Knowledge that Transforms

We study an incentive model of financial intermediation in which firms as well as intermediaries are capital constrained. We analyze how the distribution of wealth across firms, intermediaries, and uninformed investors affects investment, interest rates, and the intensity of monitoring. We show that all forms of capital tightening (a credit crunch, a collateral squeeze, or a savings squeeze) hit poorly capitalized firms the hardest, but that interest rate effects and the intensity of monitoring will depend on relative changes in the various components of capital. The predictions of the model are broadly consistent with the lending patterns observed during the recent financial crises.

Some commentators argue that increased sorting into internally homogeneous neighborhoods, schools, and marriages is radically polarizing society. Calibration of a formal model, however, suggests that the steady-state standard deviation of education would increase only 1.7 percent if the correlation between neighbors' education doubled, and would fall only 1.6 percent if educational sorting by neighborhood disappeared. The steady-state standard deviation of education would grow 1 percent if the correlation between spouses' education increased from 0.6 to 0.8. In fact, marital and neighborhood sorting have been stable, or even decreasing historically. Sorting has somewhat more significant effects on intergenerational mobility than on inequality.

The recent decline in the unemployment insurance (UI) takeup rate has puzzled researchers. Using administrative data with accurate information on the potential level and duration of benefits, we examine whether a separating employee receives UI. We find a strong positive effect of the benefit level on takeup, and smaller effects of the potential duration and the tax treatment of benefits. Simulations indicate that the recent inclusion of UI in the income tax base can account for most of the previously unexplained decline in UI receipt.

This paper presents evidence that “social capital” matters for measurable economic performance, using indicators of trust and civic norms from the World Values Surveys for a sample of 29 market economies. Memberships in formal groups—Putnam's measure of social capital—is not associated with trust or with improved economic performance. We find trust and civic norms are stronger in nations with higher and more equal incomes, with institutions that restrain predatory actions of chief executives, and with better-educated and ethnically homogeneous populations.

Are the large measured wage differentials for on-the-job computer use a true return to computer skills, or do they just reflect that higher wage workers use computers on their jobs? We examine this issue with three large cross-sectional surveys from Germany. First, we confirm that the estimated wage differential associated with computer use in Germany is very similar to the U. S. differential. Second, we also measure large differentials for on-the-job use of calculators, telephones, pens or pencils, or for those who work while sitting down. We argue that these findings cast some doubt on the literal interpretation of the computer use wage differential as reflecting true returns to computer use or skill.

We test and confirm that retail gasoline prices respond more quickly to increases than to decreases in crude oil prices. Among the possible sources of this asymmetry are production/inventory adjustment lags and market power of some sellers. By analyzing price transmission at different points in the distribution chain, we attempt to shed light on these theories. Spot prices for generic gasoline show asymmetry in responding to crude oil price changes, which may reflect inventory adjustment effects. Asymmetry also appears in the response of retail prices to wholesale price changes, possibly indicating short-run market power among retailers.

Myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently. Two implications of myopic loss aversion are tested experimentally. 1. Investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often. 2. If all payoffs are increased enough to eliminate losses, investors will accept more risk. In a task in which investors learn from experience, both predictions are supported. The investors who got the most frequent feedback (and thus the most information) took the least risk and earned the least money.

We develop a theory of labor contracting in which negative productivity shocks lead to costly job loss, despite unlimited possibilities for renegotiating wage contracts. Such fragile contracts emerge from firms' trade-offs between robustness of incentives in ongoing employment relationships and costly specific investment. Contractual fragility can serve as a powerful mechanism for propagating underlying productivity shocks: in a simulated matching market equilibrium, i.i.d. shocks are greatly magnified in their effect on market output, and the effect is highly persistent. We also explore novel motivations for government policies that strengthen employment relationships.

Generating government revenue is a common objective in privatization. This paper asks what determines privatization prices using firm-level data for all 236 Mexican companies privatized between 1983 and 1992. There are three main reasons why net prices—auction prices net of the cost of prior restructuring measures—are low, averaging 54 cents per dollar of assets. First, privatization prices are very sensitive to the level of competition in the auction and restrictions often limited participation. Second, the privatization process took too long, and lengthier privatizations are associated with lower premiums. Third, firm prior restructuring measures absorbed an average of 33 percent of the auction price. Most restructuring measures do not increase price and delay privatization further. Net prices would have increased by 71 cents per dollar of assets if the government had emphasized speed, succeeding in divesting assets in one year less than the average, and firing the CEO were the only restructuring step taken.

Political constitutions are incomplete contracts and therefore leave room for abuse of power. In democracies, elections are the primary mechanism for disciplining public officials, but they are not sufficient. Separation of powers between executive and legislative bodies also helps to prevent the abuse of power, but only with appropriate checks and balances. Checks and balances work by creating a conflict of interest between the executive and the legislature, yet requiring both bodies to agree on public policy. In this way, the two bodies discipline each other to the voters' advantage. Under appropriate checks and balances, separation of powers also helps the voters elicit information.