Knowledge that Transforms

I model and quantify the impact of a new dimension of globalization: offshore R&D. In the model, firms employ researchers across the globe to develop new product blueprints and then engage in offshore production and exporting. Frictions impeding trade and the separation of production from R&D lead to a “market-access” motive for offshore R&D, while cross-country differences in the distributions of firm knowhow and worker ability generate a “talent-acquisition” motive. I discipline the model using empirical facts derived from a new firm-level dataset. Counterfactual experiments show that the two motives can account for a significant portion of the observed offshore R&D. Incorporating offshore R&D amplifies the gains from globalization by a factor of 1.3 and generates new implications for the impacts of traditional forms of global integration, namely trade and multinational production.

Authoritarian regimes often use targeted social control—unequal application of the law to limit expressive freedom and enforce social conformity. At the same time, their methods appear less draconian than in the past. In this model, an authority structures punishments and rewards to compel adherence to its preferred norm. The authority’s commitment is time-limited and depends on imperfectly informative signals of a citizen’s behaviour. Given two citizens with the same observed behaviour, the authority imposes harsher punishments on the poorer and/or ex ante dissident individual. Lighter punishments are imposed on the wealthier citizen to prevent “over-compliance”. Wealth inequality increases over time. Some citizens become prosperous “lackeys” while others become destitute from confiscation. In stable regimes with high state capacity, the authority reduces punishments and/or increases rewards to allow citizens to accumulate wealth, leading to social conformity and balanced growth in the long run. In unstable regimes with low capacity, the citizenry splits into groups of wealthy lackeys and destitute proles.

How can we motivate good politicians—those that will carry out policy that is responsive to citizens’ preferences—to enter politics? In a field experiment in Pakistan, we vary how political office is portrayed to ordinary citizens. Emphasizing prosocial motives for holding political office instead of personal returns—such as the ability to help others versus enhancing one’s own respect and status—raises the likelihood that individuals run for office and that voters elect them. A year later, the treatment improves the alignment of policy with citizens’ preferences. These effects emerge only when treatments are randomly delivered in a public setting. Taken together, the results demonstrate that how politics is perceived shapes who decides to run for office, who is elected, as well the policies that democracies deliver.

This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets, and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries.

We characterize the conditions under which a socially responsible (SR) fund induces firms to reduce externalities, even when profit-seeking capital is in perfectly elastic supply. Such impact requires that the SR fund’s mandate permits the fund to trade off financial performance against reductions in social costs—relative to the counterfactual in which the fund does not invest in a given firm. Based on such an impact mandate, we derive the social profitability index, an investment criterion that characterizes the optimal ranking of impact investments when SR capital is scarce. If firms face binding financial constraints, the optimal way to achieve impact is by enabling a scale increase for clean production. In this case, SR and profit-seeking capital are complementary: Surplus is higher when both investor types are present.

We experimentally study how individuals read strategically transmitted information when they have preferences over what they will learn. Subjects play disclosure games in which Receivers should interpret messages skeptically. We vary whether the state that Senders communicate about is ego-relevant or neutral for Receivers, and whether skeptical beliefs are aligned or not with what Receivers prefer believing. Compared to neutral settings, skepticism is significantly lower when it is self-threatening, and not enhanced when it is self-serving. These results shed light on a new channel that individuals can use to protect their beliefs in communication situations: they exercise skepticism in a motivated way, that is, in a way that depends on the desirability of the conclusions that skeptical inferences lead to. We propose two behavioural models that can generate motivated skepticism. In one model, the Receiver freely manipulates his beliefs after having made skeptical inferences. In the other, the Receiver reasons about evidence in steps and the depth of his reasoning is motivated.

In Spring 2005, the Ombud for Equal Treatment in Austria launched a campaign notifying employers and newspapers that gender preferences in job ads were illegal. At the time, over 40% of vacancies on the nation’s largest job board stated a gender preference; within a year the rate fell below 5%. We merge job board vacancies and employer records to study how the campaign affected hiring choices and the gender diversity of occupations and workplaces. Using pre-campaign data, we predict the use of gender preferences, then conduct a difference-in-differences analysis of hiring outcomes for vacancies with predicted male or female preferences, relative to those with no predicted preferences. The elimination of explicit gender preferences boosted the share of women hired for jobs that were likely to be targeted to men (and vice versa). At the firm level, we find that the campaign led to a rise in the share of women at firms that were more likely to use male stated gender preferences (SGP’s), and a symmetric increase in the share of men at firms that were likely to use female SGP’s, with no effects on firm survival, employment, or average wages.

In many countries, divorce law mandates post-marital maintenance payments (child support and alimony) to insure the lower earner in married couples against financial losses upon divorce. This paper studies how maintenance payments affect couples’ intertemporal decisions and welfare. I develop a dynamic model of family labour supply, home production, savings, and divorce and estimate it using Danish register and survey data. The model captures the policy tradeoff between providing insurance to the lower earner and enabling couples to specialise efficiently, on the one hand, and maintaining labour supply incentives for divorcees, on the other hand. I use the estimated model to study various counterfactual policy scenarios. I find that alimony comes with more substantial labour supply disincentives compared to child support payments and is less efficient in providing consumption insurance. The welfare maximising policy, within the status quo policy space, involves increasing child support and reducing alimony payments. My results show that Pareto improvements beyond this welfare maximising policy are feasible, highlighting limitations of how child support and alimony policies are commonly implemented.

Hundreds of millions of microenterprises in emerging economies face increased competition from the entry and expansion of large firms that offer similar products. This paper examines the impacts of the opening of chain-run convenience stores on one of the world’s most ubiquitous microenterprises: owner-operated shops. To address endogeneity in time and location of chains’ opening, I pair two-way fixed effects with a novel instrument that shifts the profitability of chains but not of shops at the neighbourhood level. Expanding the number of chain outlets from zero to the neighbourhood average of 6.7 stores reduces the number of shops by 15%, a decline driven not by increased shop exits but by decreased shop entries. Shops retain their sales of fresh products and keep 96% of their customers, but customers visit shops less frequently and spend less on packaged goods. Surviving shops leverage competitive advantages stemming from being owner operated, such as lower agency costs, cultivating relationships with neighbours, and offering customers informal credit. The welfare gains of convenience chains replacing shops increase with household income; the poorest households experience a welfare loss.

Do judges respond to reversals of their decisions? Using random assignment of cases across two stages of the criminal justice system in Norway and a novel dataset linking trial court decisions to reversals in appeals courts, we provide causal evidence on feedback effects in judicial decision-making. By exploiting differences in the tendencies of randomly assigned appeal panels to reverse trial court decisions, we show that trial court judges who receive a reversal of a sentence respond by updating the likelihood of imposing a prison sentence in the direction of the reversal in future cases. Consistent with a Bayesian learning model, we find that the responses are stronger for judges with weaker priors and for reversals corresponding to stronger signals. Our estimates, however, also indicate that judges overreact to reversals compared to Bayes’ rule.