Knowledge that Transforms

Widening and Deepening: Reforming the European Union by Erik Berglof, Mike Burkart, Guido Friebel and Elena Paltseva. Published in volume 98, issue 2, pages 133-37 of American Economic Review, May 2008

Beyond DSGE Models: Toward an Empirically Based Macroeconomics by David Colander, Peter Howitt, Alan Kirman, Axel Leijonhufvud and Perry Mehrling. Published in volume 98, issue 2, pages 236-40 of American Economic Review, May 2008

Policymakers often prescribe that microfinance institutions increase interest rates to eliminate their reliance on subsidies. This strategy makes sense if the poor are rate insensitive: then microlenders increase profitability (or achieve sustainability) without reducing the poor's access to credit. We test the assumption of price inelastic demand using randomized trials conducted by a consumer lender in South Africa. The demand curves are downward sloping, and steeper for price increases relative to the lender's standard rates. We also find that loan size is far more responsive to changes in loan maturity than to changes in interest rates, which is consistent with binding liquidity constraints. (JEL G21, O16)

This article examines the stock market's changing valuation of corporate patentable assets between 1910 and 1939. It shows that the value of knowledge capital increased significantly during the 1920s compared to the 1910s as investors responded to the quality of technological inventions. Innovation was an important driver of the late 1920s stock market runup, and the Great Crash did not reflect a significant revaluation of knowledge capital relative to physical capital. Although substantial quantities of influential patents were accumulated during the post-crash recovery, high technology firms did not earn significant excess returns over low technology firms for most of the 1930s. (JEL G14, N12, N22, O30)

Twenty years ago, Thomas A. Rietz (1988) showed that infrequent, large drops in consumption make the theoretical equity premium large. Recent research has resurrected this ‘disaster’explanation of the equity premium puzzle. Robert J. Barro (2006) measures disasters during the XXth century, and …nds that they are frequent and large enough, and stock returns low enough relative

Standard intuitions for optimal gerrymandering involve concentrating one's extreme opponents in “unwinnable” districts (“packing”) and spreading one's supporters evenly over “winnable” districts (“cracking”). These intuitions come from models with either no uncertainty about voter preferences or only two voter types. In contrast, we characterize the solution to a problem in which a gerrymanderer observes a noisy signal of voter preferences from a continuous distribution and creates N districts of equal size to maximize the expected number of districts she wins. Under mild regularity conditions, we show that cracking is never optimal—one's most ardent supporters should be grouped together. Moreover, for sufficiently precise signals, the optimal solution involves creating a district that matches extreme “Republicans” with extreme “Democrats,” and then continuing to match toward the center of the signal distribution. (JEL D72)

When a job-seeker and an employer meet, find a prospective joint surplus, and bargain over the wage, conditions in the outside labor market, including especially unemployment, may have limited influence. The job-seeker's only credible threat during bargaining is to hold out for a better deal. The employer's threat is to delay bargaining. Consequently, the outcome of the bargain depends on the relative costs of delays to the parties, rather than on the payoffs that result from exiting negotiations. Modeling bargaining in this way makes wages less responsive to unemployment. A stochastic model of the labor market with credible bargaining and reasonable parameter values yields larger employment fluctuations than does the standard Mortensen-Pissarides model. (JEL J22, J23, J31, J64)

What has driven trade booms and trade busts in the past century and a half? Was it changes in global output or in the costs of international trade? To address this question, we derive a micro-founded measure of aggregate bilateral trade costs based on a standard model of trade in differentiated goods. These trade costs gauge the difference between observed bilateral trade and frictionless trade in terms of an implied markup on retail prices of foreign goods. Thus, we are able to estimate the combined magnitude of tariffs, transportation costs, and all other macroeconomic frictions that impede interna tional trade but that are inherently difficult to observe. We use this measure to examine the growth of global trade between 1870 and 1913, its retreat from 1921 to 1939, and its subsequent rise from 1950 to 2000. We find that trade cost declines explain roughly 55 percent of the pre– World War I trade boom and 33 percent of the post–World War II trade boom, while a precipi tous rise in trade costs explains the entire inter

Testing for a Reference Consumer in International Comparisons of Living Standards by Ian Crawford and J. Peter Neary. Published in volume 98, issue 4, pages 1731-32 of American Economic Review, September 2008

Hatfield and Milgrom (2005) present a unified model of matching with contracts phrased in terms of hospitals and doctors, which subsumes the standard two-sided matching and some package auction models. They show that a stable allocation exists if contracts are substitutes for each hospital. They further claim that if a hospital's preferences violate the substitutes condition, there exist singleton preferences for the other hospitals and doctors such that no stable allocation exists. We show this last claim does not hold in general. We further present a weaker condition that is necessary to guarantee the existence of stable allocations. (JEL C78, D86, J41)