Knowledge that Transforms

This article quantitatively evaluates the trade-off between the provision of health-related social insurance and the incentives to maintain good health through costly investments. To do so, we construct and estimate a dynamic model of health investments and health insurance in which the cross-sectional health distribution evolves endogenously and is shaped by labour market and health insurance policies. A no wage discrimination law in the labour market limits the extent to which wages can depend on the health status of a worker, and a no prior conditions law outlaws higher insurance premia for individuals with worse health status. In the model, the static gains from better insurance against poor health induced by these policies are traded off against their adverse dynamic incentive effects on household efforts to lead a healthy life. In our quantitative analysis, we find that it is optimal to insure 80% of labour market-related income risk (70% if a no prior conditions law is also present). Providing full insurance is strongly suboptimal, however, since at high levels of consumption insurance, the negative dynamic incentive effects on health effort and thus the population health distribution in the long run start to dominate the short-run consumption insurance gains.

The majority of innovations are developed by multi-sector firms. The knowledge needed to invent new products is more easily adapted from some sectors than from others. We study this network of knowledge linkages between sectors and its impact on firm innovation and aggregate growth. We first document a set of sectoral-level and firm-level observations on knowledge applicability and firms’ multi-sector patenting behaviour. We then develop a general equilibrium model of firm innovation in which inter-sectoral knowledge linkages determine the set of sectors a firm chooses to innovate in and how much R&D to invest in each sector. It captures how firms evolve in the technology space, accounts for cross-sector differences in R&D intensity, and describes an aggregate model of technological change. The model matches new observations as demonstrated by simulation. It also yields new insights regarding the mechanism through which sectoral fixed costs of R&D affect growth.

We propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households, that is, have a collateralization advantage. Intermediaries require capital as they have to finance the additional amount that they can lend out of their own net worth. The net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity, such as investment, and financing. The accumulation of net worth of intermediaries is slow relative to that of the corporate sector. The model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch, namely, their severity, their protractedness, and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns. The model captures the tentative and halting nature of recoveries from crises.

We use randomized interest rates, offered across eighty geographically distinct regions for twenty-nine months by Mexico’s largest microlender, to sketch the adjustment from a price change to a new equilibrium. Demand is elastic, and more so over the longer run; e.g. the dollars-borrowed elasticity increases from -1.1 in Year one to -2.9 in Year three. Credit bureau data do not show evidence of crowd-out, although this and other null results are imprecisely estimated. The lender’s profits increase, albeit noisily, starting in Year two. But competitors do not respond by reducing rates. These findings, together with other results, suggest that informational frictions are important, and that cutting rates furthered Compartamos Banco’s “double bottom line” of improving social welfare subject to a profitability constraint.

This article develops a method to estimate and simulate the adoption of a network good. I estimate demand for mobile phones as a function of individuals’ social networks, coverage, and prices, using transaction data from nearly the entire network of Rwandan mobile phone subscribers at the time, over 4.5 years. I estimate the utility of adopting a phone based on its eventual usage: subscribers pay on the margin, so calls reveal the value of communicating with each contact. I use this structural model to simulate the effects of two policies. A requirement to serve rural areas lowered operator profits but increased net social welfare. Developing countries heavily tax mobile phones, but standard metrics that neglect network effects grossly understate the true welfare cost in a growing network, which is up to 3.12 times the revenue raised. Shifting from handset to usage taxes would have increased the surplus of poorer users by at least 26%.

We study the impact of the integration of women in U.S. policing between the late 1970s and early 1990s on violent crime reporting and domestic violence (DV). Along these two key dimensions, we find that female officers improved police quality. Crime victimization data reveal that as female representation increases among officers in an area, violent crimes against women in that area, and especially DV, are reported to the police at significantly higher rates. There are no such effects for violent crimes against men or from increases in the female share of civilian police employees. Furthermore, increases in female officer shares are followed by significant declines in rates of intimate partner homicide and non-fatal domestic abuse. These effects are all consistent between fixed effects models with controls for economic and policy variables and models that focus exclusively on increases in female police employment driven by externally imposed affirmative action plans following litigation for employment discrimination.

The standard revenue-maximizing auction discriminates against a priori stronger bidders so as to reduce their information rents. We show that such discrimination is no longer optimal when the auction’s winner may resell to another bidder, and the auctioneer has non-Bayesian uncertainty about such resale opportunities. We identify a “worst-case” resale scenario, in which bidders’ values become publicly known after the auction and losing bidders compete Bertrand-style to buy the object from the winner. With this form of resale, misallocation no longer reduces the information rents of the high-value bidder, as he could still secure the same rents by buying the object in resale. Under regularity assumptions, we show that revenue is maximized by a version of the Vickrey auction with bidder-specific reserve prices, first proposed by Ausubel and Cramton (2004). The proof of optimality involves constructing Lagrange multipliers on a double continuum of binding non-local incentive constraints.

In this article, we use cross-state panel and cross-U.S. commuting-zone data to look at the relationship between innovation, top income inequality and social mobility. We find positive correlations between measures of innovation and top income inequality. We also show that the correlations between innovation and broad measures of inequality are not significant. Next, using instrumental variable analysis, we argue that these correlations at least partly reflect a causality from innovation to top income shares. Finally, we show that innovation, particularly by new entrants, is positively associated with social mobility, but less so in local areas with more intense lobbying activities.

Deforestation is a matter of pressing global concern, yet surprisingly little is known about the relative efficacy of various policies designed to combat it. This article sets out a framework for measuring the cost effectiveness of alternative policies—both command-and-control and incentive-based—in the Brazilian Amazon. First, I estimate the demand for deforestation on private properties, exploiting regional variation in transportation costs as a means to recover farmers’ responses to permanent policies. Here, rescaling transportation costs using local yields allows me to express changes in farmers’ valuations in dollars per hectare. I then use the estimated demand to infer farmers’ willingness to deforest under different counterfactual policies, such as payments to avoid deforestation and taxes on land use, along with the corresponding potential farmers’ lost surpluses. The results indicate that payment programmes and land use taxes on agricultural land can be highly effective in preserving the rainforest and also be substantially less expensive than command-and-control policies (approximately 8 times less costly). A carbon tax equal to the social cost of carbon could virtually eliminate all agricultural land in the Amazon, given the low agricultural returns there.

The muted volatility of inflation during the Great Recession and its aftermath has refocused attention on the constraints that firms face when adjusting prices. Using new empirical and theoretical results, I argue that each firm’s choice of how much information to acquire to set prices plays a central role in determining the patterns of pricing at the product level and the degree of aggregate price rigidity in response to shocks. In support of the information channel, I present product-level evidence that firms price goods using coarse pricing policies that are updated infrequently and consist of a small menu of prices. Firms are heterogeneous in the complexity and duration of their pricing policies, and this heterogeneity is reflected in differential responses to the Great Recession cycle, with firms exhibiting more complex policies responding more aggressively. I develop a theory of information-constrained price setting that generates coarse pricing endogenously, and quantitatively matches the discreteness, duration, and volatility of policies in the data. The information friction dampens the responsiveness of prices to shocks, and, coupled with heightened volatility, induces firms to keep prices relatively high, to protect against losses in an uncertain environment.