Knowledge that Transforms

If better informed voters receive favourable policies, then mass media will affect policy because mass media provide most of the information people use in voting. This paper models the incentives of the media to deliver news to different groups. The increasing-returns-to-scale technology and advertising financing of media firms induce them to provide more news to large groups, such as taxpayers and dispersed consumer interests, and groups that are valuable to advertisers. This news bias alters the trade-off in political competition and therefore introduces a bias in public policy. The paper also discusses the effects of broadcast media replacing newspapers as the main information source about politics. The model predicts that this change should raise spending on government programmes used by poor and rural voters.

In this paper we study the evolution of lifetime labour income inequality by constructing present value life cycle measures that incorporate both earnings and employment risk. We find that, even though lifetime income inequality is 40% less than earnings inequality, the total increase in lifetime income inequality over the past 20 years is the same as earnings inequality. While the total increase is the same, the pathways there differ with earnings inequality experiencing a steady increase and lifetime income inequality increasing in spurts particularly in the latter half of the 1990s. Finally, we find the changes in lifetime income inequality are primarily driven by changes in earnings mobility and changes in the earnings distribution itself, changes in employment risk and the composition of the sample, such as the shift toward attaining more education and the ageing population, do not play a large role. Copyright 2004, Wiley-Blackwell.

This paper investigates firms' incentives to invest in cost reduction in the first price sealed bid auction, a format largely used for procurement. Two central features of the model are that we allow firms to be heterogeneous and that investment is observable. We find that firms will tend to underinvest in cost reduction because they anticipate fiercer head-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants and that this is socially inefficient. These results have implications for market design when investment is important.

We analyse a bargaining game in which one party, called the buyer, has the option of choosing the sequence of negotiations with other participants, called sellers. When the sequencing of negotiations is confidential and the sellers' goods are highly complementary, efficient, non-dissipative equilibria exist in which the buyer randomizes over negotiation sequences. In these equilibria, the buyer can obtain higher pay-offs than in pure strategy equilibria or in public negotiations. The degree of sequencing uncertainty that maximizes buyer pay-offs is inversely related to the aggregate bargaining power of the sellers.

We analyse the efficiency of the labour market outcome in a competitive search equilibrium model with endogenous turnover and endogenous general human capital formation. We show that search frictions do not distort training decisions if firms and their employees are able to coordinate efficiently, for instance, by using long-term contracts. In the absence of efficient coordination devices there is too much turnover and too little investment in general training. Nonetheless, the number of training firms and the amount of training provided are constrained optimal, and training subsidies therefore reduce welfare.

This paper analyses the link between the internal organization of the firm and the growth process. We present a Schumpeterian growth model in which monopoly firms face agency costs due to collusion between managers inside the organization. These costs affect incentives to invest and the rate of innovation in the economy. When collusion is self-enforcing, higher growth and more creative destruction shortens in turn the time horizon of colluding agents in the organization and makes internal collusion more difficult to sustain. We analyse this two-way mechanism between growth and agency problems and show how the transaction costs of side-contracting within the firm and the growth rate of the economy are simultaneously derived.

Procedures are presented that allow the empiricist to estimate and test asset pricing models on limited-liability securities without the assumption that thehistorical payoff distribution provides a consistent estimate of the market's priorbeliefs. The procedures effectively filter return data for unspecified historical biases in the market's priors. They do not involve explicit estimation of the market's priors, and hence, economize on parameters. The procedures derive from a new but simple property of Bayesian learning, namely: if the correct likelihood is used, the inverse posterior at the true parameter value forms a martingale process relative to the learner's information filtration augmented with the true parameter value. Application of this central result to tests of asset pricing models requires a deliberate selection bias. Hence, as a by-product, the article establishes that biased samples contain information with which to falsify an asset pricing model or estimate its parameters. These include samples subject to, "e.g." survivorship bias or Peso problems. Copyright The Review of Economic Studies Limited, 2004.

Multi-store firms are common in the retailing industry. Theory suggests thatc ross-elasticities between stores of the same firm enhance market power. To evaluate the importance of this effect in the U.K. supermarket industry, we estimate a model of consumer choice and expenditure using three data sources:profit margins for each chain, a survey of consumer choices and a data-set of store characteristics. To permit plausible substitution patterns, the utility model interacts consumer and store characteristics. We measure market powerby calculating the effect of merger and demerger on Nash equilibriumprices. Demerger reduces the prices of the largest firms by between 2 and 3.8% depending on local concentration; mergers between the largest firms lead to price increases up to 7.4%. Copyright The Review of Economic Studies Limited, 2004.

We study optimal enforcement in credit markets in which the only threat facing a defaulting borrower is restricted access to financial markets. We solve for the optimal level of exclusion, and link it to observed institutional arrangements. Regulation in this environment must accomplish two objectives. First, it must prevent borrowers from defaulting on one bank and transferring their resources to another bank. Second, and less obviously, it must give banks the incentive to make sizeable loans, and to honour their promises of future credit. We establish that the optimal regulation resembles observed laws governing default on debt. Moreover, if debtors have the right to a “fresh start” after bankruptcy then this must be balanced by enforceable provisions against fraudulent conveyance. Our optimal regulation is robust, in that it can be implemented in a way that does not require the regulator to have information about either the borrower or lender. Our results isolate the way in which specific institutions surrounding bankruptcy—namely rules governing asset garnishment and fraudulent conveyances—support loan markets in which borrowers have no collateral.

Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by Mundell (1961): a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union is desirable. This paper explores this argument in a setting with both monetary and fiscal policies. In an economy with monetary policy alone, we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low. However, fiscal interventions by national governments, combined with a central bank that has the ability to commit to monetary policy, overturn these results. In equilibrium, such a monetary union will be welfare improving for any correlation of shocks.