Knowledge that Transforms

I examine the implications of employer learning and statistical discrimination for initial employment rates, wages, and occupational attainment and for wage growth and occupational change over a career using a model in which the sensitivity of productivity to worker skill is increasing in the skill requirements of the job and in which employers learn about worker skill more rapidly in high skill jobs. I show that statistical discrimination influences initial employment rates, wage levels and job type, and that employers' initial estimate of productivity influences wage growth even in an environment in which access to training is not an issue. The implication is that the market may be slow to learn that a worker is highly skilled if worker's best early job opportunity given the information available to employers is a low skill level job that reveals little about the worker's talent.

We study herd behavior in a laboratory financial market. Subjects receive private information on the fundamental value of an asset and trade it in sequence with a market maker. The market maker updates the asset price according to the history of trades. Theory predicts that agents should never herd. Our experimental results are in line with this prediction. Nevertheless, we observe a phenomenon not accounted for by the theory. In some cases, subjects decide not to use their private information and choose not to trade. In other cases, they ignore their private information to trade against the market (contrarian behavior).

We analyze a general equilibrium model in which there is both adverse selection of, and moral hazard by, banks. The regulator can screen banks prior to giving them a licence, audit them ex post to learn the success probability of their projects, and impose capital adequacy requirements. Capital requirements combat moral hazard when the regulator has a strong screening reputation, and they otherwise substitute for screening ability. Crises of confidence can occur only in the latter case, and contrary to conventional wisdom, the appropriate policy response may be to tighten capital requirements to improve the quality of surviving banks.

We investigate the occurrence of bubble-crash pricing patterns in laboratory financial markets with a mixture of experienced and inexperienced traders. We find that even with a minority of experienced traders, bubbles are substantially abated.

Dynamic Inefficiencies in Insurance Markets: Evidence from Long-Term Care Insurance by Amy Finkelstein, Kathleen McGarry and Amir Sufi. Published in volume 95, issue 2, pages 224-228 of American Economic Review, May 2005

Accepted Manuscript

We are helping a task force of the American Gastroenterology Association to evaluate the current state of the (decentralized) market for gastroenterology fellows, and to assess the prospects of reorganizing it via a suitably designed centralized clearinghouse, a "match." This market used a match from 1986 until the late 1990s. Starting in 1996, participation in the match declined precipitously, and it was formally abandoned after 1999. Consequently, the experience of this market when the match was in place, in comparison to the periods before and since, allows an assessment of the effects of the match. An analysis of how the match failed in the 1990s yields insights into the prospects for success of a new match. These events offer economists a rare window on how decentralized labor markets clear, and on how market clearinghouses succeed and fail.

Heavy Alcohol Use and the Commission of Nuisance Crime: Evidence from Underage Drunk Driving Laws by Christopher S. Carpenter. Published in volume 95, issue 2, pages 267-272 of American Economic Review, May 2005

Public policy towards low-income families with children in the United States has changed dramatically in the last two decades. The Aid to Families with Dependent Children (AFDC) program, in existence since 1935, was replaced with Temporary Assistance to Needy Families (TANF) as part of the 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA). PRWORA eliminated the entitlement feature of cash assistance to poor families. Alongside this dismantling of the traditional welfare system has been the increasing reliance on the tax system as a means of providing cash support for needy families. A series of tax acts starting with the 1986 Tax Reform Act have increased assistance to the working poor through expansions of the Earned Income Tax Credit (EITC). In 2003, more than 21 million families are estimated to have benefited from the tax credit, at a total cost to the federal government of more than 37 billion dollars (U.S. Treasury 2004).1 It is widely accepted that the Earned Income Tax Credit (EITC) raised the employment of eligible women with children. Empirical evidence consistent with economic theory suggests that the EITC has been especially successful at promoting employment among eligible unmarried women with children (Eissa and Liebman 1996, Meyer and Rosenbaum 2000). In fact, the labor force participation rate of single mothers increased by an astounding 14 percentage points between 1989 and 2002, a period of substantial

Infertility is considered by the medical community to be a disease of the reproductive system. It currently affects over 6 million individuals, and one in ten couples cannot conceive without medical assistance. The psychological effects of infertility have been compared to the effects of other diseases such as cancer and heart disease (e.g., Anne T. Fidler and Judith Bernstein, 1999), and the financial costs of treatment can be quite large. However, only 25 percent of all health-plan sponsors provide coverage for infertility services. In response to a perceived need for coverage, legislation was introduced at the federal level in 2003 that would require health plans to provide infertility benefits. As the fraction of the population affected by infertility continues to rise, there are likely to be continued efforts to mandate coverage. Understanding the costs and benefits of these policies thus becomes increasingly important. The first component of a full analysis is to determine whether these mandates will actually have an effect on fertility. By reducing the price of infertility treatment, one might expect to see an increase in utilization of treatments. This could be true if the mandate expands access to individuals who previously could not afford treatment, or if individuals who were previously receiving treatment now choose to consume higher quantities (or a higher quality) of treatment. However, it is also possible that these mandates have no effect on access or on treatment consumed but simply provide windfall gains to those individuals who would have purchased treatment in the absence of insurance coverage. Finally, mandates may also have dynamic effects on the timing of births. Individuals could seek treatment earlier, which is beneficial from a medical perspective. Alternatively, individuals could further delay childbearing, with the knowledge that they will ultimately be covered. In this paper, I ask the first-order question of whether the mandated insurance coverage of infertility treatment has affected birth rates. As of 2003, 15 states have enacted some form of infertility insurance mandate. Using a differencein-differences approach, I exploit variation in the enactment of mandates both across states and over time and identify control groups that should not have been affected by infertility coverage. My results suggest that the mandates increase firstbirth rates for women over age 35 by 32 percent.