Knowledge that Transforms

Recent empirical evidence demonstrates the presence of an important long-memory component in realized asset return volatility. We specify and estimate multivariate models for the joint dynamics of stock returns and volatility that allow for long memory in volatility without imposing this property on returns. Asset pricing theory imposes testable cross-equation restrictions on the system that are not rejected in our preferred specifications, which include a strong financial leverage effect. We show that the impact of volatility shocks on stock prices is small and short lived, in spite of a positive risk-return tradeoff and long memory in volatility.

We develop an econometric model where the determinants of working while in school, academic performance, and the decision to drop out are set in the context of two types of high school students: those who prefer schooling and those who are more likely to join the labor market. The likelihood function of this model with heterogeneous preferences for schooling is composed of 48 individual contributions of a standard quadrivariate normal function. Exploiting a unique Canadian microdata set of high school students and school dropouts, we show that being a female student, attending a private school, and living with educated parents are linked to having a strong preference for schooling over the labor market. We also find that working fewer than fifteen hours per week while in school is not necessarily detrimental to success in school. Our results indicate that the decision to drop out is affected by the legal age to access the labor market, high minimum wages, and low unemployment rates. Several policies that aim at reducing the number of high school dropouts are identified.

We use administrative data from Missouri to examine the sensitivity of earnings impact estimates for a job training program based on alternative nonexperimental methods. We consider regression adjustment, Mahalanobis distance matching, and various methods using propensity-score matching, examining both cross-sectional estimates and difference-in-difference estimates. Specification tests suggest that the difference-in-difference estimator may provide a better measure of program impact. We find that propensity-score matching is most effective, but the detailed implementation is not of critical importance. Our analyses demonstrate that existing data can be used to obtain useful estimates of program impact.

The World Health Organization estimates that 300 million clinical cases of malaria occur annually and observed that during the 80s and part of the 90s its incidence increased. In this paper, we explore the influence of refugees from civil wars on the incidence of malaria in the refugee-receiving countries. Using civil wars as an instrumental variable, we show that for each 1,000 refugees there are between 2,000 and 2,700 cases of malaria in the refugee-receiving country. On average 13% of the cases of malaria reported by the WHO are caused by forced migration as a consequence of civil wars.

The impact of candidate campaign spending on votes and abstention in multiparty elections is estimated from the specification of a structural model of voter behavior. This model accounts for the endogeneity of campaign spending as well as the heterogeneity in voter preferences. Empirical results are estimated from aggregate (actual) election data. The results demonstrate the importance of spending during the campaign period and voter heterogeneity with respect to these expenditures. The own- and cross-expenditure vote share elasticity estimates reveal that political campaign spending not only redistributes voters across parties but also decreases the size of the abstaining group of the electorate.

Many urban growth controls attempt to check sprawl by restricting allowable new housing densities. However, land may be undeveloped to preserve its real-option value. Real options in land markets arise from uncertainty as to the optimum use of a site. By limiting allowable development choices, growth controls can narrow real options and potentially accelerate investment. This paper examines the effect of price volatility, a generator of option value, on the timing of development after the imposition of an Urban Growth Boundary (UGB) around Seattle. While the net effect of the UGB is to lower the likelihood of new housing outside the boundary by between 28% and 39%, price volatility is no longer a deterrent to development.

We develop a test of precautionary behavior in the consumption decisions of rural agricultural households. Among surveyed households facing a median level of consumption risk, 10% of savings can be attributed to a precautionary motive, and this increases to 15% for households with consumption per capita below the poverty line. We next use distant lags of local rainfall shocks uncorrelated with current consumption growth to identify the size of migrant networks outside the village, and then present evidence that both poor and nonpoor households engage in less precautionary saving as the size of the village migrant network increases. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Using U.S. state-level data we show that agglomeration externalities influence the level of foreign-invested capital in a location. Our empirical model allows the separation of agglomeration effects from the rate of capital stock adjustment, two forces that previous research has conflated. We estimate an agglomeration elasticity of investment of 0.11 to 0.15 with respect to same-source-country investment, lower than previous estimates. We also investigate the influence of state policies and find that although general investment incentives do not affect the location of FDI, targeted policies such as unitary taxation and state foreign offices influence investment.

This paper examines the impact of the birth rate on economic growth by using a panel data set of 28 provinces in China over twenty years. Because China's one-child policy applied only to the Han Chinese but not to minorities, this unique affirmative policy allows us to use the proportion of minorities in a province as an instrumental variable to identify the causal effect of the birth rate on economic growth. We find that the birth rate has a negative impact on economic growth. The finding not only supports the view of Malthus, but also suggests that China's birth control policy is indeed growth enhancing.

This paper documents the widely perceived but little investigated notion that teachers today are less qualified than they once were. Evidence of a marked decline in the quality of young women going into teaching between 1960 and 1990 is presented, using standardized test scores, undergraduate institution selectivity, and positive assortative mating characteristics as indicators of quality. In contrast, the quality of young women becoming professionals increased. The Roy model of self-selection highlights how occupational differences in the returns to skill determine teacher quality. Estimates suggest the significance of increasing professional opportunities for women in affecting the decline in teacher quality.