Knowledge that Transforms

This paper documents that the Pearl Harbor attack triggered a sharp increase in volunteer enlistment rates of American men, the magnitude of the increase was smaller for Black men than for White men and the Black–White gap was larger in counties with higher levels of racial discrimination. The results suggest that political exclusion and discrimination can undermine support for the government during critical times such as war.

We document that most dispersion in marginal revenue products of inputs occurs across plants within firms rather than between firms. This is commonly thought to reflect misallocation: dispersion is “bad”. However, we show that eliminating frictions hampering internal capital markets in a multi-plant firm model may in fact increase productivity dispersion and raise output: dispersion can be “good”. This arises as firms optimally stagger investment activity across their plants over time to avoid raising costly external finance, instead relying on reallocating internal funds. The staggering in turn generates dispersion in marginal revenue products. We use U.S. Census data on multi-plant manufacturing firms to provide empirical evidence for the model mechanism and show a quantitatively important role for good dispersion. Since there is less scope for good dispersion in emerging economies, the difference in the degree of misallocation between emerging and developed economies looks more pronounced than previously thought.

We conduct an experimental analysis of selective disclosure in communication. In the model, an informed sender aims to influence a receiver by disclosing verifiable evidence that is selected from a larger pool of available evidence. Our experimental design leverages this model’s rich comparative statics, allowing us to systematically quantify the effects of selection relative to concealment. Our findings confirm the key qualitative predictions of the theory, suggesting that selection, rather than concealment, is often the dominant distortion in communication. We also identify deviations from the theory: Some senders are “deception averse” and overcommunicate relative to predictions; receivers respond too optimistically to both concealed and selected evidence, with errors of similar magnitude. Yet selection generates greater overall distortion in receiver behavior because it is far more prevalent than concealment.

We study structural change in production networks for intermediate inputs (inputoutput network) and new capital (investment network). For each network, we document that the share of output produced by services (relative to goods) is rising over time. While the relative prices of services that produce intermediates and consumption are rising, we find that the relative price of services that produce investment is falling over time. We then develop a multi-sector growth model to study these trends and their implications for economic growth. To match the relative price trends, inputs to intermediates production are complements and inputs to investment production are substitutes. Hence, structural change endogenously reallocates resources to the slowest growing intermediates producers and the fastest growing investment producers. Growth accounting exercises reveal that investment-specific technical change accounts for an increasing share of U.S. aggregate growth, with 20% of aggregate growth since 2000 due to investment structural change. Growth projections from our model show that structural change within investment networks alone can offset stagnating or declining growth in other sectors due to Baumol’s cost disease.

An agent samples projects over time, observing quality for each, while a principal can select at most one. The principal values quality, whereas the agent only wants a project chosen. Transfers are unavailable, but the principal can verify quality by paying a cost. We fully characterize the dynamics of verification by determining optimal mechanisms for this problem. With a low verification cost and a long horizon, the optimal mechanism involves a deterministic selection rule that initially discriminates on quality but chooses a project irrespective of its quality at a deadline. Verification occurs with an intermediate probability before the deadline, declining over time. We show how these conclusions change if the verification cost is high or the horizon is short, and under certain forms of imperfect commitment. Our analysis provides guidelines on how dynamics interact with the benefits of verification.

We develop a model of multi-dimensional misspecified learning in which an overconfident agent learns about groups in society from observations of his and others’ successes. We show that the average person sees his group relative to other groups too positively, and this in-group bias exhibits systematic comparative-statics patterns. First, a person is most likely to have negative opinions about other groups he competes with. Second, while information about another group’s achievements does not lower a person’s prejudice, information about economic or social forces affecting the group can, and personal contact with group members has a beneficial effect that is larger than in classical settings. Third, the agent’s beliefs are subject to “bias substitution”, whereby forces that decrease his bias regarding one group tend to increase his biases regarding unrelated other groups.

This article studies the impact of income-based criminal punishments on crime. In Finland, speeding tickets become income-dependent if the driver’s speed exceeds the speeding limit by more than 20 km/h, leading to a substantial jump in the size of the speeding ticket. Contrary to predictions of a traditional Becker model, individuals do not bunch below the fine hike. Instead, the speeding distributions are smooth at the cutoff. However, I demonstrate that the size of the realized speeding ticket has sizable, but short-lived, impacts on reoffending. I use a regression discontinuity design to show that fines that are, on average, 200 euros larger decrease reoffending by 15% in the following 6 months. The drop in reoffending is driven by high-income individuals facing the highest fine at the cutoff. I estimate that a fixed fine hike that matches the current deterrence effect would raise the fine increase faced by the bottom income quartile by about 300% at the cutoff, relative to the increase they face under the current income-based schedule. My empirical results are consistent with an explanation that people operate under information frictions. To illustrate this, I construct a Becker model with misperception and learning that can explain all the empirical findings.

Unemployment differentials are greater between countries in the euro area than between U.S. states. In both regions, net migration responds to unemployment differentials, though the response is smaller in the euro area compared to the U.S. We use a multi-country DSGE model with cross-border migration to quantify Mundell’s hypothesis that labour mobility could substitute for independent monetary policy in a currency union. While not as effective as independent monetary policy, increased labour mobility reduces business cycle fluctuations for most countries in the euro area. However, Mundell’s conjecture does not hold uniformly. For countries that primarily face demand shocks, labour mobility stabilizes inflation and unemployment and improves welfare. If supply shocks are dominant however, labour mobility increases the cost of being in a currency union by magnifying inflation volatility.

We prove a central limit theorem for network formation models with strategic interactions and homophilous agents. Since data often consists of observations on a single large network, we consider an asymptotic framework in which the network size diverges. We argue that a modification of “stabilization” conditions from the literature on geometric graphs provides a useful high-level formulation of weak dependence which we utilize to establish an abstract central limit theorem. Using results in branching process theory, we derive interpretable primitive conditions for stabilization. The main conditions restrict the strength of strategic interactions and equilibrium selection mechanism. We discuss practical inference procedures justified by our results.

Despite the increasing importance of multiple priors in various domains of economics, choice-based incentive-compatible multiple-prior elicitation remains an open problem. This paper develops a solution, comprising a preference-based identification of a subject’s probability interval for an event, and a method for eliciting it. The method applies under weak decision-theoretic assumptions, with no need for probabilistic sophistication. To demonstrate its feasibility, we implement it in three incentivized experiments on artificial and natural sources of uncertainty. Intervals elicited by our method are sensitive to the direction and amount of information and are typically consistent with “objective” probabilities where available. We find a predominance of non-degenerate probability intervals, with intervals being wider when there is less information or predictability. The probability intervals elicited with our method are similar to those stated by subjects on aggregate, suggesting that the method can provide behavioural foundations for the use of stated probability-interval techniques in the field.