Knowledge that Transforms

An increase in the share of youth in the working age population of one state or region relative to the rest of the United States causes a sharp reduction in that state's relative unemployment rate and a modest increase in its labor force participation rate. This is inconsistent with many theories of the labor market, but can be easily explained by a model of frictional unemployment with on-the-job search. The theory makes strong predictions regarding the behavior of wages which are shown to be consistent with the data. The paper also reconciles its findings with an existing body of apparently contradictory empirical evidence. # I have received helpful comments from Daron Acemoglu, Olivier Blanchard, Andrew Caplin, Henry Farber, Christopher Foote, Edward Glaeser, Bo Honore, Lawrence Katz, Alan Krueger, Christina Paxson, Harvey Rosen, Robert Topel, two anonymous referees, and many seminar participants. Thanks to Susan Gorel for providing me with cross-state unemployment and partic...

We show that if firms statistically discriminate among young workers on the basis of easily observable characteristics such as education, then as firms learn about productivity, the coefficients on the easily observed variables should fall, and the coefficients on hard-to-observe correlates of productivity should rise. We find support for this proposition using NLSY79 data on education, the AFQT test, father's education, and wages for young men and their siblings. We find little evidence for statistical discrimination in wages on the basis of race. Our analysis has a wide range of applications in the labor market and elsewhere.

Who should enforce laws or contracts: judges or regulators? Many Coasians, though not Coase himself, advocate judicial enforcement. We show that the incentives facing judges and regulators crucially shape this choice. We then compare the regulation of financial markets in Poland and the Czech Republic in the 1990s. In Poland, strict enforcement of the securities law by a highly motivated regulator was associated with a rapidly developing stock market. In the Czech Republic, hands-off regulation was associated with a moribund stock market.

Psychological experiments demonstrate that repeated pairings of a cue and a consumption good eventually create cue-based complementarities: the presence of the cue raises the marginal utility derived from consumption. In this paper, such dynamic preferences are embedded in a rational choice model. Behavior that arises from this model is characterized by endogenous cue sensitivities, costly cue-management, commitment, and cue-based spikes in impatience. The model is used to understand addictive/habit-forming behaviors and marketing. The model explains why preferences change rapidly from moment to moment, why temptations should sometimes be avoided, and how firms package and position goods.

Mergers can reduce costs and alter incentives about how to position products, so that theory alone cannot predict whether mergers will increase product variety. We document the effect of mergers on variety by exploiting the natural experiment provided by the 1996 Telecommunications Act. We find that consolidation reduced station entry and increased the number of formats available relative to the number of stations. We find some evidence that increased concentration increases variety absolutely. Based on the programming overlap of jointly owned stations, we can infer that the effects operate through product crowding that is consistent with spatial preemption.

This paper presents a theory of parliamentary systems with a proportional representation electoral system, a formateur selected based on party representation in parliament, and parties that cannot commit to the policies they will implement once in government. Government formation involves efficient proto-coalition bargaining, and elections yield unique strong Nash equilibrium outcomes. Depending on the status quo, minimal-majority, surplus, or consensus governments can form. If parties and voters are myopic and the status quo is subject to shocks, consensus governments and centrist policies occur only in a crisis. Otherwise, governments are minimal winning, and policies reflect only the preferences of the government parties.

We think of voice as a means of information aggregation within groups operating in a variety of settings. We explore how the characteristics of groups and their leaders influence voice. In relatively homogeneous groups, members farthest away from the leader have the best incentives to provide information, and their voice tends to moderate policy decisions. In large heterogeneous groups where leaders cannot identifY individual members, the possibilities for informational exchange are severely limited, and any communication that exists pushes policies farther to the extreme.

Does competition among financial intermediaries lead to excessively low standards? To examine this question, we construct a model where intermediaries design contracts to attract trading volume, taking into consideration that traders differ in credit quality and may default. When credit quality is observable, intermediaries demand the “right” amount of guarantees. A monopolist would demand fewer guarantees. Private information about credit quality has an ambiguous effect in a competitive environment. When the cost of default is large (small), private information leads to higher (lower) standards. We exhibit examples where private information is present and competition produces higher standards than monopoly does.

In the formative stages of their businesses, entrepreneurs have to provide incentives for employees to protect, rather than steal, the source of organizational rents. We study how the entrepreneur's response to this problem determines the organization's internal structure, growth, and its eventual size. Large, steep hierarchies will predominate in physical-capital-intensive industries, and will have seniority-based promotion policies. By contrast, flat hierarchies will prevail in human-capital-intensive industries and will have up-or-out promotion systems. Furthermore, flat hierarchies will have more distinctive technologies or cultures than steep hierarchies. The model points to some essential differences between organized hierarchies and markets.

Although the college-high school wage gap for younger U. S. men has doubled over the past 30 years, the gap for older men has remained nearly constant. In the United Kingdom and Canada the college-high school wage gap also increased for younger relative to older men. Using a model with imperfect substitution between similarly educated workers in different age groups, we argue that these shifts reflect changes in the relative supply of highly educated workers across age groups. The driving force behind these changes is the slowdown in the rate of growth of educational attainment that began with cohorts born in the early 1950s in all three countries.