Knowledge that Transforms

Consumers respond positively to products tied to charity, particularly from sellers that are relatively new and hence have limited alternative means of assuring quality. We establish this result using data from a diverse group of eBay sellers who “experiment” with charity by varying the presence of a donation in a set of otherwise matched product listings. Most of charity's benefits accrue to sellers without extensive eBay histories. Consistent with charity serving as a quality signal, we find fewer customer complaints among charity-intensive sellers.

This paper investigates how precisely short-term, job-search oriented training programs as opposed to long-term, human capital intensive training programs work. We evaluate and compare their eects on time until job entry, stability of employment, and earnings. Further, we examine the heterogeneity of treatment eects according to the timing of training during unemployment as well as across dierent subgroups of participants. We nd that participating in short-term training reduces the remaining time in unemployment and moderately increases job stability. Long-term training programs initially prolong the remaining time in unemployment, but once the scheduled program end is reached participants exit to employment at a much faster rate than without training. In addition, they benet from substantially more stable employment spells and higher earnings. Overall, long-term training programs are well eective in supporting the occupational advancement of very heterogeneous groups of participants, including those with generally weak labor market prospects. However, from a scal perspective only the low-cost short-term training schemes are cost ecient in the short run.

We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero lower bound, the optimal inflation rate is low, typically <2% even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and state-dependent price stickiness, capital formation, model uncertainty, and downward nominal wage rigidities. On the normative side, price-level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero bound episodes.

We study the identification of panel models with linear individual-specific coefficients, when T is fixed. We show identification of the variance of the effects under conditional uncorrelatedness. Identification requires restricted dependence of errors, reflecting a trade-off between heterogeneity and error dynamics. We show identification of the density of individual effects when errors follow an ARMA process under conditional independence. We discuss GMM estimation of moments of effects and errors, and introduce a simple density estimator of a slope effect in a special case. As an application we estimate the effect that a mother smokes during pregnancy on child’s birth weight.

We propose a new inverse probability weighting (IPW) estimator for moment condition models with missing data. Our estimator is easy to implement and compares favourably with existing IPW estimators, including augmented IPW estimators, in terms of efficiency, robustness, and higher-order bias. We illustrate our method with a study of the relationship between early Black–White differences in cognitive achievement and subsequent differences in adult earnings. In our data set, the early childhood achievement measure, the main regressor of interest, is missing for many units.

We study efficient non-linear taxation of labour and capital in a dynamic Mirrleesian model incorporating political economy constraints. Policies are chosen sequentially over time, without commitment. Our main result is that the marginal tax on capital income is progressive, in the sense that richer agents face higher marginal tax rates.

A buyer suggests prices to N sellers in a time period and buys from the seller who accepts the bid first. The number of bidding rounds is determined by how frequently the buyer can make an offer. We show that with no limit on the frequency and without discounting, the price path is either kept flat initially with large jumps at the end or increasing steadily over time. Which class of path occurs in equilibrium depends on the buyer's trade-off between committing to a price ceiling versus finely screening the sellers' costs. With discounting, limiting the number of rounds mitigates the delay caused by the reluctance to raise bids in the first class of equilibrium and therefore can benefit the buyer. This result suggests why, in reality, bargaining parties often take measures to make their offers rigid and consequently force themselves to make fewer offers.

This paper studies the long-run properties of intertemporal distortions in a broad class of second-best economies. Our unified framework encompasses and extends many well-known models, such as variants of the Ramsey taxation model with aggregate or idiosyncratic risk, and economies with incentive compatibility constraints due to limited commitment, political economy, self-enforcement or private information, or combinations of these. We identify a sufficient condition that rules out permanent intertemporal distortions: if there exists an allocation that satisfies all constraints and eventually converges to the limiting first-best allocation, then intertemporal distortions are temporary in the second best. This result uncovers a common optimality principle linking the intertemporal allocation of resources with the ability to front-load distortions for this broad class of environments. A series of applications illustrates the significance of these findings.

We examine the welfare effects of provision of local public goods in an empirically relevant setting using a multi-community model with mobile and heterogeneous households and with flexible housing supplies. We characterize the first-best allocation and show efficiency can be implemented with decentralization using head taxes. We calibrate the model and compare welfare in property-tax equilibria, both decentralized and centralized, to the efficient allocation. Inefficiencies with decentralization and property taxation are large, dissipating most if not all the potential welfare gains that efficient decentralization could achieve. In property-tax equilibrium, centralization is frequently more efficient! An externality in community choice underlies the failure to achieve efficiency with decentralization and property taxes: poorer households crowd richer communities and free ride by consuming relatively little housing thereby avoiding taxes.

This paper analyses the possibility and the consequences of rational bubbles in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is abundant (scarce). We analyse extensions with firm heterogeneity and stochastic bubbles.