Knowledge that Transforms

The existing literature typically does not differentiate between security returns and the returns of investors in these securities. This study clarifies that investor and security returns differ because of the timing and magnitude of investor capital flows into and out of these securities. The empirical results indicate that actual investor returns are systematically lower than buy-and-hold returns for nearly all major international stock markets. These results imply that the historical equity premium and the cost of equity capital are likely lower than previously thought. (JEL G11, G12, G15)

�Inattentive agents update their information sporadically, and thus respond belatedly to news. We generate optimally inattentive behavior by assuming that to observe the value of his investment portfolio the consumer must pay a cost that is proportional to the portfolio’s contempo raneous value. It is optimal for the consumer to check his investment portfolio at equally spaced points in time, consuming from a riskless trans actions account in the interim. The riskless transactions account that finances consump tion guarantees that funds are never unwittingly exhausted. � We show that the optimal interval of time between consecutive observations of the value of the portfolio is the unique positive solution to a nonlinear equation. Quantitatively, even a small observation cost (one basis point of wealth) implies a substantial (eight-month) decision interval under conventional parameter values.

Quitting rights play a major role in many economic interactions, whether in the precontractual phase or after contracts have been signed. Clearly, no party can be forced to sign a contract if she is unwilling to, thus implying that quitting rights can be exerted at the ex ante stage when no contract has been signed. But, quitting rights can also be exerted after explicit contracts have been signed in a number of instances. For example, most labor contracts allow employees to leave their job if they want to. Also, quitting rights may be asymmetric across agents as labor contracts illustrate. (Employers are generally constrained in their ability to replace their employees.)

Central banks target CPI inflation; independent central banks are concerned about their balance sheet and the level of their capital. The first fact makes it difficult for a central bank to implement the optimal escape from a liquidity trap, because it undermines a commitment to overshoot the inflation target. We show that the second fact provides a solution. Capital concerns provide a mechanism for an independent central bank to commit to inflate ex post. The optimal policy can take the form of a currency depreciation combined with a crawling peg, a policy advocated by Svensson as the “Foolproof Way” to escape from a liquidity trap. (JEL E31, E52, E58, E62)

*This paper is based on a long-term research program with Rachel Kranton on the implications of identity for economic behavior and also a manuscript we are currently writing on the missing motivation in economics. Our previous joint papers (Akerlof and Kranton (2000), (2002) and (2005)) have explored implications outside of macroeconomics of utility functions dependent on peoples notions of what ought to be. Conversations with Kranton have also been the basis for the section on economic methodology. I have also benefitted from conversations with Robert Shiller, with whom I am co-authoring work on behavioral macroeconomics. In addition, I

Do We Really Know That the WTO Increases Trade? Comment by Michael Tomz, Judith L. Goldstein and Douglas Rivers. Published in volume 97, issue 5, pages 2005-2018 of American Economic Review, December 2007

Nobel Prize Lecture, December 8, 2006

“More than half the people of the world are living in conditions approaching misery … For the first time in history, humanity possesses the knowledge and the skill to relieve the suffering of these people. ” Harry S. Truman, Inaugural Address, 1949 “We have the opportunity in the coming decade to cut world poverty by half. Billions more people could enjoy the fruits of the global economy…And for the first time, the cost is utterly affordable. ” United Nations Millennium Project, 2005 The repetition of virtually the same language after more than half a century and $2.5 trillion worth of development assistance (in today’s dollars) is not encouraging for its promise to achieve the reduction of poverty and misery. This paper argues that development assistance as originally conceived and still largely conceived today, was a mistake. This is not based on any original research undertaken for this paper, it is just drawing the natural implication of a large body of literature quickly surveyed here. 1 The conclusion of the paper will argue that foreign aid could still accomplish some good things for poor people, even if it cannot fulfill the purpose of “development assistance.”

A new 45-industry, 23-year, dataset for Japan is used to investigate the duration of industry leadership. A new scaling relationship linking a firm's current market share with the standard deviation of market share changes is reported. This relationship discriminates in a powerful way between rival candidate theoretical models of market share dynamics. It also makes possible a useful simplification in testing a benchmark model of a Markovian kind. Relative to that model, it is found that at least some industries display a “Chandlerian” bias toward longer durations of leadership than would be present in the benchmark model. (JEL D43, L13)

The War for Independence (1775-1783) left the federal government deeply in debt. The spoils from winning that war also gave it an empire of land. So, post-1783 was the federal government solvent, or at what point did it become solvent? Did winning the war, in effect, pay for the war? While these questions have not been addressed before, knowing the answer is important for understanding why a particular method was chosen for funding the national debt, how the new Constitution adopted by Congress in 1789 affected public finance, and how this new untried government - that was deeply in debt and had been in default on this debt for half a decade after independence - could garner an excellent credit rating by the early 1790s. Evidence is gathered on the government's liabilities and assets to estimate its net worth and so answer these questions.(This abstract was borrowed from another version of this item.)