Knowledge that Transforms

Bank of Minneapolis and University of Minnesota. We thank the NSF for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The Great Depression is not yet well understood. Economists have offered many theories for both the massive decline and the slow recovery of output during 1929—39, but no consensus has formed on the main forces behind this major economic event. Here we describe and demonstrate a simple methodology for determining which types of theories are the most promising. Several prominent theories blame the Great Depression on frictions in labor and capital markets. The sticky wage theory is that wage stickiness together with a monetary contraction produces a downturn in output. (See Michael Bordo, Christopher Erceg, and Charles Evans 2001.) The cartelization theory is that an increase in cartelization and unionization leads to a slow recovery. (See Harold Cole and Lee Ohanian 2001.) The investment friction theory is that monetary contractions increase frictions in capital markets that produce investment-driven downturns in output.

Effects of Environmental and Land Use Regulation in the Oil and Gas Industry Using the Wyoming Checkerboard as an Experimental Design by Mitch Kunce, Shelby Gerking and William Morgan. Published in volume 92, issue 5, pages 1588-1593 of American Economic Review, December 2002

Estimating Individual Discount Rates in Denmark: A Field Experiment by Glenn W. Harrison, Morten I. Lau and Melonie B. Williams. Published in volume 92, issue 5, pages 1606-1617 of American Economic Review, December 2002

This Paper develops a model of economic growth and activity locating endogenously on a 3-dimensional featureless global geography. The same economic forces influence simultaneously growth, convergence, and spatial agglomeration and clustering. Economic activity is not concentrated on discrete isolated points but instead a dynamically-fluctuating, smooth spatial distribution. Spatial inequality is a Cass-Koopmans saddlepath, and the global distribution of economic activity converges towards egalitarian growth. Equality is stable but spatial inequality is needed to attain it.

Height is consulted as a latent indicator of early nutrition and lifetime health status. Height is observed to increase in recent decades in populations where per capita national income has increased and public health activities have grown. Height is determined by genetic make up and realized in part through satisfactory nutrition and health related care and conditions. Alternative instrumental variables (IV) are explored which proxy price and income constraints which are expected to influence the latter reproducible human capital investments in height. I report OLS and IV estimates of the partial effect of height on log hourly wages in recent national surveys from three countries: Ghana, Brazil and the United States. I conclude that the human capital productivity effect of height estimated by parent education IVs in the US and Ghana are many times larger than the OLS estimates, and in Ghana and Brazil the regional price IVs estimates also imply a substantially larger human capital wage effects of height compared with the OLS estimates. The OLS estimates of height effects on wages are dominated by the genetic variation in height, and appear to understate substantially the human capital returns to health and nutrition inputs which increase adult height.

Competitive Pressure and Labor Productivity: World Iron-Ore Markets in the 1980's by José E. Galdón-Sánchez and James A. Schmitz Jr.. Published in volume 92, issue 4, pages 1222-1235 of American Economic Review, September 2002

We document the return to investing in U.S. nonpublicly traded equity. Entrepreneurial investment is extremely concentrated, yet despite its poor diversification, we find that the returns to private equity are no higher than the returns to public equity. Given the large public equity premium, it is puzzling why households willingly invest substantial amounts in a single privately held firm with a seemingly far worse risk-return trade-off. We briefly discuss how large nonpecuniary benefits, a preference for skewness, or overestimates of the probability of survival could potentially explain investment in private equity despite these findings.

An income tax provides implicit insurance by dampening the variability of disposable income and consumption. Using an empirical framework derived from the consumption insurance literature and data from the Panel Study of Income Dynamics we examine the effect of federal income tax reforms of the 1980's on automatic stabilization of consumption. Overall, ERTA and TRA86 reduced consumption stability by about 50 percent. Recently increased EITC generosity restored or enhanced consumption insurance. The welfare cost of moving to the post-TRA86 system is sizable for relatively risk-averse households facing large income risk but is much more modest for the typical household.

The scope for growth of trade in services is vast. Although services currently make up over 60 percent of world production, they account for only about 20 percent of world trade. A primary reason why international trade in services has been limited is that the performance of many services necessitates physical contact between producers and consumers, a condition that renders service provision to distant locations infeasible. New technology, in particular, the Internet, provides a medium of exchange that overcomes such historical trading hurdles for many services, effectively reducing transport costs from infinity to virtually nothing. There is ample anecdotal evidence that the Internet is having just this sort of an effect on services trade. The accounting firm Netlink maintains the books for 6,000 employees in Reyanosa, Mexico, from their offices in Manhattan. Infosys of India provides softwareconsulting services to international clients, including Apple Computers, Lucent Technologies, and Microsoft. A medical-transcription company in South Africa, ITS, receives digital recordings from abroad electronically and returns a transcribed text file the next day. Still, the question remains as to whether electronic sharing of information is an important enough development to alter significantly the geography of service provision. Indeed, many services need to be tailored to the consumer’s needs and monitored for quality, and these are likely to be more effective if the provider is close by and speaks the same language. In addition, in the event of a dispute, resolution will be less complicated if both parties are subject to the same legal system. Finally, there may be security concerns with allowing foreign access to some documents or systems. Thus, for some services, especially those where familiarity, communication, and non-standardization contribute to quality, the Internet would not be expected to have a large impact on international trade. To determine whether the Internet has significantly affected international service provision in practice, we estimate a general model of services trade across countries and examine whether the inclusion of data on Internet penetration, as measured by the number of Internet hosts in a country, is statistically significant. Overall, our results offer evidence that the Internet is related to growth in services trade. After controlling for GDP and exchange-rate movements, we find that a 10-percent increase in Internet penetration in a foreign country is associated with about a 1.7-percentage-point increase in export growth and a 1.1-percentagepoint increase in import growth. The results are robust to a number of alternative specifications.

Auctions are generally not efficient when the object's expected value depends on private and common value information. We report a series of first-price auction experiments to measure the degree of inefficiency that occurs with financially motivated bidders. While some subjects fall prey to the winner's curse, they weigh their private and common value information in roughly the same manner as rational bidders, with observed efficiencies close to predicted levels. Increased competition and reduced uncertainty about the common value positively affect revenues and efficiency. The public release of information about the common value also raises efficiency, although less than predicted.