Knowledge that Transforms

We analyze politically motivated privatization in a bipartisan environment. When median-class voters a priori favor redistributive policies, a strategic privatization program allocating them enough shares can induce a voting shift away from left-wing parties whose policy would reduce the value of shareholdings. To induce median-class voters to buy enough shares to shift political preferences, strategic rationing and underpricing is often necessary. In the extreme, this may lead to free share distribution and voucher privatization. Shifting voting preferences becomes impossible when strong ex ante political constraints require large upfront transfers to insiders or when social inequality is extreme.

Competitive Pressure and Labor Productivity: World Iron-Ore Markets in the 1980's by José E. Galdón-Sánchez and James A. Schmitz Jr.. Published in volume 92, issue 4, pages 1222-1235 of American Economic Review, September 2002

There is a welter of advice about what topics to include, which audiovisual/computing wizardry to employ, and how to use modem learning theory in Microeconomics Principles classes (William Becker and Michael Watts, 1999). What appears lacking (except for Kenneth Elzinga, 2001) is plain advice aimed particularly at newer instructors on how to present material and treat students-generally how to avoid having the course burden students and instructor. The spur is my upset when people say economics was the most boring course in college and one they never understood. My only bona fides for providing this advice is experience, over 30 sections of Micro Principles with over 12,000 students. The advice is aimed toward instructors of sections of at least 100 students, but most applies in smaller sections as well. The crucial assumptions here are that students: (i) do not intend to take more economics; (ii) know very little about what economics is really about; and (iii) are very concerned about maintaining/raising their grade point averages. These assumptions regrettably characterize the majority of students in Micro Principles classes and should condition how we teach. They imply that the burden of teaching, including the sheer physical energy and attention required to demonstrate the relevance of economics and maintain students' interest, is greater than in other courses. They necessitate introducing only those techniques that will be used in class in analyzing real-world issues: Teach ideas, not techniques.' The purpose is to enable students to see economic principles in action in real life, not to prepare budding economics majors. I. In-Class Issues

This paper provides a model of individual decisionmaking in the presence of neighborhood effects. By neighborhood effects, we refer to interdependencies between individual decisions and the decisions and characteristics of others within a common neighborhood. As such, neighborhood effects are forms of social interactions; in fact the terms would seem to be interchangeable in many contexts. Within economics, there has developed an increasing recognition that neighborhood effects play a possibly major role in explaining a range of individual behaviors; rich empirical and theoretical literatures have developed. A failing of much of this work is the absence of strong connections between theory and empirics. This paper addresses this limitation by providing a model of multinomial choice with neighborhood effects. The model represents a generalization of the binary choice model of William Brock and Steven Durlauf (2001a,b). The model is econometrically implementable and so has the potential of allowing for structural estimation of neighborhood effects. Section I outlines a basic choice model with neighborhood effects. Section II specializes the structure using a multinomial logit framework. Section III considers econometric implementation. Section IV discusses some limitations of the framework and proposes some research directions. Proofs of all theorems may be found in Brock and Durlauf (2001c).

Banking crises are frequent events. Gerard Caprio and Daniela Klingebiel (1997) catalog over 80 banking crises during the last 25 years. Interestingly, some banking crises are associated with no output losses whatsoever, while others involve massive recessions. Finally, it is known that the probability of a banking crisis rises as the rate of inflation rises (see Asli Demirguc-Kunt and Enrica Detragiache, 1997; John Boyd et al., 2001a, b). While received wisdom exists about the conduct of monetary policy while a crisis is underway, there is no formal treatment of how the conduct of monetary policy during “normal times” affects the potential for banking crises to occur. To fill that gap, I consider economies where spatial separation and limited communication create a transactions role for money, and random shocks to agents’ liquidity preferences create a role for banks. In addition, banks confront randomness in withdrawal demand. When withdrawal demand is sufficiently high, banks exhaust their cash reserves. There are good reasons to associate this with a banking panic. The output lost during a banking panic depends on how great withdrawal demand is. Some banking crises generate no output losses, while others generate large reductions in resource availability. In addition, the conduct of monetary policy during “normal times” affects the probability of a banking crisis. The higher the nominal interest rate (the inflation rate), the higher is the probability of a panic. Driving the nominal interest rate to zero (following the Friedman rule) eliminates bank panics. This constitutes a new rationale for the Friedman rule. Nonetheless, conventional methods of implementing the Friedman rule never produce an optimal resource allocation. In particular, low nominal interest rates induce banks to hold large cash reserves, thereby forgoing socially more productive investments. In effect, the Friedman rule induces banks to become narrow banks voluntarily. The banking system is very safe, but it undertakes a suboptimal level of investment. Less conventional methods for implementing the Friedman rule, such as allowing unrestricted access to the discount window at a zero nominal interest rate, lead either to the nonexistence of equilibrium, or to massive indeterminacies. None of the equilibria will be consistent with full optimality.

We document the return to investing in U.S. nonpublicly traded equity. Entrepreneurial investment is extremely concentrated, yet despite its poor diversification, we find that the returns to private equity are no higher than the returns to public equity. Given the large public equity premium, it is puzzling why households willingly invest substantial amounts in a single privately held firm with a seemingly far worse risk-return trade-off. We briefly discuss how large nonpecuniary benefits, a preference for skewness, or overestimates of the probability of survival could potentially explain investment in private equity despite these findings.

This paper suggests that skill accumulation through past work experience, or “learning-by-doing” (LBD), can provide an important propagation mechanism in a dynamic stochastic general-equilibrium model, as the current labor supply affects future productivity. Our econometric analysis uses a Bayesian approach to combine micro-level panel data with aggregate time series. Formal model evaluation shows that the introduction of the LBD mechanism improves the model's ability to fit the dynamics of aggregate output and hours.

As policy makers have sought to reduce the welfare rolls by increasing labor supply among single mothers, much attention has been given to the possible role of expanded child care subsidies, including direct provision of public preschool. At the same time, public interest in child care subsidies for two-parent households is high; for example, former Vice President Gore not long ago proposed to make high-quality pre-school fully available to every family, for every child, in every community in America (Albert Gore, 1999). In this paper, I use 1980 Census data to estimate the effect of public school enrollment for a woman's five-year-old on measures of labor supply and public assistance receipt. This approach has two advantages. First, I am able to estimate the effect of a large implicit child care subsidy.1 Second, because public kindergarten is universally available to all age-eligible children where it is provided, selection problems related to means-testing do not arise. A difficulty with public school enrollment arises because parents may choose to hold their children back a year or enroll them in private school. I deal with this issue by using five-yearold's quarter of birth (QOB) variables as instruments for public school enrollment status. This strategy works because parents' ability to enroll a child in public kindergarten in the academic year when the child turns five typically depends on the calendar date of the child's birth.2 In most states, children born in the second quarter (April 1-June 30) of 1974 will have been eligible to start kindergarten in the fall of 1979, while children born in the first quarter (January 1March 31) of 1975 generally will not. Eligibility for children born between July 1 and December 31, 1974 depends on the rules where they live.3

We discuss two-class voting procedures where voters are divided into classes and a separate majority is required in each class. Examples include Chapter 11 bankruptcy proceedings and some political mechanisms. We investigate how voting mechanisms aggregate information dispersed among voters when voters have conflicts of interests as well as different information regarding a proposal. We find that two-class voting provides a significant improvement over one-class voting in all situations where voters have significant conflicts of interests, and where the voters are relatively evenly divided between interest groups. However, two-class voting is inefficient absent conflicts of interests.

The Economics of Copyright "Fair Use" in a Networked World by Benjamin Klein, Andres V. Lerner and Kevin M. Murphy. Published in volume 92, issue 2, pages 205-208 of American Economic Review, May 2002