Knowledge that Transforms

Wages and Employment in a Random Social Network with Arbitrary Degree Distribution by Yannis M. Ioannides and Adriaan R. Soetevent. Published in volume 96, issue 2, pages 270-274 of American Economic Review, May 2006

The change to the minimum school-leaving age in the United Kingdom from 14 to 15 had a powerful and immediate effect that redirected almost half the population of 14-year-olds in the mid-twentieth century to stay in school for one more year. The magnitude of this impact provides a rare opportunity to (a) estimate local average treatment effects (LATE) of high school that come close to population average treatment effects (ATE); and (b) estimate returns to education using a regression discontinuity design instead of previous estimates that rely on difference-in-differences methodology or relatively weak instruments. Comparing LATE estimates for the United States and Canada, where very few students were affected by compulsory school laws, to the United Kingdom estimates provides a test as to whether instrumental variables (IV) returns to schooling often exceed ordinary least squares (OLS) because gains are high only for small and peculiar groups among the more general population. I find, instead, that the benefits from compulsory schooling are very large whether these laws have an impact on a majority or minority of those exposed.

Most countries are members of preferential trade agreements (PTAs). The effect of these agreements has attracted much interest and raised the question of whether PTAs promote or slow multilateral trade liberalization, i.e., whether they are a “building block” or “stumbling block” to multilateral liberalization. Despite this long-standing concern with PTAs and the lack of theoretical consensus, there is no systematic evidence on whether they are actually a stumbling block to multilateral liberalization. We use detailed data on U.S. multilateral tariffs to provide the first systematic evidence that the direct effect of PTAs was to generate a stumbling block to its MTL. We also provide evidence of reciprocity in multilateral tariff reductions.

We propose a framework for analyzing transformations of demand. Such transformations frequently stem from changes in the dispersion of consumers' valuations, which lead to rotations of the demand curve. In many settings, profits are a U-shaped function of dispersion. High dispersion is complemented by niche production, and low dispersion is complemented by mass-market supply. We investigate numerous applications, including product design; advertising, marketing and sales advice; and the construction of quality-differentiated product lines. We also suggest a new taxonomy of advertising, distinguishing between hype, which shifts demand, and real information, which rotates demand.

International audience

We examine the “technology sourcing” hypothesis that foreign research labs located in the U.S. tap into U.S. R&D spillovers and improve home country productivity. We show that U.K. firms that established a high proportion of inventors based in the U.S. by 1990 benefited disproportionately from the growth of U.S. R&D stock over the next ten years. We estimate that U.S. R&D during the 1990s was associated with 5 percent higher Total Factor Productivity for U.K. manufacturing firms in 2000 (about $13 billion), with the majority of benefits accruing to firms with an innovative presence in the U.S.

Executive turnover and its link to firm performance can provide a crucial measure of how effectively a firm solves the two sets of principal-agent problems: (a) the diverging interests between top management and shareholders, which may result in managerial entrenchment; and (b) the diverging interests between controlling shareholders and minority shareholders, which may lead to the expropriation of the latter by the former or “tunneling,” as referred to in the literature. Tying the personal fortune of top executives to the firm’s performance aligns the interests of shareholders and those of management. It also breaks up the “insider” alliance between the controlling shareholder and management, thereby helping protect the interests of minority shareholders. Although there is a large literature on executive turnover in Western firms, research on executive turnover in non-Western firms is limited, and this paper is the only one on China. A closer look at the executive turnoverperformance link in China (one of the two major internal discipline mechanisms in corporate governance) is particularly relevant, since effective markets for corporate control are missing in China, the largest developing and transitional economy in the world. Furthermore, China is an interesting case because both types of agency problems are acute due to poorly defined property rights and weak investor protection, which result largely from its command economy legacy.

We decompose the beauty premium in an experimental labor market where “employers” determine wages of “workers” who perform a maze-solving task. This task requires a true skill which we show to be unaffected by physical attractiveness. We find a sizable beauty premium and can identify three transmission channels: (a) physically attractive workers are more confident and higher confidence increases wages; (b) for a given level of confidence, physically attractive workers are (wrongly) considered more able by employers; (c) controlling for worker confidence, physically attractive workers have oral skills (such as communication and social skills) that raise their wages when they interact with employers. Our methodology can be adopted to study the sources of discriminatory pay differentials in other settings.

Since the crisis of 1997–1998, there has been a proliferation of proposals for fostering Asian monetary integration. Asian countries, it is suggested, should collectively peg their currencies to the dollar, the yen, or a dollar-yen-euro basket, or establish a multilateral currency grid like the European Monetary System (EMS). The resulting exchange rate stability would promote intraregional trade, simplify investment planning, and encourage cross-border participation in local bond markets. Experience with establishing and maintaining a system of stable exchange rates would help ready the region for the introduction of a single currency. Asia, in this view, should emulate Europe’s approach to regional monetary integration. Along with the attractions of the European example, however, there are also dangers. Defending a system of currency pegs in the presence of high capital mobility requires the close convergence of policies and the maintenance of confidence. If either precondition is disturbed, a country will require extensive financial support in order to defend its peg or to undertake an orderly realignment. In practice, Asian countries possess neither the willingness to subordinate other policies to these imperatives nor the solidarity needed to offer extensive financial supports. Absent an appetite for political integration, there is little readiness to create a regional central bank like the European Central Bank, since there is no counterpart to the European Parliament to hold it accountable for its actions. Hence, there is little prospect of early monetary union to tie down expectations. A system of Asian currency pegs would consequently be fragile and crisis-prone. As a road to monetary unification, it would be a dead end. It would be better for governments to create an Asian Currency Unit (ACU), constituted as a weighted average of Asian currencies, and allow it to circulate alongside their national currencies. This would have three advantages. First, it would not be necessary to stabilize exchange rates between the currencies comprising the basket; hence, fragility would be less. Second, the parallel currency would be more stable than any one national currency in terms of aggregate Asian production and exports; it would, thus, be a vehicle for encouraging intraregional trade and investment. Third, the decision to move to a single currency could be driven by economics rather than politics. Only when a critical mass of producers, exporters, and investors had adopted the parallel currency would it be clear that Asian economies were ready for monetary unification.

Previous experiments using the minimum-effort coordination game reveal a striking regularity—large groups never coordinate efficiently. Given the frequency with which large real-world groups, such as firms, face similarly difficult coordination problems, this poses an important question: Why do we observe large, successfully coordinated groups in the real world when they are so difficult to create in the laboratory? This paper presents one reason. The experiments show that, even though efficient coordination does not occur in groups that start off large, efficiently coordinated large groups can be “grown.” By starting with small groups that find it easier to coordinate, we can add entrants—who are aware of the group's history—to create efficiently coordinated large groups. This represents the first experimental demonstration of large groups tacitly coordinated at high levels of efficiency.