Knowledge that Transforms

This paper provides the first real-world evidence of Giffen behavior, i.e., upward sloping demand. Subsidizing the prices of dietary staples for extremely poor households in two provinces of China, we find strong evidence of Giffen behavior for rice in Hunan, and weaker evidence for wheat in Gansu. The data provide new insight into the consumption behavior of the poor, who act as though maximizing utility subject to subsistence concerns. We find that their elasticity of demand depends significantly, and nonlinearly, on the severity of their poverty. Understanding this heterogeneity is important for the effective design of welfare programs for the poor. (JEL D12, O12).

The utility of homeownership as a household wealth-building vehicle has long been recognized. In recent years, homeownership has been promoted as an important strategy for improving the financial situation of lowand moderateincome households. However, this strategy does not come without its risks, as homeownership exposes households to potential troubles along multiple dimensions. This paper highlights the conditions under which a homeownership strategy is likely to be effective. A key contribution is its significant focus on the risks of homeownership, which are assessed by studying the distribution of foreclosure across neighborhoods. According to the Current Population Survey (CPS), between 1994 and 2006, homeownership rates among households in the first and second income quartiles increased by 11.1 and 12.9 percent, respectively. This exceeded the 10.3 percent increase observed for the general population and was due in part to several factors. First, income, education, and wealth for lowand moderate-income households all increased significantly over this period (Arthur B. Kennickell 2006), which increased the accesAssets And Credit Among Low-inCome HouseHoLds †

For over three centuries and across the globe, lottery-linked savings (LLS) programs have offered individuals the opportunity to save, and in lieu of paying traditional interest, have given savers periodic chances to win money or prizes. Despite their long history, LLS programs are relatively unstudied by scholars. In this paper, I detail an LLS program that the UK government has offered continuously since 1956, the UK Premium Bond (PB) program. PBs guarantee holders risk-free return of nominal principal. In aggregate, they pay a market-related return, distributed to holders each month by a lottery like mechanism. Premium bonds are popular savings vehicles in the UK. Over £31.1 billion of PBs were outstanding as of March 2006, and public reports suggest that they were held by between 22 percent and 40 percent of UK citizens. The 60.2 million residents of the UK had £517 invested in PBs per capita. If held in the banking sector, PB holdings would have accounted for 3.9 percent of household sterling deposits in UK financial institutions. LLS programs, such as PBs, are fascinating not just because of their size, but because of their appeal to nonsavers, especially low-income families. Mauro Guillen and Adrian Tschoegl (2002, reviewing LLS programs in Latin America, concluded: “The bankers we spoke with believe that [LLS] are especially successful with low income depositors, and in cases where there are lots of people outside the banking system.” In South Africa, a new LLS program raised over 1.2 billion rand and enrolled 750,000 participants across a wide spectrum of the economy in two years. In the United Kingdom, while PBs are held by about the same fraction of the population holding stocks, PBs have a stronger appeal to lower-income British households. PBs are held by a larger fraction of British households than are stocks and shares for all households, except those earning over £52,000 annually (Department for Work and Pensions 2007). Are PB holders saving, gambling, or engaging in both activities? This question is not just academic, because national laws and regulations in many countries bar private LLS programs on the basis that they are prohibited gambling activities. For example, in South Africa, the government has tried to shut down the popular LLS program mentioned above; in the United States, these programs would violate state lottery laws and federal banking regulations. In this paper, I analyze the time series of net sales of the PB program and conclude that the program appears to be a hybrid of gambling and savings, but with a clear savings element.

There is considerable evidence that producer-level churning contributes substantially to aggregate (industry) productivity growth, as more productive businesses displace less productive ones. However, this research has been limited by the fact that producer-level prices are typically unobserved; thus within-industry price differences are embodied in productivity measures. If prices reflect idiosyncratic demand or market power shifts, high "productivity" businesses may not be particularly efficient, and the literature's findings might be better interpreted as evidence of entering businesses displacing less profitable, but not necessarily less productive, exiting businesses. In this paper, we investigate the nature of selection and productivity growth using data from industries where we observe producer-level quantities and prices separately. We show there are important differences between revenue and physical productivity. A key dissimilarity is that physical productivity is inversely correlated with plant-level prices while revenue productivity is positively correlated with prices. This implies that previous work linking (revenue-based) productivity to survival has confounded the separate and opposing effects of technical efficiency and demand on survival, understating the true impacts of both. We further show that young producers charge lower prices than incumbents, and as such the literature understates the productivity advantage of new producers and the contribution of entry to aggregate productivity growth.

Committees always seem to have chairmen, and monetary policy committees (MPCs) are no exception. But some MPCs are dominated by their chairmen, who are definitely first among unequals, while others come closer to making decisions by true consensus or even by major? ity vote. Does it matter? Is strong leadership an important ingredient in good monetary policy? With no real-world observations on leaderless

An earlier study (Barro 2006) applied the Thomas A. Rietz (1988) insight on rare eco? nomic disasters to explain the equity premium and related asset-pricing puzzles. Key param? eters were the probability, p, of disaster and the distribution of disaster sizes, b. In the main analysis, p and the ?-distribution were assumed to be time invariant. An extension to time-vary? ing p is in Xavier Gabaix (2008). Because large macroeconomic disasters are rare, pinning down p and the ?-distribution from historical data requires long time series for many countries, along with the assumption of rough parameter stability over time and across countries. Barro (2006) relied on the long-term international GDP data for 35 countries from Angus Maddison (2003). Using the definition of an economic disaster as a peak-to-trough fall in per capita GDP by at least 15 percent, 60 disas? ters were found, corresponding to p ?* 0.017 per year. The average disaster size was 29 percent, and the empirical size distribution was used to calibrate a model of asset pricing. The underlying asset-pricing theory relates to consumption, C, rather than GDP. This distinc? tion is especially important for wars. For exam? ple, in the United Kingdom during the two world wars, GDP increased while C fell sharply?the difference representing mostly added military spending. Maddison (2003) provides national-accounts information only for GDP. Our initial idea was to add consumption, C, which we measure by personal consumer expenditure because of diffi? culties in separating durables from nondurables in the long-term data. We have not assembled data on government consumption, some of which may substitute for C and, thereby, affect asset pricing. However, this substitution is prob? ably unimportant for military outlays, which are the type of government spending that moves a lot during some disaster events. Maddison (2003) represents a monumental contribution for international studies using long term GDP data. However, although much of the information is sound, close examination revealed many problems. Specifically, Maddison tends to fill in missing data with doubtful assumptions, and this practice is often significant for major crises. As examples, Maddison assumed that Belgium's GDP during WWI and WWII moved with France's; that Mexico's GDP between 1910 and 1920, including the Revolution and Civil War, followed a smooth trend (with no crisis); that GDP for Colombia and Peru over more than a decade moved with the average of Brazil and Chile; and that GDP in Germany for the crucial years 1944-1946 followed a linear trend. There are also some mismatches between original works and published series for GDP in Japan at the end of WWII and Greece during WWII and its Civil War. Given these difficulties, our project expanded to estimating long-term GDP for many countries. The Maddison informa? tion was often usable, but superior estimates can be constructed in many cases. Also, results from recent major long-term national-accounts projects for some countries are now available, including Argentina, Brazil, Chile, Colombia, Greece, Norway, Spain, Sweden, and Taiwan. We are dealing with long-term national accounts data for 41 countries, but the current study applies to the 21 for which we have, thus far, assembled annual data on C and GDP from before WWI to 2006. (See Table 1 for a list of included countries and starting years.) We begin + Discussant: John Campbell, Harvard University.

The intertemporal elasticity of investment for long-lived capital goods is nearly infinite. Consequently, investment prices should fully reflect temporary tax subsidies, regardless of the investment supply elasticity. Since prices move one-for-one with the subsidy, elasticities can be inferred from quantities alone. This paper uses a recent tax policy—bonus depreciation—to estimate the investment supply elasticity. Investment in qualified capital increased sharply. The estimated elasticity is high—between 6 and 14. There is no evidence that market prices reacted to the subsidy, suggesting that adjustment costs are internal, or that measurement error masks the price changes. (JEL G31, H32)

Modeling Competition and Market Equilibrium in Insurance: Empirical Issues by Pierre-Andre Chiappori and Bernard Salanie. Published in volume 98, issue 2, pages 146-50 of American Economic Review, May 2008

Research across a number of disciplines has highlighted the role of early life health and circumstance in determining health and economic outcomes at older ages. Nutrition in utero and in infancy may set the stage for the chronic disease burden that an individual will face in middle age (David J. Barker, 1998; Barker et al. 1989; Johann Eriksson et al. 2001). Childhood health may also have significant effects on economic outcomes in adulthood. Collectively, a set of childhood health measures can account for a large fraction of the explained variance in employment and social status observed among a British cohort followed from birth into adulthood (Anne Case, Angela Fertig and Christina Paxson 2005).

Hurricane Katrina displaced approximately 650,000 people and destroyed or severely damaged 217,000 homes along the Gulf Coast. Damage was especially severe in New Orleans, and the return of displaced residents to this city has been slow. The fraction of households receiving mail (which, in the absence of reliable population estimates, is a good indicator for returns) was 49.5 percent in August 2006, and 66.0 percent in June 2007 (Greater New Orleans Community Data Center, 2007). Low-income minority families appear to have been slower than others to return (William H. Frey and Audrey Singer, 2006). In this paper, we examine the determinants of returning to New Orleans in the 18 months after the hurricane. The data come from a study of low-income parents, mainly African American women, who were enrolled in a community college intervention prior to the hurricane. Although the sample is not representative of the pre-Katrina population of the city, it nonetheless is of great interest. The relatively slow return of low income, primarily African American, residents is a politically charged issue. One (extreme) view is that the redevelopment plans are designed to discourage low-income minority residents from returning. A quite different view is that members of this group have found better opportunities outside of New Orleans, and do not want to return. Because few data sets trace individuals from before to after the hurricane, this debate has taken place largely without the benefit of evidence.