Knowledge that Transforms

This paper develops a growth theory that captures the replacement of physical capital accumulation by human capital accumulation as a prime engine of growth along the process of development. It argues that the positive impact of inequality on the growth process was reversed in this process. In early stages of the Industrial Revolution, when physical capital accumulation was the prime source of growth, inequality stimulated development by channelling resources towards individuals with a higher propensity to save. As human capital emerged as a growth engine, equality alleviated adverse effects of credit constraints on human capital accumulation, stimulating the growth process.

This paper estimates the importance of network effects in the market for Yellow Pages. I estimate three simultaneous equations: consumer demand for usage of a directory, advertiser demand for advertising and a publisher's first-order condition (derived from profit-maximizing behaviour). Estimation shows that advertisers value consumer usage and that consumers value advertising, implying a network effect. I find that internalizing network effects would significantly increase surplus. As an application, I consider whether the market benefits from monopoly (which takes advantage of network effects) or oligopoly (which reduces market power). I find that a more competitive market is preferable. Copyright 2004, Wiley-Blackwell.

This paper uses an empirical dynamic oligopoly model of the commercial aircraft industry to analyse industry pricing, industry performance, and optimal industry policy. A novel feature of the model with respect to the previous literature is that entry, exit, prices, and quantities are endogenously determined in Markov perfect equilibrium (MPE). We find that many unusual aspects of the aircraft data, such as high concentration and persistent pricing below static marginal cost, are explained by this model. We also find that the unconstrained MPE is quite efficient from a social perspective, providing only 10% less welfare on average than a social planner would obtain. Finally, we provide simulation evidence that an anti-trust policy in the form of a concentration restriction would be welfare reducing. Copyright 2004, Wiley-Blackwell.

Do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets? To address this issue, we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals. Even abstracting from signalling, the presence of the large investor does make all other traders more aggressive in their selling. Relative to the case in which there is no large investor, small investors attack the currency when fundamentals are stronger. Yet, the difference can be small, or non-existent, depending on the relative precision of private information of the small and large investors. Adding signalling makes the influence of the large trader on small traders' behaviour much stronger. Copyright 2004, Wiley-Blackwell.

Data from a field experiment are used to estimate the gain in productivity that is realized when workers are paid piece rates rather than fixed wages. The experiment was conducted within a tree-planting firm and provides daily observations on individual worker productivity under both compensation systems. Unrestricted statistical methods estimate the productivity gain to be 20%. Since planting conditions potentially affect incentives, structural econometric methods are used to generalize the experimental results to out-of-sample conditions. The structural results suggest that the average productivity gain, outside of the experimental conditions, would be at least 21.7%.

This paper investigates the role of money in markets in which producers have private information about the quality of the goods they supply. When the fraction of high-quality producers in the economy is given, money promotes the production of high-quality goods, which improves the quality mix and welfare unambiguously. When this fraction is endogenous, however, we find that money can decrease welfare relative to the barter equilibrium. The origin of this inefficiency is that money provides consumption insurance to low-quality producers, which can result in a higher fraction of low-quality producers in the monetary equilibrium. Finally, we find that most often agents acquire more costly information in the monetary equilibrium than in the barter equilibrium. Consequently, money is welfare-enhancing because it promotes useful production and exchange, but not because it saves information costs. Copyright 2004, Wiley-Blackwell.

Two players simultaneously decide whether or not to acquire new weapons in an arms race game. Each player's type determines his propensity to arm. Types are private information, and are independently drawn from a continuous distribution. With probability close to one, the best outcome for each player is for neither to acquire new weapons (although each prefers to acquire new weapons if he thinks the opponent will). There is a small probability that a player is a dominant strategy type who always prefers to acquire new weapons. We find conditions under which the unique Bayesian-Nash equilibrium involves an arms race with probability one. However, if the probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the cheap-talk extension of the game where the probability of an arms race is close to zero.

Identical agents gather costly information, and then aggregate it through voting.Because information is a public good, information is underprovided relative to the social optimum. A "good" voting rule must give incentives to acquire information,as well as aggregate information efficiently. A voting rule that requires a large plurality (in the extreme, unanimity) to upset the status quo can be optimal only if the information available to each agent is sufficiently accurate. This result is independent of the preferences of voters and of the cost of information. Copyright The Review of Economic Studies Limited, 2004.

We analyse an overlapping generations model of voting on “reform projects”. These resemble investments in that they first require some investment expenditure and later payoff. Since the time during which old people get the benefit is shorter, or because older people are more wealthy and hence pay more taxes, they are more conservative (against reforms) than young people. We show that if people vote on which majority should be required in future elections for a bill to become a law, the winning proposal specifies a supermajority. This result is very robust even if age related conflict is only one determinant among others for voting behaviour in the society.

This paper examines the effect of “news” or advance information about future production on competitive storage behaviour and prices using a structural model of commodity markets. In particular, it generalizes the neoclassical storage model to incorporate information on future harvests, while allowing for seasonal production, two features important to African and other developing country grain markets. The model is first developed to suit the case of the Ethiopian grain markets, and a general model is then stated. The effects on welfare and price variability of the addition of news are discussed, as well as changes in key demand and uncertainty parameters. The model is shown to replicate some features of the data better than the model without news, particularly the high autocorrelation in price, and performs better in formal estimation. However, it appears that the incorporation of news still fails to explain the extreme seasonal price movements observed.