Knowledge that Transforms

This paper uses data from a randomized social experiment in Mexico to estimate and validate a dynamic behavioral model of parental decisions about fertility and child schooling, to evaluate the effects of the PROGRESA school subsidy program, and to perform a variety of counterfactual experiments of policy alternatives. Our method of validation estimates the model without using post-program data and then compares the model’s predictions about program impacts to the experimental impact estimates. The results show that the model’s predicted program impacts track the experimental results. Our analysis of counterfactual policies reveals an alternative subsidy schedule that would induce a greater impact on average school attainment at similar cost to the existing program.

We develop a model of currency crises, in which traders are heterogeneously informed, and interest rates are endogenously determined in a noisy rational expectations equilibrium. In our model, multiple equilibria result from distinct roles an interest rate plays in determining domestic asset market allocations and the devaluation outcome. Except for special cases, this finding is not affected by the introduction of noisy private signals. We conclude that the global games results on equilibrium uniqueness do not apply to market-based models of currency crises.

Using questions expressly added to the Consumer Expenditure Survey, we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income hypothesis. We exploit the unique, randomized timing of rebate receipt across households. Households spent 20 to 40 percent of their rebates on nondurable goods during the three-month period in which their rebates arrived, and roughly two-thirds of their rebates cumulatively during this period and the subsequent three-month period. The implied effects on aggregate consumption demand are substantial. Consistent with liquidity constraints, responses are larger for households with low liquid wealth or low income.

Crises are volatile times when endogenous sources of information are closely monitored. We study the role of information in crises by introducing a financial market in a coordination game with imperfect information. The asset price aggregates dispersed private information acting as a public noisy signal. In contrast to the case with exogenous information, our main result is that uniqueness may not obtain as a perturbation from perfect information: multiplicity is ensured with small noise. In addition, we show that: (a) multiplicity may emerge in the financial price itself; (b) less noise may contribute toward nonfundamental volatility even when the equilibrium is unique; and (c) similar results obtain for a model where individuals observe one another?s actions, highlighting the importance of endogenous information more generally.

This paper summarizes key aspects of China’s exchange rate policy, outlines the problems it creates for both China and the global economy, and proposes a feasible policy compromise. China’s Currency Regime On July 21, 2005, China announced a 2.1 percent appreciation of the Renminbi (RMB) against the US dollar, a move to a managed float, and a number of other “reforms. ” Most of these “reforms ” simply reiterated long-standing arrangements: since 1994 China has identified its currency regime as a managed float and has set a 0.3 percent per day fluctuation limit (in either direction) for the RMB against the dollar (vis-à-vis the central parity). The July 21 st announcement, however, did pledge two potentially important alterations: (i) the RMB was henceforth to be managed “with reference to a basket of currencies ” rather than being pegged to the dollar; and (ii) the exchange rate was to become “more flexible, ” with its value based more on “market supply and demand.” In practice, the July 21 st reforms have so far had little visible effect. As of mid-

This paper considers whether the disadvantages that accrue to black Americans with a dark skin hue also induce a transition into criminal activity—an outcome consistent with standard economic models of crime. We also examine whether or not prison terms are conditioned on skin hue. With data on black offenders in the state of Mississippi, we estimate Cox proportional hazard specifications of the transition into criminal activity, and find that it is conditioned on the darkness of skin hue. Our parameter estimates are consistent with a theoretical framework in which being black and having a dark skin hue induces a transition into criminal activity by limiting the set of legitimate opportunities for an individual. Given a conviction, we also find that the severity of punishment for black offenders as measured by the length of sentence is an increasing function of the darkness of skin hue. JEL Classification: J0, J7, K4, Z0 ∗Professor and Chair, Department of Economics, College of Business Administration, 4202 E. Fowler Ave, BSN 3403, Tampa, Florida 33620–5500, email: [email protected], Tel # (813) 974-6520, ∗∗Corresponding Author: Director, Mississippi Urban Research Center, Jackson State University, P.O. Box 17309, Jackson Mississippi, 39217, email: [email protected], Tel #: (601), 979-1428. This paper was prepared for presentation at the Annual Meeting of the Allied Social Science Association, joint AEA/NEA paper session on “Skin Tone Discrimination and Economic Outcomes”, January 7, 2006 in Boston, Massachusetts. Conditional on being black there is evidence that skin hue matters for a wide array of socioeconomic outcomes. For example, relative to blacks with a light skin hue, there is evidence that blacks with a dark skin hue fare worse in terms of wages (Goldsmith, Hamilton and Darity, 2005), occupational prestige (Hill, 2000), unemployment ( Hunter, Allen and Telles, 2001), access to health resources (Bodenhorn, 2002), and intergenerational wealth accumulation (Bodenhorn, 2003). Such findings suggest that the distribution of advantage and disadvantage in American life is conditioned not just on being black, but given that one is black, skin hue as well. That skin hue conditions economic outcomes for blacks suggests that profit maximizing firms and utility maximizing individuals optimize across a preference for blacks with light skin hues (Goldsmith, Hamilton and Darity, 2005). If so, the distribution of disadvantage among blacks will fall along a continuum of gradations in skin hue, with disadvantage increasing with respect to the darkness of skin hue. One possible manifestation of disadvantage is crime. In the canonical economic model of crime of Becker (1968) and as extended by Ehrlich (1973), disadvantaged individuals can be viewed as those with constrained opportunities for engaging in legitimate activities, relative to illegitimate activities. To the extent that conditional on being black, opportunities for engaging in legitimate activities are inversely proportional to the darkness of skin hue, the probability of participating in illegitimate activities—crime—may also be conditioned on skin hue. Despite the apparent importance of skin hue in the distribution of advantage and disadvantage, the economics of crime literature tends to view blacks as one homogeneous group. To the extent that skin hue matters, aggregating across black Americans in this manner could lead to biased estimates of the effects of being black on participation in criminal activity, and to inferences that being black is associated with higher stocks of “criminal capital” relative to non-blacks. However, given that race and skin hue determine the distribution of disadvantage among black Americans, the effects of being black on criminal activity may instead reflect the disadvantages that accrue to being black conditional on skin hue. In this paper we consider the effects of skin hue both on the likelihood of participation in criminal activities, and on sentencing for black Americans conditional on being convicted for crime. To the extent that individuals, firms and social institutions optimize across preferences for blacks with a light skin hue, it is plausible that blacks with a dark skin hue face, relative to those with a light skin hue, constraints on opportunities for legitimate activities that motivate illegitimate activities and once arrested, are punished more severely than black offenders with a light skin hue. See for example Ehrlich (1973) and Gyimah-Brempong (1997). The only evidence that we are aware of that links skin hue among blacks with criminal justice issues is that provided by Johnson, Farrell and Stoloff (2000). They found that among black men with prior criminal records in Los Angeles, the jobless rate for those with a dark skin hue was 54 percent—in contrast to 41.7 for those with a light skin hue.

The phenomenon of choice shifts in group decision-making has received attention in the social psychology literature. Faced with a risky group decision, individuals appear to support more extreme choices relative to those they would make on their own. This paper demonstrates that from a decision-theoretic perspective, choice shifts are intimately connected to failures of expected utility theory. In the model studied here, the Allais paradox is equivalent to a well-studied configuration of choice shifts. Thus, our results marry two well-known behavioral regularities, one in individual decision theory and another in the social psychology of groups.

Over the postwar period, many industrialized countries have experienced significant medium-frequency oscillations between periods of robust growth versus relative stagnation. Conventional business cycle filters, however, tend to sweep these oscillations into the trend. In this paper we explore whether they may, instead, reflect a persistent response of economic activity to the high-frequency fluctuations normally associated with the cycle. We define as the medium-term cycle the sum of the high- and medium-frequency variation in the data, and then show that these kinds of fluctuations are substantially more volatile and persistent than are the conventional measures. These fluctuations, further, feature significant procyclical movements in both embodied and disembodied technological change, and research and development (R&D), as well as the efficiency and intensity of resource utilization. We then develop a model of medium-term business cycles. A virtue of the framework is that, in addition to offering a unified approach to explaining the high- and medium-frequency variation in the data, it fully endogenizes the movements in productivity that appear central to the persistence of these fluctuations. For comparison, we also explore how well an exogenous productivity model can explain the facts.

This paper summarizes the main findings and perspectives emerging from a collective research project on the dynamics of income and wealth distribution. The primary objective of this project is to construct a high-quality, longrun, international database on income and wealth concentration, using historical tax statistics. The resulting database now includes annual series covering most of the twentieth century for a number of (mostly Western) countries. 1 The main motivation for this project comes from a general dissatisfaction with existing income inequality databases. Existing international databases display little homogeneity over time or across countries. They cover only a few isolated years per country, generally restricted to the post-1970 or post-1980 period. They almost never offer any decomposition of income inequality into a labor-income and a capitalincome component. Economic mechanisms can be very different for the distribution of labor income (demand and supply of skills, labor market institutions, etc.) and the distribution of capital income (capital accumulation, credit constraints, inheritance law and taxation, etc.), so that it is difficult to test any of these mechanisms using existing data. The fact that existing data are not long run is also problematic, because structural changes in income and wealth distribution often span several decades.