Knowledge that Transforms

The magnitude and the direction of net international capital flows do not fit neoclassical models. The fifty U.S. states comprise an integrated capital market with very low barriers to capital flows, which makes them an ideal testing ground for neoclassical models. We develop a simple frictionless open economy model with perfectly diversified ownership of capital and find that capital flows among the states are consistent with the model. Therefore, the small size and “wrong” direction of net international capital flows are likely due to frictions associated with national borders, not to inherent flaws in the neoclassical model.

This paper studies the persistence of innovation in Dutch manufacturing using an unbalanced panel of firm data from four waves of the Community Innovation Survey between 1994 and 2002. We estimate by maximum likelihood a dynamic type 2 tobit model accounting for individual effects and handling the initial conditions problem. We find true persistence in the probability of innovating in the high-tech category of industries and spurious persistence in the low-tech category. Furthermore, past innovation output intensity affects, albeit to a small extent, current innovation output intensity in the high-tech category, while no such evidence is found in the low-tech category.

What is the role of transport improvements in globalization? We argue that the nineteenth century is the ideal testing ground for this question: freight rates fell on average by 50% while global trade increased 400% from 1870 to 1913. We estimate the first indices of bilateral freight rates for the period and directly incorporate these into a standard gravity model. We also take the endogeneity of bilateral trade and freight rates seriously and propose an instrumental variables approach. The results are striking as we find no evidence that the maritime transport revolution was the primary driver of the late nineteenth century global trade boom. Rather, the most powerful forces driving the boom were those of income growth and convergence.

This paper analyzes a 1992 decrease in U.S. federal income tax withholding that shifted the timing of income tax payments while leaving ultimate tax burdens unchanged. Consequently income typically received as a lump-sum refund on filing a tax return was shifted into the previous year's monthly income. This paper considers the impact of the withholding change in the context of mental accounting and finds a decrease in the probability that households contributed to a tax-preferred retirement account. Additional robustness tests show that short-term saving did not simultaneously increase and that the main findings are not driven by liquidity constraints.

We document a positive correlation between stock market capitalization and price levels (wages) within the group of countries with poorly developed stock markets and a negative correlation between these two variables within the group of countries with more developed stock markets. This paper argues that there is a causal relationship behind these correlations. Stock markets initially stimulate growth, pushing the demand for nontradables and increasing prices and wages. Stock markets also promote a shift toward more capital-intensive technologies in the tradable sector, increasing the migration of workers to services and eventually putting downward pressure on wages and prices.

An important class of investment decisions is characterized by unrecoverable sunk costs, resolution of uncertainty through time, and the ability to invest in the future as an alternative to investing today. The options model provides guidance in such settings, including an investment decision rule called the "bad news principle": the downside investment state influences the investment decision whereas the upside investment state is ignored. This study takes a new approach to examining predictions of the options model by using the tools of experimental economics. Our evidence, which is drawn from student and professional trader subject pools, is broadly consonant with the options model.

The efforts exerted by children, parents, and schools affect the outcome of the education process. We build this idea into a theoretical model where the effort exerted by the three groups of agents is simultaneously determined as a Nash equilibrium. The empirical analysis tests the model using the British National Child Development Study and finds support for this idea. We identify which factors affect educational attainment directly and which indirectly through effort. From a policy perspective, the paper indicates that affecting effort directly would have a positive impact on attainment.

Universities are engaged in many activities, primarily research and teaching. Many states have instituted performance measures that focus on evaluating a university's success in teaching. We suggest that multitasking may be important in this context, and we consider research outcomes after adoption. We find striking results that depend on university status. Research activity is higher at flagship institutions after the adoption of performance measures. Most of this increase in activity is with respect to the level of research funding and the number of articles produced. In contrast, research funding and the number of publications is dramatically lower at nonflagship institutions. There is some evidence that citations per publication at nonflagship institutions are higher after the adoption of performance standards. The evidence suggests that universities have become more specialized since the introduction of these programs.

If households face uninsurable idiosyncratic earnings risk, theory predicts that redistributive tax and transfer systems have both an insurance and a distortionary effect. Exploiting the substantial variation of tax and transfer systems across U.S. states and over time, we investigate the necessary traces of these two effects in the data: that state-level measures of redistributive taxation should correlate negatively with the standard deviation and the mean of the within-state consumption distribution. We find that the first correlation is robust, supporting strongly the presence of an insurance effect. The distortionary effect can also be detected in the data, but it is less precisely estimated.