Knowledge that Transforms

We study the effects of antitrust policy in industries with continual innovation. Antitrust policies that restrict incumbent behavior toward new entrants may have conflicting effects on innovation incentives, raising the profits of new entrants, but lowering those of continuing incumbents. We show that the direction of the net effect can be determined by analyzing shifts in innovation benefit and supply, holding the innovation rate fixed. We apply this framework to analyze several specific antitrust policies. We also show that, in some cases, the tension does not arise, and policies that protect entrants necessarily raise the rate of innovation.

The Political Economy of the US Monetary Union: The Civil War Era as a Watershed by David F. Weiman and John A. James. Published in volume 97, issue 2, pages 271-275 of American Economic Review, May 2007

For two districts or countries that try to internalize externalities, I analyze a bargaining game under private information. I derive conditions for when it is efficient with uniform policies across regions—with and without side payments—and when it is efficient to prohibit side payments in the negotiations. While policy differentiation and side payments allow the policy to better reflect local conditions, they create conflicts between the regions and, thus, delay. The results also describe when political centralization outperforms decentralized cooperation, and they provide a theoretical foundation for the controversial “uniformity assumption” traditionally used by the fiscal federalism literature.

This paper analyzes the welfare costs of business cycles when workers face uninsurable job displacement risk. The paper uses a simple macroeconomic model with incomplete markets to show that cyclical variations in the long-term earnings losses of displaced workers can generate arbitrarily large cost of business cycles even if the variance of individual income changes is constant over the cycle. In addition to the theoretical analysis, this paper conducts a quantitative study of the cost of business cycles using empirical evidence on the long-term earnings losses of US workers. The quantitative analysis shows that realistic variations in job displacement risk generate sizable costs of business cycles, even though a second-moment analysis would suggest negligible costs.

Economic Review 2004.I used a bilateral "gravity" model of trade and showed that dummy variables for membership by either one or two countries in the GATT had only small effects on trade.In essence, TGR point out that a lot of countries were not formal members of the GATT but still participated in it as colonies, de facto, or provisional members.TGR argue that if one includes these other types of more informal membership, you get large positive effects.

Many view the period after the Second Industrial Revolution as a paradigm of a transition to a new economy following a technological revolution, including the Information Technology Revolution. We build a quantitative model of diffusion and growth during transitions to evaluate that view. With a learning process quantified by data on the life cycle of US manufacturing plants, the model accounts for the key features of the transition after the Second Industrial Revolution. But we find that features like those will occur in other transitions only if a large amount of knowledge about old technologies exists before the transition begins.

We analyze the impact of recent immigration on the employment and wages of less educated workers during the 1990s, a period of heightened geographic diffusion of immigrants across the nation. We focus on men residing in metropolitan areas, who are between the ages of 25 and 62 and are from the three major racial/ ethnic groups: white non-Hispanic, black nonHispanic, and Latino (hereafter referred to as race groups). Theory predicts that immigration will increase the wages of native workers who are complements to immigrants and decrease the wages of natives who are substitutes. Because immigrants have low education relative to natives, low-educated natives are likely to be substitutes, and high-educated natives are likely to be complements. We find negative effects of recent immigration on the employment, and especially the wages, of low-skilled workers. The wage effects are largest for Latinos, followed by blacks.

The current literature offers two views on the nature of the labor income process. According to the first view, individuals are subject to very persistent income shocks while facing similar life-cycle income profiles (the RIP process, Thomas MaCurdy 1982). According to the alternative, individuals are subject to shocks with modest persistence while facing individual-specific profiles (the HIP process, Lee A. Lillard and Yoram A. Weiss 1979). In this paper we study the restrictions imposed by these two processes on consumption data—in the context of a life-cycle model—to distinguish between the two views. We find that the life-cycle model with a HIP process, which has not been studied in the previous literature, is consistent with several features of consumption data, whereas the model with a RIP process is consistent with some, but not with others. We conclude that the HIP model could be a credible contender to—and along some dimensions, a more coherent alternative than—the RIP model.

We develop a tractable framework for the analysis of the relationship between contractual incompleteness, technological complementarities, and technology adoption. In our model, a firm chooses its technology and investment levels in contractible activities by suppliers of intermediate inputs. Suppliers then choose investments in noncontractible activities, anticipating payoffs from an ex post bargaining game. We show that greater contractual incompleteness leads to the adoption of less advanced technologies, and that the impact of contractual incompleteness is more pronounced when there is greater complementary among the intermediate inputs. We study a number of applications of the main framework and show that the mechanism proposed in the paper can generate sizable productivity differences across countries with different contracting institutions, and that differences in contracting institutions lead to endogenous comparative advantage differences.