Knowledge that Transforms

This paper presents a model where income distribution and redistributive fiscal policy interact to affect the budget deficit and the pattern of net borrowing of a country. According to the standard representative agent paradigm, a small open economy should smooth consumption by borrowing from (lending to) the rest of the world when its income increases (declines) over time. The simple model of this paper delivers exactly the same predictions in the absence of income dispersion. When income distribution is not degenerate, however, the same model gives rise to a surprising wealth of results. In particular, poor economies with high inequality may exhibit completely counter-intuitive patterns of fiscal policy and external borrowing. The country's production path declines over time, because the more mobile agents leave the country to escape taxation; yet, the country might end up having a budget deficit and borrowing from abroad, thereby reinforcing rather than smoothing the asymmetry in consumption between the two periods. An important feature of this outcome is that it is backed by both the poor and the rich, who gain from the fiscal system at the expense of the middle class.

This paper examines shares of fixed capital formation in GDP and rates of economic growth for more than 100 countries over successive five-year periods between 1965 and 1985 to determine the direction of causality between them. Simple regressions and multiple regressions including several standard determinants of growth, as well as a simple causality test, provide more evidence that increases in growth precede rises in rates of capital formation than that increases in capital formation precede increases in growth. High rates of fixed capital formation accompany rapid growth in per capita income, but we find no evidence that fixed investment is the only or main source of ignition for economic growth.

This paper explains why developed countries impose more trade barriers on middle-income countries than on either poor or other developed countries. We use a median voter model of the choice between trade and autarky embedded within an intraindustry trade model similar to Krugman. Our main result is the derivation of conditions under which a rich country rejects trade with middle-income countries, but accepts trade with either similar or poor countries. We also show that if increased inequality lowers median wealth in the developed country, the range of countries for which free trade is rejected is enlarged.

The paper suggests a new test for rent-sharing in the U. S. labor market. Using an unbalanced panel from the manufacturing sector, it shows that a rise in a sector's profitability leads after some years to an increase in the long-run level of wages in that sector. The paper controls for workers' characteristics, for industry fixed effects, and for unionism. Lester's range of wages is estimated, for rentsharing reasons alone, at approximately 24 percent of the mean wage.

As traders learn about the true distribution of some asset's dividends, a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred. Small differences in prior beliefs lead to large speculative premiums during the learning process. This phenomenon helps explain a paradox concerning the pricing of initial public offerings. The result casts light on the significance of the common prior assumption in economic models.

This paper documents the extent to which immigrants participate in the many programs that make up the welfare state. The immigrant-native difference in the probability of receiving cash benefits is small, but the gap widens once other programs are included in the analysis: 21 percent of immigrant households receive some type of assistance, as compared with only 14 percent of native households. The types of benefits received by earlier immigrants influence the types of benefits received by newly arrived immigrants. Hence there might be ethnic networks that transmit information about the availability of particular benefits to new immigrants.

In an audit study of sex discrimination in hiring, comparably matched pairs of men and women applied for jobs as waiters and waitresses at restaurants in Philadelphia. In high-price restaurants (where earnings are higher), job applications from women had an estimated probability of receiving a job offer that was lower by about 0.4, and an estimated probability of receiving an interview that was lower by about 0.35. Both estimated differentials are statistically significant. Additional evidence suggests that customer discrimination partly underlies the hiring discrimination.

Simultaneity between prisoner populations and crime rates makes it difficult to isolate the causal effect of changes in prison populations on crime. To break that simultaneity, this paper uses prison overcrowding litigation in a state as an instrument for changes in the prison population. The resulting elasticities are two to three times greater than those of previous studies. A one-prisoner reduction is associated with an increase of fifteen Index I crimes per year. While calculations of the costs of crime are inherently uncertain, it appears that the social benefits associated with crime reduction equal or exceed the social costs of incarceration for the marginal prisoner.

We study the effect of public insurance for children on their utilization of medical care and health outcomes by exploiting recent expansions of the Medicaid program to low-income children. These expansions doubled the fraction of children eligible for Medicaid between 1984 and 1992. Take-up of these expansions was much less than full, however, even among otherwise uninsured children. Despite this take-up problem, eligibility for Medicaid significantly increased the utilization of medical care, particularly care delivered in physicians' offices. Increased eligibility was also associated with a sizable and significant reduction in child mortality.

We analyze the timing, pace, and efficiency of ongoing job reallocation that results from product and process innovation. There are strong reasons why an efficient economy ought to concentrate both job creation and destruction during recessions, when the opportunity cost of reallocation is lowest. Incomplete contracting between labor and capital can disrupt this synchronized pattern and decouple creation and destruction. Transactional difficulties also lead to technological “sclerosis,” characterized by excessively slow renovation. Government incentives to production may alleviate high unemployment but exacerbate sclerosis. In contrast, creation incentives increase the pace of reallocation. An optimal combination of both policies restores economic efficiency.