Knowledge that Transforms

A Theory of Brain Drain and Public Funding for Higher Education in the United States by Felicia Ionescu and Linnea A. Polgreen. Published in volume 99, issue 2, pages 517-21 of American Economic Review, May 2009

In the public sector, employment may be inefficiently high because of patronage, and wages may be inefficiently high because of public employee interest groups. This paper explores whether the initiative process, a direct democracy institution of growing importance, ameliorates these political economy problems. In a sample of 650+ cities, I find that when public employees cannot bargain collectively and patronage could be a problem, initiatives appear to cut employment but not wages. When public employees bargain collectively, driving up wages, the initiative appears to cut wages but not employment. The employment-cutting result is robust; the wage-cutting result survives some but not all robustness tests. (JEL D72, J31, J45, J52)

South Africa's Post-apartheid Two-Step: Social Demands versus Macro Stability by Brahima Coulibaly and Trevon D. Logan. Published in volume 99, issue 2, pages 275-81 of American Economic Review, May 2009

The structure of employment is always changing, and economists are always trying to understand those changes. In the 1990s the idea of skill-biased technological change (SBTC) was used to understand the shift in employment toward more educated workers (see David H. Autor and Lawrence F. Katz 1999, for a survey). However, in recent years, it has become appar ent that a more nuanced approach is needed. The idea of SBTC might lead one to predict a uni form shift in employment away from low-skilled and toward high-skilled occupations, but studies for the United States (Autor, Katz, and Melissa S. Kearney 2006) and the United Kingdom (Goos and Manning 2007) have shown that there is growth in employment in both the high est-skilled (professional and managerial) and lowest-skilled (personal services) occupations, with declining employment in the middle of the distribution (manufacturing and office jobs). This is what Goos and Manning (2007) term job polarization (although see the introduc to Goos and Manning 2007 for antecedents of these ideas). There are several hypotheses about the rea sons for job polarization. First, the routiniza tion hypothesis (first put forward by Autor, Frank Levy, and Richard Murnane 2003) sug gests that the effect of technological progress is to replace routine labor which tends to be clerical and craft jobs in the middle of the wage distribution. Second, there is the view that globalization in general, and offshoring in par ticular, is an important source of change in the job structure in the richest countries (see, for example, Alan S. Blinder 2007). Third, there may be a link between job polarization and

January 2009Although almost half of the world™s population lives under nondemocratic regimes, thequestions of how policy decisions are made and how power changes hands in nondemocra-cies have received relatively little attention in the political economy literature. A popularview, forcefully articulated by Gordon Tullock (1987), is that because there are no stronginstitutions ensuring consensus and regulating the election and succession of leaders, non-democratic regimes rapidly degenerate into personal rule, where a single dictator dominatesevery aspect of decision-making. Tullock writes: fiEmpirically the Junta characteristicallyshrinks to one man...fl(p. 144) and continues to explain this as the result of dynamic in-teractions among the members of the junta. He suggests that there will typically be anaccumulation of power by one of the junta members. If this upstart member succeeds, hebecomes the sole ruler. If he fails, he is eliminated by the other members of the junta.This process continues until one member is standing. Tullock thus concludes: fiIt can beseen that this process would tend over time to lead the junta into becoming just one manthrough the gradual exclusion of individuals who had failed in plotting or the success of anindividual who had not.fl(p. 145)Tullock™s account, like that of many others, implicitly recognizes that politics in non-democratic and weakly-institutionalized societies should be conceptualized as one of thedynamic coalition formationS there are no rules that ensure orderly transitions of powerand no checks against some members of the ruling coalition eliminating or sidelining others.However, formal models of dynamic coalition formation in nondemocratic societies have notbeen developed until recently.In this paper, we draw on our work on dynamic coalition formation (Daron Acemoglu,Georgy Egorov and Konstantin Sonin, 2008a) and investigate Tullock™s conjecture formally.1

We study a simple model of liquidity risk management in which a firm is subject to rollover risk. When a firm is unable to rollover its maturing bonds by issuing new bonds, it may have to seek more expensive sources of financing or even liquidate its assets, possibly at fire-sale prices. One way to reduce this risk is to hold excess cash reserves, which can be expensive in practice (Bengt Holmström and Jean Tirole 2000; 2001). In this paper, we focus on an alternative way of managing liquidity risk, through the optimal (dynamic) choice of the maturity structure of debt. Our analysis highlights one advantage of short-term financing. The firm, while in good financial health, can readjust its maturity structure more quickly in response to changes in its asset value. Ideally, the firm would secure long-term financing just prior to when its financial health may worsen. Through this strategy, the firm can secure financing for the longest continuous period possible without rollover failure, avoiding inefficient restructuring costs. Put differently, the objective of the firm with long-term assets is to maximize the effective maturity of its liabilities across several refinancing cycles, rather than to maximize the maturity of the current bonds outstanding.

In a market-based financial system, banking and capital market developments are inseparable, and funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Offering a window on liquidity, the balance sheet growth of broker-dealers provides a sense of the availability of credit. Contractions of broker-dealer balance sheets have tended to precede declines in real economic growth, even before the current turmoil. For this reason, balance sheet quantities of market-based financial intermediaries are important macroeconomic state variables for the conduct of monetary policy.

Temperature and Income: Reconciling New Cross-Sectional and Panel Estimates by Melissa Dell, Benjamin F. Jones and Benjamin A. Olken. Published in volume 99, issue 2, pages 198-204 of American Economic Review, May 2009