Knowledge that Transforms

Fifteen years after reunification, the economy of the former East Germany is on the mend. Industrial production excluding construction has expanded by more than 60 percent since 1995 and by 28 percent since 2000, compared with only about 4 percent in West Germany, for the latter period. Real GDP has grown 3.5 percent per year since 1991 and 8.2 percent annually in the manufacturing industry alone. More than half of the measured labor productivity gap and more than a third of the GDP per capita gap between East and West have been closed, in considerably less time than predicted by Robert J. Barro (1991). As Table 1 shows, convergence has been impressive on a wide array of indicators, although it has slowed in recent years and remains most difficult in the labor market. Despite this positive news, net migration continues from East to West—about 70,000, or 0.5 percent of the population, per annum since 2000, especially concentrated among 18to 25year-olds. At the same time, new physical capital continues to flow into the East—80 to 90 billion euros, or about 20 percent of GDP each year. The reallocation of production factors is one of the most impressive aspects of German unification. Since 1991, more than 1.2 trillion euros of new investment (in 1995 prices) was spent in the East, yet the workforce of East Germany shrank by roughly 1.2 million, or 15 percent, over the same period; employment rose in the West by 4.1 percent. As Figure 1 shows, the intensity of factor movement was not constant, but rather high at first, and declining into the 1990s. Migration was greatest in the early 1990s, falling until mid-decade, rising again until 2001, and declining since. In addition, a large fraction (two-thirds) of the cumulated investment flow in Eastern Germany was dedicated to residential and business structures, compared with about one-third in business equipment. The large runup in investment spending on structures is often blamed on distorted investment incentives, with possible longer-run consequences for the structure of output and factor demands (Hans-Werner Sinn and Gerlinde Sinn, 1992). This intensive movement of production factors in opposite directions is difficult to explain as a reaction to disturbances in technology, preferences, or demand. To use Horst Siebert’s (1992) terminology, Germany was hit by a massive integration shock. I offer the following definition of economic integration: the achievement of the efficient production pattern by two or more geographic regions made possible by their union, measured at world market prices. The German integration episode presents a unique opportunity to study this form of economic integration and the roles of the relative importance of adjustment costs in determin† Discussants: Hans-Werner Sinn, CES-ifo and University of Munich; Nicola Fuchs-Schundeln, Harvard University; Claudia Buch, University of Tubingen.

We analyze the effect of economic conditions early in life on individual mortality rate later in life, using business cycle conditions early in life as an exogenous indicator. Individual records from Dutch registers of birth, marriage, and death, covering a window of unprecedented size (1912–2000) are merged with historical data on macroeconomic and health indicators. We correct for secular changes over time and other mortality determinants. We nonparametrically compare those born in a recession to those born in the preceding boom, and we estimate duration models where the individual's mortality rate depends on current conditions, conditions early in life, age individual characteristics, including individual socioeconomic indicators, and interaction terms. The results indicate a significant negative effect of economic conditions early in life on individual mortality rates at all ages.

Empirical evidence suggests that most advertisements contain little direct information. Many do not mention prices. We analyze a monopoly firm's choice of advertising content and the information disclosed to consumers. The firm advertises only product information, price information, or both, and prefers to convey only limited product information if possible. It is socially harmful to force it to provide full information if it has sufficient ability to parse the information imparted, nor does it help to restrict the information voluntarily provided.

We study dynamic monopoly pricing of storable goods in an environment where demand changes over time. The literature on durables has focused on incentives to delay purchases. Our analysis focuses on a different intertemporal demand incentive. The key force on the consumer side is advance purchases or stockpiling. In the case of storable goods, the stockpiling motive has recently been documented empirically. We show that, in this environment, if the monopolist cannot commit, then prices are higher in all periods, and social welfare is lower, than in the case in which the monopolist can commit. This is in contrast with the analysis in the literature on the Coase conjecture.

The Effects of the 2003 Dividend Tax Cut on Corporate Behavior: Interpreting the Evidence by Raj Chetty and Emmanuel Saez. Published in volume 96, issue 2, pages 124-129 of American Economic Review, May 2006

This paper addresses the question of how traditional institutions interact with the forces of globalization to shape the economic mobility and welfare of particular groups of individuals in the new economy. We explore the role of one such traditional institution—the caste system—in shaping career choices by gender in Bombay using new survey data on school enrollment and income over the past 20 years. We find that male working-class—lower-caste—networks continue to channel boys into local language schools that lead to the traditional occupation, despite the fact that returns to nontraditional white-collar occupations rose substantially in the 1990s, suggesting the possibility of a dynamic inefficiency. In contrast, lower-caste girls, who historically had low labor market participation rates and so did not benefit from the network, are taking full advantage of the opportunities that became available in the new economy by switching rapidly to English schools.

This paper discusses five questions the incoming chairman of the Federal Reserve must ponder as he assumes his new post. How important are monetary rules? Should the Fed adopt inflation targeting? Should he be free with his opinions? Should he be a high-profile public figure? Is it more important to be good or lucky?

This paper analyses the compensatory behavior of smokers. Exploiting data on cotinine concentration--a metabolite of nicotine--measured in a large population of smokers over time, we show that smokers compensate for tax hikes by extracting more nicotine per cigarette. Our study makes two important contributions. First, as smoking a given cigarette more intensively is detrimental to health, our results question the usefulness of tax increases. Second, we develop a model of rational addiction where agents can also adjust their intensity of smoking, and we show that the previous empirical results suffer from estimation biases.

Incentives and Student Learning: A Natural Experiment with Economics Problem Sets by Wayne A. Grove and Tim Wasserman. Published in volume 96, issue 2, pages 447-452 of American Economic Review, May 2006