave the system excessively vulnerable to costly financial crises. Second, it shows how in a simple economy where commercial banks are the only lenders, conventional monetary-policy tools such as open-market operations can be used to regulate this externality, while in more advanced economies it may be helpful to supplement monetary policy with other measures. Third, from a positive perspective, the model provides an account of how monetary policy can influence bank lending and real activity, even in a world where prices adjust frictionlessly and there are other transactions media besides bank-created money that are outside the control of the central bank.

We estimate the effect of new private-sector unionization on publicly traded firms' equity value in the United States over the 1961–1999 period using a newly assembled sample of National Labor Relations Board (NLRB) representation elections matched to stock market data. Event-study estimates show an average union effect on the equity value of the firm equivalent to $40,500 per unionized worker, an effect that takes 15 to 18 months after unionization to fully materialize, and one that could not be detected by a short-run event study. At the same time, point estimates from a regression discontinuity design—comparing the stock market impact of close union election wins to close losses—are considerably smaller and close to zero. We find a negative relationship between the cumulative abnormal returns and the vote share in support of the union, allowing us to reconcile these seemingly contradictory findings.

Despite their importance, there is limited evidence on how institutions can be strengthened. Evaluating the effects of specific reforms is complicated by the lack of exogenous variation in institutions, the difficulty of measuring institutional performance, and the temptation to “cherry pick” estimates from among the large number of indicators required to capture this multifaceted subject. We evaluate one attempt to make local institutions more democratic and egalitarian by imposing participation requirements for marginalized groups (including women) and test for learning-by-doing effects. We exploit the random assignment of a governance program in Sierra Leone, develop innovative real-world outcome measures, and use a preanalysis plan (PAP) to bind our hands against data mining. The intervention studied is a “community-driven development” program, which has become a popular strategy for foreign aid donors. We find positive short-run effects on local public goods and economic outcomes, but no evidence for sustained impacts on collective action, decision making, or the involvement of marginalized groups, suggesting that the intervention did not durably reshape local institutions. We discuss the practical trade-offs faced in implementing a PAP and show how in its absence we could have generated two divergent, equally erroneous interpretations of program impacts on institutions.

We consider a repeated interaction between a long-run player and a sequence of short-run players, in which the long-run player may either be rational or may be a mechanical type who plays the same (possibly mixed) action in every stage game. We depart from the classical model in assuming that the short-run players make inferences by analogical reasoning, meaning that they correctly identify the average strategy of each type of long-run player, but do not recognize how this play varies across histories. Concentrating on 2 × 2 games, we provide a characterization of equilibrium payoffs, establishing a payoff bound for the rational long-run player that can be strictly larger than the familiar “Stackelberg” bound. We also provide a characterization of equilibrium behavior, showing that play begins with either a reputation-building or a reputation-spending stage (depending on parameters), followed by a reputation-manipulation stage.