Knowledge that Transforms

We study an open economy where a pro-labor and a pro-business candidate compete in an election. The winner chooses taxes, which affect investment returns. Electoral outcomes depend on the size of the foreign debt, but the debt itself reflects expectations about the election. The resulting interaction is novel and has several implications. Elections are associated with increased volatility. Politico-economic crises can occur. Inefficiencies vanish if the candidates commit to an appropriate tax policy, but such commitments have predictable effects on the election. Empirical evidence supporting the theory is discussed. (JEL D72, F34, O17, O19)

Early admissions are widely used by selective colleges and universities. We identify some basic facts about early admissions policies, including the admissions advantage enjoyed by early applicants and patterns in application behavior, and propose a game-theoretic model that matches these facts. The key feature of the model is that colleges want to admit students who are enthusiastic about attending, and early admissions programs give students an opportunity to signal this enthusiasm. (JEL C78, I23)

In their comment, Taylor, Kreisle and Zimmerman use gasoline price data taken from fleet card transactions at selected gasoline stations to re-examine a subset of results presented in Hastings (2004). Bringing new data to re-examine the question is a helpful contribution. Both data sets have limitations, potentially causing differences in the estimated effect. I worked with the authors to explore and understand the differences in the data sets and how they impact the estimates in both analyses, and conclude that the effects sizes are likely smaller in areas of overlap between the two data sets.

Equilibrium, affine asset pricing models with Larry G. Epstein and Stanley E. Zin (1989)’s preferences typically generate time variation in risk premiums through time variation in the quantity of risks, with the market prices of risks (MPR) held constant. This is true of models with built in long-run consumption risks (LRR) (e.g., Ravi Bansal and Amir Yaron (2004), Bansal, Dana Kiku, and Yaron (2009)), as well as of the broader formulations in Bjorn Eraker and Ivan Shaliastovich (2008). For pricing bonds such formulations may be overly constrained as reduced form models suggest that it is time variation in the MPRs, more than stochastic yield volatilities, that resolve the expectations puzzles in bond markets. Constant MPRs are not an inherent feature of equilibrium pricing models with recursive preferences, but rather they arise as a consequence of the linearizations underlying the affine approximations to these models that have been explored empirically. The essential ingredients of these econometric formulations are (P1) recursive (Epstein-Zin) preferences, (P2) risk neutral (핈), affine pricing, and (P3) the assumption that the state of the economy is described by an affine process under the historical (핇) distribution. Key to achieving property (P2), given P1 and P3, is the assumption that the valuation ratio (the log “price/consumption” ratio) associated with the claim that pays aggregate consumption is an affine function of the state. We develop a dynamic term structure model with recursive preferences that preserves

Why Do Firms in Developing Countries Have Low Productivity? by Nicholas Bloom, Aprajit Mahajan, David McKenzie and John Roberts. Published in volume 100, issue 2, pages 619-23 of American Economic Review, May 2010

To gauge the competitiveness of the group health insurance industry, I investigate whether health insurers charge higher premiums, ceteris paribus, to more profitable firms. Such "direct price discrimination" is feasible only in imperfectly competitive settings. Using a proprietary national database of health plans offered by a sample of large, multisite firms from 1998–2005, I find firms with positive profit shocks subsequently face higher premium growth, even for the same health plans. Moreover, within a given firm, those sites located in concentrated insurance markets experience the greatest premium increases. The findings suggest health care insurers are exercising market power in an increasing number of geographic markets.

This study examines why people initially give to charities, why they remain committed to the cause, and what factors attenuate these influences. Using an experimental design that links donations across distinct treatments separated in time, we present several results. For example, previous donors are more likely to give, and contribute more, than other donor types. Yet, how previous donors were acquired is critical: agents initially attracted by an economic mechanism are more likely to continue giving than agents attracted by a nonmechanism factor. From a methodological viewpoint, our study showcases the benefit of moving beyond an experimental design that focuses on short-run substitution effects. (JEL C93, D64, D82, H41, L31, Z12)

The welfare effects of trade shocks turn on the nature and magnitude of the costs workers face in moving between sectors. Using an Euler-type equilibrium condition derived from a rational expectations model of dynamic labor adjustment, we estimate the mean and variance of workers' switching costs from the US CPS. We estimate high values of both parameters, implying slow adjustment of the economy and sharp movements in wages in response to trade shocks. However, import-competing workers can still benefit from tariff removal; liberalization lowers their wages in the short and long run but raises their option value. (JEL E24, F13, F16)

In a series of binary choice problems, we investigate how a chooser's risk taking changes when others share in their personal risk, either equally or unequally. We find that when the safe option yields inequality, the risky option is taken significantly more often. On the other hand, the inequality resulting from the risky choice does not affect risk taking. We also find that choosers tend to be less risk-averse in a one-person context compared to when the risk also affects the payoff of another. (C72, D81, Z13)

The United States is beginning to emerge from the deepest downturn the country has experienced since the Great Depression. As of October 2009, the number of unemployed persons had risen by 8.2 million since the “Great Recession” began in December 2007. All demographic groups have experienced job losses, but some groups have been more adversely affected than others. Repeating the pattern of most previous downturns, the recession’s impact has been worst for low education and minority workers. One group that has been particularly hard hit is Mexican immigrants. Data from the Current Population Survey indicate that between the first quarter of 2007 and the second quarter of 2009, the unemployment rate among Mexican immigrants rose from 4.2 percent to 11.3 percent, and their employment rate dropped by 5 percentage points. In contrast, during that period the unemployment rate among non-Hispanic white natives rose from 3.7 percent to 7.8 percent, and their employment rate fell by 2.6 percentage points. Mexican immigrants tend to be particularly vulnerable to economic downturns because of their relatively low skill levels. They make up one-fourth of all workers who do not have a high school diploma or equivalent and over one-half of workers who have completed at most eighth grade. When the economy slows, employers look to shed their least productive employees first. Employers tend to invest less in training low skilled workers and therefore have less