Knowledge that Transforms

What Does Performance in Graduate School Predict? Graduate Economics Education and Student Outcomes by Susan Athey, Lawrence F. Katz, Alan B. Krueger, Steven Levitt and James Poterba. Published in volume 97, issue 2, pages 512-520 of American Economic Review, May 2007

With the use of French and US data, new and systematic evidence is provided about the rapid location changes of industries across cities (the fast). Cities are also slowly moving up and down the urban hierarchy (the slow), while the size distribution of cities is skewed to the right and very stable (the still). The model proposed here reproduces these three features. Small, innovation-driven shocks lead to the churning of industries across cities. Then, cities slowly grow or decline following net gains or losses of industries. These changes occur within a stable distribution. The quantitative implications of the model are also explored.

We examine how countries' incentives to go to war depend on the “political bias” of their pivotal decision makers. This bias is measured by a decision maker's risk/reward ratio from a war compared to that of the country at large. If there is no political bias, then there are mutually acceptable transfers from one country to the other that will avoid a war in the presence of commitment or enforceability of peace treaties. There are cases with a strong enough bias on the part of one or both countries where war cannot be prevented by any transfer payments. Our results shed some new light on the uneven contender paradox and the interpretation of the “democratic peace.” We examine countries' choices of the bias of their leaders and show that when transfers are possible, at least one country will choose a biased leader, as that leads to a strong bargaining position and extraction of transfers.

A core question in the contemporary debate on distributive justice is how to understand fairness in situations involving production. Important theories of distributive justice, such as strict egalitarianism, liberal egalitarianism, and libertarianism, provide different answers to this question. This paper presents the results from a dictator game where the distribution phase is preceded by a production phase. Each player's contribution is a result of a freely chosen investment level and an exogenously given rate of return. We estimate simultaneously the prevalence of three principles of distributive justice among the players and the distribution of the weight they attach to fairness.

A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor. For the infinite horizon. it is shown that there is no loss from restricting the analysis to contracts in which the Agent receives a constant efficiency wage and no feedback until he is fired. Furthermore, optimal contracts cannot be replicated by short-term contracts. A family of fixed interval review contracts is characterized. Longer review intervals are preferable but harder to implement. Comparative statics on the review length are carried out. Finally, these contracts are shown approximate first best if players are very patient.

The search for talent is of particular interest to economists; in fact, nothing unites academic economists’ interest like speculation about the causes of two key measures of success in their profession: completion of the doctorate and success in publishing. We assess both outcomes by using a rich set of pre-graduate school characteristics to forecast both success in the Ph.D. program and professional achievement. Using information contained in application files to a top 5 economics Ph.D. program in 1989, we predict the determinants of doctoral degree completion and research productivity 17 years later. The results suggest that several variables consistently predict degree completion and long run research productivity: quantitative GRE scores, having a foreign undergraduate degree, and the quality of the individuals who write letters of reference.

This paper examines the role of cash transfers as a screening device when combined with in-kind transfers. It shows that linking in-kind to cash transfers makes first-best redistribution possible despite the government's inability to tell rich and poor individuals apart. Moreover, the maximal attainable welfare for the poor can be pushed beyond its first-best level by distorting downward the quality of the indivisible good the poor receive relative to the cash value of their net transfers. Using in-kind transfers alone, as in Besley and Coate (1991), leads to a third-best solution.

What role does labor play in firms' market value? We use a production-based asset pricing model with factor adjustment costs and forward-looking agents to explore this question. We posit that the hiring of labor is akin to investment in capital and that the two interact, with the interaction being a crucial determinant of the dynamic behavior of market value. Using aggregate US corporate sector data, we estimate firms' optimal hiring and investment decisions and the consequences for firms' value.

We consider a seller who faces several buyers and lacks access to an institution to credibly close a sale. If buyers anticipate that the seller may negotiate further, they will prefer to wait before making their best and final offers. This in turn induces the seller to bargain at length with buyers, even if doing so is costly. When the seller's cost of soliciting another round of offers is either very large or very small, the seller credibly commits to an auction and experiences negligible bargaining costs. Otherwise, there may be several rounds of increasing offers and significant seller losses. In these situations, an intermediary with a sufficiently valuable reputation and/or weak marginal incentives regarding price can create value by credibly committing to help sell the object without delay.

This paper presents a theory of trade agreements where "politics" play an central role. This stands in contrast with the standard theory, where even politically-motivated governments sign trade agreements only to deal with terms-of-trade externalities. We develop a model where governments may be motivated to sign a trade agreement both by the presence of standard terms-of-trade externalities and by the desire to commit vis-a-vis domestic industrial lobbies. The model is rich in implications. In particular, it predicts that trade agreements result in deeper trade liberalization when governments are more politically motivated (provided capital mobility is sufficiently high) and when capital can move more freely across sectors. Also, governments tend to prefer a commitment in the form of tariff ceilings rather than exact tariff levels. In a fully dynamic specification of the model, trade liberalization occurs in two stages: an immediate slashing of tariffs and a subsequent gradual reduction of tariffs. The immediate tariff cut is a reflection of the terms-of-trade motive for the agreement, while the domestic-commitment motive is reflected in the gradual phase of trade liberalization. Finally, the speed of trade liberalization is higher when capital is more mobile across sectors.