Knowledge that Transforms

There are growing calls to restrict advertising of junk foods. Whether such a move will improve diet quality will depend on how advertising shifts consumer demands and how firms respond. We study an important and typical junk food market-the potato chips market. We exploit consumer level exposure to adverts to estimate demand, allowing advertising to potentially shift the weight consumers place on product healthiness, tilt demand curves, have dynamic effects and spillover effects across brands. We simulate the impact of a ban and show that the potential health benefits are partially offset by firms lowering prices and by consumer switching to other junk foods.

We introduce menu costs in the search-theoretic model of imperfect competition of Burdett and Judd. When menu costs are not too large, the equilibrium is such that sellers follow a (Q,S,s) pricing rule. According to the rule, a seller lets inflation erode the real value of its nominal price until it reaches some point s. Then, the seller pays the menu cost and resets the real value of its nominal price to a point randomly drawn from a distribution with support [S,Q], where s<S<Q. A (Q,S,s) equilibrium differs with respect to a standard (S,s) equilibrium: (1) in a (Q,S,s) equilibrium, sellers sometimes keep their nominal price constant to avoid paying the menu cost, other times because they are indifferent to changes in the real value of their price. An exploratory calibration reveals that menu costs account less than half of the observed duration of nominal prices. (2) in a (Q,S,s) equilibrium, higher inflation leads to higher real prices, as sellers pass onto buyers the cost of more frequent price adjustments, and to lower welfare.

I show that, in a benchmark model, debt securities minimize the welfare losses associated with the moral hazards of excessive risk-taking and lax effort. For any security design, the variance of the security payoff is a statistic that summarizes these welfare losses. Debt securities have the least variance, among all limited liability securities with the same expected value. In other models, mixtures of debt and equity are exactly optimal, and pure debt securities are approximately optimal. I study both static and dynamic security design problems, and show that these two types of problems are equivalent. I use moral hazard in mortgage lending as a recurring example, but my results apply to other corporate finance and principal-agent problems.

We study the impact of intersectoral and interregional trade linkages in propagating disaggregated productivity changes to the rest of the economy. Using U.S. regional and industry data, we obtain the aggregate, regional and sectoral elasticities of measured total factor productivity, GDP, and employment to regional and sectoral productivity changes. We find that the elasticities vary significantly depending on the sectors and regions affected, and are importantly determined by the spatial structure of the economy. We use our calibrated model to perform a variety of counterfactual exercises including several specific studies of the aggregate and disaggregate effects of shocks to productivity and infrastructure. The specific episodes we study include the boom in California’s computer industry, the productivity boom in North Dakota associated with the shale oil boom, the disruptions in New York’s finance and real state industries during the 2008 crisis, as well as the effect of the destruction of infrastructure in Louisiana following hurricane Katrina.

This article provides a model-based empirical strategy to, (1) detect the presence and gauge the magnitude of government subsidies and (2) quantify their impact on production reallocation across countries, industry prices, costs and consumer surplus. I construct and estimate an industry model that allows for dynamic agents in both demand and supply and apply my strategy to world shipbuilding, a classic target of industrial policy. I find strong evidence consistent with China having intervened and reducing shipyard costs by 13–20%, corresponding to 1.5 to 4.5 billion US dollars, between 2006 and 2012. The subsidies led to substantial reallocation of ship production across the world, with Japan, in particular, losing significant market share. They also misaligned costs and production, while leading to minor surplus gains for shippers.

We develop a model of crime in which the number of police, the crime rate, the arrest rate, the employment rate, and the wage rate are joint outcomes of a subgame perfect Nash equilibrium. The local government chooses the size of its police force and citizens choose among work, home, and crime alternatives. We estimate the model using metropolitan statistical area (MSA)-level data. We use the estimated model to examine the effects on crime of targeted federal transfers to local governments to increase police. We find that knowledge about unobserved MSA-specific attributes is critical for the optimal allocation of police across MSA’s.

Most of the political economy literature blames inefficient policies on institutions or politicians’ motives to supply bad policy, but voters may themselves be partially responsible by demanding bad policy. In this article, we posit that voters may systematically err when assessing potential changes in policy by underappreciating how new policies lead to new equilibrium behaviour. This biases voters towards policy changes that create direct benefits—welfare would rise if behaviour were held constant—even if those reforms ultimately reduce welfare because people adjust behaviour. Conversely, voters are biased against policies that impose direct costs even if they induce larger indirect benefits. Using a lab experiment, we find that a majority of subjects vote against policies that, while inflicting direct costs, would help them to overcome social dilemmas and thereby increase welfare. Subjects also support policies that, while producing direct benefits, create social dilemmas and ultimately hurt welfare. Both mistakes arise because subjects fail to fully anticipate the equilibrium effects of new policies. More precisely, we establish that subjects systematically underappreciate the extent to which policy changes will affect the behaviour of other people, and that these mistaken beliefs exert a causal effect on the demand for bad policy.

Police agencies devote vast resources to minimizing the time that it takes them to attend the scene of a crime. Despite this, the long-standing consensus is that police response time has no meaningful effect on the likelihood of catching offenders. We revisit this question using a uniquely rich dataset from the Greater Manchester Police. To identify causal effects, we use a novel strategy that exploits discontinuities in distance to the response station across locations next to each other, but on different sides of division boundaries. Contrary to previous evidence, we find large and strongly significant effects: in our preferred estimate, a 10% increase in response time leads to a 4.7 percentage points decrease in the likelihood of clearing the crime. We find stronger effects for thefts than for violent offences, although the effects are large for every type of crime. We find suggestive evidence in support of two mechanisms: the likelihood of an immediate arrest and the likelihood that a suspect will be named by a victim or witness both increase as response time becomes faster. We argue that, under conservative assumptions, hiring an additional response officer would generate a benefit, in terms of future crime prevented, equivalent to 170% of her payroll cost.

This article presents evidence that loss aversion affects taxpayers as they file their annual tax returns, and presents a framework for estimating the policy impact of this psychological phenomenon. In my theoretical framework, taxpayers manipulate the money paid to the tax authority through avoidance and evasion activities. When taxpayers face the prospect of owing the tax authority money on tax day, loss aversion generates the perception of a greater marginal utility of tax reduction and therefore motivates greater pursuit of tax reduction activities. Applying a bunching-based identification strategy to U.S. tax return data, I estimate that taxpayers facing a payment on tax day reduce their tax liability by $34 more than taxpayers owed a refund.

This article characterizes the efficiency properties of competitive economies with financial constraints, in which phenomena such as fire sales and financial amplification may arise. We show that financial constraints lead to two distinct types of pecuniary externalities: distributive externalities that arise from incomplete insurance markets and collateral externalities that arise from price-dependent financial constraints. For both types of externalities, we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations. We also show that fire sales and financial amplification are neither necessary nor sufficient to generate inefficient pecuniary externalities. We demonstrate how to employ our framework in a number of applications. Whereas collateral externalities generally lead to over-borrowing, the distortions from distributive externalities may easily flip sign, leading to either under- or over-borrowing. Both types of externalities may lead to under- or over-investment.