Knowledge that Transforms

We study frictionless matching in large economies with and without market imperfections, providing sufficient conditions for monotone matching that are weaker than those previously known. Necessary conditions, which depend on a key analytical object we call the surplus function, are also offered. Changes in the surplus yield valuable information about the comparative statics of matching patterns across environments. We apply our framework to some examples adapted from the literature, accounting for and extending several comparative-static and welfare results. We also explore the dependence of the matching pattern on the type distribution.

We introduce firm heterogeneity into the standard monopolistically competitive real business cycle (RBC) model. The fundamental equilibrium path is derived and the time-series properties of aggregate GDP are studied analytically. Although firms' productivities are subject to temporary shocks, the aggregate process displays a surprising novel form of nonlinearity and long memory which had not been built into the model at the outset. This aggregate GDP turns out to have very different properties from log-linear time-series models such as auto-regressive (AR) models and their extensions. It displays very strong persistence, which ends abruptly with a sudden change of tendency, giving its autocorrelation function (ACF) an S-shape. Although persistent, it is mean-reverting, unlike the everlasting memory of unit-root processes. Its volatility is of a greater order of magnitude than that of any of its components, so small micro-shocks can generate large macro fluctuations. It is also characterized by long, asymmetric cycles of random lengths. Increased monopoly power tends to reduce the amplitude and increase the persistence of business cycles. Strikingly, we find that the empirical ACFs constructed from GDP data for the U.K. and the U.S. display this characteristic S-shape.

We analyse the optimal Initial Public Offering (IPO) mechanism in a multidimensional adverse selection setting where institutional investors have private information about the market valuation of the shares, the intermediary has private information about the demand, and the institutional investors and intermediary collude. Theorem 1 states that uniform pricing is optimal (all agents pay the same price) and characterizes the IPO price in terms of conditional expectations. Theorem 2 states that the optimal mechanism can be implemented by a non-linear price schedule decreasing in the quantity allocated to retail investors. This is similar to IPO procedures used in the U.K. and France. Relying on French IPO data we perform a GMM structural estimation and test of the model. The price schedule is estimated and the conditions characterizing the optimal mechanism are not rejected.

Theapproximatee®ectsofmeasurementerroronavarietyof measures ofinequality and poverty are derived. They are shown to depend on themeasurementerrorvarianceandfunctionalsoftheerrorcontaminatedincome distribution. Sincethesefunctionalscanbeestimateditispossibletoinvestigate the sensitivity ofwelfare measures to alternative amounts ofmeasurementerror and,whenanestimateofthemeasurementerrorvarianceisavailable,tocalculate corrected welfare measures. The methods are illustrated in an application using Indonesianhouseholdexpendituredata. Key W ords:inequalitymeasurement,povertyindices,measurementerror.

Departures from self-interest in economic experiments have recently inspired models of “social preferences”. We design a range of simple experimental games that test these theories more directly than existing experiments. Our experiments show that subjects are more concerned with increasing social welfare—sacrificing to increase the payoffs for all recipients, especially low-payoff recipients—than with reducing differences in payoffs (as supposed in recent models). Subjects are also motivated by reciprocity: They withdraw willingness to sacrifice to achieve a fair outcome when others are

This paper presents an interpretation of rising regionalism in world trade as a coordination failure, based on (i) sector-specific sunk costs in production, and (ii) "friction" in trade negotiation. Given these elements, if a regional trade bloc is expected to form, private agents will make investments that will make bloc member countries more specialized toward each other, but bloc and nonbloc countries mutually less specialized. This diminishes the ex post demand for multilateral free trade. Thus, the expected supply of regionalism generates its own demand, creating a Pareto-inferior equilibrium.

This research develops an evolutionary growth theory that captures the interplay between the evolution of mankind and economic growth since the emergence of the human species. This uni…ed theory encompasses the observed evolution of population, technology and income per capita in the long transition from an epoch of Malthusian stagnation to sustained economic growth. The theory suggests that prolonged economic stagnation prior to the transition to sustained growth stimulated natural selection that shaped the evolution of the human species, whereas the evolution of the human species was the origin of the take-o¤ from an epoch of stagnation to sustained growth. – Growth ; Technological Progress ; Fertility ; Human Capital ; Evolution ; Natural Selection ; Malthusian Stagnation

It is well-known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. But when goods and financial markets are tightly linked, is it problematic if countries unilaterally design their monetary policy rules? Are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination? We argue that under plausible assumptions the answer is no. Unless risk aversion is very high, lack of coordination in rule setting is a second-order problem compared with the overall gains from macroeconomic stabilization.

Sex ratios, i.e., relative numbers of men and women, can affect marriage prospects, labor force participation, and other social and economic variables. But the observed association between sex ratios and social and economic conditions may be confounded by omitted variables and reverse causality. This paper uses variation in immigrant flows as a natural experiment to study the effect of sex ratios on the children and grandchildren of immigrants. The flow of immigrants affected the second generation marriage market because second generation marriages were mostly endogamous, i.e., to members of the same ethnic group. The empirical results suggest that high sex ratios had a large positive effect on the likelihood of female marriage, and a large negative effect on female labor force participation. Perhaps surprisingly, the marriage rates of second generation men appear to be a slightly increasing function of immigrant sex ratios. Higher sex ratios also appear to have raised male earnings and the incomes of parents with young children. The empirical results are broadly consistent with theories where higher sex ratios increase female bargaining power in the marriage market.

Countries differ significantly in the way in which they regulate the entry of new businesses. To meet government requirements for starting to operate a business in Austria, an entrepreneur must complete 12 procedures taking at least 154 business days and pay US$11,612 in government fees. To do the same, an entrepreneur in Bolivia needs to follow 20 different procedures, pay US$2,696 in fees to the government and wait at least 82 business days to acquire the necessary permits. In contrast, an entrepreneur in Canada can finish the process in roughly 2 days by paying US$280 in government fees and completing only 2 procedures.