Knowledge that Transforms

Among 188 countries, 72 had no state religion in 2000,1970, and 1900; 58 had a state religion throughout; and 58 had 1 or 2 transitions. We use a Hotelling spatial competition model to analyze the likelihood that the religion market would be monopolized. Similar forces influence a government's decision to establish a state religion. Consistent with the model, the probability of state religion in 1970 and 2000 is increasing with the adherence rate to the main religion, has a nonlinear relation with population, and has little relation with per capita GDP. The probability of state religion decreases sharply under Communism, but lagged Communism has only a weak effect. With costly adjustment for institutions, the probability of state religion in 1970 or 2000 depends substantially on the status in 1900. This persistence is much stronger for countries with no major regime change than for countries with such a change.

There is an extensive theoretical literature that postulates a trade-off between child quantity and quality within a family. However, there is little causal evidence that speaks to this theory. Using a rich data set 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. We find a negative correlation between family size and children's education, but when we include indicators for birth order or use twin births as an instrument, family size effects become negligible. In addition, higher 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.

When it is hard to assess service quality, firms will suboptimally hire low ability workers. We show that organizing as a profit-sharing partnership can alleviate these problems. Our theory explains the relative scarcity of partnerships outside of professional service industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting. It also sheds light on features of partnerships such as up-or-out promotion systems, the use of noncompete clauses, and recent trends in professional service industries.

We present an argument for changes in the franchise in which an elite split along economic interests uses the suffrage to influence implemented policies. Through the influence of these policies on the character of industrialization, we analyze the effects of franchise changes on economic growth. We identify in the social structure of society an explanation for the connection between enfranchisement and growth: when (1) there exists an economic conflict among the elite, (2) landed classes are not politically strong, and (3) there exists a critical mass of industrial workers, we observe both growth and democratization. The lack of conditions (1) or (2) resolves in stagnant autocracies while the absence of condition (3) drives growth-deterring democratic expansions. We provide historical support for our argument by analyzing the experience of eleven countries.

We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics. Established time series and panel methods fail to control for this. Using Eurostat data, we find that when heterogeneity is taken into account, the estimated persistence of real exchange rates falls dramatically. Its half-life, for instance, may fall to as low as eleven months, significantly below the “consensus view” of three to five years.

Public provision of education is usually viewed as a form of redistribution in kind.However, does it arise when income redistribution is feasible as well?I analyze a twodimensional model of political decision-making with endogenous political parties.Society chooses both the tax rate and the allocation of the revenues between income redistribution and public education.Agents differ in their income and in their age, where young agents prefer public education and the old prefer income redistribution.I find that when the cohort size of the young is not too large then public education arises as a political compromise between the rich and the young segment of the poor.They collude in order to reduce the size of government (which benefits the rich) and target some of its resources to education (which benefits the young poor).When the cohort size of the young is too large however, income redistribution crowds out public provision of education in the political equilibrium.

The majority of asset-management intermediaries (e.g., mutual funds, hedge funds) are structured on an open-end basis, even though it appears that the open-end form can be a serious impediment to arbitrage. I argue that when funds compete to attract investors' dollars, the equilibrium degree of open-ending in an economy can be excessive from the point of view of these investors. One implication of the analysis is that, even absent short-sales constraints or other frictions, economically large mispricings can coexist with rational, competitive arbitrageurs who earn small excess returns.

The federal government spends billions of dollars each year on programs designed to increase the resources available to hospitals that serve the poor. This paper explores the intended and unintended effects of such targeted funds. First, how do these funds distort the behavior of state and local governments who wish to appropriate the funds for other uses? Second, to the extent that these funds do increase resources in the targeted hospitals, do patients benefit? We use the rapid and uneven growth in Medicaid Disproportionate Share Hospital (DSH) payments across states and hospitals to answer these questions. We identify states that were most able to appropriate DSH funds and show that, while DSH payments to public hospitals in these states were systematically diverted, DSH payments to other hospitals and in other states were not diverted. Additional resources that were made available to hospitals (rather than appropriated by the state) were associated with significant declines in infant and post-heart attack mortality. A range of evidence suggests that these improvements were due to better hospital care. Overall, our analysis implies that public subsidies can be an effective mechanism for improving medical care and outcomes for the poor, but that the impact is limited by the ability of state and local government to divert the targeted funds.

This paper analyzes the effects of dividend taxation on corporate behavior using the large tax cut on individual dividend income enacted in 2003. We document a 20 percent increase in dividend payments by nonfinancial, nonutility publicly traded corporations following the tax cut. An unusually large number of firms initiated or increased regular dividend payments in the year after the reform. As a result, the number of firms paying dividends began to increase in 2003 after a continuous decline for more than two decades. Firms with high levels of nontaxable institutional ownership did not change payout policies, supporting the causality of the tax cut in increasing aggregate dividend payments. The response to the tax cut was strongest in firms with strong principals whose tax incentives changed (those with large taxable institutional owners or independent directors with large share holdings), and in firms where agents had stronger incentives to respond (high share ownership and low options ownership among top executives). Hence, principal-agent issues appear to play an important role in corporate responses to taxation.

Party platforms differ sharply from one another, especially on issues with religious content, such as abortion or gay marriage. Given the high return to attracting the median voter, why do vote-maximizing politicians take extreme positions? In this paper we find that strategic extremism depends on an intensive margin where politicians want to induce their core constituents to vote (or make donations) and the ability to target political messages toward those core constituents. Our model predicts that the political relevance of religious issues is highest when around one-half of the voting population attends church regularly. Using data from across the world and within the United States, we indeed find a nonmonotonic relationship between religious extremism and religious attendance.