Knowledge that Transforms

We investigate how technologies that reduce the costs of monitoring by central authorities have shaped the historical transition from small patrimonial states to large bureaucratic organizations. Our analysis is based on a novel dataset that traces changes in the organizational structure and geographic presence of the U.S. federal government over the nineteenth century. To identify causal effects, we develop a new identification strategy that exploits the expansion of the railroad network as a source of variation in the travel time–and thus monitoring costs–between Washington D.C. and other locations. We present three main findings. First, reductions in travel time to Washington D.C. significantly increased the likelihood of federal government presence in a location. Second, this effect is stronger for occupations and tasks characterized by more severe agency problems. Third, decreases in travel time to Washington D.C. are associated with a decline in patrimonial features of the federal government in the location, in line with enhanced monitoring capacity reducing dependence on personal trust and connections.

I develop a unified theoretical framework with schools and residential choices to study the welfare consequences of public schools’ switching from the traditional neighbourhood assignment to the deferred acceptance mechanism. I find that when families receive higher priorities at neighbourhood schools, the deferred acceptance mechanism creates higher aggregate or utilitarian welfare than neighbourhood assignment. Under a common school ranking assumption, I also show that the deferred acceptance creates higher aggregate welfare with neighbourhood priorities than without them.

We study collusion among firms against imperfectly monitored environmental regulation. Firms increase variable profits by violating regulation and reduce expected noncompliance penalties by violating jointly. We consider a case of three German automakers colluding to reduce the effectiveness of emissions control technology. By estimating a structural model of the European automobile industry from 2007 to 2018, we find that collusion lowers expected noncompliance penalties substantially and increases buyer and producer surplus. Due to increased pollution, welfare decreases by € 1.57–5.57 billion. We show how environmental policy design and antitrust play complementary roles in preventing noncompliance.

This paper studies the long-term effects of technology and know-how transfers on structural transformations. In the 1950s, the Soviet Union supported the construction of the 156 Projects, which were large-scale, capital-intensive industrial clusters in China. These projects included a technology transfer, consisting of state-of-the-art Soviet machinery and equipment, and a know-how transfer, via the training of Chinese engineers, production supervisors, and high-skilled technicians by Soviet experts. We use newly assembled data that follow steel plants for over four decades, and we exploit natural variation in the transfers they eventually received. We find that, while production advantages stemming from Soviet technology faded away if not complemented with training, the know-how transfer had a long-lasting impact on plant performance, stimulated technology upgrade when China was a closed economy, and increased exports to the Western world when China engaged in international trade. The know-how transfer also generated productivity and technology spillovers onto complementary establishments.

When employers face a trade-off between being large and paying low wages—and in this sense have monopsony power—some productive employers decide against building large business networks, forgo sales, and remain small. These decisions have adverse consequences for aggregate labour productivity. Using high-quality administrative data from Germany, we document that East German plants (compared to West German ones) face steeper size-wage curves, invest less in their business networks, remain smaller, and are less productive. A model with labour market monopsony, product market power, and business network investments matching these features of the data predicts a 10% lower aggregate labour productivity in East Germany.

We study empirically and theoretically the effects of international financial flows on resource allocation. Using the universe of firms in Hungary, we show that removing capital controls lowers firms’ cost of capital and increases household consumption, with the latter playing a dominant role. The consumption channel leads to reallocation of resources toward high expenditure elasticity activities—such as services—promoting both the expansion of incumbents and firm entry. A multi-sector heterogeneous firm model replicates these dynamics. Our model shows that nonhomotheticity in consumption can quantitatively account for the reallocation of resources towards services and successfully replicates the dynamics of aggregate productivity following episodes of financial openness.

We analyse discontinuous Markovian strategies for differential games. The best response correspondence uniquely maps almost all profiles of opponents’ strategies back to the strategy space. We thus make Markov-perfect equilibria in a wide class of differential games well-behaved, resolving a long-standing open problem. We provide a readily applicable necessary and sufficient condition for best responses and Markov-perfect Nash equilibria. We demonstrate our methods in a canonical model of non-cooperative mitigation of climate change. Our approach provides novel, economically important results: we obtain the entire set of symmetric Markov-perfect equilibria and demonstrate that the best equilibria can yield a major welfare improvement over the equilibrium which previous literature has focused on. International climate negotiations can be seen as being about coordination on good equilibria, rather than about bargaining over the limited surplus available in a dynamic prisoner’s dilemma.

We study aggregate capital dynamics in an investment model with idiosyncratic productivity shocks, fixed capital adjustment costs, and irreversibility driven by a wedge between capital purchase and resale prices. We derive sufficient statistics that capture the role of investment frictions in aggregate capital fluctuations, measure these statistics using investment microdata, and exploit them to discipline the capital price wedge. Irreversibility doubles the persistence of capital fluctuations and is crucial for reconciling micro-level investment behaviour with macroeconomic propagation.

How do localized conflicts disrupt supply chains and prompt firms to reorganize them? How do these forces affect firm-level and aggregate economic activity? Using firm-to-firm Ukrainian railway-shipment data before and during the 2014 Russia–Ukraine conflict, we document that firms with prior supplier and buyer exposure to the conflict areas substantially decreased their output. Simultaneously, firms reorganized their production linkages away from partners directly or indirectly exposed to the conflict shock. We build a general-equilibrium production-network model with endogeneous link formation, and we show that our model’s sufficient statistics accurately explains the observed relative decline in firm output once we account for network reorganization. Calibrating our model to the Ukrainian economy, we find that the localized conflict decreased aggregate output in nonconflict areas by 5.5%. This effect increases to 8.4% if we abstract from endogeneous link formation, suggesting that production-network reorganization partially mitigates the detrimental, far-reaching aggregate economic costs of conflicts.

Non-family-based institutions for socializing young people may play a vital role in creating close-knit, inclusive communities. We study the potential for youth camps—integrating rituals, sports, and civics training—to strengthen intergroup cohesion. We randomly assigned Hindu and Muslim adolescent boys, from West Bengal, India, to 2-week camps or to a pure control arm. To isolate mechanisms, we cross-randomized collective rituals (such as singing the national anthem, wearing uniforms, chanting support during matches, and synchronous dancing) and the intensity of intergroup contact. We find that camps reduce ingroup bias, increase willingness to interact with outgroup members, and enhance psychological well-being. Campers continue to have twice as many outgroup friends than control participants 1 year after the camps ended. Meanwhile, additional camp elements have heterogeneous effects: rituals have more positive impacts for the Hindu majority than the Muslim minority, while higher intergroup contact backfires among Hindus but not Muslims. Our findings demonstrate that inclusive youth camps may be a powerful tool for bridging deep social divides. Yet, we also highlight the conceptual challenges in crafting optimal integrative camps that help all groups.