Knowledge that Transforms

There is almost no support for the proposition that capital is attracted to low wages from firm-level studies. We examine the location choices of 2,884 firms investing in China between 1993 and 1996 to offer two main contributions. First, we find that the location of labor-intensive activities is highly elastic to provincial wage differences. Generally, investors' wage sensitivity declines as the skill intensity of the industry increases. Second, we find that unobserved location-specific attributes exert a downward bias on estimated wage sensitivity. Using a control function approach, we estimate a downward bias of 50% to 90% in wage coefficients estimated with standard techniques.

This paper introduces an empirical strategy to estimate dynamic treatment effects in randomized trials that provide treatment in multiple stages and in which various noncompliance problems arise, such as attrition and selective transitions between treatment and control groups. Our approach is applied to the highly influential four-year randomized class size study, Project STAR. We find benefits from attending small classes in all cognitive subject areas in kindergarten and first grade. We do not find any statistically significant dynamic benefits from continuous treatment versus never attending small classes following grade 1. Finally, statistical tests support accounting for both selective attrition and noncompliance with treatment assignment.

Understanding the relationship between nominal and real variables, most notably inflation and cyclical output, is one of the fundamental questions of economics. Toward this understanding, we develop a model that integrates sticky prices and sticky information—a dual-stickiness model. We find that both rigidities are present in U.S. data. We also show that the dual-stickiness model's closest competitor is the hybrid New Keynesian model. For both models, current inflation depends in part on last period's inflation. The former model achieves this dependence endogenously through the interaction of the two rigidities rather than through backward-looking behavior. U.S. data support the dual-stickiness model over the hybrid model because lagged expectations terms appear in the former's inflation Euler equation. Finally, we show that it is quantitatively important to distinguish between the two by simulating a dynamic equilibrium model under each of the two inflation equations.

We analyze nonlinear adjustments of capital and labor using plant data from the Colombian Annual Manufacturing Survey, allowing for interdependence in adjustments of the two factors. We find nonlinear employment and capital adjustments. We also find that capital shortages reduce hiring, and labor surpluses reduce capital shedding. Moreover, we find that job destruction and capital formation increased after factor market deregulation in Colombia. Finally, we find that completely eliminating frictions in factor adjustment would yield a substantial increase in aggregate productivity through improved allocative efficiency, but that the actual impact of the Colombian deregulation on productivity was modest.

Not properly accounting for differences between business owners and nonbusiness owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives. Using data from the Panel Study of Income Dynamics from the 1980s and 1990s, we show that within samples of both business owners and non–business owners, the amount of precautionary savings with respect to labor income risk is modest and accounts for less than 10% of total household wealth. Previous large estimates of the size of precautionary balances resulted from pooling these two groups together. Such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non–business owners for reasons unrelated to precautionary motives.

Economic theory suggests that intergovernmental grants are equivalent to private income. A large empirical literature, however, contradicts this prediction. A school finance reform in New Hampshire, where local public goods decisions are made by a form of direct democracy, provides an unusually compelling test of the theory. The results, which suggest that approximately ninety cents per grant dollar are spent on tax reduction, provide support for equivalence. The paper's findings have important policy implications for the financing of local public goods in general and for school finance reform in particular.

Abstract Recent theoretical models underscore the potential asymmetric response of various behaviors, ranging from criminal activity to smoking. In this paper, we use state-level panel and individual-level panel data to document the previously unnoticed asymmetric response of crime to changes in the unemployment rate. The results have policy implications, and they have potentially widespread ramifications because similar asymmetries may also be prevalent in other domains, ranging from the relationship between income and health to peer quality and student outcomes.

Being very attractive reduces a young adult's propensity for criminal activity and being unattractive increases it. Being very attractive is also positively associated with wages and with adult vocabulary test scores, which implies that beauty may have an impact on human capital formation. The results suggest that a labor market penalty provides a direct incentive for unattractive individuals toward criminal activity. The level of beauty in high school is associated with criminal propensity seven to eight years later, which seems to be due to the impact of beauty in high school on human capital formation, although this avenue seems to be effective for females only.

In this paper we use two alternative methods to assess the effects of climate change on the quality of wines from the vineyards of the Mosel Valley in Germany. In the first, structural approach we use a physical model of solar radiation to measure the amount of energy collected by a vineyard and then to establish the econometric relation between energy and vineyard quality. Coupling this hedonic function with the physics of heat and energy permits a calculation of the impact of any temperature change on vineyard quality (and prices). In a second approach, we measure the effect of year-to-year changes in the weather on land or crop values in the same region and use the estimated hedonic equation to measure the effect of temperature change on prices. The empirical results of both analyses indicate that the vineyards of the Mosel Valley will increase in value under a scenario of global warming, and perhaps by a considerable amount.

Shape invariance is a property of demand functions that is widely used for parametric and semiparametric modeling and is associated with a commonly employed class of equivalence scale models used for welfare calculations. This paper derives the set of all shape-invariant demand functions and associated preferences. All previously known shape-invariant demands were derived from utility functions that, up to monotonic transformation, are called IB/ESE (independent of base–equivalence scale exact) utility functions, because they yield IB/ESE equivalence scales. This paper shows that there exist exceptional shape-invariant demands that are not derived from a transform of IB/ESE utility and provides some simple tests for these exceptions. In particular, all the exceptions have rank 2, so any rank 3 or higher demand system is shape invariant if and only if it is derived from a transform of IB/ESE utility.