This paper views the standard production function in macroeconomics as a reduced form and derives its properties from microfoundations. The shape of this production function is governed by the distribution of ideas. If that distribution is Pareto, then two results obtain: the global production function is Cobb-Douglas, and technical change in the long run is labor-augmenting. Kortum showed that Pareto distributions are necessary if search-based idea models are to exhibit steady-state growth. Here we show that this same assumption delivers the additional results about the shape of the production function and the direction of technical change

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 the equilibrium degree of open-ending in an economy can be excessive from the point of view of investors. When funds compete for investors' dollars, they may engage in a counterproductive race towards the open-end form, even though this form leaves them ill-suited to undertaking certain types of arbitrage trades. 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 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.

We present a model in which setting up and running a regulatory institution takes a fixed cost. As a consequence, the supply of regulation is limited by the extent of the market. We test three implications of this model. First, jurisdictions with larger populations affected by a given regulation are more likely to have it. Second, jurisdictions with lower incremental fixed costs of introducing and administering new regulations should regulate more. This implies that regulation spreads from higher to lower population jurisdictions, and that jurisdictions that build up transferable regulatory capabilities should regulate more intensely. Consistent with the model, we find that higher population U. S. states have more pages of legislation and adopt particular laws earlier in their history than do smaller states. We also find that the regulation of entry, the regulation of labor, and the military draft are more extensive in countries with larger populations, as well as in civil law countries, where we argue that the incremental fixed costs are lower.

We develop a simple model of international outsourcing and apply it to processing trade in China. Export processing involves a foreign firm contracting with a Chinese factory manager to assemble intermediate inputs into a final product. Whether the same or different parties should have ownership of the processing factory and control over input purchases depends on parameters of the model, which we estimate. We find that multinational firms engaged in export processing in China tend to split factory ownership and input control with local managers: the most common outcome is to have foreign factory ownership but Chinese control over input purchases. Consistent with our model, this pattern is especially prevalent in the southern coastal provinces, where export markets are thickest and contracting costs are lowest.

This paper studies large private banks in 21 major emerging markets in the 1990s. It first demonstrates that bank failures are very common in these countries: about 25 percent of these banks failed during the seven-year sample period. The paper also shows that political concerns play a significant role in delaying government interventions to failing banks. Failing banks are much less likely to be taken over by the government or to lose their licenses before elections than after. This result is robust to controlling for macroeconomic and bank-specific factors, a new party in power, early elections, outstanding loans from the IMF, as well as country-specific, time-independent factors. This finding implies that much of the within-country clustering in emerging market bank failures is directly due to political concerns.

Modigliani and Cohn hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has implications for the pricing of risky stocks relative to safe stocks. Simultaneously examining the pricing of Treasury bills, safe stocks, and risky stocks allows us to distinguish money illusion from any change in the attitudes of investors toward risk. Our empirical results support the hypothesis that the stock market suffers from money illusion.

In this paper, we develop a simple model of international outsourcing and apply it to processing trade in China.We observe China's processing exports broken down by who owns the plant and by who controls the inputs the plant processes.Multinational firms engaged in export processing in China tend to split factory ownership and input control with managers in China: the most common outcome is to have foreign factory ownership but Chinese control over input purchases.To account for this organizational arrangement, we appeal to a property-rights model of the firm.Multinational firms and the Chinese factory managers with whom they contract divide the surplus associated with export processing by Nash bargaining.Investments in input search, production, and marketing are partially relationship specific.In our benchmarks estimates, this relationship specificity is lowest in southern coastal provinces, where export markets are thickest, and highest in interior and northern provinces.The probability contracts are enforced has a similar pattern and is the lowest along the southern coast and the highest in the north.