Knowledge that Transforms

The effect of insecure ownership on ordinary investment and natural resource use is examined. Insecure ownership is postulated to depend on the type of government regime in power and the prevalence of political violence or instability. The political determinants of economywide investment are estimated from cross-country data, and the results are used to form an index of ownership security. When introduced into empirical models of natural resource use, this index has a significant and quantitatively important effect on the use of forests and petroleum. Contrary to conventional wisdom, ownership risk slows resource use in some circumstances.

Optimal Risk Adjustment in Markets with Adverse Selection: An Application to Managed Care by Jacob Glazer and Thomas G. McGuire. Published in volume 90, issue 4, pages 1055-1071 of American Economic Review, September 2000

Garfinkel: Department of Economics, University of fornia, 3151 Social Science Plaza, Irvine, CA 92697; Lee: artment of Economics, University of California, 3151 SoScience Plaza, Irvine, CA 92697, and International MonFund, 700 19th Street, NW, Washington, DC 20431. We k, without implicating, Avinash Dixit, Amihai Glazer, chel Grossman, Luisa Lambertini, Stergios Skaperdas, an ymous referee, and seminar participants at the University alifornia-Los Angeles, California State Universityerton, and the 1998 Winter Meetings of the Econometociety for helpful comments on previous drafts of this r, which had been circulated under the title “Political ipline and the Dynamic Consistency of Policy.” The s expressed in this paper are those of the authors and ld not be attributed to the International Monetary Fund. See Torsten Persson and Guido Tabellini (1990) for a ul survey of this literature.

Nominal Wage Rigidity and Industry Characteristics in the Downturns of 1893, 1929, and 1981 by Christopher Hanes. Published in volume 90, issue 5, pages 1432-1446 of American Economic Review, December 2000

High and rising executive pay levels over the past two decades have attracted considerable popular and political hostility. As Michael Jensen and Kevin J. Murphy (1990 p. 227) argue, these forces may constrain compensation practices in informal and indirect ways. Our earlier work documents the impact of such indirect political constraints on executive compensation in regulated sectors (Paul Joskow et al., 1993, 1996). This study investigates the political use of the corporate tax code to influence executive-pay decisions more broadly. In particular, we analyze the provision of the Omnibus Budget Reconciliation Act of 1993 (OBRA) that eliminated corporate tax deductibility for compensation in excess of $1 million for the CEO and each of the next four highestpaid executives within a firm. Congressional proponents of this legislation argued that this provision would reduce excessive CEO pay by raising its cost to the corporation. Exemptions for qualified performance-based compensation could have further indirect effects by inducing changes in the structure of executive compensation plans. Given the broad scope for exemptions and the minimal impact that tax deductibility of executive pay typically has on overall corporate profitability, however, the real impact of the tax cap on executive-pay patterns remains an open question. This paper, with Rose and Wolfram (2000), extends analyses by Tod Perry and Marc Zenner (1999) and Brian Hall and Jeffrey Liebman (2000), to provide further evidence on the impact of this legislation on CEO pay.

This paper challenges the current belief that income inequality has a negative relationship with economic growth. It uses an improved data set on income inequality which not only reduces measurement error, but also allows estimation via a panel technique. Panel estimation makes it possible to control for time-invariant country-specific effects, therefore eliminating a potential source of omitted-variable bias. Results suggest that in the short and medium term, an increase in a country's level of income inequality has a significant positive relationship with subsequent economic growth. This relationship is highly robust across samples, variable definitions, and model specifications.

The macroeconomic analysis of fiscal policy is usually based on one of two canonical models--the Barro-Ramsey model of infinitely-lived families or the Diamond-Samuelson model of overlapping generations. This paper argues that neither model is satisfactory and suggests an alternative. In the proposed model, some consumers plan ahead for themselves and their descendants, while others live paycheck to paycheck. This model is easier to reconcile with the essential facts about consumer behavior and wealth accumulation, and it yields some new and surprising conclusions about fiscal policy.

It is hard to believe that factor-endowments theory could offer an adequate explanation of international trade patterns. While the theory adequately predicts Saudi Arabian oil exports, it hardly seems appropriate for explaining the revolutionary impact of new technologies on world trade. Yet to take this position is to misunderstand the thrust of recent empirical research in international trade, research that is giving shape to a new generation of Heckscher-Ohlin-Vanek (HOV) thinking. The core of this new thinking is a class of HOV predictions that allow for international differences in technology and choice of techniques. The literature is in the process of rapid evolution. As a result, the key questions tend to get lost. There have been three of them. First, what empirical regularities account for the poor performance of the HOV model? Second, are there alternative assumptions about technology that lead to better test results for the model? Both of these are interesting questions, but they hardly constitute an end point for understanding the impacts of international trade. As Edward E. Leamer (1993 p. 439) pointed out, [E]conomists ought to abandon the idea that models are either true or false in favor of the notion that models are sometimes useful and sometimes misleading. The third and most important question is whether the HOV model provides a useful framework for thinking about international technology differences. In spite of the defects of the model, the answer is a definite ''yes.9

Direct measures of labor-force quality from international mathematics and science test scores are strongly related to growth. Indirect specification tests are generally consistent with a causal link: direct spending on schools is unrelated to student performance differences; the estimated growth effects of improved labor-force quality hold when East Asian countries are excluded; and, finally, home-country quality differences of immigrants are directly related to U.S. earnings if the immigrants are educated in their own country but not in the United States. The last estimates of micro productivity effects, however, introduce uncertainty about the magnitude of the growth effects.