Knowledge that Transforms

Capital Flows and Macroeconomic Performance: Lessons from the Golden Era of International Finance by Lee E. Ohanian and Mark L. J. Wright. Published in volume 100, issue 2, pages 68-72 of American Economic Review, May 2010

This paper studies equilibrium behavior in a class of games that models asymmetric competitions with unconditional and conditional investments. Such competitions include lobbying settings, labor-market tournaments, and R&D races, among others. I provide an algorithm that constructs the unique equilibrium in these games and apply it to study competitions in which a fraction of each competitor's investment is sunk and the rest is paid only by the winners. Complete-information all-pay auctions are a special case.

The incidence of bilateral trade costs is calculated here using neglected properties of the structural gravity model, disaggregated by commodity and region, and re-aggregated into forms useful for economic geography. For Canada's provinces, 1992–2003, sellers' incidence is on average some five times higher than buyers' incidence. Sellers' incidence falls over time due to specialization, despite constant gravity coefficients. This previously unrecognized globalizing force drives big reductions in “constructed home bias,” the disproportionate predicted share of local trade; and large but varying gains in real GDP.

Using data on user attributes and interactions from an online dating site, we estimate mate preferences, and use the Gale-Shapley algorithm to predict stable matches. The predicted matches are similar to the actual matches achieved by the dating site, and the actual matches are approximately efficient. Out-of-sample predictions of offline matches, i.e., marriages, exhibit assortative mating patterns similar to those observed in actual marriages. Thus, mate preferences, without resort to search frictions, can generate sorting in marriages. However, we underpredict some of the correlation patterns; search frictions may play a role in explaining the discrepancy.

Gaps in educational performance between whites and racial minorities are not present at early ages but do emerge early in the schooling years and increase over time (Roland Fryer and Steve Levitt 2006, forthcoming). James Heckman (2007) assembles evidence from both the bio logical and social sciences which highlights the dynamic complementarity of the learning pro cess?the notion that early learning is vital for learning later on. A recent literature in econom ics finds evidence that the returns to early invest ments in children yield high returns to society (Heckman and Dimitriy Masterov 2007). That educational gaps exist and worsen over time is troubling as educational attainment is associated with a host of socioeconomic outcomes such as health, earnings, and wealth (David Cutler and Adriana Lleras-Muney 2008). At the same time, gaps in educational performance and outcomes are but one dimension of racial inequality. One area of research has been with respect to racial health disparities, which unlike educational dis parities appear at very early ages and increase over time (Linda Dynan (2009) provides a lit erature review). Little work, however, directly analyzes how health disparities in children may impact other outcomes.1 The fact that health out comes may lead to socioeconomic differences which themselves may lead to further health and

Medicare Part D began coverage of prescription drugs in 2006. Rather than setting pharmaceutical prices, the government contracted with private insurers to provide drug coverage. Theory suggests that additional insured consumers will raise the optimal price of a branded drug, while the insurer's ability to move demand to substitute treatments may lower prices. We estimate the program's effect on the price and utilization of pharmaceutical treatments. We find that Part D enrollees paid substantially lower prices than while uninsured, and increased their utilization of prescription drugs. We find relative price declines only for drugs with significant therapeutic competition.

The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed.

Conventional wisdom says that, in the absence of default penalties, sovereign risk destroys all foreign asset trade. We show that this conventional wisdom rests on one implicit assumption: that assets cannot be retraded in secondary markets. Without this assumption, foreign asset trade is possible even in the absence of default penalties. This result suggests a broader perspective regarding the origins of sovereign risk and its remedies. Sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly. To reduce its effects, one can either increase default penalties or improve the working of secondary markets.

American Economic Association Universal Academic Questionnaire Summary Statistics by Charles E. Scott and John J. Siegfried. Published in volume 100, issue 2, pages 647-50 of American Economic Review, May 2010