Knowledge that Transforms

We devise tests that distinguish between competitive (Walrasian), fully revealing rational expectations and noisy rational expectations equilibria based on their predictions concerning trading volume around public information signals. Empirical results strongly support the noisy rational expectations hypothesis. This indicates that a significant amount of noise exists (so that private information has value), but not enough to obfuscate entirely the information content of price. Our analysis also indicates that the dispersion of private information across traders has an impact on trading volume, but not on price.

Sanctions are measures that one party (the sender) uses to influence another (the target). Sanctions, or the threat of sanctions, have been used by governments to alter the human rights, trade, or foreign policies of other governments. We develop notions of the sender's and target's toughness that depend on their patience and on the extent of their suffering from sanctions. How much a sender can exact from the target depends on the relative toughness of the two. Sanctions that impose less harm on the target can sometimes be more effective than those that impose greater harm.

In a long-standing controversy over monetary experiences in colonial America, the main substantive issue concerns large and rapid increases in stocks of paper currency that were followed by negligible changes in price levels. The "backing theory" or anticlassical interpretation is that prices failed to respond to major increases in total money supplies. The "quantity theory" or classical hypothesis, by contrast, is that specie was exported in amounts that left total money stocks approximately unchanged. This paper develops and applies a strategy for resolving this fundamental disagreement despite the absence of data on stocks and flows of specie.

Partnerships and profit sharing are often claimed to motivate workers by giving them a share of the pie. But in organizations of any significant size, the free-rider effects would seem to choke off any motivational forces. This analysis explores how peer pressure operates and how factors such as profit sharing, shame, guilt, norms, mutual monitoring, and empathy interact to create incentives in the firm. The argument that Japanese firms enjoy team spirit because compensation is linked to overall profitability is analyzed. An explanation for the prevalence of partnerships among individuals in similar occupations is provided.

This paper studies optimal incentive contracts when workers have career concerns--concerns about the effects of current performance on future compensation. We show that the optimal compensation contract optimizes total incentives: the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers. We find empirical support for this prediction in the relation between chief executive compensation and stock market performance.

An empirical investigation of trade-offs between number of children and their scholastic performance confirms that family size directly affects children's achievement. Though parents show no favoritism to first-born children, being early in the birth order implies a distinct advantage, entirely because of the higher probability of being in a small family. Recent large changes in family size explain a portion of aggregate test score declines, but increased divorce rates and market work by mothers have no apparent impact. Finally, teachers are shown to differ enormously, even though performance differences are poorly captured by commonly measured teacher characteristics. The evidence supports a teacher skill interpretation of differences in classroom achievement.

We develop an estimator that allows us to calculate an upper bound to the fraction of unrejected null hypotheses tested in economics journal articles that are in fact true. Our point estimate is that none of the unrejected nulls in our sample is true. We reject the hypothesis that more than one-third are true. We consider three explanations for this finding: that all null hypotheses are mere approximations, that data-mining biases reported standard errors downward, and that journals tend to publish papers that fail to reject their null hypotheses only when the null hypotheses are likely to be false. While all these explanations are important, the last seems best able to explain our findings.