Knowledge that Transforms

This paper develops a growth model characterized by ability-biased technological transition in which the evolution of technology, education attainment, and wage inequality is consistent with the observed pattern in the United States and other advanced countries over the past several decades. It argues that an increase in the rate of technological progress raises the return to ability and simultaneously generates an increase in wage inequality between and within groups of skilled and unskilled workers, an increase in average wages of skilled workers, a temporary decline in average wages of unskilled workers, an increase in education, and a productivity transitory slowdown.

We study the consequences of hospital competition for Medicare beneficiaries' heart attack care from 1985 to 1994. We examine how relatively exogenous determinants of hospital choice such as travel distances influence the competitiveness of hospital markets, and how hospital competition interacts with the influence of managed-care organizations to affect the key determinants of social welfare—expenditures on treatment and patient health outcomes. In the 1980s the welfare effects of competition were ambiguous; but in the 1990s competition unambiguously improves social welfare. Increasing HMO enrollment over the sample period partially explains the dramatic change in the impact of hospital competition.

This essay argues that the history of macroeconomics during the twentieth century can be divided into three epochs. Pre-1940: a period of exploration, during which all the right ingredients were developed. But also a period where confusion reigned, because of the lack of an integrated framework. From 1940 to 1980: a period during which an integrated framework was developed—from the IS-LM to dynamic general equilibrium models. But a construction with an Achilles'heel, too casual a treatment of imperfections, leading to a crisis in the late 1970s. Since 1980: a new period of exploration, focused on the role of imperfections in macroeconomics. Exploration often feels like confusion. But behind it is one of the most productive periods of research in macroeconomics.

Some of this century's many valuable contributions to economics, like macroeconomics, econometrics, and game theory, are widely recognized. However, arguably equally important is the enhanced role of empirical study permitted by more abundant data and improved methods. Also insufficiently recognized are the increased rigor and use of applied economics in public finance, regulation, corporation finance, etc., employing abstract theory and sophisticated data analysis. The striking contrast with earlier intuitively based applied economics and empirical study is illustrated. Comparison with Marshall's Principles also indicates that, except for macroeconomics, remarkably little space in today's texts deals with some ofthe rich contributions ofthis century.

We compare free trade reached through expanding regional trading blocs to free trade accomplished by multilateral negotiation. With sunk costs, the outcomes are different. Trade in an imperfectly competitive good flows disproportionately more between the original members of a regional agreement even after free trade is reached. They secure a higher welfare level from regionalism than from free trade achieved multilaterally; nonmembers, however, reach a lower welfare level. A surprising result is that world welfare during free trade is greater when it is achieved by the regional path. We conclude with some empirical evidence from the European Union that is consistent with the model.

This paper considers the interpretation of evidence from social experiments when persons randomized out of a program being evaluated have good substitutes for it, and when persons randomized into a program drop out to pursue better alternatives. Using data from an experimental evaluation of a classroom training program, we document the empirical importance of control group substitution and treatment group dropping out. Evidence that one program is ineffective relative to close substitutes is not evidence that the type of service provided by all of the programs is ineffective, although that is the way experimental evidence is often interpreted.

I identify the effects of class size on student achievement using longitudinal variation in the population associated with each grade in 649 elementary schools. I use variation in class size driven by idiosyncratic variation in the population. I also use discrete jumps in class size that occur when a small change in enrollment triggers a maximum or minimum class size rule. The estimates indicate that class size does not have a statistically significant effect on student achievement. I rule out even modest effects (2 to 4 percent of a standard deviation in scores for a 10 percent reduction in class size).

The hospital market is served by firms that are private for-profit, private not-for-profit, and government-owned and operated. I use a plausibly exogenous change in hospital financing that was intended to improve medical care for the poor to test three theories of organizational behavior. I find that the critical difference between the three types of hospitals is caused by the soft budget constraint of government-owned institutions. The decision-makers in private not-for-profit hospitals are just as responsive to financial incentives and are no more altruistic than their counterparts in profit-maximizing facilities. My final set of results suggests that the significant increase in public medical spending examined in this paper has not improved health outcomes for the indigent.

This paper examines evidence of the role that reputation plays in determining contractual outcomes. We conduct an empirical analysis of the Indian customized software industry, using a data set we collected containing detailed information on 230 projects carried out by 125 software firms. We propose a model ofthe industry where reputation determines contractual outcomes. The evidence supports the view that reputation matters. Ex ante contracts, as well as the outcome after ex post renegotiation, vary with firms' characteristics plausibly associated with reputation. This holds after controlling for project, client, and firm characteristics.

During the nineteenth century most Western societies extended voting rights, a decision that led to unprecedented redistributive programs. We argue that these political reforms can be viewed as strategic decisions by the political elite to prevent widespread social unrest and revolution. Political transition, rather than redistribution under existing political institutions, occurs because current transfers do not ensure future transfers, while the extension of the franchise changes future political equilibria and acts as a commitment to redistribution. Our theory also offers a novel explanation for the Kuznets curve in many Western economies during this period, with the fall in inequality following redistribution due to democratization.