Knowledge that Transforms

We present evidence on whether workers have social preferences by comparing workers' productivity under relative incentives, where individual effort imposes a negative externality on others, to their productivity under piece rates, where it does not. We find that the productivity of the average worker is at least 50 percent higher under piece rates than under relative incentives. We show that this is due to workers partially internalizing the negative externality their effort imposes on others under relative incentives, especially when working alongside their friends. Under piece rates, the relationship among workers does not affect productivity. Further analysis reveals that workers internalize the externality only when they can monitor others and be monitored. This rules out pure altruism as the underlying motive of workers' behavior.

The Moving to Opportunity (MTO) demonstration assigned housing vouchers via random lottery to public housing residents in five cities. We use the exogenous variation in residential locations generated by MTO to estimate neighborhood effects on youth crime and delinquency. The offer to relocate to lower-poverty areas reduces arrests among female youth for violent and property crimes, relative to a control group. For males the offer to relocate reduces arrests for violent crime, at least in the short run, but increases problem behaviors and property crime arrests. The gender difference in treatment effects seems to reflect differences in how male and female youths from disadvantaged backgrounds adapt and respond to similar new neighborhood environments.

We develop a stochastic, general equilibrium, two-country model of trade and macroeconomic dynamics. Productivity differs across individual, monopolistically competitive firms in each country. Firms face a sunk entry cost in the domestic market and both fixed and per-unit export costs. Only relatively more productive firms export. Exogenous shocks to aggregate productivity and entry or trade costs induce firms to enter and exit both their domestic and export markets, thus altering the composition of consumption baskets across countries over time. In a world of flexible prices, our model generates endogenously persistent deviations from PPP that would not exist absent our microeconomic structure with heterogeneous firms. It provides an endogenous, microfounded explanation for a Harrod-Balassa-Samuelson effect in response to aggregate productivity differentials and deregulation. Finally, the model successfully matches several moments of U. S. and international business cycles.

This paper investigates whether individuals feel worse off when others around them earn more. In other words, do people care about relative position and does “lagging behind the Joneses” diminish well-being? To answer this question, I match individual-level panel data containing a number of indicators of well-being to information about local average earnings. I find that, controlling for an individual’s own income, higher earnings of neighbors are associated with lower levels of self-reported happiness. The data’s panel nature and rich set of measures of well-being and behavior indicate that this association is not driven by selection or by changes in the way people define happiness. There is suggestive evidence that the negative effect of increases in neighbors’ earnings on own well-being is most likely caused by interpersonal preferences, i.e. people having utility functions that depend on relative consumption in addition to absolute consumption.

Economic growth within countries varies sharply across decades.This paper examines one explanation for these sustained shifts in growth-changes in the national leader.We use deaths of leaders while in office as a source of exogenous variation in leadership, and ask whether these plausibly exogenous leadership transitions are associated with shifts in country growth rates.We find robust evidence that leaders matter for growth.The results suggest that the effects of individual leaders are strongest in autocratic settings where there are fewer constraints on a leader's power.Leaders also appear to affect policy outcomes, particularly monetary policy.The results suggest that individual leaders can play crucial roles in shaping the growth of nations."There is no number two, three, or four . . .

Structural vector autoregressions (VARs) are widely used to trace out the effect of monetary policy innovations on the economy.However, the sparse information sets typically used in these empirical models lead to at least two potential problems with the results.First, to the extent that central banks and the private sector have information not reflected in the VAR, the measurement of policy innovations is likely to be contaminated.A second problem is that impulse responses can be observed only for the included variables, which generally constitute only a small subset of the variables that the researcher and policymaker care about.In this paper we investigate one potential solution to this limited information problem, which combines the standard structural VAR analysis with recent developments in factor analysis for large data sets.We find that the information that our factor-augmented VAR (FAVAR) methodology exploits is indeed important to properly identify the monetary transmission mechanism.Overall, our results provide a comprehensive and coherent picture of the effect of monetary policy on the economy.

We introduce imperfect creditor protection in a multicountry Schumpeterian growth model. The theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run growth rate. We present evidence supporting these and other implications, in the form of a cross-country growth regression with a significant and sizable negative coefficient on initial per-capita GDP (relative to the United States) interacted with financial intermediation. In addition, we find that other variables representing schooling, geography, health, policy, politics, and institutions do not affect the significance of the interaction between financial intermediation and initial per capita GDP, and do not show any independent effect on convergence in the regressions. Our findings are robust to removal of outliers and to alternative conditioning sets, estimation procedures, and measures of financial development.

There is an extensive theoretical literature that postulates a tradeoff between child quantity and quality within a family. However, there is little causal evidence that speaks to this theory. Using a rich dataset on the entire population of Norway over an extended period of time, we examine the effects of family size and birth order on the educational attainment of children. While we find a negative correlation between family size and children's education, when we include indicators for birth order and/or use twin births as an instrument, family size effects become negligible. In addition, birth order has a significant and large negative effect on children's education. We also study adult earnings, employment, and teenage childbearing, and find strong evidence for birth order effects with these outcomes, particularly among women. These findings suggest the need to revisit economic models of fertility and child "production", focusing not only on differences across families but differences within families as well.

This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model-that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck-are both supported by the data. © 2005 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.