Knowledge that Transforms

Arbitrage costs lead to large deviations of prices from fundamentals. Using a sample of closed-end funds, I find that the market value of a fund is more likely to deviate from the value of its assets (1) for funds with portfolios that are difficult to replicate, (2) for funds that pay out smaller dividends, (3) for funds with lower market values, and (4) when interest rates are high. These factors are related to the magnitude of the deviation, as opposed to the direction (i.e., whether discount or premium), and explain a quarter of cross-sectional mispricing variation. These findings are consistent with noise trader models of asset pricing.

This paper provides a new perspective on the validity of the so-called 'leverage theory'. In a model of preemptive innovation in 'systems' markets, 1 examine the effect of bundling on R&D incentives. 1 find that bundling provides a channel through which monopoly 'slack' in one component market can be shifted to another, with the effect of mitigating rent dissipation in the systems market. Bundling can be profitable if this beneficial effect of reduced rent dissipation outweighs the negative effect of intensified price competition. After demonstrating the private optimality of bundling, its welfare implications are considered. There is a discrepancy between the market outcome and the socially optimal outcome which can be explained in terms of externalities conferred on consumers' surplus and the rival firm's profits due to bundling. Finally, the results can be reinterpreted to analyze the relationship between compatibility decisions and R&D incentives in mix-and-match models.

The cost of expanding public sector health programs depends critically on the extent to which public eligibility will cover just the uninsured, or will crowd out existing private insurance coverage. We estimate the extent of crowd-out arising from the expansions of Medicaid to pregnant women and children over the 1987–1992 period. We estimate that approximately 50 percent of the increase in Medicaid coverage was associated with a reduction in private insurance coverage. This occurred largely because employees took up employer-based insurance less frequently. There is also some evidence that employers contributed less for insurance and that workers dropped coverage of dependents.

The Pure Expectations Hypothesis (PEH) serves as the benchmark model for the relationship between yields on bonds of different maturities. When coupled with rational expectations, however, empirical renderings of the model fail miserably. I explore the possibility that failure to account for changes in monetary policy regime explains much of the failure of the PEH. Estimating changing monetary regimes in conjunction with the PEH significantly improves its performance. The predicted spread between the long and short rates is highly correlated with the actual spread. The standard deviation of the theoretical spread is nearly identical to that of the actual spread.

We investigate the effect of abortion access on teen birthrates using county-level panel data. Past research suggested that prohibiting abortion led to higher teen birthrates. Perhaps surprisingly, we find that more recent restrictions in abortion access, including the closing of abortion clinics and restrictions on Medicaid funding, had the opposite effect. Small declines in access were related to small declines among in-wedlock births; out-of-wedlock births were relatively unaffected. Both results are consistent with a simple model in which pregnancy is endogenous and women gain new information about the attractiveness of parenthood only after becoming pregnant.

Targeted tax-based saving incentives can be a powerful tool for promoting household and national saving. This study examines the effect of the cancellation of the Registered Home Ownership Savings Plan (RHOSP), a Canadian tax-subsidized saving program, on household saving. The cancellation provides exogenous variation in eligibility for the subsidy that is uncorrelated with householdspecific heterogeneity in saving behavior. The empirical analysis suggests that the subsidy had a substantial impact on saving: each dollar contributed to the program represented 56-93 and 20-57 cents of new household and national saving, respectively.

The high variance of crime rates across time and space is one of the oldest puzzles in the social sciences; this variance appears too high to be explained by changes in the exogenous costs and benefits of crime. We present a model where social interactions create enough covariance across individuals to explain the high cross-city variance of crime rates. This model provides an index of social interac-tions which suggests that the amount of social interactions is highest in petty crimes, moderate in more serious crimes, and almost negligible in murder and rape. Quelquefois aussi le crime prend sa source dans l'esprit d'imitation, que l'homme possede 'a un haut degre et qu'il manifeste en toutes choses [A. Quetelet 1835]. I.

Using a panel of 51 prices from 48 cities in the United States, we provide an upper bound estimate of the rate of convergence to purchasing power parity. We find convergence rates substantially higher than typically found in cross-country data. We investigate some potentially serious biases induced by i.i.d. measurement errors in the data, and find our estimates to be robust to these potential biases. We also present evidence that convergence occurs faster for larger price differences. Finally, we find that rates of convergence are slower for cities farther apart. However, our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders.

Building on earlier work by Eichengreen and Sachs, we use data for 22 countries to study the role of wage stickiness in propagating the Great Depression. Recent research suggests that monetary shocks, transmitted internationally by the gold standard, were a major cause of the Depression. Accordingly, we use money supplies and other aggregate demand shifters as instruments to identify aggregate supply relationships. We find that nominal wages adjusted quite slowly to falling prices, and that the resulting increases in real wages depressed output. These findings leave open the question of why wages were so inertial in the face of extreme labor market conditions.

We analyze the timing, pace, and efficiency of ongoing job reallocation that results from product and process innovation. There are strong reasons why an efficient economy ought to concentrate both job creation and destruction during recessions, when the opportunity cost of reallocation is lowest. Incomplete contracting between labor and capital can disrupt this synchronized pattern and decouple creation and destruction. Transactional difficulties also lead to technological “sclerosis,” characterized by excessively slow renovation. Government incentives to production may alleviate high unemployment but exacerbate sclerosis. In contrast, creation incentives increase the pace of reallocation. An optimal combination of both policies restores economic efficiency.