Knowledge that Transforms

We present a dynamic model of adverse selection to examine the interactions between new and used goods markets. We find that the used market never shuts down, the volume of trade can be large, and distortions are lower than previously thought. New cars prices can be higher under adverse selection than in its absence. An extension to several brands that differ in reliability leads to testable predictions of the effects of adverse selection. Unreliable brands have steeper price declines and lower volumes of trade. We contrast these predictions with those of a model where brands physically depreciate at different rates.

Theory restricts short-run job creation and destruction responses and cumulative employment and job reallocation responses to allocative and aggregate shocks. We formulate these restrictions and implement them for postwar data on U.S. manufacturing. Allocative shocks are the main driving force behind cyclical movements in job reallocation, but their contribution to employment fluctuations varies greatly across alternative identification assumptions. Also, the data compel one or both of the following inferences: aggregate shocks greatly alter the shape and not just the mean of the cross-sectional density of employment growth rates; allocative shocks cause short-run reductions in aggregate employment.

Does the positive correlation between infrastructure and productivity reflect causation? If so, in which direction? I find that when growth in roads (the largest component of infrastructure) changes, productivity growth changes disproportionately in U.S. industries with more vehicles. That vehicle-intensive industries benefit more from road-building suggests that roads are productive. At the margin, however, road investments do not appear unusually productive. Intuitively, the interstate system was highly productive, but a second one would not be. Road-building thus explains much of the productivity slowdown through a one-time, unrepeatable productivity boost in the 1950's and 1960's.

A central implication of the life-cycle (or permanent-income) theory is that consumption should not respond to predictable fluctuations in income. Tests of this implication have yielded mixed results, especially on micro data (Angus Deaton, 1992; Martin Browning and Annamaria Lusardi, 1996). In large part this might be due to the difficulties of isolating the predictable component of income at the micro level. Most tests proceed by instrumenting for income, but since the available instruments are typically poor, such tests might be prejudiced against finding significant excess sensitivity of consumption to income (John Shea, 1995).' Also, it is not clear how closely the resulting econometric predictions of income coincide with agents' actual expectations of income. To avoid these difficulties this paper examines the response of household consumption to a particular type of income that is both predictable and transitory-income tax refunds. Since a refund depends on events in the previous calendar year, it is predictable income as regards consumption in the year of its receipt. Consequently, under the life-cycle theory consumption should not increase on receipt of a refund.2 In addition to testing the canonical model of consumption, this paper provides estimates interpretable as the marginal propensity to consume (MPC) out of refunds. Since federal tax refunds now amount to over $80 billion per year (averaging well over $1,000 per refund), these estimates are of interest in themselves. More generally they bear on the impact of even preannounced and temporary changes in fiscal policy. The paper begins by surveying related studies in Section I. Section II describes the data, the Consumer Expenditure Survey (CEX), which of the leading U.S. micro data sets has the most comprehensive coverage of expenditure. The empirical specification is set out in Section HI. Section IV reports the results, and Section V concludes.

Governments often promote inward foreign investment to encourage technology “spillovers” from foreign to domestic firms. Using panel data on Venezuelan plants, we find that foreign equity participation is positively correlated with plant productivity (the “own-plant” effect), but this relationship is only robust for small enterprises. We then test for spillovers from joint ventures to plants with no foreign investment. Foreign investment negatively affects the productivity of domestically owned plants. The net impact of foreign investment, taking into account these two offsetting effects, is quite small. The gains from foreign investment appear to be entirely captured by joint ventures.

Governments often seek influence beyond their borders. One way is through what Thomas Schelling (1960, 1966) calls brute force, taking direct physical control. Less extreme methods are to promise rewards for taking desired actions, or to threaten punishments for not carrying them out-sanctions. Sanctions involve two parties, the sender and the target. (To help identify pronouns' antecedents, we consider a feminine sender and masculine target.) The sender's objective is to influence the target by threatening to impose some measure against him for acting contrary to her interest. Sanctions have long been important in international relations. Athens imposed a trade embargo against Megara, ultimately setting off the Peloponnesian War (431-404 BC). Sanctions are central to such international agreements as the United Nations Charter, the World Trade Organization, and the Montreal Protocol governing chlorofluorocarbons. U.S. law prescribes the use of sanctions in circumstances related, for example, to national security, human rights, intellectual property, and international trade.' Do sanctions actually achieve senders' objectives? A common claim is that they usually fail and are costly to senders. Recent U.S. legislation proposes to limit unilateral U.S. sanctions (except trade-related ones), on the grounds that they cost more than they are worth. History provides examples of sanctions that were costly and ineffectual, such as the League of Nations sanctions against the Italian occupation of Abyssinia, or U.S. sanctions against Cuba. United Nations sanctions against Iraq remain in place, having achieved less than full success, to say the least (see Gary Hufbauer et al., 1990). More systematic studies suggest that sanctions often do succeed, particularly when objectives are modest. Hufbauer et al. (1990) examine 116 episodes of sanctions with military or political objectives, deeming about one-third successful. Sanctions imposed under U.S. trade law have worked even better, about three-fourths of the time (see e.g., Sykes, 1992; Thomas Bayard and Kimberly A. Elliott, 1994; Elliott and J. David Richardson, 1997). Here we develop a simple framework to explain how sanctions can worl, and what is required for them to succeed. Our framework exploits advances in the theory of repeated games and bargaining under incomplete information. While a game-theorist would recognize the flavor of our results, the setting here is a fresh one.2 We find success more likely when the threatened measure costs the sender little relative to the gain from modifying the target's behavior, while the damage to the target is large relative to his cost of complying with the sender's will-results consistent with both intuition and empirical evidence (as well as with Adam Smith [1776 Book IV, Ch. I]). Moreover, a more patient sender is more likely to succeed, while the target's patience can work to the sender's disadvantage.3

Casual observations and the best data available indicate remarkable geographic differences in levels of living within China. What creates China's poor areas? Are they catching up? What should governments do? The paper provides an overview of recent research addressing these questions. There is evidence of sizable negative externalities to households of living in a poor area. Location matters greatly to growth prospects at the farm household level independently of (observed and unobserved) household characteristics. Geographic poverty traps are common. There also appears to be a high degree of transient poverty associated with poorly developed risk markets. The paper argues that poor-area programs make sense in China, given that where you live constrains prospects of escaping poverty, including by out-migration. However, such programs alone are unlikely to solve China's poverty problem. A comprehensive strategy for doing so will also help protect poor people from the risks they face, and should not neglect poor people in non-poor areas.

Examining the Employer-Size Wage Premium in the Manufacturing, Retail Trade, and Service Industries Using Employer-Employee Matched Data by Kimberly Bayard and Kenneth R. Troske. Published in volume 89, issue 2, pages 99-103 of American Economic Review, May 1999

The Geographic Concentration of Industry: Does Natural Advantage Explain Agglomeration? by Glenn Ellison and Edward L. Glaeser. Published in volume 89, issue 2, pages 311-316 of American Economic Review, May 1999