Knowledge that Transforms

The determinants of bargaining power and price formation in a dynamic exchange market where new traders enter randomly over time are studied. When agents on the long side of the market possess the option to wait for the arrival of future partners, the terms of trade in the spot market must honor the value of this option. The equilibrium terms of trade are expressed in intuitive closed-form equations that highlight the distinct influences of short-run spot-market conditions and long-run market demographics.

This paper provides a simple framework showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit-constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The paper offers evidence from small business data in support of this hypothesis.

This paper presents new results on the size, frequency, and synchronization of price changes for twelve selected retail goods over the past 35 years. Three basic facts about the data are uncovered. First, nominal prices are typically fixed for more than one year, although the time between changes is very irregular. Second, prices change more often during periods of high overall inflation. Third, when prices do change, the sizes of the changes are widely dispersed. Both “large” and “small” changes occur for the same item, and the sizes of these changes do not closely depend on overall inflation.

This paper documents the fundamental role played by factor accumulation in explaining the extraordinary postwar growth of Hong Kong, Singapore, South Korea, and Taiwan. Participation rates, educational levels, and (excepting Hong Kong) investment rates have risen rapidly in all four economies. In addition, in most cases there has been a large intersectoral transfer of labor into manufacturing, which has helped fuel growth in that sector. Once one accounts for the dramatic rise in factor inputs, one arrives at estimated total factor productivity growth rates that are closely approximated by the historical performance of many of the OECD and Latin American economies. While the growth of output and manufacturing exports in the newly industrializing countries of East Asia is virtually unprecedented, the growth of total factor productivity in these economies is not.

This paper presents a simple model of trade in the housing market. The crucial feature is that a minimum down payment is required for the purchase of a new home. The model has direct implications for the volatility of house prices, as well as for the correlation between prices and trading volume. The model can also be extended to address the correlation between prices and time-to-sale, as well as certain aspects of the cyclical behavior of housing starts.

Field research attempted to measure the risky environments, the information structures, the institutions, and the risk-response mechanisms of ten villages in northern Thailand. Various key features are then modeled in an abstract but realistic way, either with a full-information risk-sharing model or an information-constrained version of the same model. Observations from some of the villages seem consistent with one or the other of these models, but in many of the villages one is left with risk-response variations across households which suggest that Pareto improvements are possible.

According to endogenous growth theory, permanent changes in certain policy variables have permanent effects on the rate of economic growth. Empirically, however, U. S. growth rates exhibit no large persistent changes. Therefore, the determinants of long-run growth highlighted by a specific growth model must similarly exhibit no large persistent changes, or the persistent movement in these variables must be offsetting. Otherwise, the growth model is inconsistent with time series evidence. This paper argues that many AK-style models and R&D-based models of endogenous growth are rejected by this criterion. The rejection of the R&D-based models is particularly strong.

This paper studies the way that word-of-mouth communication aggregates the information of individual agents. We find that the structure of the communication process determines whether all agents end up making identical choices, with less communication making this conformity more likely. Despite the players' naive decision rules and the stochastic decision environment, word-of-mouth communication may lead all players to adopt the action that is on average superior. These socially efficient outcomes tend to occur when each agent samples only a few others.

The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be “loss averse,” meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate their portfolios frequently. We dub this combination “myopic loss aversion.” Using simulations, we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually.

Using theory, case studies, and cross-country evidence, we investigate the factors behind the concentration of a nation's urban population in a single city. High tariffs, high costs of internal trade, and low levels of international trade increase the degree of concentration. Even more clearly, politics (such as the degree of instability) determines urban primacy. Dictatorships have central cities that are, on average, 50 percent larger than their democratic counterparts. Using information about the timing of city growth, and a series of instruments, we conclude that the predominant causality is from political factors to urban concentration, not from concentration to political change.