Knowledge that Transforms

To investigate whether secondary markets aid or harm durable goods manufacturers, we build a dynamic model of durable goods oligopoly with transaction costs in the secondary market. Calibrating model parameters using data from the US automobile industry, we find the net effect of opening the secondary market is to decrease new car manufacturers' profits by 35 percent. Counterfactual scenarios in which the size of the used good stock decreases, such as when products become less durable, when the number of firms decreases, or when firms can commit to future production levels, increase the profitability of opening the secondary market.

Do the repayment requirements of the classic microfinance contract inhibit investment in high-return but illiquid business opportunities among the poor? Using a field experiment, we compare the classic contract which requires that repayment begin immediately after loan disbursement to a contract that includes a two-month grace period. The provision of a grace period increased short-run business investment and long-run profits but also default rates. The results, thus, indicate that debt contracts that require early repayment discourage illiquid risky investment and thereby limit the potential impact of microfinance on microenterprise growth and household poverty.

We consider a dynamic economy in which agents are repeatedly matched and decide whether or not to form profitable partnerships. Each agent has a physical color and a social color. An agent's social color acts as a signal, conveying information about the physical color of agents in his partnership history. Before an agent makes a decision, he observes his match's physical and social colors. Neither the physical color nor the social color is payoff relevant. We identify environments where equilibria arise in which agents condition their decisions on the physical and social colors of their potential partners. That is, they discriminate.

We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates “standard” risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions—characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes—play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. We demonstrate that neither Kőszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting.

We present evidence on the level of and trend in inequality from 1985-2010 in the United States, using disposable income and consumption for a sample of individuals from the Consumer Expenditure (CE) Survey. Differing from the findings in other recent research, we find that the trends in income and consumption inequality are broadly similar between 1985 and 2006, but diverge during the Great Recession with consumption inequality decreasing and income inequality increasing. Given the differences in the trends in inequality in the last four years, using both income and consumption provides useful information.

Dissertations in economics have changed dramatically over the past forty years, from primarily treatise-length books to sets of essays on related topics. We document trends in essay-style dissertations across several metrics, using data on dissertation format, PhD program characteristics, demographics, job market outcomes, and early career research productivity for two large samples of US PhDs graduating in 1996-1997 or 2001-2002. Students at higher ranked PhD programs, citizens outside the United States, and microeconomics students have been at the forefront of this trend. Economics PhD graduates who take jobs as academics are more likely to have written essay-style dissertations, while those who take government jobs are more likely to have written a treatise. Finally, most of the evidence suggests that essay-style dissertations enhance economists' early career research productivity.

We adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates. We find that one shock can explain the majority of unpredictable movements in the slope. Impulse response functions lead us to interpret this shock as news about future total factor productivity (TFP). By showing that “slope shocks” are essentially “TFP news shocks” we provide a new explanation for the relationship between the slope and macroeconomic fundamentals. Our results also provide a new empirical benchmark for structural models at the intersection of macroeconomics and finance.

The share of household resources devoted to children is hard to identify because consumption is measured at the household level and goods can be shared. Using semiparametric restrictions on individual preferences within a collective model, we identify how total household resources are divided up among household members by observing how each family member's expenditures on a single private good like clothing vary with income and family size. Using data from Malawi we show how resources devoted to wives and children vary by family size and structure, and we find that standard poverty indices understate the incidence of child poverty.

This study investigates three questions: (i) are there differences in teaching and research behavior between economists and other professors; (ii) do economists in the top 100 research departments allocate time differently than faculty in other disciplines at similarly ranked departments; and (iii) do professors respond to changes in incentives in allocating their time? The study uses data from the National Study of Postsecondary Faculty (NSOPF). The study specifies a regression equation controlling for institutional incentives to compare time allocation to teaching and research for economics professors and faculty members in math, physics, psychology, political science and business.