Knowledge that Transforms

What features characterize the evolution of the U.S. urban system in this past century? To what extent has the 500-percent increase in national urban population during 1900 – 1990 been accommodated by growth in numbers versus sizes of cities? Given the radical changes in the U.S. economic geography, has the relative size distribution of city sizes changed significantly with, say, strong increases in urban concentration and primacy, a popular notion? As urbanization slowed after World War II, did fluctuations in city sizes and upward/downward mobility of cities dampen, as an Arthur scale economy framework would predict (Brian Arthur, 1990)? Finally, what natural geographic features of a city promote growth? How important are climate, location, neighbor cities, and the like? An interrelated set of questions concerns the agglomeration and mobility of industrial activity within the set of cities. Are industries that are subject to greater scale economies both more agglomerated and less mobile? For industries that are not subject to scale economies, why does agglomeration occur? Central to answering these questions is measuring the nature and extent of scale economies. This paper reports results on these two sets of issues, using Population Census data for 1900–1990 and Manufacturers Census data for 1963–1992 for a selection of machinery and high-tech industries.

William Vickrey's predicted equivalences between first-price sealed-bid and Dutch auctions, and between second-price sealed-bid and English auctions, are tested using field experiments that auctioned off collectible trading cards over the Internet. The results indicate that the Dutch auction produces 30-percent higher revenues than the first-price auction format, a violation of the theoretical prediction and a reversal of previous laboratory results, and that the English and second-price formats produce roughly equivalent revenues.

This paper presents the point systems used for immigrant selections under the Humanitarian and Migration programs in Australia which regulates the inflow of persons seeking permanent residence. The method used for immigrant selection in these programs may affect immigrant quality and labor-market performance. The point tests identify factors in a potential migrant that will benefit Australia or assist with the residency process. The point systems used in a number of components of the immigration program in Australia offer a means of selecting immigrants who will adjust rapidly to the situation of the Australian labor market and bring benefit to Australia. It was demonstrated immigrants are selected for entry on the basis of observable characteristics of the type generally included in empirical analysis of immigrant labor-market performance. It was further concluded that the worldwide market conditions for skilled immigrants are more likely to affect the variations in immigrant quality in Australia than by the Australian point system.

New Evidence on the Money's Worth of Individual Annuities by Olivia S. Mitchell, James M. Poterba, Mark J. Warshawsky and Jeffrey R. Brown. Published in volume 89, issue 5, pages 1299-1318 of American Economic Review, December 1999

This paper studies decision-making with rules of thumb in the context of dynamic decision problems and compares it to dynamic programming. A rule is a fixed mapping from a subset of states into actions. Rules are compared by averaging over past experiences. This can lead to favoring rules which are only applicable in good states. Correcting this good state bias requires solving the dynamic program. We provide a general framework and characterize the asymptotic properties. We apply it to provide a candidate explanation for the sensitivity of consumption to transitory income.

We model a war of attrition with N + K firms competing for N prizes. In a “natural oligopoly” context, the K − 1 lowest-value firms drop out instantaneously, even though each firm's value is private information to itself. In a “standard setting” context, in which every competitor suffers losses until a standard is chosen, even after giving up on its own preferred alternative, each firm's exit time is independent both of K and of other players' actions. Our results explain how long it takes to form a winning coalition in politics. Solving the model is facilitated by the Revenue Equivalence Theorem.

There is a great deal of geographic variation in Medicare spending. For example, while the average Medicare cost per beneficiary was around $5200 in 1996, Medicare spending, adjusted for diffences in regional prices and demographic composition, was about $8000 per person in Miami, but only $3500 in Minneapolis. In this paper, we explore the source of this variation. We find that a substantial amount can be explained by differences across areas in the health of the elderly population. This finding suggests that some of the geographic variation in Medicare spending is efficient. But even accounting for differences in the health of the population, significant variation remains. We have been able to explain some of the remaining variation. The strongest factors are supply variables: for-profit hospitals and specialist physicians both increase Medicare spending. If these factors are exogenous, public policy may want to consider the supply of medical services more than it currently does. We do not find that expensive places spend a disproportionate amount on those near death.

We study a dynamic version of Meltzer and Richard's median-voter model of the size of government. Taxes are proportional to total income, and they are redistributed as equal lump-sum transfers. Voting takes place periodically over time, and each consumer votes for the tax rate that maximizes his equilibrium utility. We calibrate the model to U.S. data. Key elements in the calibration are the income and wealth distribution and the parameters governing the leisure and consumption choices. The total size of transfers predicted by our political-economy model is quite close to the size of transfers in the data.

The Impact of Global Warming on Agriculture: A Ricardian Analysis: Reply by Robert Mendelsohn and William D. Nordhaus. Published in volume 89, issue 4, pages 1046-1048 of American Economic Review, September 1999

In recent years there has been great interest in economic geography (e.g., Paul Krugman, 1991). A central theoretical result from this literature is that if the population increases at a location, there will be an increase in the variety of differentiated goods produced at the location. In these analyses, the number of different varieties at a location is the key margin. This paper (which summarizes work in Holmes [1998]) highlights a second margin that the previous literature has ignored. It argues that this second margin should be incorporated into the analysis because it will help to explain an empirical relationship. This second margin is the scale of local production of particular differentiated goods. An increase in population will increase the scale of production of existing locally produced goods, in addition to increasing the variety of such goods. The empirical relationship that holds for certain industries is a convexity in the relationship between local production and population. The existing literature has ignored this second margin because it has focused on the Dixit-Stiglitz model of monopolistic competition (Avinash K. Dixit and Joseph E. Stiglitz, 1977). In the way this model is usually implemented, the equilibrium output of any particular locally produced differentiated product is independent of local population. As population increases, total local production expands by adding new varieties; the scale of production of any existing product remains fixed. This is an implausible implication. It is reasonable to expect that the output of existing products would increase. This paper departs from the Dixit-Stiglitz formulation to incorporate this second margin. A general requirement of the Dixit-Stiglitz formulation is that the elasticity of substitution between differentiated inputs exceed 1. A key feature of my formulation is a low elasticity of substitution; in fact, I look at a special case where it is zero (Leontief). This limits the tendency to substitute variety for quantity of particular differentiated inputs. To see the basic idea, suppose output in a particular industry (e.g., grocery wholesaling), is a composite of 10 different specialized inputs (e.g., vegetable wholesaling, fish wholesaling, etc.). The technology is Leontief so that to make one unit of the wholesaling composite, one unit of each of the 10 differentiated inputs is required. In a small town, there may be local production of perhaps only two specialist inputs. For example, the small town may have a local vegetable wholesaler and a packaged-goods wholesaler, but not a fish wholesaler, not a candy wholesaler, and so on. For this town, required vegetable and required packaged-goods wholesaling services will be acquired locally, while the needed fishwholesaling services will be imported from somewhere else. In contrast, a large city may be of sufficient scale to have many different inputs produced locally. For the purpose of later discussion, I will assume that a particular large city has seven out of the 10 different inputs provided locally. Adding people to a location increases the variety of locally produced goods, as in the standard model. But there is also a second effect: adding people increases the scale of production of the existing products. If the vegetable-wholesaling product is initially provided locally, then adding an additional person will increase the output of local vegetable wholesaling because this new person will want vegetables! The reason why adding this second margin is an interesting thing to do is that it provides a nice explanation for why there might exist a convex relationship between local industry production and population (I discuss the empirical basis for this relationship below). * Department of Economics, University of Minnesota, Minneapolis, MN 55455, and Federal Reserve Bank of Minneapolis. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.