Knowledge that Transforms

We introduce a novel empirical strategy to measure the size of credit shocks. Theoretically, we show that credit shocks reduce the value of long-term relative to short-term investments. Empirically, we can therefore compare the reduction of long-term relative to short-term investments within firms, allowing for firm-times-year fixed effects. Using Spanish firm-level data, we estimate the credit crunch to be equivalent to an additional tax rate of around 11% on the longest-lived capital. To pin down credit constraints as the underlying cause, we apply triple-differences strategies using foreign ownership or precrisis debt maturity.

We specify and estimate a dynamic game to study the equilibrium relationship between market structure and innovation in the automobile industry. The quality of each firm’s product for the average consumer, the key state variable, is modeled as stochastically increasing in innovation,the dynamic control, which is proxied by patent applications. Equilibrium innovation is a function of market structure, the vector of quality levels of all active firms, and the cost of R&D. Our main findings are as follows:(a) optimal innovation has an inverted-U shape in own quality; (b) holding own quality constant, innovation is declining in average rival quality but increasing in quality dispersion; and (c) following entry, each incumbent’s innovation declines, but aggregate innovation increases in most market structures. These findings are broadly consistent with the Schumpeterian hypothesis that market power leads to more innovation.

Between 2000 and 2010, five U.S. states adopted mandates requiring high school juniors to take a college entrance exam. In the two earliest-adopting states, nearly half of all students were induced into testing, and 40% to 45% of them earned scores high enough to qualify for selective colleges. Selective enrollment rose by 20% following implementation of the mandates, reflecting substitution away from noncompetitive schools. I conclude that a large number of high-ability students appear to dramatically underestimate their candidacy for selective colleges. Policies aimed at reducing this information shortage are likely to increase human capital investment for a substantial number of students.

Grogger and Ridgeway (2006) use the daylight saving time shift to develop a police racial profiling test that is based on differences in driver race visibility and (hence) the race distribution of traffic stops across daylight and darkness. However, urban environments may be well lit at night, eroding the power of their test. We refine their test using streetlight location data in Syracuse, New York, and the results change in the direction of finding profiling of black drivers. Our preferred specification suggests that the odds of a black driver being stopped (relative to nonblack drivers) increase 15% in daylight compared to darkness.

This study is the first to estimate the effect of war service in the Global War on Terrorism on domestic violence. We exploit a natural experiment in overseas deployment assignment among active-duty servicemen by relying on theoretical and empirical evidence that, conditional on military rank and occupation, deployment assignments are orthogonal to the propensity for violence. Our results show that assignment to combat substantially increases the probability of intimate partner violence and child abuse. Descriptive evidence suggests that the effects may be explained in part by the stress- and substance use–related consequences of war.

We estimate the intertemporal elasticity of substitution in consumption (IES) using a preannounced increase in Japan’s consumption tax rate. Because this tax is highly comprehensive, the rate increase was announced prior to its implementation, and because other factors that affect the real interest rate were constant, the tax rate increase presents an ideal natural experiment to estimate the IES. A Japanese monthly household survey is exploited to accurately categorize nondurables, and our empirical specification addresses intratemporal substitution bias. We find that the IES is 0.21 and not significantly different from 0, but it is significantly less than 1.

It is well established in the literature that financial development (FD) is conducive to growth, and yet the channels through which FD affects growth are not well understood. Using a unique new panel data set for 21 OECD countries over the past 140 years, this paper examines the extent to which FD transmits to growth through ideas production, savings, fixed investment, and schooling. Unionization and agricultural share are used as instruments for FD. The empirical results show that FD influences growth through all four channels. In particular, ideas production is found to be the most important channel through which FD affects growth.

We use staggered banking deregulation across states in the United States to examine the impact of the resulting increased credit supply on college enrollment from the 1970s to the early 1990s. Our research design produces estimates that are not confounded by wealth effects due to changes in income or housing wealth. We find that lifting banking restrictions raises college enrollment by about 2.6 percentage points (4.9%). We rule out alternative interpretations by examining results for different income groups and bankrupt households. We also find similar effects for two-year or four-year college completion and supporting evidence in household educational borrowing.

We provide the first experimental estimation of the effects of the supply of publicly financed urban infrastructure on property values. Using random allocation of first-time street asphalting of residential streets located in peripheral neighborhoods in Mexico, we show that within two years of the intervention, households are able to transform their increased property wealth into significantly larger rates of vehicle ownership, household appliances, and home improvements. Increased consumption is made possible by both credit use and less saving. A cost-benefit analysis indicates that the valuation of street asphalting as capitalized into property values is about as large as construction costs.

Firmly anchored inflation expectations are widely viewed as playing a central role for the conduct of monetary policy. This paper presents estimates of trend inflation, based on information contained in monthly data on realized inflation, survey expectations, and the term structure of interest rates. In order to assess whether inflation expectations are anchored, a timevarying volatility of trend shocks is estimated as well. While there is some commonality in inflation- and survey-based estimates of trend inflation, yield-based trend estimates embed a highly persistent component orthogonal to trend inflation. Trimmed-mean inflation rates and survey forecasts are most indicative of trend inflation.