Knowledge that Transforms

Tiebout choice among districts is the most powerful market force in American public education. Naive estimates of its effects are biased by endogenous district formation. I derive instruments from the natural boundaries in a metropolitan area. My results suggest that metropolitan areas with greater Tiebout choice have more productive public schools and less private schooling. Little of the effect of Tiebout choice works through its effect on household sorting. This finding may be explained by another finding: students are equally segregated by school in metropolitan areas with greater and lesser degrees of Tiebout choice among districts.

This paper examines the role for tax policies in productivity-shock driven economies with catching-up-with-the-Joneses utility functions. The optimal tax policy is shown to affect the economy countercyclically via procyclical taxes, i.e., “cooling down” the economy with higher taxes when it is “overheating” in booms and “stimulating” the economy with lower taxes in recessions to keep consumption up. Thus, models with catching-up-with-the-Joneses utility functions call for traditional Keynesian demand-management policies but for rather unorthodox reasons.

Asset Markets: How They Are Affected by Tournament Incentives for Individuals by Duncan James and R. Mark Isaac. Published in volume 90, issue 4, pages 995-1004 of American Economic Review, September 2000

Economies of Scale and Constant Returns to Capital: A Neglected Early Contribution to the Theory of Economic Growth by Edmund S. Cannon. Published in volume 90, issue 1, pages 292-295 of American Economic Review, March 2000

Everyone has observed people invoking fair-ness arguments in defense of their opinions or actions, and it is not uncommon for such argu-ments to be wielded on both sides of an issue about which views conflict. For example, dur-ing a televised debate Representative Charles B. Rangel said, “I think [Affirmative Action] has to involve a search for fairness, ” whereas com-mentator Avi Nelson opined that “you promote more unfairness than fairness when you depart from the basic criterion, which is that individ-uals should be treated as individuals ” (Annen-

A Theory of Rigid Extremists and Flexible Moderates with an Application to the U.S. Congress by S. Brock Blomberg and Joseph E. Harrington. Published in volume 90, issue 3, pages 605-620 of American Economic Review, June 2000

The paper takes the search and matching model of the aggregate labor market to the data. It tests the model's empirical validity and employs structural estimation to generate a characterization of the optimal behavior of firms and workers. The model is applied to Israeli data that are uniquely suited for this kind of empirical investigation. The structural estimates are used to quantify the frictions embodied in the model, including the costs of search, the congestion and trading externality effects, and the matching process. A calibration-simulation analysis then studies the effect of several key variables on equilibrium unemployment.

Does Culture Matter in Economic Behavior? Ultimatum Game Bargaining among the Machiguenga of the Peruvian Amazon by Joseph Henrich. Published in volume 90, issue 4, pages 973-979 of American Economic Review, September 2000

In a world of trade restrictions, large countries enjoy economic benefits, because political boundaries determine the size of the market. Under free trade and global markets even relatively small cultural, linguistic or ethnic groups can benefit from forming small, homogeneous political jurisdictions. This paper provides a formal model of the relationship between openness and the equilibrium number and size of countries, and successfully tests two implications of the model. Firstly, the economic benefits of country size are mediated by the degree of openness to trade. Secondly, the history of nation-state creations and secessions is influenced by the trade regime.