Knowledge that Transforms

Controlling for labor productivity, income levels, and other possible determinants, there is a robust and statistically significant association between the extent of democracy and the level of manufacturing wages in a country. The association exists both across countries and over time within countries. The coefficient estimates suggest that nonnegligible wage improvements result from the enhancement of democratic institutions: average wages in a country like Mexico would be expected to increase by 10 to 40 percent if Mexico were to attain a level of democracy comparable to that prevailing in the United States. Political competition and participation seem to be the driving force behind the result.

This paper compares the performance of privatized and state firms in the transition economies of Central Europe, while controlling for various forms of selection bias. It argues that privatization has different effects depending on the types of owners to whom it gives control. In particular, privatization to outsider, but not insider, owners has significant performance effects. Where privatization is effective, the effect on revenue performance is very pronounced, but there is no comparable effect on cost reduction. Overlooking the strong revenue effect of privatization to outsider owners leads to a substantial overstatement of potential employment losses from postprivatization restructuring.

We examine how principals should design incentives to induce time-inconsistent procrastinating agents to complete tasks efficiently. Delay is costly to the principal, but the agent faces stochastic costs of completing the task, and efficiency requires waiting when costs are high. If the principal knows the task-cost distribution, she can always achieve first-best efficiency. If the agent has private information, the principal can induce first-best efficiency for time-consistent agents, but often cannot for procrastinators. We show that second-best optimal incentives for procrastinators typically involve an increasing punishment for delay as time passes.

Economists have long suggested that nominal product prices are changed infrequently because of fixed costs. In such a setting, optimal price adjustment should depend on the state of the economy. Yet, while widely discussed, statedependent pricing has proved difficult to incorporate into macroeconomic models. This paper develops a new, tractable theoretical state-dependent pricing framework. We use it to study how optimal pricing depends on the persistence of monetary shocks, the elasticities of labor supply and goods demand, and the interest sensitivity of money demand.

Critics of privatization argue that the increased profitability of privatized companies comes at the expense of society. Using data from 97 percent of those nonfinancial firms privatized in Mexico during the period 1983–1991, we study two channels for social losses: (1) increased prices, and (2) layoffs and lower wages. Privatization is followed by a 24-percentage-point increase in the mean ratio of operating income to sales as firms catch up with industry-matched control groups. We estimate that higher product prices explain 5 percent of that increase; transfers from laid-off workers, 31 percent; and productivity gains, the remainder.

This paper evaluates the loss of global welfare from exhaustion of nonrenewable resources, such as oil. The underlying methodology represents an empirical application of some recent developments in the theory of green accounting and sustainability. The paper estimates that the world loses the equivalent of about 1 percent of final consumption per year from finiteness of the earth's resources, compared with a counterfactual trajectory where global extraction of minerals is allowed to remain forever constant at today's flow rates and extraction costs.

The neoclassical growth model is modified to include a variable rate of time preference. With no commitment ability and log utility, the equilibrium features a constant effective rate of time preference and is observationally equivalent to the standard model. The extended framework yields testable linkages between the extent of commitment ability and the rates of saving and growth. The model also has welfare implications, including the optimal design of institutions that facilitate household commitments. Steady-state results are obtained for general concave utility functions, and some properties of the transitional dynamics are characterized for isoelastic utility.

Do professional forecasters provide their true unbiased estimates, or do they behave strategically? In our model, forecasters have common information, confer actively, and thus know the true pdf of future outcomes. Intensive users of economic forecasts monitor forecasters' performance closely; occasional users are drawn to the forecaster who fared best in the previous period. In the resulting Nash equilibrium, even though economists have identical expectations, they make a range of projections that mimics the true probability distribution of the forecast variable. Those whose wages depend most on publicity produce forecasts that differ most from the consensus. Empirical evidence supports the model.

This paper investigates private-interest, public-interest, and political-institutional theories of regulatory change to analyze state-level deregulation of bank branching restrictions. Using a hazard model, we find that interest group factors related to the relative strength of potential winners (large banks and small, bank-dependent firms) and losers (small banks and the rival insurance firms) can explain the timing of branching deregulation across states during the last quarter century. The same factors also explain congressional voting on interstate branching deregulation. While we find some support for each theory, the private interest approach provides the most compelling overall explanation of our results.

We develop a methodology for testing Hicks's induced innovation hypothesis by estimating a product-characteristics model of energy-using consumer durables, augmenting the hypothesis to allow for the influence of government regulations. For the products we explored, the evidence suggests that (i) the rate of overall innovation was independent of energy prices and regulations; (ii) the direction of innovation was responsive to energy price changes for some products but not for others; (iii) energy price changes induced changes in the subset of technically feasible models that were offered for sale; (iv) this responsiveness increased substantially during the period after energy-efficiency product labeling was required; and (v) nonetheless, a sizable portion of efficiency improvements were autonomous.