Knowledge that Transforms

This paper argues that both inequality of opportunity and social mobility are necessary implications of an efficient, or optimal, societal arrangement when incentives must be provided. ∗The author thanks Marco Bassetto, V.V. Chari, Narayana Kocherlakota and Aleh Tsyvinski for helpful comments. The views expressed herein are those of the author and not necessarily those of the Federal The fact that the children of rich parents have better prospects then the children of poor parents (“inequality of opportunity”) is generally thought to be one of the weak points of modern capitalist societies. On the other hand, the ability of the descendants of poor families to eventually become rich and the descendants of rich families to eventually become poor

We study a linear public goods game using an inter-generational approach. Subjects in one generation leave advice for the succeeding generation via free-form messages. Such advice can be private knowledge (advice left by one player in generation t is given only to his or her immediate successor in generation t + 1), public knowledge (advice left by players of generation t is made available to all members of generation t + 1), and common knowledge (where the advice is not only public but is also read aloud by the experimenter). Common knowledge of advice generates a process of social learning that leads to high contributions and less free-riding. This behaviour is sustained by advice that is generally exhortative, suggesting high contributions, which in turn creates optimistic beliefs among subjects about others' contributions. We suggest that socially connected communities may achieve high contributions to a public good even in the absence of punishment for norm violators.

I estimate a model in which new technology entails random adjustment needs. Rapid adjustments may cause measured productivity to decline. The slowdowns persist because adjustment is costly and, hence, protracted. The model explains both the “steepness ” and the “deepness ” asymmetry of cycles. Adjustment costs amount to about 14 percent of output, and technological inefficiency to about 28 percent. Firms abandon technologies long before they are perfected — current-practice TFP is 20 percent below its maximal level.

We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect—where increasing inequality allows innovators to charge higher prices and (negative) market-size effects—with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.

We develop a model of undescribable events. Examples of events that are well understood by economic agents but are prohibitively difficult to describe in advance abound in real life. This notion has also pervaded a substantial amount of economic literature. Undescribable events in our model are understood by economic agents-their consequences and probabilities are known-but are such that every finite description of such events necessarily leaves out relevant features that have a non-negligible impact on the parties' expected utilities. We illustrate our results using a simple coinsurance problem as a backdrop. When the only uncertainty faced by the two agents is an undescribable event the optimal finite coinsurance contract is no contract at all.

This paper models an agent in a three-period setting who does not update according to Bayes' Rule and who is self-aware and anticipates her updating behaviour when formulating plans. Gul and Pesendorfer's theory of temptation and self-control is a key building block. The main result is a representation theorem that generalizes (the dynamic version of) Anscombe-Aumann's theorem so that both the prior and the way in which it is updated are subjective. The model can accommodate updating biases analogous to those observed by psychologists.

Standard theoretical arguments tell us that countries with relatively little capital benefit from financial integration as foreign capital flows in and speeds up the process of convergence. We show in a calibrated neoclassical model that conventionally measured welfare gains from this type of convergence appear relatively limited for the typical emerging market country. The welfare gain from switching from financial autarky to perfect capital mobility is roughly equivalent to a 1 % permanent increase in domestic consumption for the typical non-OECD country. This is negligible relative to the welfare gain from a take-off in domestic productivity of the magnitude observed in some of these countries.

This paper models and estimates net urban agglomeration economies for cities. Economic models of cities postulate an inverted U shape of real income per worker against city employment, where the inverted U shifts with industrial composition across the urban hierarchy of cities. This relationship has never been estimated, in part because of data requirements. China has the necessary data and context. We find that urban agglomeration benefits are high—real incomes per worker rise sharply with increases in city size from a low level. They level out nearer the peak and then decline very slowly past the peak. We find that a large fraction of cities in China are undersized due to nationally imposed, strong migration restrictions, resulting in large income losses.

Using data from the Consumer Expenditure Survey, we first document that the recent increase in income inequality in the U.S. has not been accompanied by a corresponding rise in consumption inequality. Much of this divergence is due to different trends in within-group inequality, which has increased significantly for income, but little for consumption. We then develop a simple framework that allows us to characterize analytically how within-group income inequality affects consumption inequality in a world in which agents can trade a full set of contingent consumption claims, subject to endogenous constraints emanating from the limited enforcement of intertemporal contracts. Finally, we quantitatively evaluate, in the context of a calibrated general equilibrium production economy, whether this set-up, or alternatively a standard incomplete markets model, can account for the documented stylized consumption inequality facts from the U.S. data.

We analyse a model of equilibrium directed search in a large labour market. Each worker, observing the wages posted at all vacancies, makes a fixed, finite number of applications, a. We allow for the possibility of ex post competition should more than one vacancy want to hire the same worker. For each a, there is a unique symmetric equilibrium in which all vacancies post the same wage. When a =1, the common posted wage lies between the competitive and monopsony levels, and equilibrium is efficient. When a > 1, all vacancies post the monopsony wage. Some workers fail to find a job, some find a job at the monopsony wage, and some - those for whom there is competition - get the competitive wage. Equilibrium is inefficient when a > 1; in particular, there is excessive vacancy creation.