Knowledge that Transforms

In this study we extend our previous work to examine the dynamic relationship between violence committed by Palestinian factions and that committed by Israel during the Second Intifada. We find a statistically significant relationship between Israeli fatalities claimed by groups associated with the ruling political party, Fatah, and subsequent Palestinian fatalities. We do not find a similar relationship for Israeli fatalities claimed by Hamas, Palestinian Islamic Jihad, and other Palestinian factions. We conjecture that these differences are due to the different positions of the factions vis-à-vis bargaining over a two-state solution to the conflict as well as the organizational structures of the factions.

What stands out in retrospect about U.S. monetary policy during the Greenspan Era is the ongoing movement away from mechanistic restrictions on the conduct of policy, together with a willingness on occasion to depart even from what more flexible guidelines dictated by contemporary conventional wisdom would imply, in the interest of carrying out the Federal Reserve System's dual mandate to pursue both stable prices and maximum employment. Part of this change was procedural -for example, the elimination of money growth targets. The most substantive demonstration of policy flexibility came in the latter half of the 1990s, as unemployment fell below 6% (in 1994), then below 5% (in 1997), and then remained below 5% for more than four years, yet the Federal Reserve did not tighten monetary policy. This policy stance was consistent with a view of the economy, including faster productivity growth and increased exposure to international competition, that Chairman Greenspan had articulated nearly a decade before.

A multivariate regime-switching model for monetary policy is confronted with U.S. data. The best fit allows time variation in disturbance variances only. With coefficients allowed to change, the best fit is with change only in the monetary policy rule and there are three estimated regimes corresponding roughly to periods when most observers believe that monetary policy actually differed. But the differences among regimes are not large enough to account for the rise, then decline, in inflation of the 1970s and 1980s. Our estimates imply monetary targeting was central in the early 1980s, but also important sporadically in the 1970s.

Rasmusen et al. (1991) and Segal and Whinston (2000) show that an incumbent monopolist might prevent entry of a more efficient competitor by exploiting externalities among buyers. We show that their results hold only when downstream competition among buyers is weak. Under fierce downstream competition, if entry took place, a free buyer would become more competitive and increase its output and profits at the expense of buyers that sign an exclusive deal with the incumbent. Anticipating that orders from a single buyer would trigger entry, no buyer will sign the exclusive deal and entry will occur. This result is robust across different specifications of the game.

We analyze the consequences of control on motivation in an experimental principal-agent game, where the principal can control the agent by implementing a minimum performance requirement before the agent chooses a productive activity. Our results show that control entails hidden costs since most agents reduce their performance as a response to the principal's controlling decision. Overall, the effect of control on the principal's payoff is nonmonotonic. When asked for their emotional perception of control, most agents who react negatively say that they perceive the controlling decision as a signal of distrust and a limitation of their choice autonomy.

In an experiment, players' ability to learn to cooperate in the repeated prisoner's dilemma was substantially diminished when the payoffs were noisy, even though players could monitor one another's past actions perfectly. In contrast, in one-time play against a succession of opponents, noisy payoffs increased cooperation, by slowing the rate at which cooperation decays. These observations are consistent with the robust observation from the psychology literature that partial reinforcement (adding randomness to the link between an action and its consequences while holding expected payoffs constant) slows learning. This effect is magnified in the repeated game: when others are slow to learn to cooperate, the benefits of cooperation are reduced, which further hampers cooperation. These results show that a small change in the payoff environment, which changes the speed of individual learning, can have a large effect on collective behavior. And they show that there may be interesting comparative dynamics that can be derived from careful attention to the fact that at least some economic behavior is learned from experience.

Countries? ” If there exist aggregate production functions representing approximately the same technology across countries, then the vastly higher output per worker in richer countries implies that capital per worker must be much higher in these countries, and diminishing returns implies a much lower rate of return to capital in rich than in poor countries. The details of the calculation depend, of course, on specific assumptions. However, the magnitudes are sufficiently large that the absence of massive capital flows to the poorest countries is properly seen as a fundamental puzzle. Lucas considers the possibility that capital market imperfections permit the existence of a gap in the returns to capital across countries, but argues that this cannot account for most of the difference implied by his calculation. He, therefore, raises the possibility that there are huge differences in human capital across countries, and externalities associated with these differences imply that returns to physical capital are not so different across countries with even large differences in physical capital per worker. Accordingly, there is no mystery about the lack of physical capital flows. In contrast, Abhijit V. Banerjee and Esther C. Duflo (2005) review a good deal of evidence, mostly from India, showing widely varying and often very high real interest rates. In addition, ∗We are grateful to Marcus Noland for the initial conversation that led to this paper, to Erica Field, Barbara O’Brien and Yuichi Kitamura for valuable comments, and to Hyungi Woo, Tavneet Suri, and Patrick Amihere

The property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives, while bargaining is ex post efficient. In contrast, transaction cost economics emphasizes ex post inefficiencies. In the present paper, a party may invest and acquire private information about the default payoff that it can realize on its own. Inefficient rent seeking can overturn prominent implications of the property rights theory. In particular, ownership by party B may be optimal, even though only the indispensable party A makes an investment decision.

Helping Infant Economies Grow: Foundations of Trade Policies for Developing Countries by Bruce Greenwald and Joseph E. Stiglitz. Published in volume 96, issue 2, pages 141-146 of American Economic Review, May 2006

We demonstrate the existence of multiple dimensions of private information in the long-term care insurance market. Two types of people purchase insurance: individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance. Ex post, the former are higher risk than insurance companies expect, while the latter are lower risk. In aggregate, those with more insurance are not higher risk. Our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence. The results also suggest a general test for asymmetric information.