Knowledge that Transforms

We consider the strategic timing of information releases in a dynamic disclosure model. Because investors don't know whether or when the firm is informed, the firm will not necessarily disclose immediately. We show that bad market news can trigger the immediate release of information by firms. Conversely, good market news slows the release of information by firms. Thus, our model generates clustering of negative announcements. Surprisingly, this result holds only when firms can preemptively disclose their own information prior to the arrival of external information. These results have implications for conditional variance and skewness of stock returns. (JEL D21, D83, G12, G14, L11)

Due to inadequate savings and binding borrowing constraints, income volatility can make households in developing countries particularly susceptible to economic hardship. We examine the role of remittances in either alleviating or increasing household income volatility using Mexican household level data over the 2000 through 2008 period. We correct for reverse causality and endogeneity and find that while income smoothing does not appear to be the main motive for sending remittances in a non-negligible share of households, remittances do indeed smooth household income on average. Other variables surrounding income volatility are also considered and evaluated.

We examine the source of the large fall and rebound in US trade in the recent recession. While trade fell and rebounded more than expenditures or production of traded goods, we find that relative to the magnitude of the downturn, these trade fluctuations were in line with those in previous business cycle fluctuations. We argue that the high volatility of trade is attributed to more severe inventory management considerations of firms involved in international trade. We present empirical evidence for autos as well as at the aggregate level that the adjustment of inventory holdings help explain these fluctuations in trade.

Plott and Zeiler (2005) report that the willingness-to-pay/willingness-to-accept disparity is absent for mugs in a particular experimental setting, designed to neutralize misconceptions about the procedures used to elicit valuations. This result has received sustained attention in the literature. However, other data from that same study, not published in that paper, exhibit a significant and persistent disparity when the same experimental procedures are applied to lotteries. We report new data confirming both results, thereby suggesting that the presence or absence of a disparity may be a more complex issue than some may have supposed. (JEL C91, D12, D81, D83)

We examine changes in subjective probabilities regarding retirement between the 2006 and 2008 waves of the Health and Retirement Study. Using a first-difference approach to eliminate individual heterogeneity, we find that the steep drop in asset prices in 2008 increased the reported probability of working at age 62 during the Great Recession. Increasing unemployment at least partly attenuated this effect, but subjective probabilities of working did not respond to changes in housing markets. Older workers' probabilities of working were more sensitive to fluctuations in the stock market, but less responsive to changes in labor market conditions.

A dispute about the size of the aggregate labor supply elasticity has been fortified by a contentious aggregation theory used by real business cycle theorists. The replacement of that aggregation theory with one more congenial to microeconomic observations opens possibilities for an accord about the aggregate labor supply elasticity. The new aggregation theory drops features to which empirical microeconomists objected and replaces them with life-cycle choices. Whether the new aggregation theory ultimately indicates a small or large macro labor supply elasticity will depend on how shocks and government institutions interact to put workers at interior solutions for career length.

In a market-clearing economy, declines in demand from one sector do not cause large declines in aggregate output because other sectors expand. The key price mediating the response is the interest rate. A decline in the rate stimulates all categories of spending. But in a low-inflation economy, the room for a decline in the rate is small, because of the notorious lower limit of zero on the nominal interest rate. In the Great Depression, substantial deflation caused the real interest rate to reach high levels. In the Great Slump that began at the end of 2007, low inflation resulted in an only slightly negative real rate when full employment called for a much lower real rate because of declines in demand. Fortunately, the inflation rate hardly responded to conditions in product and labor markets, else deflation might have occurred, with an even higher real interest rate. I concentrate on three closely related sources of declines in demand: the buildup of excess stocks of housing and consumer durables, the corresponding expansion of consumer debt that financed the buildup, and financial frictions that resulted from the decline in real-estate prices. (JEL E23, E24, E31, E32, E65)

We examine the impact of poor water quality on avoidance behavior by estimating the change in bottled water purchases in response to drinking water violations. Using data from a national grocery chain matched with water quality violations, we find an increase in bottled water sales of 22 percent from violations due to microorganisms and 17 percent from violations due to elements and chemicals. Back-of-the envelope calculations yield costs of avoidance behavior at roughly $60 million for all nationwide violations in 2005, which likely reflects a significant understatement of the total willingness to pay to eliminate violations.

Using a model of statistical discrimination and educational sorting, we explain why blacks get more education than whites of similar cognitive ability, and we explore how the Armed Forces Qualification Test (AFQT), wages, and education are related. The model suggests that one should control for both AFQT and education when comparing the earnings of blacks and whites, in which case a substantial black-white wage differential emerges. We reject the hypothesis that differences in school quality between blacks and whites explain the wage and education differentials. Our findings support the view that some of the black-white wage differential reflects the operation of the labor market. (JEL I21, J15, J24, J31, J71)

Newly developed historical time series on public debt, along with data on external debts, allow a deeper analysis of the debt cycles underlying serial debt and banking crises. We test three related hypotheses at both “world” aggregate levels and on an individual country basis. First, external debt surges are an antecedent to banking crises. Second, banking crises (domestic and those in financial centers) often precede or accompany sovereign debt crises; we find they help predict them. Third, public borrowing surges ahead of external sovereign default, as governments have “hidden domestic debts” that exceed the better documented levels of external debt. (JEL E44, F34, F44, G01, H63, N20)