Knowledge that Transforms

This article proposes a theory of optimal public expenditure when unemployment is inefficient. The theory is based on a matching model. Optimal public expenditure deviates from the Samuelson rule to reduce the unemployment gap (the difference between current and efficient unemployment rates). Such optimal “stimulus spending” is described by a formula expressed with three sufficient statistics: the unemployment gap, the unemployment multiplier (the decrease in unemployment achieved by increasing public expenditure), and the elasticity of substitution between public and private consumption. When unemployment is inefficiently high and the multiplier is positive, the formula yields the following results. (1) Optimal stimulus spending is positive and increasing in the unemployment gap. (2) Optimal stimulus spending is zero for a zero multiplier, increasing in the multiplier for small multipliers, largest for a moderate multiplier, and decreasing in the multiplier beyond that. (3) Optimal stimulus spending is zero if extra public goods have no value, it becomes larger as the elasticity of substitution increases, and it completely fills the unemployment gap if extra public goods are as valuable as extra private goods.

This article provides a model of social learning where the order in which actions are taken is determined by an m-dimensional integer lattice rather than along a line as in the herding model. The observation structure is determined by a random network. Every agent links to each of his preceding lattice neighbours independently with probability p, and observes the actions of all agents that are reachable via a directed path in the realized social network. For m≥ 2, we show that as p<1 goes to one, (1) so does the asymptotic proportion of agents who take the optimal action, (2) this holds for any informative signal distribution, and (3) bounded signal distributions might achieve higher expected welfare than unbounded signal distributions. In contrast, if signals are bounded and p=1, all agents select the suboptimal action with positive probability.

When judging the value of a good, people may be overly influenced by the state in which they previously consumed it. For example, someone who tries out a new restaurant while very hungry may subsequently rate it as high quality, even if the food is mediocre. We produce a simple framework for this form of attribution bias that embeds a standard model of decision making as a special case. We test for attribution bias across two consumer decisions. First, we conduct an experiment in which we randomly manipulate the thirst of participants prior to consuming a new drink. Second, using data from thousands of amusement park visitors, we explore how pleasant weather during their most recent trip affects their stated and actual likelihood of returning. In both of these domains, we find evidence that people misattribute the influence of a temporary state to a stable quality of the consumption good. We provide evidence against several alternative accounts for our findings and discuss the broader implications of attribution bias in economic decision making.

Standard optimal Debt Management (DM) models prescribe a dominant role for long bonds and advocate against issuing short bonds. They require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue (r/r) new ones. These features of DM are inconsistent with U.S. data. We introduce incomplete markets via small transaction costs which serves to make optimal DM more closely resemble the data : r/r are negligible, short bond issuance substantial and persistent and short and long bonds positively co-vary. Intuitively, long bonds help smooth taxes over states and short bonds over time. Solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions.

What are the origins and consequences of the state as a provider of public goods? We study public goods provision established through new laws in German cities during the 1500s. Cities that adopted the laws subsequently began to differentially produce and attract human capital and to grow faster. Legal change occurred where ideological competition introduced by the Protestant Reformation interacted with local politics. We study plagues that shifted local politics in a narrow period as sources of exogenous variation in public goods institutions, and find support for a causal interpretation of the relationship between legal change, human capital, and growth.

Non-equilibrium models of choice (e.g. level-k reasoning) have significantly different, sometimes more accurate, predictions in games than does Nash equilibrium. When it comes to the maximal set of functions that are implementable in mechanism design, however, they turn out to have similar implications. Focusing on single-valued rules, we discuss the role and implications of different behavioural anchors (arbitrary level-0 play), and prove a level-k revelation principle. If a function is level-k implementable given any level-0 play, it must obey a slight weakening of standard strict incentive constraints. Further, the same condition is also sufficient for level-k implementability, although the role of specific level-0 anchors is more controversial for the sufficiency argument. Nonetheless, our results provide tight characterizations of level-k implementable functions under a variety of level-0 play, including truthful, uniform, and atomless anchors.

We empirically study the effects of broadband internet diffusion on local election outcomes and on local government policies using rich data from the U.K. Our analysis shows that the internet has displaced other media with greater news content (i.e. radio and newspapers), thereby decreasing voter turnout, most notably among less-educated and younger individuals. In turn, we find suggestive evidence that local government expenditures and taxes are lower in areas with greater broadband diffusion, particularly expenditures targeted at less-educated voters. Our findings are consistent with the idea that voters’ information plays a key role in determining electoral participation, government policies, and government size.

We build a dynamic model of migration where, in addition to standard relocation costs, workers face spatial frictions that decrease their ability to compete for distant job opportunities. We estimate the model on a matched employer–employee panel dataset describing labour market transitions within and between the 100 largest French cities. Our identification strategy is based on the premise that frictions affect the frequency of job transitions, while mobility costs impact the distribution of accepted wages. We find that: (1) controlling for spatial frictions reduces mobility cost estimates by one order of magnitude; (2) the urban wage premium is driven by better opportunities for local job-to-job transitions in larger cities; (3) migration reduces lifetime inequalities by providing insurance against unsatisfactory initial location draws; (4) labour mobility policies based on relocation subsidies are inefficient, unlike switching from nationwide to local minimum wages.

Large multi-product firms dominate international trade flows. Using novel linked production and export data at the firm-product level, we find that the overwhelming majority of manufacturing firms export products that they do not produce. Three quarters of the exported products and 30% of export value from Belgian manufacturers are in goods that are not produced by the firm, so-called Carry-Along Trade (CAT). The number of CAT products is strongly increasing in firm productivity while the number of produced products that are exported is weakly increasing in firm productivity. We propose a general model of production and sourcing at multi-product firms and explore new demand- and supply-side modelling features capable of generating predictions consistent with the empirical findings. Export price data and company interviews offer suggestive evidence for the presence of demand-scope complementarities.

We develop and evaluate experimentally a novel tool that redesigns the job search process by providing tailored advice at low cost. We invited jobseekers to our computer facilities for twelve consecutive weekly sessions to search for real jobs on our web interface. For one-half, instead of relying on their own search criteria, we use readily available labour market data to display relevant alternative occupations and associated jobs. The data indicate that this broadens the set of jobs they consider and increases their job interviews especially for participants who otherwise search narrowly and have been unemployed for a few months.