Knowledge that Transforms

Abstract We quantify the role of geography and land quality for agricultural productivity differences across countries using high-resolution micro-geography data and a spatial accounting framework. The rich spatial data provide for each cell of land covering the entire globe, the potential yield for 18 crops, which measures the maximum attainable crop output given soil quality, climate conditions, terrain topography, and a given level of cultivation inputs. While there is considerable heterogeneity in land quality across space, even within narrow geographic regions, we find that low agricultural land productivity is not due to unfavourable geographic endowments. If countries produced current crops in each cell according to potential yields, the rich-poor agricultural yield gap would virtually disappear, from 214% to 5%. We also find evidence of additional aggregate productivity gains attainable through spatial reallocation and changes in crop production.

Abstract We present a model of endogenous network formation to recover unobserved social networks using only observable outcomes. We propose a novel equilibrium concept that allows for a sharp characterization of equilibrium behaviour and that yields a unique prediction under testable conditions. While the equilibrium is characterized by a large number of non-linear equations, we show that it can be efficiently employed to recover the networks by an appropriately designed approximate Bayesian computation method. We apply the model to recover the network of social links between lawmakers in the U.S. Congress using data from the 109th to 113th legislatures. We show that social connections are important for legislators’ productivities, and we identify some of the key determinants of network centralities in the U.S. Congress.

Abstract We study a class of permutation tests of the randomness of a collection of Bernoulli sequences and their application to analyses of the human tendency to perceive streaks of consecutive successes as overly representative of positive dependence—the hot hand fallacy. In particular, we study permutation tests of the null hypothesis of randomness (i.e. that trials are i.i.d.) based on test statistics that compare the proportion of successes that directly follow k consecutive successes with either the overall proportion of successes or the proportion of successes that directly follow k consecutive failures. We characterize the asymptotic distributions of these test statistics and their permutation distributions under randomness, under a set of general stationary processes, and under a class of Markov chain alternatives, which allow us to derive their local asymptotic power. The results are applied to evaluate the empirical support for the hot hand fallacy provided by four controlled basketball shooting experiments. We establish that substantially larger data sets are required to derive an informative measurement of the deviation from randomness in basketball shooting. In one experiment, for which we were able to obtain data, multiple testing procedures reveal that one shooter exhibits a shooting pattern significantly inconsistent with randomness—supplying strong evidence that basketball shooting is not random for all shooters all of the time. However, we find that the evidence against randomness in this experiment is limited to this shooter. Our results provide a mathematical and statistical foundation for the design and validation of experiments that directly compare deviations from randomness with human beliefs about deviations from randomness and thereby constitute a direct test of the hot hand fallacy.

Abstract Since the collapse of the Bretton Woods monetary system, the monies of the developed world have been unbacked by any formal promise of convertibility. Yet, inflation has typically undershot, not overshot, central bank targets over the past couple decades. The low, while generally positive, inflation rate has (more arguably) been associated with low output and low growth. In this article, I consider these observations through the lens of a class of representative agent rational expectations models with nominal (price-setting) frictions and the possibility of firm entry/exit. I show that for any level of nominal frictions (no matter how small) and for any monetary policy rule that satisfies a set of weak restrictions, there is a large set of equilibria that exhibit permanently low inflation, low output, and low nominal interest rates. These equilibria can only exhibit positive long-run inflation if growth is low and the specification of nominal frictions (i.e. the Phillips curve) takes an unconventional but nonetheless empirically plausible form.

Abstract This article explores a natural connection between fiscal multipliers and foreign holdings of public debt. Although fiscal expansions can raise domestic economic activity through various channels, they can also have crowding-out effects if the resources used to acquire public debt reduce domestic consumption and investment. These crowding-out effects are likely to be weaker when governments have access to foreign savings when selling their debt, leading to larger fiscal multipliers. We test this hypothesis for the U.S. in the post-war period and for a panel of 17 advanced economies from the 1980s to the present. To do so, we assemble a novel database of public debt holdings by domestic and foreign creditors for these countries. We combine these data with standard measures of fiscal policy shocks and show that, indeed, the size of fiscal multipliers is increasing in the share of public debt held by foreigners. In particular, the fiscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the 1950s and 1960s and Japan today, and larger than one when the foreign share is high, such as in the U.S. and several European countries today.

Abstract We argue theoretically and document empirically that aging leads to greater (industrial) automation, because it creates a shortage of middle-aged workers specializing in manual production tasks. We show that demographic change is associated with greater adoption of robots and other automation technologies across countries and with more robotics-related activities across U.S. commuting zones. We also document more automation innovation in countries undergoing faster aging. Our directed technological change model predicts that the response of automation technologies to aging should be more pronounced in industries that rely more on middle-aged workers and those that present greater opportunities for automation and that productivity should improve and the labor share should decline relatively in industries that are more amenable to automation. The evidence supports all four of these predictions.

Abstract Using newly collected data on death rates and aerial victories of more than 5,000 German fighter pilots during World War II, we examine the effects of public recognition on performance and risk-taking. When a particular pilot is honoured publicly, both the victory rate and the death rate of his former peers increase. Fellow pilots react more if they come from the same region of Germany, or if they worked closely with him. Our results suggest that personal rivalry can be a prime motivating force, and that non-financial rewards can lead to a crowd-in of both effort and risk-taking via social connections.

Abstract We study a coordination game among agents in a network. The agents choose whether to take action (e.g. adopting a new technology) in an uncertain environment that yields increasing value in the actions of neighbours. We develop an algorithm that fully partitions the network into communities (coordination sets) within which agents have the same propensity to adopt. Our main finding is that a novel measure of network connectedness, which we term “social connectedness,” determines the propensity to adopt for each agent. Social connectedness captures both the number of links each agent has within her community (interconnectedness) as well as the number of links she has with members of other communities who have a higher propensity to adopt (embeddedness). There is a single coordination set if and only if the network is balanced—that is, the average degree of each subnetwork is no larger than the average degree of the network. Finally, we demonstrate that contagion is localized within coordination sets, such that a shock to an agent uniformly affects this agent and all members of her coordination set but has no impact on the other agents in the network.

Abstract About half of the change in U.S. non-durable consumption expenditure is due to changes in the products entering households’ consumption basket (the extensive margin). Changes in the basket are driven by fluctuations in the rate at which households add products; removals fluctuate little. These patterns reflect that, in response to income increases, households adopt consumer products already available in the market. Household adoption amplifies the effects of fiscal transfers on consumption by more than 30%. Cyclical household adoption of products also implies that inflation measures based on a representative household consuming all varieties available in the market underestimate true household-level inflation by as much as 1% per year over the Great Recession in the consumption categories covered by our data.

Abstract An increasing number of households installing solar panels and consuming the energy thus produced raises two challenges for regulators: network financing and vertical equity. We propose alternative tariff and subsidy designs for policymakers to incentivize solar panel adoptions and guarantee that network costs are recovered, while trading off efficiency, equity, and welfare motives. We estimate a structural model of energy demand and solar panel adoption, using a unique matched dataset on energy consumption, prices, income, wealth, solar panel installations, and building characteristics for 165,000 households in Switzerland from 2008 to 2014. Our counterfactuals recommend the optimal solar panel installation cost subsidies and two-part energy tariffs to achieve a solar energy target. We show that, relative to installation cost subsidies, relying on marginal prices to incentivize solar panel adoptions is more cost efficient and progressive across the income distribution, but generates a larger aggregate welfare loss.