Knowledge that Transforms

We evaluate two alternative models of international trade in differentiated products. An increasing returns model where varieties are linked to firms predicts home market effects: increases in a country's share of demand cause disproportionate increases in its share of output. In contrast, a constant returns model with national product differentiation predicts a less than proportionate increase. We examine a panel of U.S. and Canadian manufacturing industries to test the models. Although we find support for either model, depending on whether we estimate based on within or between variation, the preponderance of the evidence supports national product differentiation. (JEL F12, F15)

The estimates in the study considered whether any of the governmental or family factors individually could explain the magnitude and pattern of black-white achievement gaps. Neither the level nor the distribution of school spending appears to provide much explanation for the gaps. School spending levels show little consistent impact with any indication of differential impact on blacks being small. Direct analyses of the effects of spending equalization on performance similarly show little impact. On the other hand, governmental intervention through integration programs appears potentially more important.

This paper investigates how openness to international goods markets affects pollution concentrations. We develop a theoretical model to divide trade's impact on pollution into scale, technique, and composition effects and then examine this theory using data on sulfur dioxide concentrations. We find international trade creates relatively small changes in pollution concentrations when it alters the composition of national output. Estimates of the trade-induced technique and scale effects imply a net reduction in pollution from these sources. Combining our estimates of all three effects yields a somewhat surprising conclusion: freer trade appears to be good for the environment. (JEL F11, Q25)

Economists are as perplexed as anyone by the behavior of the stock market. Figure 1 shows a broad measure of stock-market value in relation to GDP from 1947 through 2000. In addition to saw-tooth movements including the contraction in late 2000, the value of the stock market has large, low-frequency swings, moving upward from 1950 to 1965, then downward to 1982, and upward until early 2000. I entertain the hypothesis that these large movements are the result of rational (if not accurate) appraisal of the cash likely to be received by shareholders in the future. The hypothesis receives some support from work by financial economists showing that irrational markets create profit opportunities for active traders and that passive traders consistently earn higher returns. Most of my discussion will be complementary to the work of financial economists—I will look at the fundamentals underlying stock-market values. The lecture considers three potential contributors to the big movements shown in Figure 1:

One of the most striking trends in the behavior of youth in the United States during the 1990's has been the increased incidence of smoking. After steadily declining over the previous 15 years, youth smoking began to rise precipitously in 1992. By 1997, smoking by teenagers in the United States had risen by one-third from its 1991 trough, before declining again somewhat in 1998 and 1999. This trend is particularly striking in light of the continuing steady decline in adult smoking in the United States. This striking time trend has motivated substantial public-policy interest in youth smoking, highlighted by the recent unsuccessful attempt of the Clinton Administration to pass a comprehensive tobacco-regulation bill that had the ostensible main pulpose of reducing youth smoking. This public-policy interest arises out of concern that youth are not appropriately recognizing the long-run implications of their smoking decisions. Indeed, young smokers clearly underestimate the likelihood that they will still be smoking in their early twenties and beyond. For example, among high-school seniors who smoke, 56 percent say that they will not be smoking five years later, but only 31 percent of them have in fact quit five years hence. Moreover, among those who smoke more than one pack per day, the smoking rate five years later among those who stated that they would not be smoking (74 percent) is actually higher than the smoking rate among those who stated that they would be smoking (72 percent) (Department of Health and Human Services, 1994). If youth smoking leads to adult smoking, particularly in a manner that is underappreciated by the youth smokers themselves, it can have drastic implications for the health of the U.S. population. Smoking-related illness is the leading preventable cause of death in the United States, and smokers on average live from 6.5 (males) to 5.7 (females) fewer years, relative to those who have never smoked (David Cutler et al., 1999). The notion that this increase in youth smoking will lead to a rise in adult smoking is supported by the fact that 75 percent of smokers begin before their 19th birthday (Gruber and Jonathan Zinman, 2001). But this fact does not prove that the curTent upswing in youth smoking will lead to higher long-run adult smoking rates, as it is difficult to distinguish causality from these intertemporal colTelations; smoking later in life may not be a consequence of youth smoking for adults in the past, but rather smoking at both points in life may simply arise from intertemporal correlation in tastes for this activity. In this paper, I first discuss the causes of the rise in youth smoking in the 1990's, then provide some evidence to help causally assess its long-run implications for smoking in the United States and the health of the U.S. population.

In this paper, I try to shed some new light on the “puzzle” of why the Lucas critique, believed to be important by most economists, seems to have received very little empirical support. I use a real-business-cycle model to verify that the Lucas critique is quantitatively important in theory, and to examine the properties of the super-exogeneity test, which is used to detect the applicability of the Lucas critique in practice. The results suggest that the superexogeneity test is not capable of detecting the relevance of the Lucas critique in practice in small samples. (JEL C52, C22, E41)

This paper develops microfoundations for the role that diversified cities play in fostering innovation. A simple model of process innovation is proposed, where firms learn about their ideal production process by making prototypes. We build around this a dynamic general-equilibrium model, and derive conditions under which diversified and specialized cities coexist. New products are developed in diversified cities, trying processes borrowed from different activities. On finding their ideal process, firms switch to mass production and relocate to specialized cities where production costs are lower. We find strong evidence of this pattern in establishment relocations across French employment areas 1993–1996. (JEL R30, O31, D83)

This paper introduces a new model of exchange: networks, rather than markets, of buyers and sellers. It begins with the empirically motivated premise that a buyer and seller must have a relationship, a “link,” to exchange goods. Networks—buyers, sellers, and the pattern of links connecting them—are common exchange environments. This paper develops a methodology to study network structures and explains why agents may form networks. In a model that captures characteristics of a variety of industries, the paper shows that buyers and sellers, acting strategically in their own self-interests, can form the network structures that maximize overall welfare. (JEL D00, L00)

E-commerce is a hot topic; however, little is known about the actual size and impact of ecommerce in the United States. In part this is because e-commerce is a recent and rapidly evolving phenomenon, but it is also because the measurement of e-commerce presents a number of challenges. Some of these challenges are essentially unique. Others are similar to, or extensions of, old economy measurement challenges.

Creating Modern Art: The Changing Careers of Painters in France from Impressionism to Cubism by David W. Galenson and Bruce A. Weinberg. Published in volume 91, issue 4, pages 1063-1071 of American Economic Review, September 2001