Knowledge that Transforms

We examine the labor market for mutual fund managers. Using data from 1992–1994, we find that “termination” is more performance-sensitive for younger managers. We identify possible implicit incentives created by the termination-performance relationship. The shape of the termination-performance relationship may give younger managers an incentive to avoid unsystematic risk. Direct effects of portfolio composition may also give younger managers an incentive to “herd” into popular sectors. Consistent with these incentives, we find that younger managers hold less unsystematic risk and have more conventional portfolios. Promotion incentives and market responses to managerial turnover are also studied.

The magnitude of growth in “underlying” wage inequality in the United States during the 1980s is obscured by a concurrent decline in the federal minimum wage, which itself could cause an increase in observed wage inequality. This study uses regional variation in the relative level of the federal minimum wage to separately identify the impact of the minimum wage from nationwide growth in “latent” wage dispersion during the 1980s. The analysis suggests that the minimum wage can account for much of the rise in dispersion in the lower tail of the wage distribution, particularly for women.

The canonical model of strategic complementarities between individual actions, which exhibits multiple equilibria under perfect information, is extended with heterogeneous agents and imperfect information. Agents observe their own cost of action and the history of the levels of aggregate activity. The distribution of individual characteristics evolves through a random process, and individuals are rational Bayesians. Under plausible conditions, there is a unique equilibrium with phases of high and low activity and random switches. Applications may be found in macroeconomics and revolutions.

Among U. S. industries where earnings rose relatively from 1979–1995, injury rates declined relatively. Obversely, during the 1960s narrowing interindustry wage differentials were associated with an increase in the relative risk of injury in high-wage industries. Evidence from the NLSY suggests similar results among full-time workers between 1988 and 1996. Between 1973 and 1991 the disamenity of evening/night work was increasingly borne by low-wage male workers. Changing earnings inequality has understated changing inequality in the returns to work. Assuming skill-neutral changes in the cost of reducing these disamenities, estimates of the implied income elasticities of demand for amenities are well above unity.

We show that a framework that integrates job assignment, human-capital acquisition, and learning captures several empirical findings concerning wage and promotion dynamics inside firms, including the following. First, real-wage decreases are not rare but demotions are. Second, wage increases are serially correlated. Third, promotions are associated with large wage increases. Fourth, wage increases at promotion are small relative to the difference between average wages across levels of the job ladder. Fifth, workers who receive large wage increases early in their stay at one level of the job ladder are promoted quickly to the next.

In the 1980s several countries with large government debt or deficit implemented substantial, and in some cases drastic, deficit cuts. Contrary to widespread expectations, in many cases private consumption boomed rather than contracted. This paper shows that in times of “fiscal stress” shocks to government revenues and, especially, expenditure have very different effects on private consumption than in “normal” times.

The twelfth century rabbinic scholar Maimonides proposed a maximum class size of 40. This same maximum induces a nonlinear and nonmonotonic relationship between grade enrollment and class size in Israeli public schools today. Maimonides' rule of 40 is used here to construct instrumental variables estimates of effects of class size on test scores. The resulting identification strategy can be viewed as an application of Donald Campbell's regression-discontinuity design to the class-size question. The estimates show that reducing class size induces a significant and substantial increase in test scores for fourth and fifth graders, although not for third graders.

This paper investigates the effects of uncertainty on the investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms' products according to the entrepreneurs. The results support the view that uncertainty weakens the response of investment to demand thus slowing down capital accumulation. Consistent with the predictions of the theory, there is considerable heterogeneity in the effect of uncertainty on investment: it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power. We show that the negative effect of uncertainty on investment cannot be explained by uncertainty proxying for liquidity constraints.

The evaluation of numerous school reforms requires an understanding of the value of better schools. Given the difficulty of calculating the relationship between school quality and student outcomes, I turn to another method and use house prices to infer the value parents place on school quality. I look within school districts at houses located on attendance district boundaries; houses then differ only by the elementary school the child attends. I thereby effectively remove the variation in neighborhoods, taxes, and school spending. I find that parents are willing to pay 2.5 percent more for a 5 percent increase in test scores. This finding is robust to a number of sensitivity checks.

Trading relations in Vietnam's emerging private sector are shaped by two market frictions: the difficulty of locating trading partners and the absence of legal enforcement of contracts. Examining relational contracting, we find that a firm trusts its customer enough to offer credit when the customer finds it hard to locate an alternative supplier. A longer duration of trading relationship is associated with larger credit, as is prior information gathering. Customers identified through business networks receive more credit. These network effects are enduring, suggesting that networks are used to sanction defaulting customers.