Knowledge that Transforms

Rationality leads people to imitate those with similar tastes but different information. But people who imitate common sources develop correlated beliefs, and rationality demands that later social learners take this correlation into account. This implies severe limits to rational imitation. We show that (i) in most natural observation structures besides the canonical single-file case, full rationality dictates that people must “anti-imitate” some of those they observe; and (ii) in every observation structure full rationality dictates that people imitate, on net, at most one person and are imitated by, on net, at most one person, over any set of interconnected players. We also show that in a very broad class of settings, any learning rule in which people regularly do imitate more than one person without anti-imitating others will lead to a positive probability of people converging to confident and wrong long-run beliefs.

We study the long-run effects of one of the most ambitious regional development programs in U.S. history: the Tennessee Valley Authority (TVA). Using as controls authorities that were proposed but never approved by Congress, we find that the TVA led to large gains in agricultural employment that were eventually reversed when the program’s subsidies ended. Gains in manufacturing employment, by contrast, continued to intensify well after federal transfers had lapsed—a pattern consistent with the presence of agglomeration economies in manufacturing. Because manufacturing paid higher wages than agriculture, this shift raised aggregate income in the TVA region for an extended period of time. Economists have long cautioned that the local gains created by place-based policies may be offset by losses elsewhere. We develop a structured approach to assessing the TVA’s aggregate consequences that is applicable to other place-based policies. In our model, the TVA affects the national economy both directly through infrastructure improvements and indirectly through agglomeration economies. The model’s estimates suggest that the TVA’s direct investments yielded a significant increase in national manufacturing productivity, with benefits exceeding the program’s costs. However, the program’s indirect effects appear to have been limited: agglomeration gains in the TVA region were offset by losses in the rest of the country. Spillovers in manufacturing appear to be the rare example of a localized market failure that cancels out in the aggregate.

Gender differences in competitiveness have been hypothesized as a potential explanation for gender differences in education and labor market outcomes. We examine the predictive power of a standard laboratory experimental measure of competitiveness for the later important choice of academic track of secondary school students in the Netherlands. Although boys and girls display similar levels of academic ability, boys choose substantially more prestigious academic tracks, where more prestigious tracks are more math- and science-intensive. Our experimental measure shows that boys are also substantially more competitive than girls. We find that competitiveness is strongly positively correlated with choosing more prestigious academic tracks even conditional on academic ability. Most important, we find that the gender difference in competitiveness accounts for a substantial portion (about 20%) of the gender difference in track choice.

International trade can have profound effects on domestic institutions. We examine this proposition in the context of medieval Venice circa 800–1600. Early on, the growth of long-distance trade enriched a broad group of merchants who used their newfound economic muscle to push for constraints on the executive, that is, for the end of a de facto hereditary Doge in 1032 and the establishment of a parliament in 1172. The merchants also pushed for remarkably modern innovations in contracting institutions that facilitated long-distance trade, for example, the colleganza. However, starting in 1297, a small group of particularly wealthy merchants blocked political and economic competition: they made parliamentary participation hereditary and erected barriers to participation in the most lucrative aspects of long-distance trade. Over the next two centuries this led to a fundamental societal shift away from political openness, economic competition, and social mobility and toward political closure, extreme inequality, and social stratification. We document this oligarchization using a unique database on the names of 8,178 parliamentarians and their families’ use of the colleganza in the periods immediately before and after 1297. We then link these families to 6,959 marriages during 1400–1599 to document the use of marriage alliances to monopolize the galley trade. Monopolization led to the rise of extreme inequality, with those who were powerful before 1297 emerging as the undisputed winners.

This article proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs. Instead of taking a stand on whose belief is correct, our criterion asserts that an allocation is belief-neutral efficient (inefficient) if it is efficient (inefficient) under any convex combination of agents’ beliefs. Although this criterion gives an incomplete ranking of social allocations, it can identify positive- and negative-sum speculation driven by conflicting beliefs in a broad range of economic environments.

We introduce the model of asset management developed in Gennaioli, Shleifer, and Vishny (“Money Doctors,” Journal of Finance , forthcoming 2015) into a Solow-style neoclassical growth model with diminishing returns to capital. Savers rely on trusted intermediaries to manage their wealth (claims on capital stock), who can charge fees above costs to trusting investors. In this model, the ratio of financial income to GDP increases with the ratio of aggregate wealth to GDP. Both rise along the convergence path to steady state growth. We examine several further implications of the model for management fees, unit costs of finance, and the consequences of shocks to trust and to the capital stock.

We analyze the effect of exposure to international trade on earnings and employment of U.S. workers from 1992 through 2007 by exploiting industry shocks to import competition stemming from China’s spectacular rise as a manufacturing exporter paired with longitudinal data on individual earnings by employer spanning close to two decades. Individuals who in 1991 worked in manufacturing industries that experienced high subsequent import growth garner lower cumulative earnings, face elevated risk of obtaining public disability benefits, and spend less time working for their initial employers, less time in their initial two-digit manufacturing industries, and more time working elsewhere in manufacturing and outside of manufacturing. Earnings losses are larger for individuals with low initial wages, low initial tenure, and low attachment to the labor force. Low-wage workers churn primarily among manufacturing sectors, where they are repeatedly exposed to subsequent trade shocks. High-wage workers are better able to move across employers with minimal earnings losses and are more likely to move out of manufacturing conditional on separation. These findings reveal that import shocks impose substantial labor adjustment costs that are highly unevenly distributed across workers according to their skill levels and conditions of employment in the pre-shock period.

We present new data documenting medieval Europe’s Commercial Revolution using information on the establishment of markets in Germany. We use these data to test whether medieval universities played a causal role in expanding economic activity, examining the foundation of Germany’s first universities after 1386 following the papal schism. We find that the trend rate of market establishment breaks upward in 1386 and this break is greatest where the distance to a university shrank most. There is no differential pre-1386 trend associated with the reduction in distance to a university, and there is no break in trend in 1386 where university proximity did not change. These results are robust to estimating a variety of specifications that address concerns about the endogeneity of university location. Universities provided training in newly rediscovered Roman and canon law; students with legal training served in positions that reduced the uncertainty of trade in the Middle Ages. We argue that training in the law, and the consequent development of legal and administrative institutions, was an important channel linking universities and greater economic activity in medieval Germany.

We investigate the existence and importance of family welfare cultures, where the receipt of a welfare program by one generation causes increased participation in the next generation. Our context is Norway’s disability insurance (DI) system. To overcome the challenge of correlated unobservables across generations, we take advantage of random assignment of judges to DI applicants whose cases are initially denied. Some appeal judges are systematically more lenient, which leads to random variation in the probability a parent will be allowed DI. Using this exogenous variation, we find strong evidence for a causal link across generations: when a parent is allowed DI at the appeal stage, their adult child’s participation over the next five years increases by 6 percentage points. This effect grows over time, rising to 12 percentage points after 10 years. Although these findings are specific to our setting, they highlight that welfare reforms can have long-lasting effects on program participation, since any original effect on the current generation could be reinforced by changing the participation behavior of their children as well. The detailed nature of our data allows us to compare the intergenerational transmission with spillover effects in other networks and to explore mechanisms.

We study the end of race-based busing in Charlotte-Mecklenburg schools (CMS). In 2001, school boundaries in CMS were redrawn dramatically, and half of students received a new assignment. Using addresses measured prior to the policy change, we compare students in the same neighborhood that lived on opposite sides of a newly drawn boundary. We find that both white and minority students score lower on high school exams when they are assigned to schools with more minority students. We also find decreases in high school graduation and four-year college attendance for whites and large increases in crime for minority males. We conclude that the end of race-based busing widened racial inequality, despite efforts by CMS to mitigate the effect of segregation through compensatory resource allocation.