Knowledge that Transforms

Recent research has reaffirmed that the prob? ability of an unemployed worker finding a job varies substantially over the business cycle. Robert E. Hall (2005, 101) concludes from his examination of a variety of data sources that Unemployment is high in a recession because jobs are hard to find, not because more job-seek? ers have been dumped into the labor market by elevated separation rates. Shimer (2007) shows that movements in the job finding probability account for three-quarters of the fluctuations in the unemployment rate in the United States during the postwar period, while movements in the exit rate from employment to unemployment account for the other quarter. Michael W. Elsby, Ryan Michaels, and Gary Solon (2007) argue that movements in the job finding probability accounted for about 65 percent of unemploy? ment fluctuations prior to the last two reces? sions, and more in 1990-1991 and 2001. Shigeru Fujita and Gary Ramey (2007) claim a more substantial role for the exit rate to unemploy? ment but still find that the job finding probabil? ity accounts for at least half of the fluctuations in unemployment. While it is theoretically convenient to discuss a single job finding probability for all workers, economists have long recognized that the job finding probability falls with unemployment duration (Hyman B. Kaitz 1970). This paper reexamines duration dependence and the cycli? cally of duration dependence in the job finding probability, both empirically and theoretically. To start, I develop a simple model with a single parameter that determines both how the job finding probability varies with unemployment duration and how it varies with aggregate eco? nomic conditions. The model's main departure from most existing research is to think of unemployed workers as waiting for labor mar? ket conditions to improve, rather than searching for job opportunities (Boyan Jovanovic 1987; Fernando Alvarez and Shimer 2007). They continuously compare their lifetime utility in the best available job with their lifetime utility if they remain unemployed. Individual / works if this difference, 8?(t), is positive at time t and not if it is negative. If S? is persistent, this leads to duration dependence in the hazard rate of exiting unemployment, since a newly unem? ployed worker is more likely to be near the threshold for taking a job than someone who is long term unemployed. The extent of dura? tion dependence is governed by the stochastic process for S?, which also determines how the average job finding probability varies with eco? nomic conditions.

Charles Tiebout's suggestion that people “vote with their feet” for communities with optimal bundles of taxes and public goods has played a central role in local public finance for over 50 years. Using a locational equilibrium model, we derive formal tests of his premise. The model predicts increased population density in neighborhoods experiencing exogenous improvements in public goods and, for large improvements, increased relative mean incomes. We test these hypotheses in the context of changing air quality. Our results provide strong empirical support for the notion that households “vote with their feet” for environmental quality. (JEL H41, H73, Q53, R23)

The sustained rise in US current account deficits, the stubborn decline in long-run real rates, and the rise in US assets in global portfolios appear as anomalies from the perspective of conventional models. This paper rationalizes these facts as an equilibrium outcome when different regions of the world differ in their capacity to generate financial assets from real investments. Extensions of the basic model generate exchange rate and foreign direct investment excess returns broadly consistent with the recent trends in these variables. The framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment. (JEL: E44, F21, F31, F32)

Do Women Supply More Public Goods Than Men? Preliminary Experimental Evidence from Matrilineal and Patriarchal Societies by Steffen Andersen, Erwin Bulte, Uri Gneezy and John A. List. Published in volume 98, issue 2, pages 376-81 of American Economic Review, May 2008

We construct a model to study the implications of changes in political institutions for economic institutions. A change in political institutions alters the distribution of de jure political power, but creates incentives for investments in de facto political power to partially or even fully offset change in de jure power. The model can imply a pattern of captured democracy, whereby a democratic regime may survive but choose economic institutions favoring an elite. The model provides conditions under which economic or policy outcomes will be invariant to changes in political institutions, and economic institutions themselves will persist over time. (JEL D02, D72) The domination of an organized minority … over the unorganized majority is inevitable. The power of any minority is irresistible as against each single individual in the majority, who stands alone before the totality of the organized minority. At the same time, the minority is organized for the very reason that it is a minority. —Gaetano Mosca (1939, 53).

We show that the week after selling a large-prize Texas Lotto winning ticket, a retailer experiences a 12 to 38 percent relative increase in ticket sales. Some increase persists for up to 40 weeks. We document that the sales response increases with jackpot size and is larger in areas with more economically disadvantaged populations. Sales patterns across games and across retailers are not consistent with most advertising explanations. Furthermore, response patterns are not consistent with representativeness-based explanations for the hot hand or gambler's fallacy; we suggest an alternative explanation for the observed "lucky store" effect. (JEL H27, H71)

Rethinking Global Environmental Governance to Deal with Climate Change: The Multiple Logics of Global Collective Action by Daniel C. Esty. Published in volume 98, issue 2, pages 116-21 of American Economic Review, May 2008

Is the 2007-2008 U.S. sub-prime mortgage financial crisis truly a new and different phenomena? Our examination of the longer historical record finds stunning qualitative and quantitative parallels to 18 earlier post-war banking crises in industrialized countries. Specifically, the run-up in U.S. equity and housing prices (which, for countries experiencing large capital inflows, stands out as the best leading indicator in the financial crisis literature) closely tracks the average of the earlier crises. Another important parallel is the inverted v-shape curve for output growth the U.S. experienced as its economy slowed in the eve of the crisis. Among other indicators, the run-up in U.S. public debt and is actually somewhat below the average of other episodes, and its pre-crisis inflation level is also lower. On the other hand, the United States current account deficit trajectory is worse than average. A critical question is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which case growth may fall significantly below trend for an extended period. Or will it prove like one of the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy response.

Economics has traditionally relied on revealed preferences (and, occasionally, on verbal reports) to understand the desires of people. Another source of information has been developed in recent years: the direct observation of choice processes. This mechanism, possible thanks to the improvements in the designs and techniques to measure brain activity, is explored in the bur geoning field of experimental neuroeconom ics (see Paul W. Glimcher and Aldo Rustichini (2004) and Colin Camerer, George Loewenstein, and Drazen Prelec (2005) for recent surveys). In this article, we argue that the evidence on brain activity can also be used to build theo retical models that help us understand choices and predict behaviors. We label this research “Neuroeconomic Theory.” In Section I, we describe the procedure, discuss some advan tages over traditional methodologies, and estab lish some facts that motivate our approach. In Section II, we illustrate the methodology with two brain-based models of decision making. I. What is “Neuroeconomic Theory”? Neuroeconomic theory is an interdisciplin ary line of investigation that combines research from neuroscience, neurobiology, and econom ics. Experimental neuroscience and neurobiology provide detailed evidence of the functionality, interconnectivity, and physiological constraints of the brain systems involved in decision making. Microeconomic theory supplies the toolkit to build simple optimization models that incorporate these network interactions and well-defined con straints into the mechanisms of choice.