Knowledge that Transforms

We model an international union as a group of countries deciding to centralize the provision of public goods, or policies, that generate externalities across union members. The trade-off between the benefits of coordination and the loss of independent policymaking endogenously determines size, composition, and scope of the union. Policy uniformity reduces the size of the union, may block the entry of new members, and induces excessive centralization. We study flexible rules with nonuniform policies that reduce these inefficiencies, focusing particularly on arrangements that are relevant to the ongoing debate on the institutional structure of the European Union.

Questions remain as to whether results from experimental economics are generalizable to real decisions in nonlaboratory settings. Furthermore, questions persist about whether social capital helps mitigate information asymmetries in credit markets. I examine whether behavior in two laboratory games, Trust and a Public Goods, predicts loan repayments to a Peruvian group-lending microfinance program. Since this program relies on social capital to enforce repayment, this tests the external validity of the games. Individuals identified as “trustworthy” by the Trust Game are indeed less likely to default on their loans. No similar support is found for the game's identification of “trusting” individuals.

We present a theoretical model of airport searches. The model extends previous work in the area in that detection conditional on search is imperfect. The hit rates tests for racial bias developed in Knowles, Persico, and Todd (2001) is shown to apply even in the presence of imperfections in monitoring. We then study two channels for improving airport security: better targeting and better detection. We show that better targeting does not necessarily decrease the overall crime rate, although it will decrease crime in the group that is targeted. Improved detection rates unambiguously decrease crime. Group-specific improvements in detection do not necessarily increase the number of searches for those groups. The analysis is extended to allow for the possibility that criminal passengers disguise themselves as members of low-crime groups.

Organizations often distribute resources through weighted voting. We analyze this setting using a noncooperative bargaining game based on the Baron-Ferejohn (1989) model. Unlike analyses derived from cooperative game theory, we find that each voter's expected payoff is proportional to her voting weight. An exception occurs when many high-weight voters exist, as low-weight voters may expect disproportionately high payoffs due to proposal power. The model also predicts that, ex post, the coalition formateur (the party chosen to form a coalition) will receive a disproportionately high payoff. Using data from coalition governments from 1946 to 2001, we find strong evidence of such formateur effects.

The equilibrium relationship between trade and the spatial distribution of economic activity is fundamental to the analysis of national and regional trade patterns, as well as to the effect of trade frictions. We study this relationship using a trade model with a continuum of regions, transport costs, and agglomeration effects caused by production externalities. We analyze the equilibrium specialization and trade patterns for different levels of transport costs and externality parameters. Understanding trade via the distribution of economic activity in space naturally rationalizes the evidence on border effects and the “gravity equation.”

Academic journal publishing has evolved rapidly in the past two decades. Prices, ownership concentration, the number of journals, and the means of distribution have all changed dramatically. Substantial price increases have been the norm. Average prices have risen severalfold over this period, with prices climbing the most at forprofit journals, where these prices are now as much as 500 percent higher than nonprofits (Gail Yokote, 2003). The price difference between forprofit and nonprofit academic journals is particularly striking, given that these journals are generally similar in format and editorial processes, and that for-profit journals do not appear to be of higher quality (Theodore C. Bergstrom, 2001 p. 183). Increased concentration provides one possible explanation for why prices of for-profit journals are so high. To take one example, measured by revenue, in 2001 Elsevier Science had a 22.9percent share of the Science, Technology, and Medicine (STM) industry, with Kluwer at 11.7 percent, and Thomson at 10.7 percent. But concentration offers at best only a partial answer. Bundling offers another, potentially more significant explanation, particularly for recent increases. The prices of for-profit journals could not be high and increasing without significant structural barriers to entry. Recently, however, a new strategic barrier has emerged. Major publishers have been offering libraries packages of journals that are bundled across journals and across print and electronic versions. The exact terms have varied from publisher to publisher, but a contract (sometimes called a “Big Deal” by librarians) typically involves a library entering into a long-term arrangement to get access to a large electronic library of journals at a substantial discount, in exchange for a promise not to cut print subscriptions (whose prices will increase over time); in this sense print and electronic are bundled. Since the electronic library becomes much less expensive when ordered in quantity, there is likewise bundling across electronic journals. Bundling can be seen as a device that erects a strategic barrier to entry. At a simple level of analysis, the Big Deal contracts leave libraries few budgetary dollars with which to purchase journals from new entrants. Looking one level deeper, we see that bundling entails average prices that exceed marginal prices, and this creates a barrier to entry if entrants compete with the marginal journal. Other things equal, bundling practices are likely to be anticompetitive to the extent that they allow for the maintenance of supracompetitive average prices that limit usage of academic journals by scholars and/or distort library choices between journals and monographs and books. There are, however, pro-competitive benefits associated with bundling. Recent deals have provided scholars with extra access to journals; moreover, when electronic databases contain journals not included in the libraries’ print collections, the collections expand. Finding an economic approach that analyzes a range of bundling practices and evaluates them by appropriately balancing benefits and costs † Discussants: V. Kerry Smith, North Carolina State University; Robert Hall, Stanford University.

In this paper we evaluate the impact of a major school reform, that took place in the 1950s in Sweden, on educational attainment and earnings. The reform, which has many common elements with reforms in other European countries including the UK, consisted of increasing compulsor schooling, imposing a national curriculum and abolishing selectionby ability into Academic and non-academic streams at the age of 12 (comprehensive school reform). Our data combines survey data with administrative sources. We find that the reform increased both the educational attainment and the earnings of children whose fathers had just complusory education. However the earnings of those with educated parents declined - possibly because of a dilution of quality at the top end of the education levels. The overall effect of the reform was however positive. In this paper we evaluate the impact of a major school reform, that took place in the 1950s in Sweden, on educational attainment and earnings. The reform, which has many common elements with reforms in other European countries including the UK, consisted of increasing compulsor schooling, imposing a national curriculum and abolishing selectionby ability into Academic and non-academic streams at the age of 12 (comprehensive school reform). Our data combines survey data with administrative sources. We find that the reform increased both the educational attainment and the earnings of children whose fathers had just complusory education. However the earnings of those with educated parents declined - possibly because of a dilution of quality at the top end of the education levels. The overall effect of the reform was however positive.

I present a model in which the incomplete nature of contracts governing international transactions limits the extent to which the production process can be fragmented across borders. Because of contractual frictions, goods are initially manufactured in the same country where product development takes place. Only when the good becomes sufficiently standardized is the manufacturing stage of production shifted to a low-wage foreign location. Solving for the optimal organizational structure, I develop a new version of the product cycle hypothesis in which manufacturing is shifted abroad first within firm boundaries, and only at a later stage to independent foreign firms.

ABSTRACT Data on corporate governance and disclosure practices reveal wide within‐country variation that decreases with the strength of investors' legal protection. A simple model identifies three firm attributes related to that variation: investment opportunities, external financing, and ownership structure. Using firm‐level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All relations are stronger in less investor‐friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices.

ABSTRACT This paper analyzes the impact of changes in monetary policy on equity prices, with the objectives of both measuring the average reaction of the stock market and understanding the economic sources of that reaction. We find that, on average, a hypothetical unanticipated 25‐basis‐point cut in the Federal funds rate target is associated with about a 1% increase in broad stock indexes. Adapting a methodology due to Campbell and Ammer, we find that the effects of unanticipated monetary policy actions on expected excess returns account for the largest part of the response of stock prices.