Knowledge that Transforms

U. S. copyright law effectively prevents direct price discrimination for copyright holders that sell to different markets. In response, these firms can engage in indirect price discrimination. I derive theoretical predictions about the use of indirect price discrimination, and I analyze how optimal pricing strategies differ for different products. Using data on VHS and DVD movie distribution, I find that firms' pricing choices are consistent with the predictions of theory and that firms' use of indirect price discrimination benefits consumers (but harms ancillary retailers). Finally, I examine what optimal pricing strategies might look like in a legal environment that permits direct price discrimination.

We study the allocation of driver's licenses in India by randomly assigning applicants to one of three groups: bonus (offered a bonus for obtaining a license quickly), lesson (offered free driving lessons), or comparison. Both the bonus and lesson groups are more likely to obtain licenses. However, bonus group members are more likely to make extralegal payments and to obtain licenses without knowing how to drive. All extralegal payments happen through private intermediaries (“agents”). An audit study of agents reveals that they can circumvent procedures such as the driving test. Overall, our results support the view that corruption does not merely reflect transfers from citizens to bureaucrats but distorts allocation.

We study the formation of beliefs in a squatter settlement in the outskirts of Buenos Aires exploiting a natural experiment that induced an allocation of property rights that is exogenous to the characteristics of the squatters. There are significant differences in the beliefs that squatters with and without land titles declare to hold. Lucky squatters who end up with legal titles report beliefs closer to those that favor the workings of a free market. Examples include materialist and individualist beliefs (such as the belief that money is important for happiness or the belief that one can be successful without the support of a large group). The effects appear large. The value of a (generated) index of “market” beliefs is 20 percent higher for titled squatters than for untitled squatters, in spite of leading otherwise similar lives. Moreover, the effect is sufficiently large so as to make the beliefs of the squatters with legal titles broadly comparable to those of the general Buenos Aires population, in spite of the large differences in the lives they lead.

This paper develops an approach to studying how bias in favor of one party due to the pattern of electoral districting affects policy choice. We tie a commonly used measure of electoral bias to the theory of party competition and show how this affects party strategy in theory. The usefulness of the approach is illustrated using data on local government in England. The results suggest that reducing electoral bias leads parties to moderate their policies.

When information is limited or costly, agents are unable to engage in optimal arbitrage. Excess price dispersion across markets can arise and goods may not be allocated efficiently; in this setting, information technologies may improve market performance and increase welfare. Between 1997 and 2001, mobile phone service was introduced throughout Kerala, a state in India with a large fishing industry. Using micro-level survey data, we show that the adoption of mobile phones by fishermen and wholesalers was associated with a dramatic reduction in price dispersion, the complete elimination of waste and near-perfect adherence to the Law of One Price. Both consumer and producer welfare increased.

This paper investigates the problem of optimal districting in the context of a simple model of legislative elections. In the model, districting matters because it determines the seat-vote curve, which describes the relationship between seats and votes. The paper first characterizes the optimal seat-vote curve and shows that, under a weak condition, there exist districtings that generate this ideal relationship. The paper then develops an empirical methodology for computing seat-vote curves and measuring the welfare gains from implementing optimal districting. This is applied to analyze the districting plans used to elect U.S. state legislators during the 1990s.

This paper studies the productivity and distributional effects of large irrigation dams in India. Our instrumental variable estimates exploit the fact that river gradient affects a district's suitability for dams. In districts located downstream from a dam, agricultural production increases, and vulnerability to rainfall shocks declines. In contrast, agricultural production shows an insignificant increase in the district where the dam is located but its volatility increases. Rural poverty declines in downstream districts but increases in the district where the dam is built, suggesting that neither markets nor state institutions have alleviated the adverse distributional impacts of dam construction.

This paper uses a unique dataset from Denmark to investigate the impact of family characteristics in corporate decision making and the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or external chief executive officer (CEO). The paper uses variation in CEO succession decisions that result from the gender of a departing CEO's firstborn child. This is a plausible instrumental variable (IV), as male first-child firms are more likely to pass on control to a family CEO than are female first-child firms, but the gender of the first child is unlikely to affect firms' outcomes. We find that family successions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transitions. Our IV estimates are significantly larger than those obtained using ordinary least squares. Furthermore, we show that family-CEO underperformance is particularly large in fast-growing industries, industries with highly skilled labor force, and relatively large firms. Overall, our empirical results demonstrate that professional, nonfamily CEOs provide extremely valuable services to the organizations they head.

Why is GDP growth so much more volatile in poor countries than in rich ones? We identify three possible reasons: (i) poor countries specialize in fewer and more volatile sectors; (ii) poor countries experience more frequent and more severe aggregate shocks (e.g., from macroeconomic policy); and (iii) poor countries' macroeconomic fluduations are more highly correlated with the shocks affecting the sectors they specialize in. We show how to decompose volatility into the various sources, quantify their contribution to aggregate volatility, and study how they relate to the stage of development. We document the following regularities. First, as countries develop, their productive structure moves from more volatile to less volatile sectors. Second, the volatility of country-specific macroeconomic shocks falls with development. Third, the covariance between sector-specific and country-specific shocks does not vary systematically with the level of development. There is also some evidence that the degree of sectoral concentration declines with development at early stages, and increases at later stages. We argue that many theories linking volatility and development are not consistent with these findings, and suggest new directions for future theoretical work.

While privatizing Social Security can improve labor supply incentives, it can also reduce risk sharing when households face uninsurable risks. We simulate a stylized 50-percent privatization using an overlapping-generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty. When wage shocks are insurable, privatization produces about $21,900 of new resources for each future household (growth adjusted over time) after all households have been fully compensated for their possible transitional losses. However, when wages are not insurable, privatization reduces efficiency by about $5,600 per future household despite improved labor supply incentives. We check the robustness of these results to different model specifications and arrive at several surprising conclusions. First, privatization actually performs relatively better in a closed economy, where interest rates decline with capital accumulation, than in an open economy where capital can be accumulated without reducing interest rates. Second, privatization also performs relatively better when an actuarially-fair private annuity market does not exist than when it does exist. Third, introducing progressivity into the privatized system to restore risk sharing must be done carefully. In particular, having the government match private contributions on a progressive basis is very effective at restoring risk sharing — too much matching actually harms efficiency. However, increasing the progressivity of the remaining traditional system is very effective at restoring risk sharing, thereby allowing partial privatization to produce efficiency gains of $2,700 per future household.