Knowledge that Transforms

As traders learn about the true distribution of some asset's dividends, a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred. Small differences in prior beliefs lead to large speculative premiums during the learning process. This phenomenon helps explain a paradox concerning the pricing of initial public offerings. The result casts light on the significance of the common prior assumption in economic models.

This paper examines the impact of the Tax Reform Act of 1986 (TRA86), which included an expansion of the earned income tax credit, on the labor force participation and hours of work of single women with children. We identify the impact of TRA86 by comparing the change in labor supply of single women with children to the change for single women without children. We find that between 1984–1986 and 1988–1990, single women with children increased their relative labor force participation by up to 2.8 percentage points. We observe no change in the relative hours worked by single women with children who were already in the labor force.

This paper proposes a microfoundation for social increasing returns in human capital accumulation. The underlying mechanism is a pecuniary externality due to the interaction of ex ante investments and costly bilateral search in the labor market. It is shown that the equilibrium rate of return on the human capital of a worker is increasing in the average human capital of the workforce even though all the production functions in the economy exhibit constant returns to scale, there are no technological externalities, and all workers are competing for the same jobs.

This paper examines the impact of technological innovation on wages using a panel of British firms. A head-count measure of major innovations between 1945 and 1983 is combined with share price and accounting information. Innovating firms are found to have higher average wages, but rival innovation tends to depress own wages. This appears consistent with a model where wages are partly determined by a sharing in the rents generated by innovation. In other words, innovation may be a good instrument for proxies for rents such as profitability, quasi rents, or Tobin's (average) Q . Instrumental variable estimates of the elasticity between wages and quasi rents are about 0.29.

Capital investment decisions must recognize the limitations on the firm's ability to later sell or expand capacity. This paper shows how opportunities for future expansion or contraction can be valued as options, how their valuation relates to the q theory of investment, and their effect on the incentive to invest. Generally, the option to expand reduces the incentive to invest, while the option to disinvest raises it. We show how these options determine the effect of uncertainty on investment, how they are changed by shifts of the distribution of future profitability, and how the q-theory and option pricing approaches are related.

This paper documents the extent to which immigrants participate in the many programs that make up the welfare state. The immigrant-native difference in the probability of receiving cash benefits is small, but the gap widens once other programs are included in the analysis: 21 percent of immigrant households receive some type of assistance, as compared with only 14 percent of native households. The types of benefits received by earlier immigrants influence the types of benefits received by newly arrived immigrants. Hence there might be ethnic networks that transmit information about the availability of particular benefits to new immigrants.

In an audit study of sex discrimination in hiring, comparably matched pairs of men and women applied for jobs as waiters and waitresses at restaurants in Philadelphia. In high-price restaurants (where earnings are higher), job applications from women had an estimated probability of receiving a job offer that was lower by about 0.4, and an estimated probability of receiving an interview that was lower by about 0.35. Both estimated differentials are statistically significant. Additional evidence suggests that customer discrimination partly underlies the hiring discrimination.

This study helps to explain why measured school inputs appear to have little effect on student outcomes, particularly for cohorts educated since 1960. Teachers' unionization can explain how public schools simultaneously can have more generous inputs and worse student performance. Using panel data on United States school districts, I identify the effect of teachers' unionization through differences in the timing of collective bargaining, especially timing determined by the passage of state laws that facilitate teachers' unionization. I find that teachers' unions increase school inputs but reduce productivity sufficiently to have a negative overall effect on student performance. Union effects are magnified where schools have market power.

This paper develops a multicommunity model and analyzes policies that affect spending on public education and its distribution across communities. We find that policies that on net increase the fraction of the (relatively) wealthiest residents in the poorest community are welfare enhancing; policies that decrease this fraction can make all worse off. Appropriately financed policies to (i) redistribute income toward the poorest, (ii) increase spending on education in the poorest community, and (iii) make the poorest community more attractive to relatively wealthier individuals, produce chain reactions in which the quality of education increases and tax rates fall in all communities.

Simultaneity between prisoner populations and crime rates makes it difficult to isolate the causal effect of changes in prison populations on crime. To break that simultaneity, this paper uses prison overcrowding litigation in a state as an instrument for changes in the prison population. The resulting elasticities are two to three times greater than those of previous studies. A one-prisoner reduction is associated with an increase of fifteen Index I crimes per year. While calculations of the costs of crime are inherently uncertain, it appears that the social benefits associated with crime reduction equal or exceed the social costs of incarceration for the marginal prisoner.