Knowledge that Transforms

We examine the link between wage and consumption inequality using a life-cycle model incorporating consumption and family labor supply decisions. We derive analytical expressions for the dynamics of consumption, hours, and earnings of two earners in the presence of correlated wage shocks, nonseparability, progressive taxation, and asset accumulation. The model is estimated using panel data for hours, earnings, assets, and consumption. We focus on family labor supply as an insurance mechanism and find strong evidence of smoothing of permanent wage shocks. Once family labor supply, assets, and taxes are properly accounted for there is little evidence of additional insurance. (JEL D12, D14, D91, J22, J31)

The proliferation of big data makes it possible to better target city services like hygiene inspections, but city governments rarely have the in-house talent needed for developing prediction algorithms. Cities could hire consultants, but a cheaper alternative is to crowdsource competence by making data public and offering a reward for the best algorithm. A simple model suggests that open tournaments dominate consulting contracts when cities can tolerate risk and when there is enough labor with low opportunity costs. We also report on an inexpensive Boston-based restaurant tournament, which yielded algorithms that proved reasonably accurate when tested “out-of-sample” on hygiene inspections.

We develop a quantitative equilibrium model of financial crises to assess the interaction between ex post interventions in credit markets and the buildup of risk ex ante. During a systemic crisis, bailouts relax balance sheet constraints and mitigate the severity of the recession. Ex ante, the anticipation of such bailouts leads to an increase in risk-taking, making the economy more vulnerable to a financial crisis. We find that moral hazard effects are limited if bailouts are systemic and broad-based. If bailouts are idiosyncratic and targeted, however, this makes the economy significantly more exposed to financial crises. (JEL E23, E32, E44, E63, G01, G21, G28)

We use a natural experiment in Indonesia to provide causal evidence on the role of location-specific human capital and skill transferability in shaping the spatial distribution of productivity. From 1979–1988, the Transmigration Program relocated two million migrants from rural Java and Bali to new rural settlements in the Outer Islands. Villages assigned migrants from regions with more similar agroclimatic endowments exhibit higher rice productivity and nighttime light intensity one to two decades later. We find some evidence of migrants' adaptation to agroclimatic change. Overall, our results suggest that regional productivity differences may overstate the potential gains from migration. (JEL J24, J43, J61, O13, O15, Q13, R23)

Conventional wisdom has it that in the 1930s fiscal policy did not work because it was not tried. This paper shows that fiscal policy was tried in 1936. The veterans' bonus of 1936 paid 2 percent of GDP to 3.2 million veterans; the typical veteran received a payment equal to per capita income. Multiple sources, including a household consumption survey, show that veterans spent the majority of their bonus. Point estimates of the MPC are between 0.6 and 0.75. Spending was concentrated on cars and housing in particular. (JEL E21, E32, E62, N32, N42)

We develop a macroeconomic model with banking instability. Sunspot runs can arise that are harmful to the economy. However, whether a run equilibrium exists depends on fundamentals. In contrast to earlier work, the probability of a sunspot run is the outcome of rational forecast based on fundamentals. The model captures the movement from slow to fast runs that was a feature of the Great Recession: A weakening of banks' balance sheets increases the probability of a run, leading depositors to withdraw funds from banks. These slow runs have harmful effects on the economy and set the stage for fast runs.

This paper uses the Household Finance and Consumption Survey to construct new estimates of top wealth shares in Germany, France, Spain, Italy, Belgium, Austria, Finland and The Netherlands. It provides a methodology to address simultaneously non-response and underreporting in wealth surveys.

This paper examines the impact of the Federal Reserve's founding on seasonal pressures and contagion risk in the interbank system. Deposit flows among classes of banks were highly seasonal before 1914; amplitude and timing varied regionally. Panics interrupted normal flows as banks throughout the country sought funds from the central money markets simultaneously. Seasonal pressures and contagion risk in the system were lower by the 1920s, when the Fed provided seasonal liquidity and reserves. Panics returned in the 1930s, due in part to shocks from nonmember banks and because the Fed's decentralized structure hampered a vigorous response to national crises.

An increase in a married woman's attachment to the labor market affected her family's ability to smooth unexpected income shocks. Between 1970 and 1990, the sharp rise in labor market attachment provided an increasingly important channel for smoothing shocks to spousal income. As the participation rate stabilized, this contribution to smoothing evened out. In the Great Recession, both spouses received negative income shocks, and access to transfer income became the main insurance mechanism. Volatility of consumption followed volatility of family income trends but at a lower magnitude. Families' ability to weather income shocks didn't change during the 1970-2010 period.

This comment assesses the claim of The Rise and Fall of American Growth that for coming decades, growth in US TFP will continue the disappointing pace of the last decade. While predicting future technological advance is difficult, there are indications that Gordon may actually be too optimistic on future TFP growth. The share of output from manufacturing, which still generates the majority of R&D expenditures, and has historically more rapid TFP growth, will continue to fall. There are substantial obstacles to rapid TFP advance in much of the rest of the economy: construction, transport, health care and other services.