Knowledge that Transforms

From a macroeconomic perspective, the shortterm interest rate is a policy instrument under the direct control of the central bank, which adjusts the rate to achieve its economic stabilization goals. From a finance perspective, the short rate is a fundamental building block for yields of other maturities, which are just riskadjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. In this paper, we discuss some salient questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term-structure models. I. Questions about Modeling Yields 1. Why Use Factor Models for Bond Yields?—The first problem faced in term-structure modeling is how to summarize the price information at any point in time for the large number of nominal bonds that are traded. In fact, since only a small number of sources of systematic risk appear to underlie the pricing of the myriad of tradable financial assets, nearly all bond price information can be summarized with just a few constructed variables or factors. Therefore, yield-curve models almost invariably employ a structure that consists of a small set of factors and the associated factor loadings

Patent Citations and the Geography of Knowledge Spillovers: A Reassessment by Peter Thompson and Melanie Fox-Kean. Published in volume 95, issue 1, pages 450-460 of American Economic Review, March 2005

We provide a model showing that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average safety of products sold than would occur if the firm were committed to openness. A rational risk-neutral consumer's response in a market, wherein a firm engages in confidential settlements, may be to reduce demand. A firm committed to openness incurs higher liability and R&D costs, though product demand is not diminished. We identify conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm prefers to eschew confidentiality.

We analyze race discrimination in labor markets in which wage offers are posted. If employers with job vacancies receive multiple applicants, they choose the most qualified but may choose arbitrarily among equally qualified applicants. In the model, firms post wages, workers choose where to apply, and firms decide which workers to hire. Labor-market frictions greatly amplify racial disparities, so mild discriminatory tastes or small productivity differences can produce large wage differentials between the races. Compared with the nondiscriminatory equilibrium, the discriminatory equilibrium features lower net output, lower wages for both white and black workers and greater profits for firms.(This abstract was borrowed from another version of this item.)

We propose an evolutionary explanation for the pattern of intertemporal preference reversals often ascribed to hyperbolic discounting. We take the view that preferences—manifested, for example, in urges, cravings, and inclinations— are the outcome of evolutionary forces, and so will induce animals or humans to make survival-maximizing choices in decision problems. We show that if the typical problem involves payoffs whose realization times are uncertain, then optimal preferences give rise to relatively patient behavior when the time horizon is long but induce a switch to impatience when the horizon grows short. Such reversals do not entail dynamic inconsistency in typical decision problems; behavior there is optimal. However, if a decision-maker is confronted with a choice for which the realization-time uncertainty falls outside the evolutionary norm, her preferences may well prompt her to behave inconsistently. We argue that, if such a choice problem recurs, her evolutionarily endowed aability to learn will lead her to make self-commitments against these urges.(This abstract was borrowed from another version of this item.)

Rising levels of foreign direct investment (FDI) concern growing numbers of policymakers and members of the American public. These concerns stem from the perception that foreign activities of American multinational corporations reduce employment and other economic activities within the United States. While investment flows within the United States go largely unnoticed, in an international setting the lexicon of “winners” and “losers” can be inescapable. Curiously, both capital-exporting countries and capital-importing countries have at times expressed concern over the consequences of international capital flows. Capital-exporting countries worry that too much of their capital goes abroad, while capital-importing countries fear foreign control of domestic assets and the possible macroeconomic instability associated with rapid changes in foreign investment levels. The concerns of capital-exporting countries, while diffuse, often are based on conceptions of outbound FDI as diverting economic activity. Unsurprisingly, growing overseas activities of multinational firms have become a source of economic insecurity for workers, managers, and tax collectors (see e.g., Kenneth F. Scheve and Matthew J. Slaughter, 2001).

This paper shows that a country’s wealth can be an important determinant of comparative advantage when access to credit differs across sectors of the economy. Wealthier nations exhibit a comparative advantage toward goods produced in sectors facing more severe financial imperfections. These sectors are typically populated by small firms. Empirically this paper documents that these sectors are also labor intensive. Consequently, this theory partially offsets traditional sources of comparative advantage and offers an explanation for Trefler’s missing trade mystery and the Leontief paradox. Furthermore, the theory makes the relation between trade and income distribution endogenous.

We reassess the empirical robustness of the empirical findings in Jere R. Berhman and Mark R. Rosenzweig (2002) using new information on schooling which was collected and coded independently of codings carried out by both Kate Antonovics and Arthur Goldberger, and Berhmamn and Rosenzweig. We conclude that the independently coded data and the codings by Antonovics and Goldberger provide additional support for Behrman and Rosenzweig's original results showing that the positive cross-sectional relationship between a mother's schooling and her child's schooling is not robust to controls for unmeasured, intergenerationally correlated endowments, while the positive effect of paternal schooling is robust.

There is a large body of literature that concludes that—when confronted with increased competition—banks rationally choose more risky portfolios. We argue that this literature has had a significant influence on regulators and central bankers. We review the empirical literature and conclude that the evidence is best described as “mixed.” We then show that existing theoretical analyses of this topic are fragile, since there exist fundamental risk‐incentive mechanisms that operate in exactly the opposite direction, causing banks to become more risky as their markets become more concentrated. These mechanisms should be essential ingredients of models of bank competition.