Knowledge that Transforms

What is the role of transport improvements in globalization? We argue that the nineteenth century is the ideal testing ground for this question: freight rates fell on average by 50% while global trade increased 400% from 1870 to 1913. We estimate the first indices of bilateral freight rates for the period and directly incorporate these into a standard gravity model. We also take the endogeneity of bilateral trade and freight rates seriously and propose an instrumental variables approach. The results are striking as we find no evidence that the maritime transport revolution was the primary driver of the late nineteenth century global trade boom. Rather, the most powerful forces driving the boom were those of income growth and convergence.

This paper analyzes a 1992 decrease in U.S. federal income tax withholding that shifted the timing of income tax payments while leaving ultimate tax burdens unchanged. Consequently income typically received as a lump-sum refund on filing a tax return was shifted into the previous year's monthly income. This paper considers the impact of the withholding change in the context of mental accounting and finds a decrease in the probability that households contributed to a tax-preferred retirement account. Additional robustness tests show that short-term saving did not simultaneously increase and that the main findings are not driven by liquidity constraints.

We document a positive correlation between stock market capitalization and price levels (wages) within the group of countries with poorly developed stock markets and a negative correlation between these two variables within the group of countries with more developed stock markets. This paper argues that there is a causal relationship behind these correlations. Stock markets initially stimulate growth, pushing the demand for nontradables and increasing prices and wages. Stock markets also promote a shift toward more capital-intensive technologies in the tradable sector, increasing the migration of workers to services and eventually putting downward pressure on wages and prices.

An important class of investment decisions is characterized by unrecoverable sunk costs, resolution of uncertainty through time, and the ability to invest in the future as an alternative to investing today. The options model provides guidance in such settings, including an investment decision rule called the "bad news principle": the downside investment state influences the investment decision whereas the upside investment state is ignored. This study takes a new approach to examining predictions of the options model by using the tools of experimental economics. Our evidence, which is drawn from student and professional trader subject pools, is broadly consonant with the options model.

The efforts exerted by children, parents, and schools affect the outcome of the education process. We build this idea into a theoretical model where the effort exerted by the three groups of agents is simultaneously determined as a Nash equilibrium. The empirical analysis tests the model using the British National Child Development Study and finds support for this idea. We identify which factors affect educational attainment directly and which indirectly through effort. From a policy perspective, the paper indicates that affecting effort directly would have a positive impact on attainment.

Universities are engaged in many activities, primarily research and teaching. Many states have instituted performance measures that focus on evaluating a university's success in teaching. We suggest that multitasking may be important in this context, and we consider research outcomes after adoption. We find striking results that depend on university status. Research activity is higher at flagship institutions after the adoption of performance measures. Most of this increase in activity is with respect to the level of research funding and the number of articles produced. In contrast, research funding and the number of publications is dramatically lower at nonflagship institutions. There is some evidence that citations per publication at nonflagship institutions are higher after the adoption of performance standards. The evidence suggests that universities have become more specialized since the introduction of these programs.

If households face uninsurable idiosyncratic earnings risk, theory predicts that redistributive tax and transfer systems have both an insurance and a distortionary effect. Exploiting the substantial variation of tax and transfer systems across U.S. states and over time, we investigate the necessary traces of these two effects in the data: that state-level measures of redistributive taxation should correlate negatively with the standard deviation and the mean of the within-state consumption distribution. We find that the first correlation is robust, supporting strongly the presence of an insurance effect. The distortionary effect can also be detected in the data, but it is less precisely estimated.

In a natural experiment among former colonies between 1970 and 1999, weak institutions reflected in high settler mortality and French legal origin often increase the likelihood and intensity of local currency and real crises (i.e., those resulting in a drop in real output) amid six global crises. The effects of institutions on crises are often mediated through macroeconomic policies, but they are often not primary channels. Persistent institutions (i.e., those reflected in the legal origins and settler mortality) predict the occurrence and intensity of crises better than time-varying institutions do.

Does economic inequality affect redistributive policy? This paper turns to U.S. county data on land inequality over the period 1890 to 1930 to help address this fundamental question in political economy. Redistributive policy was primarily decided at the local level during this period, making county-level data particularly informative. Examining within-state variation also reduces the potential impact of latent institutional and political variables. The paper also uses a variety of identification strategies, including historic variables as well as county weather and crop characteristics, as instruments for land inequality. The evidence consistently suggests that greater inequality is significantly associated with less redistribution. This negative relationship is especially large in heavily rural counties, where concentrated landownership implied that landed elites also controlled the majority of economic production.

Recent evidence from Bound, Brown, and Mathiowetz (2001) and Black, Sanders, and Taylor (2003) suggests that reporting errors in survey data routinely violate all of the classical measurement error assumptions. The econometrics literature has not considered the consequences of fully arbitrary measurement error for identification of regression coefficients. This paper highlights the severity of the identification problem given the presence of even infrequent arbitrary errors in a binary regressor. In the empirical component, health insurance misclassification rates of less than 1.3% generate double-digit percentage point ranges of uncertainty about the variable's true marginal effect on the use of health services.