Knowledge that Transforms

This reply to Cascaldi-Garcia's (2017) comment argues that by using the original code of Kurmann and Otrok (2013) with new data on utilization-adjusted TFP, Cascaldi-Garcia (2017) confounds positive and negative news shocks. With a small modification to the code—how a news shock is signed as positive—we obtain news shock responses consistent with Sims (2016) and Kurmann and Sims (2017) and largely reestablish the results of Kurmann and Otrok (2013). (JEL E23, E32, E43, E52, G12, G14)

We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 US financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government provides liquidity in exchange for illiquid private paper? We find that the effects of the liquidity shock can be large, and show some numerical examples in which the liquidity facilities of the Federal Reserve prevented a repeat of the Great Depression in the period 2008–2009. (JEL E13, E31, E43, E44, E52, E58, G01)

We study a common value, first-price auction in which the number of bidders is endogenous: the seller (auctioneer) knows the value and solicits bidders at a cost. The number of bidders, which is unobservable, may thus depend on the true value. Therefore, being solicited conveys information. This solicitation effect may soften competition and impede information aggregation. Under certain conditions, there is an equilibrium in which the seller solicits many bidders, yet the resulting price is not competitive and fails to aggregate any information. More broadly, these ideas are relevant for markets with adverse selection in which informed traders initiate contacts. (JEL D44, D82)

We quantify how sensitive is migration by star scientists to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists' migration patterns. The long-run elasticity of mobility relative to taxes is 1.8 for personal income taxes, 1.9 for state corporate income tax, and −1.7 for the investment tax credit. While there are many other factors that drive when innovative individuals and innovative companies decide to locate, there are enough firms and workers on the margin that state taxes matter. (JEL H24, H25, H71, H73, J44, J61, R32)

A seller designs a mechanism to sell a single object to a potential buyer whose private type is his incomplete information about his valuation. The seller can disclose additional information to the buyer about his valuation without observing its realization. In both discrete-type and continuous-type settings, we show that discriminatory disclosure—releasing different amounts of additional information to different buyer types—dominates full disclosure in terms of seller revenue. An implication is that the orthogonal decomposition technique, while an important tool in dynamic mechanism design, is generally invalid when information disclosure is part of the design. (JEL D11, D82, D83)

Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the US economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. We find that the interest-rate lower bound was a significant constraint on monetary policy that exacerbated the recession and inhibited the recovery, as our mean estimates imply that the zero lower bound (ZLB) accounted for about 30 percent of the sharp contraction in US GDP that occurred in 2009 and an even larger fraction of the slow recovery that followed. (JEL C11, C32, E12, E23, E32, E43, E52, G01)

This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned toward narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact. The 1920–1921 Depression, the Great Depression of the 1930s, the so-called Great Recession of 2007–2009, and the contentious political-economic situation of today are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future. (JEL D72, E32, G01, N10)

Several agents with privately known social values compete for a prize. The prize is allocated based on the claims of the agents, and the winner is subject to a limited penalty if he makes a false claim. If the number of agents is large, the optimal mechanism places all agents above a threshold onto a shortlist along with a fraction of agents below the threshold, and then allocates the prize to a random agent on the shortlist. When the number of agents is small, the optimal mechanism allocates the prize to the agent who makes the highest claim, but restricts the range of claims above and below. (JEL D63, D82)

We analyze sequential, binary voting schemes in settings where several privately informed agents have single-peaked preferences over a finite set of alternatives, and we focus on robust equilibria that do not depend on assumptions about the players' beliefs about each other. Our main results identify two intuitive conditions on binary voting trees, ensuring that sincere voting at each stage forms an ex post perfect equilibrium. In particular, we uncover a strong rationale for content-based agendas: if the outcome should not be sensitive to beliefs about others, nor to the deployment of strategic skills, the agenda needs to be built “from the extremes to the middle” so that more extreme alternatives are both more difficult to adopt, and are put to vote before other, more moderate options. An important corollary is that, under simple majority, the equilibrium outcome of the incomplete information game is always the Condorcet winner. Finally, we aim to guide the practical design of schemes that are widely used by legislatures and committees and we illustrate our findings with several case studies. (JEL D71, D72, I10, J16, J32, K10)

Kurmann and Otrok (2013) establish that the effects on economic activity from news on future productivity growth are similar to the effects from unexpected changes in the slope of the yield curve. This comment shows that these results become substantially weaker in the light of a recent update in the utilization-adjusted total factor productivity series produced by Fernald (2014). (JEL E23, E32, E43, E52, G12)