Knowledge that Transforms

The volume of new issuances in secondary loan markets fluctuates over time and falls when collateral values fall. We develop a model with adverse selection and reputation that is consistent with such fluctuations. Adverse selection ensures that the volume of trade falls when collateral values fall. Without reputation, the equilibrium has separation, adverse selection is quickly resolved, and trade volume is independent of collateral value. With reputation, the equilibrium has pooling and adverse selection persists over time. The equilibrium is efficient unless collateral values are low and originators' reputational levels are low. We describe policies that can implement efficient outcomes.

Demichelis and Weibull (2008) show that adding lexicographic lying costs to coordination games with cheap talk yields a sharp prediction: only the efficient outcome is evolutionarily stable. I show that this result is caused by the discontinuity of preferences rather than by small lying costs per se. Finally, I discuss why discontinuity may not be an appealing assumption in evolutionary models.

Beaudry and Portier (2006) propose an identification scheme to study the effects of news shocks about future productivity in vector error correction models (VECMs). This comment shows that, when applied to their VECMs with more than two variables, the identification scheme does not have a unique solution. The problem arises from a particular interplay of cointegration assumptions and long-run restrictions.

The data in Fehr and Tyran (2001) and Petersen and Winn (2014) show that money illusion plays an important role in nominal price adjustment after a fully anticipated negative monetary shock. Money illusion affects subjects' expectations, and causes pronounced nominal inertia after a negative shock but much less inertia after a positive shock. Thus Petersen and Winn (2014) provide a misleading interpretation of both our and their own data.

We describe two auction forms for search engine advertising and present two simple theoretical results concerning i) the estimation of click-through rates and ii) how to adjust the auctions for broad match search. We also describe some of the practical issues involved in implementing a VCG auction.

This paper analyzes long-term effects of skilled-worker immigration on productivity for the Huguenot migration to Prussia. In 1685, religiously persecuted French Huguenots settled in Brandenburg-Prussia and compensated for population losses due to plagues during the Thirty Years’ War. We combine Huguenot immigration lists from 1700 with Prussian firm-level data on the value of inputs and outputs in 1802 in a unique database to analyze the effects of skilled immigration to places with underused economic potential. Exploiting this settlement pattern in an instrumental-variable approach, we find substantial long-term effects of Huguenot settlement on the productivity of textile manufactories.

Microfinance institutions have started to bundle their basic loans with other financial services, such as health insurance. Using a randomized control trial in Karnataka, India, we evaluate the impact on loan renewal from mandating the purchase of actuarially-fair health insurance covering hospitalization and maternity expenses. Bundling loans with insurance led to a 16 percentage points (23 percent) increase in drop-out from microfinance, as many clients preferred to give up microfinance than pay higher interest rates and receive insurance. In a Pyrrhic victory, the total absence of demand for health insurance led to there being no adverse selection in insurance enrollment.

Private equity critics claim that leveraged buyouts bring huge job losses and few gains in operating performance. To evaluate these claims, we construct and analyze a new dataset that covers US buyouts from 1980 to 2005. We track 3,200 target firms and their 150,000 establishments before and after acquisition, comparing to controls defined by industry, size, age, and prior growth. Buyouts lead to modest net job losses but large increases in gross job creation and destruction. Buyouts also bring TFP gains at target firms, mainly through accelerated exit of less productive establishments and greater entry of highly productive ones.

We make use of a new data resource--merged birth and school records for all children born in Florida from 1992 to 2002--to study the relationship between birth weight and cognitive development. Using singletons as well as twin and sibling fixed effects models, we find that the effects of early health on cognitive development are essentially constant through the school career; that these effects are similar across a wide range of family backgrounds; and that they are invariant to measures of school quality. We conclude that the effects of early health on adult outcomes are therefore set very early.

We posit that household decision-making over fertility is characterized by moral hazard since most contraception can only be perfectly observed by the woman. Using an experiment in Zambia that varied whether women were given access to contraceptives alone or with their husbands, we find that women given access with their husbands were 19 percent less likely to seek family planning services, 25 percent less likely to use concealable contraception, and 27 percent more likely to give birth. However, women given access to contraception alone report a lower subjective well-being, suggesting a psychosocial cost of making contraceptives more concealable.