Knowledge that Transforms

Abstract Although largely absent from modern accounts of the Industrial Revolution, watches were the first mass-produced consumer durable and were Adam Smith’s preeminent example of technological progress. In fact, Smith makes the notable claim that watch prices may have fallen by up to 95% over the preceding century, a claim that this article attempts to evaluate. We look at changes in the reported value of over 3,200 stolen watches from criminal trials in the Old Bailey in London from 1685 to 1810. Before allowing for quality improvements, we find that the real price of watches in nearly all categories falls steadily by 1.3% a year, equivalent to a fall of 75% over a century, showing that sustained innovation in the production of a highly complex artifact had already appeared in one important sector of the British economy by the early eighteenth century.

Abstract Since the Coleman Report, many have questioned whether public school spending affects student outcomes. The school finance reforms that began in the early 1970s and accelerated in the 1980s caused dramatic changes to the structure of K–12 education spending in the United States. To study the effect of these school finance reform–induced changes in public school spending on long-run adult outcomes, we link school spending and school finance reform data to detailed, nationally representative data on children born between 1955 and 1985 and followed through 2011. We use the timing of the passage of court-mandated reforms and their associated type of funding formula change as exogenous shifters of school spending, and we compare the adult outcomes of cohorts that were differentially exposed to school finance reforms, depending on place and year of birth. Event study and instrumental variable models reveal that a 10% increase in per pupil spending each year for all 12 years of public school leads to 0.31 more completed years of education, about 7% higher wages, and a 3.2 percentage point reduction in the annual incidence of adult poverty; effects are much more pronounced for children from low-income families. Exogenous spending increases were associated with notable improvements in measured school inputs, including reductions in student-to-teacher ratios, increases in teacher salaries, and longer school years.

Abstract This article examines whether firm-level idiosyncratic shocks propagate in production networks. We identify idiosyncratic shocks with the occurrence of natural disasters. We find that affected suppliers impose substantial output losses on their customers, especially when they produce specific inputs. These output losses translate into significant market value losses, and they spill over to other suppliers. Our point estimates are economically large, suggesting that input specificity is an important determinant of the propagation of idiosyncratic shocks in the economy.

Abstract Programs to encourage labor market activity among youth, including public employment programs and wage subsidies like the Work Opportunity Tax Credit, can be supported by three broad rationales. They may (i) provide contemporaneous income support to participants; (ii) encourage work experience that improves future employment and/or educational outcomes of participants; and/or (iii) keep participants “out of trouble.” We study randomized lotteries for access to the New York City (NYC) Summer Youth Employment Program (SYEP), the largest summer youth employment program in the United States, by merging SYEP administrative data on 294,100 lottery participants to IRS data on the universe of U.S. tax records; to New York State administrative incarceration data; and to NYC administrative cause of death data. In assessing the three rationales, we find that (i) SYEP participation causes average earnings and the probability of employment to increase in the year of program participation, with modest contemporaneous crowdout of other earnings and employment; (ii) SYEP participation causes a modest decrease in average earnings for three years following the program and has no impact on college enrollment; and (iii) SYEP participation decreases the probability of incarceration and decreases the probability of mortality, which has important and potentially pivotal implications for analyzing the net benefits of the program.

Abstract We present a model of stereotypes based on Kahneman and Tversky’s representativeness heuristic. A decision maker assesses a target group by overweighting its representative types, defined as the types that occur more frequently in that group than in a baseline reference group. Stereotypes formed this way contain a “kernel of truth”: they are rooted in true differences between groups. Because stereotypes focus on differences, they cause belief distortions, particularly when groups are similar. Stereotypes are also context dependent: beliefs about a group depend on the characteristics of the reference group. In line with our predictions, beliefs in the lab about abstract groups and beliefs in the field about political groups are context dependent and distorted in the direction of representative types.

Abstract Most projects, in most walks of life, require the participation of multiple parties. While it is difficult to unite individuals in a common endeavor, some people, who we call “movers and shakers,” seem able to do it. The article specifically examines moving and shaking of an investment project, whose return depends on its quality and the total capital invested in it. We analyze a model with two types of agents: managers and investors. Managers and investors initially form social connections. Managers then bid to buy control of the project, and the winning bidder puts effort into making investors aware of it. Finally, a subset of aware investors are given the chance to invest and they decide whether to do so after receiving private signals of the project’s quality. We first show that connections are valuable since they make it easier for a manager to “move and shake” the project (i.e., obtain capital from investors). When we endogenize the network, we find that while managers are identical ex ante, a single manager emerges as most connected; he consequently earns a rent. In extensions, we move away from the assumption of ex ante identical managers to highlight forces that lead one manager or another to become a mover and shaker. Our theory sheds light on a range of topics, including entrepreneurship, venture capital, and anchor investments.

Abstract We study political competition in an environment in which voters have private information about their preferences. Our framework covers models of income taxation, public-goods provision, or publicly provided private goods. Politicians are vote-share maximizers. They can propose any policy that is resource-feasible and incentive-compatible. They can also offer special favors to subsets of the electorate. We prove two main results. First, the unique symmetric equilibrium is such that policies are surplus-maximizing and hence first-best Pareto-efficient. Second, there is a surplus-maximizing policy that wins a majority against any welfare-maximizing policy. Thus, in our model, policies that trade off equity and efficiency considerations are politically infeasible.

Abstract We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence—including human readings of 12,000 newspaper articles—indicate that our index proxies for movements in policy-related economic uncertainty. Our U.S. index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt ceiling dispute, and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, health care, finance, and infrastructure construction. At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel vector autoregressive setting, for 12 major economies. Extending our U.S. index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upward since the 1960s.

Abstract How do individuals form expectations about future inflation? We propose that individuals overweight inflation experienced during their lifetimes. This approach modifies existing adaptive learning models to allow for age-dependent updating of expectations in response to inflation surprises. Young individuals update their expectations more strongly than older individuals since recent experiences account for a greater share of their accumulated lifetime history. We find support for these predictions using 57 years of microdata on inflation expectations from the Reuters/Michigan Survey of Consumers. Differences in experiences strongly predict differences in expectations, including the substantial disagreement between young and old individuals in periods of highly volatile inflation, such as the 1970s. It also explains household borrowing and lending behavior, including the choice of mortgages.

Abstract A new typology of players is proposed based on the classification of actions as either instinctive or contemplative. A person’s type is the probability of him choosing a contemplative action. To test the typology, results of 10 games are analyzed. Actions in each game were classified depending on whether their response time was more or less, respectively, than the median response time of all subjects who played the game. It is argued that fast actions are more instinctive and slow actions are more contemplative. A subject’s contemplative index (CI) is defined as the proportion of games in which he chose a contemplative action. It is found that for 8 of the 10 games, the CI in the other 9 games is positively correlated with a player’s choice of a contemplative action in that game (average Spearman correlation of 9%). The CI is used to shed light on the nature of choice in five additional games.