Knowledge that Transforms

Until the end of 1977, the U.S. consumer price index (CPI) for rents tended to omit rent increases when units had a change of tenants or were vacant, biasing inflation estimates downward. Beginning in 1978, the Bureau of Labor Statistics (BLS) implemented a series of methodological changes that reduced this nonresponse bias, but substantial bias remained until 1985. We set up a model of nonresponse bias, parameterize it, and test it using BLS microdata. From 1940 to 1985, the official BLS CPI for urban wage earners and clerical workers (CPI-W) price index for tenant rents rose 3.6% annually; we argue that it should have risen 5.0% annually.

We test for customer discrimination with data from more than 800 retail stores employing over 70,000 individuals matched to census data on the demographics of each store's community. While our tests detect some increase in sales when the workforce more closely resembles potential customers, the effects we find are modest in magnitude. Customer discrimination is neither strong nor pervasive. We find little payoff to matching employee demographics to those of potential customers except when the customers do not speak English.

Consumption growth is predictable, a basic violation of the permanent-income hypothesis. This paper examines three possible explanations: rule-of-thumb behavior, in which households allow consumption to track per period income flows rather than permanent income; habit persistence; and nonseparability in preferences over consumption and leisure. The results illustrate that weak instruments make the results highly sensitive to some arbitrary choices common in the literature. Using a technique that is robust to instrument choice, the analysis shows support for habit persistence and rule-of-thumb behavior and little support for nonseparability between consumption and leisure.

There is almost no support for the proposition that capital is attracted to low wages from firm-level studies. We examine the location choices of 2,884 firms investing in China between 1993 and 1996 to offer two main contributions. First, we find that the location of labor-intensive activities is highly elastic to provincial wage differences. Generally, investors' wage sensitivity declines as the skill intensity of the industry increases. Second, we find that unobserved location-specific attributes exert a downward bias on estimated wage sensitivity. Using a control function approach, we estimate a downward bias of 50% to 90% in wage coefficients estimated with standard techniques.

This paper introduces an empirical strategy to estimate dynamic treatment effects in randomized trials that provide treatment in multiple stages and in which various noncompliance problems arise, such as attrition and selective transitions between treatment and control groups. Our approach is applied to the highly influential four-year randomized class size study, Project STAR. We find benefits from attending small classes in all cognitive subject areas in kindergarten and first grade. We do not find any statistically significant dynamic benefits from continuous treatment versus never attending small classes following grade 1. Finally, statistical tests support accounting for both selective attrition and noncompliance with treatment assignment.

Understanding the relationship between nominal and real variables, most notably inflation and cyclical output, is one of the fundamental questions of economics. Toward this understanding, we develop a model that integrates sticky prices and sticky information—a dual-stickiness model. We find that both rigidities are present in U.S. data. We also show that the dual-stickiness model's closest competitor is the hybrid New Keynesian model. For both models, current inflation depends in part on last period's inflation. The former model achieves this dependence endogenously through the interaction of the two rigidities rather than through backward-looking behavior. U.S. data support the dual-stickiness model over the hybrid model because lagged expectations terms appear in the former's inflation Euler equation. Finally, we show that it is quantitatively important to distinguish between the two by simulating a dynamic equilibrium model under each of the two inflation equations.

We analyze nonlinear adjustments of capital and labor using plant data from the Colombian Annual Manufacturing Survey, allowing for interdependence in adjustments of the two factors. We find nonlinear employment and capital adjustments. We also find that capital shortages reduce hiring, and labor surpluses reduce capital shedding. Moreover, we find that job destruction and capital formation increased after factor market deregulation in Colombia. Finally, we find that completely eliminating frictions in factor adjustment would yield a substantial increase in aggregate productivity through improved allocative efficiency, but that the actual impact of the Colombian deregulation on productivity was modest.

Not properly accounting for differences between business owners and nonbusiness owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives. Using data from the Panel Study of Income Dynamics from the 1980s and 1990s, we show that within samples of both business owners and non–business owners, the amount of precautionary savings with respect to labor income risk is modest and accounts for less than 10% of total household wealth. Previous large estimates of the size of precautionary balances resulted from pooling these two groups together. Such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non–business owners for reasons unrelated to precautionary motives.

Economic theory suggests that intergovernmental grants are equivalent to private income. A large empirical literature, however, contradicts this prediction. A school finance reform in New Hampshire, where local public goods decisions are made by a form of direct democracy, provides an unusually compelling test of the theory. The results, which suggest that approximately ninety cents per grant dollar are spent on tax reduction, provide support for equivalence. The paper's findings have important policy implications for the financing of local public goods in general and for school finance reform in particular.

Recent theoretical models underscore the potential asymmetric response of various behaviors, ranging from criminal activity to smoking. In this paper, we use state-level panel and individual-level panel data to document the previously unnoticed asymmetric response of crime to changes in the unemployment rate. The results have policy implications, and they have potentially widespread ramifications because similar asymmetries may also be prevalent in other domains, ranging from the relationship between income and health to peer quality and student outcomes.