Knowledge that Transforms

The pattern of disagreement between bond raters suggests that banks and insurance firms are inherently more opaque than other types of firms. Moody's and S&P split more often over these financial intermediaries, and the splits are more lopsided, as theory here predicts. Uncertainty over the banks stems from certain assets, loans and trading assets in particular, the risks of which are hard to observe or easy to change. Banks' high leverage, which invites agency problems, compounds the uncertainty over their assets. These findings bear on both the existence and reform of bank regulation.

Losing Sleep at the Market: The Daylight Saving Anomaly: Reply by Mark J. Kamstra, Lisa A. Kramer and Maurice D. Levi. Published in volume 92, issue 4, pages 1257-1263 of American Economic Review, September 2002

Asymmetric Information in Community Banking and Its Relationship to Credit-Market Discrimination by Christopher Henderson. Published in volume 92, issue 2, pages 315-319 of American Economic Review, May 2002

This paper investigates the distribution of well being among world citizens during the last two centuries. The estimates show that inequality of world distribution of income worsened from the beginning of the 19th century to World War II and after that seems to have stabilized or to have grown more slowly. In the early 19th century most inequality was due to differences within countries; later, it was due to differences between countries. Inequality in longevity, also increased during the 19th century, but then was reversed in the second half of the 20th century, perhaps mitigating the failure of income inequality to improve in the last decades.

This paper constructs a new data set of repeated sales of artworks and estimates an annual index of art prices for the period 1875-2000. Contrary to earlier studies, we find art outperforms fixed income securities as an investment, though it significantly under-performs stocks in the US. Art is also found to have lower volatility and lower correlation with other assets, making it more attractive for portfolio diversification than discovered in earlier research. There is strong evidence of underperformance of masterpieces, meaning expensive paintings tend to underperform the art market index. The evidence is mixed on whether the law of one price holds in the New York auction market.

Daniel Trefler’s article in this journal (Daniel Trefler, 1995) is an excellent investigation of observed patterns and volumes of trade. He identifies the theoretical predictions of factorproportions models of international trade put forward by Eli F. Heckscher (1991), Bertil G. Ohlin (1991), and Jaroslav Vanek (1968) and summarizes these as the HOV model. These theoretical predictions lead to a number of “mysteries” when examined empirically— “mystery” being a code word for rejection by the data. He then introduces a number of extensions of the HOV model, and gauges empirically the extent to which the modified HOV model is rejected relative to each extension. For each extension, he examines the persistence of the mysteries; in his favored specification of country-specific neutral technological difference and preference for home goods in demand, the anomalies in the data are found to be greatly reduced. In this paper, I demonstrate that there are alternative explanations for the mysteries that Trefler identified. I indicate the features of the data that lead to the mysteries and provide an intuitive separation of the mysteries into those observed in the pattern of trade and those observed in the volume of trade. Econometric tests demonstrate that explanations other than those put forward by Trefler are better supported by the data. There are three specific contributions of this Comment. First, alternative explanations of the success of Trefler’s preferred specification in modeling variation in trade data are put forward. Second, a nonparametric method for calculating the degree of mismeasurement of factor scarcity is introduced and the improvement in explanatory power of that method is measured. Third, statistical comparison of an explanation of the observed antitrade bias rooted in factor-specific differences in domestic factor mobility with Trefler’s explanation based upon country-specific productivity differences and home bias in expenditures yields the conclusion that differences in domestic factor mobility is the preferred explanation. These results, taken together, suggest that theories designed to explain observed trade patterns and volumes should reexamine the proxy for factor scarcity derived in the HOV model and should allow for the impact of factor-specific differences in the domestic mobility of factors of production.

On average, roughly 5-10 percent of the firms in a given market leave that market over the span of a single year. At least so data for a broad range of industries in several economies tell us. What is it, other than random shocks, that determines the probability of survival for a firm in a given market? We start by decomposing the forces that affect survival into industry and firm attributes. Industry attributes, we hypothesize, encompass variables that exert their influence both over time and across markets. The variables that operate over time are defined by the life cycle of the industry. Life cycles of the industry affect mainly the characteristics of demand and the rate and form of technical change. Variations across firms, we hypothesize, arise mainly from learning-by-doing, Darwinian survival of the fittest, and the obsolescence of initial endowments. These variables are linked to the life cycle of the firm. How these industry and firm life cycles define patterns of survival is the story

I use U.S. patent data from 1970 to 1994 to estimate the effect of energy prices on energy-efficient innovations. Using patent citations to construct a measure of the usefulness of the existing base of scientific knowledge, I consider the effect of both demand-side factors, which spur innovative activity by increasing the value of new innovations, and supply-side factors, such as scientific advancements that make new innovations possible. I find that both energy prices and the quality of existing knowledge have strongly significant positive effects on innovation. Furthermore, I show that omitting the quality of knowledge adversely affects the estimation results.

FEDERAL RESERVE BANK OF CLEVELANDWorking papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Working papers are now available electronically through the Cleveland Fed’s site on the World Wide

Unwanted children may be more subject to child abuse and neglect by their parents or care-takers than are desired children, in part because such children may be born and raised in less favorable circumstances that foster maltreatment. In addition, parents may be more likely to maltreat unwanted children; sociological and medical studies suggest a link between unplanned births and subsequent child abuse (Susan J. Zuravin, 1987). Child abuse and neglect may be linked to abortion availability if reduced access to abortion providers leads to more births of unwanted or unplanned children and to maltreatment of some of these children, a possibility investigated in this paper. A variety of evidence suggests that abortion availability affects fertility behavior and child outcomes. Increased abortion availability leads to lower birth rates and higher abortion rates (see e.g., Phillip Levine et al., 1999). In addi- tion, abortion legalization appears to have led to an improvement in the average living condi- tions of children by reducing the number of children who would have lived in single-parent families, lived in poverty, received welfare, and died as infants (Jonathan Gruber et al., 1999). The improvement in child outcomes appears to be primarily due to changes in the composition of women who give birth, with the largest fertility declines occurring among young, unmarried, or nonwhite women. Such nonrandom selection may lead to less maltreatment of children if abortion access reduces births among groups where maltreatment is more prevalent. Alternatively, abortion availability may reduce the number of unwanted children born to all women, leading to lower rates of child abuse and neglect. We use data on the number of reports of child abuse and child neglect to examine the rela- tionship between abortion legalization, post- legalization restrictions on abortions, and child maltreatment rates. The results suggest that le- galization lowered total reported rates of child maltreatment. The effect of Medicaid funding restrictions, parental involvement laws, and mandatory waiting periods is unclear in our results.