Knowledge that Transforms

In this paper, we expand on the seminal work of Altonji and Shakotko (1987) and Topel (1991) and reinvestigate the returns to seniority in the United States. We begin with the same wage equation as in previous studies. We extend the model of Hyslop (1999) and explicitly model the participation/employment and inter-firm mobility decisions, which, in turn, define the individual's experience and seniority. We introduce into the wage equation a summary of the workers' entire career path. The three-equation system is estimated simultaneously using data from the Panel Study of Income Dynamics (PSID). We find that for each of the three education groups studied the returns to seniority are larger than those previously found in the literature.

This paper empirically studies the effects of service offshoring on white-collar employment, using data for more than 100 US occupations over the period 1997-2006. A model of firm behaviour based on separability allows derivation of the labour demand elasticity with respect to service offshoring for each occupation. Estimation is performed with quasi-maximum likelihood, to account for high degrees of censoring in the employment variable. The estimated elasticities are then related to proxies for the skill level and the degree of tradability of the occupations. Results suggest that service offshoring is skill-biased, because it increases employment in more skilled occupations relative to less skilled occupations. At a given skill level, however, service offshoring penalizes tradable occupations relative to non-tradable occupations.

Shimer (2005) pointed out that although we have a satisfactory theory of why some workers are unemployed at any given time, we don't know why the number of unemployed workers varies so much over time. The basic Mortensen–Pissarides model does not generate nearly enough volatility in unemployment for plausible parameter values. This paper extends the Mortensen–Pissarides model to allow for informational rents. Productivity is subject to publicly observed aggregate shocks, and to idiosyncratic shocks that are seen only by the employer. It is shown that there is a unique equilibrium, provided that the idiosyncratic shocks are not too large. The main result is that small fluctuations in productivity that are privately observed by employers can give rise to a kind of wage stickiness in equilibrium, and the informational rents associated with this stickiness are sufficient to generate relatively large unemployment fluctuations.

Relative to developed countries and some parts of the developing world, most notably sub-Saharan Africa, there are far fewer women than men in India and China. It has been argued that as many as a 100 million women could be missing. The possibility of gender bias at birth and the mistreatment of young girls are widely regarded as key explanations. We provide a decomposition of these missing women by age and cause of death. While we do not dispute the existence of severe gender bias at young ages, our computations yield some striking new findings: (1) the vast majority of missing women in India and a significant proportion of those in China are of adult age; (2) as a proportion of the total female population, the number of missing women is largest in sub-Saharan Africa, and the absolute numbers are comparable to those for India and China; (3) almost all the missing women stem from disease-by-disease comparisons and not from the changing composition of disease, as described by the epidemiological transition. Finally, using historical data, we argue that a comparable proportion of women was missing at the start of the 20th century in the United States, just as they are in India, China, and sub-Saharan Africa today.

Why is the price of renting an automobile “flat” as a function of its age or odometer value? Specifically, why is it that car rental companies do not offer customers the option of renting older cars at a discount, instead of offering only relatively new cars at full price? We also tackle a related puzzle: why do car rental companies trade-in their vehicles so early? Most US companies purchase brand new rental cars and replace them after 2 years or when their odometer exceeds 34,000 km. That is a very costly strategy due to the well-known by rapid depreciation in used car prices. We show that in a competitive rental market, prices are a declining function of odometer and cars are rented over their full economic lifespan. Our solution to these puzzles is that actual rental markets are not fully competitive and firms may be behaving suboptimally. We provide a case study of a large car rental company that provided us access to its operating data. We develop a model of the company's operations that predicts that the company can significantly increase its profits by keeping its rental cars twice as long as it currently does, discounting the rental prices of older vehicles to induce its customers to rent them. The company undertook an experiment to test our model's predictions. We report initial findings from this experiment which involved over 4500 rentals of over 500 cars in 4 locations over a 5-month period. The results are consistent with the predictions of our model, and suggest that a properly chosen declining rental price function can increase overall revenues. Profits also increase significantly, since doubling the holding period of rental cars cuts discounted replacement costs by nearly 40%.

We develop a model of the gambler's fallacy—the mistaken belief that random sequences should exhibit systematic reversals. We show that an individual who holds this belief and observes a sequence of signals can exaggerate the magnitude of changes in an underlying state but underestimate their duration. When the state is constant, and so signals are i.i.d., the individual can predict that long streaks of similar signals will continue—a hot-hand fallacy. When signals are serially correlated, the individual typically under-reacts to short streaks, over-reacts to longer ones, and under-reacts to very long ones. Our model has implications for a number of puzzles in finance, e.g. the active-fund and fund-flow puzzles, and the presence of momentum and reversal in asset returns.

Prices are typically used as proxies for countries' export quality. I relax this strong assumption by exploiting both price and quantity information to estimate the quality of products exported to the United States. Higher quality is assigned to products with higher market shares conditional on price. The estimated qualities reveal substantial heterogeneity in product markets' scope for quality differentiation, or their “quality ladders”. I use this variation to explain the heterogeneous impact of low-wage competition on US manufacturing employment and output. Markets characterized by relatively short quality ladders are associated with larger employment and output declines resulting from low-wage competition.

We propose a model of equilibrium contracting between two agents who are “boundedly rational” in the sense that they face time costs of deliberating current and future transactions. We show that equilibrium contracts may be incomplete and assign control rights: they may leave some enforceable future transactions unspecified and instead specify which agent has the right to decide these transactions. Control rights allow the controlling agent to defer time-consuming deliberations on those transactions to a later date, making her less inclined to prolong negotiations over an initial incomplete contract. Still, agents tend to resolve conflicts up-front by writing more complete initial contracts. A more complete contract can take the form of either a finer adaptation to future contingencies, or greater coarseness. Either way, conflicts among contracting agents tend to result in excessively complete contracts in the sense that the maximization of joint payoffs would result in less complete contracts.

We set up and solve a spatial, dynamic equilibrium model of the housing market based on two main assumptions: households with heterogenous abilities flow in and out metropolitan areas in response to local wage shocks, and the housing supply cannot adjust instantly because of regulatory constraints. In our equilibrium, house prices compensate for cross-sectional productivity differences. We increase productivity dispersion in the calibrated model in order to match the 30-year increase in cross-sectional wage dispersion that we document based on metropolitan-level data. We show that the model quantitatively matches the observed 30-year increase in dispersion of house prices across US metropolitan areas. It is consistent with several other features of the cross-sectional distribution of house prices and wages.

Precautionary saving has been linked to the property of prudence, and the property of temperance has been used to show how the presence of an unavoidable risk affects one's behaviour towards a second risk. These two higher order risk effects also play key roles in aversion to negative skewness and to kurtosis, respectively. This article presents a laboratory experiment to determine whether subjects are prudent and/or temperate. The experiment is based upon preferences over lottery pairs in simple 50–50 gambles. Subjects are asked in which of two states of nature they would prefer to receive a zero-mean gamble. For prudence, the choices are between a lower and higher wealth outcome. For temperance, the choices are between a state with no other risk and a state with a second (independent) risk. The results show behavioural evidence for prudence, but they also show evidence of intemperate behaviour. Implications of these results for both expected-utility and non-expected-utility models are examined.