Knowledge that Transforms

The de novo evolution of protein-coding genes from noncoding DNA is emerging as a source of molecular innovation in biology. Studies of random sequence libraries, however, suggest that young de novo proteins will not fold into compact, specific structures typical of native globular proteins. Here we show that Bsc4, a functional, natural de novo protein encoded by a gene that evolved recently from noncoding DNA in the yeast S. cerevisiae, folds to a partially specific three-dimensional structure. Bsc4 forms soluble, compact oligomers with high β sheet content and a hydrophobic core, and undergoes cooperative, reversible denaturation. Bsc4 lacks a specific quaternary state, however, existing instead as a continuous distribution of oligomer sizes, and binds dyes indicative of amyloid oligomers or molten globules. The combination of native-like and non-native-like properties suggests a rudimentary fold that could potentially act as a functional intermediate in the emergence of new folded proteins de novo.

This study investigates how banks design financial products to cater to yield-seeking investors. We focus on a large market of investment products targeted exclusively at households: retail structured products. These products typically offer a high return under their best-case scenario—the headline rate—that is nested in a complex payoff formula. Using a text analysis of the payoff formulas of the 55,000 products issued in Europe from 2002 to 2010, we measure product headline rates, complexity, and risk. Over this period, product headline rates depart from the prevailing interest rates as the latter decrease, complexity increases, and risky products become more common. In the cross section, the headline rate of a product is positively correlated with its level of complexity and risk. Higher headline rate, more complex, and riskier products appear more profitable to the banks distributing them. Our results suggest that financial complexity is a by-product of banks catering to yield-seeking investors.

We present evidence that a significant fraction of commuters on the London Underground do not travel on their optimal route. We show that a strike on the Underground, which forced many commuters to experiment with new routes, brought lasting changes in behavior. This effect is stronger for commuters who live in areas where the Underground map is more distorted, which points to the importance of informational imperfections. Information resulting from the strike improved network efficiency. Search costs alone are unlikely to explain the suboptimal behavior.

Technological advances and the development of social media have made petitions, public protests, and other form of spontaneous activism increasingly common tools for individuals to influence decision makers. To study these phenomena, in this article I present a theory of petitions and public protests that explores their limits as mechanisms to aggregate information. The key assumption is that valuable information is dispersed among citizens. Through petitions and protests, citizens can signal their private information to the policy maker, who can then choose to use it or not. I first show that if citizens’ individual signals are not sufficiently precise, information aggregation is impossible, no matter how large is the population of informed citizens, even if the conflict with the policy maker is small. I then characterize the conditions on conflict and the signal structure that guarantee information aggregation. When these conditions are satisfied, I show that full information aggregation is possible as the population grows to infinity. When they are not satisfied, I show that information aggregation may still be possible if social media are available.

The nature of the relationship between employers and employees has been changing over the past three decades, with firms increasingly relying on contractors, temp agencies, and franchises rather than hiring employees directly. We investigate the impact of this transformation on the wage structure by following jobs that are moved outside the boundary of lead employers to contracting firms. We develop a new method for identifying outsourcing of food, cleaning, security, and logistics services in administrative data using the universe of social security records in Germany. We document a dramatic growth of domestic outsourcing in Germany since the early 1990s. Event-study analyses show that wages in outsourced jobs fall by approximately 10–15% relative to similar jobs that are not outsourced. We find evidence that the wage losses associated with outsourcing stem from a loss of firm-specific rents, suggesting that labor cost savings are an important reason firms choose to contract out these services. Finally, we tie the increase in outsourcing activity to broader changes in the German wage structure, in particular showing that outsourcing of cleaning, security, and logistics services alone accounts for around 9% of the increase in German wage inequality since the 1980s.

Using U.S. data from 1929 to 2015, we show that elevated credit-market sentiment in year t − 2 is associated with a decline in economic activity in years t and t + 1. Underlying this result is the existence of predictable mean reversion in credit-market conditions. When credit risk is aggressively priced, spreads subsequently widen. The timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity. Exploring the mechanism, we find that buoyant credit-market sentiment in year t − 2 also forecasts a change in the composition of external finance: net debt issuance falls in year t, while net equity issuance increases, consistent with the reversal in credit-market conditions leading to an inward shift in credit supply. Unlike much of the current literature on the role of financial frictions in macroeconomics, this article suggests that investor sentiment in credit markets can be an important driver of economic fluctuations.

We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. We show that the incorporated self-employed and their businesses engage in activities that demand comparatively strong nonroutine cognitive abilities, while the unincorporated and their firms perform tasks demanding relatively strong manual skills. People who become incorporated business owners tend to be more educated and—as teenagers—score higher on learning aptitude tests, exhibit greater self-esteem, and engage in more illicit activities than others. The combination of “smart” and “illicit” tendencies as youths accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. Individuals tend to experience a material increase in earnings when becoming entrepreneurs, and this increase occurs at each decile of the distribution.

We study how women's choices over labor activities in village economies correlate with poverty and whether enabling the poorest women to take on the activities of their richer counterparts can set them on a sustainable trajectory out of poverty. To do this we conduct a large-scale randomized control trial, covering over 21,000 households in 1,309 villages surveyed four times over a seven-year period, to evaluate a nationwide program in Bangladesh that transfers livestock assets and skills to the poorest women. At baseline, the poorest women mostly engage in low return and seasonal casual wage labor while wealthier women solely engage in livestock rearing. The program enables poor women to start engaging in livestock rearing, increasing their aggregate labor supply and earnings. This leads to asset accumulation (livestock, land, and business assets) and poverty reduction, both sustained after four and seven years. These gains do not crowd out the livestock businesses of noneligible households while the wages these receive for casual jobs increase as the poor reduce their labor supply. Our results show that (i) the poor are able to take on the work activities of the nonpoor but face barriers to doing so, and, (ii) one-off interventions that remove these barriers lead to sustainable poverty reduction.

Conventional value-added models (VAMs) compare average test scores across schools after regression-adjusting for students’ demographic characteristics and previous scores. This article tests for VAM bias using a procedure that asks whether VAM estimates accurately predict the achievement consequences of random assignment to specific schools. Test results from admissions lotteries in Boston suggest conventional VAM estimates are biased, a finding that motivates the development of a hierarchical model describing the joint distribution of school value-added, bias, and lottery compliance. We use this model to assess the substantive importance of bias in conventional VAM estimates and to construct hybrid value-added estimates that optimally combine ordinary least squares and lottery-based estimates of VAM parameters. The hybrid estimation strategy provides a general recipe for combining nonexperimental and quasi-experimental estimates. While still biased, hybrid school value-added estimates have lower mean squared error than conventional VAM estimates. Simulations calibrated to the Boston data show that, bias notwithstanding, policy decisions based on conventional VAMs that control for lagged achievement are likely to generate substantial achievement gains. Hybrid estimates that incorporate lotteries yield further gains.

This article develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and cannot commit to fiscal policy. If the government can perfectly commit, it fully insulates the economy against government spending shocks by purchasing short-term assets and issuing long-term debt. These positions are quantitatively very large relative to GDP and do not need to be actively managed by the government. Our main result is that these conclusions are not robust to the introduction of lack of commitment. Under lack of commitment, large and tilted debt positions are very expensive to finance ex ante since they exacerbate the problem of lack of commitment ex post. In contrast, a flat maturity structure minimizes the cost of lack of commitment, though it also limits insurance and increases the volatility of fiscal policy distortions. We show that the optimal time-consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility. Thus, under lack of commitment, the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols.