Knowledge that Transforms

Because of common data limitations, the existing testing framework for the generalized composite commodity theorem (Lewbel, 1996) is incomplete. This note clarifies and strengthens the testing procedure by implementing modified Bonferroni procedures. The conditions are established for consistency between the existing and modified Bonferroni tests. In an empirical application, the Bonferroni tests provide more powerful support for the generalized composite commodity theorem than is obtained from the existing test.

The United States became a net exporter of manufactured goods around 1910 after a dramatic surge in iron and steel exports began in the mid-1890s. This paper argues that natural-resource abundance fueled the expansion of iron and steel exports in part by enabling a sharp reduction in the price of U.S. exports relative to other competitors. The commercial exploitation of the Mesabi iron ore range, for example, reduced domestic ore prices by 50% in the mid-1890s and was equivalent to over a decade's worth of industry productivity improvement in its effect on iron and steel export prices. The nontradability of American ore resulted in its distinctive impact on the pattern of U.S. trade. The results are consistent with Wright's (1990) finding that U.S. manufactured exports were natural-resource-intensive at this time.

The empirically documented Pareto wealth distribution at high wealth levels implies rather extreme wealth inequality. Is this inequality primarily due to differential talent, or is it due to luck? The answer to this question has profound political, social, and philosophical implications, as well as implications regarding market efficiency. We address this question theoretically and with a unique investment experiment with equal initial endowments and real out-of-pocket money. We show that the empirically observed Pareto distribution implies that luck, rather than differential investment talent, is the main force driving inequality at high wealth levels.

Proxy variables are frequently used in economics to control for unavailable variables in a linear regression setting. For example, AFQT scores have been used to control for human capital accumulation in measuring black-white wage differentials. This practice may bias the coefficient estimates for the correctly measured variables as well. This paper models proxy variables as a measurement error process and derives bounds for the coefficients on the correctly measured variables under a variety of assumptions. The results show that the coefficient on race in a linear regression is an overstatement of the actual black-white wage gap. Sensitivity analysis suggests that if human capital could be correctly measured it would be unlikely that the coefficient on black would be negative.

This study investigates whether higher input use per stay in the hospital (treatment intensity) and longer length of stay improve outcomes of care. We allow for endogeneity of intensity and length of stay by estimating a quasi-maximum-likelihood discrete factor model, where the distribution of the unmeasured variable is modeled using a discrete distribution. Data on elderly persons come from several waves of the National Long-Term Care Survey merged with Medicare claims data for 1984–1995 and the National Death Index. We find that higher intensity improves patient survival and some dimensions of functional status among those who survive.

Did inflation targets reduce the level of expected inflation in Australia, Canada, New Zealand, Sweden, and the United Kingdom? In this note, predictions of forecasts by professional forecasters are constructed for five consecutive 12-month periods after the announcement of targets. These predictions use a variety of information variables known to forecasters at the time they make their forecasts. The results show that, after the announcement of targets, predicted forecasts are less than actual forecasts in Australia, Canada, New Zealand, and Sweden. This is evidence that targets reduced the level of expected inflation. No evidence of such effects is found in the United Kingdom.

We use information from the television game show with the highest guaranteed average payoff in the United States, Hoosier Millionaire, to analyze risktaking in a high-stakes experiment. We characterize gambling decisions under alternative assumptions about contestant behavior and preferences, and derive testable restrictions on individual risk attitudes based on this characterization. We then use an extensive sample of gambling decisions to estimate distributions of risk-aversion parameters consistent with the theoretical restrictions and revealed preferences. We find that although most contestants display risk-averse preferences, the extent of the risk aversion implied by our estimates varies substantially with the stakes involved in the different decisions.

Contrary to the predictions of the standard life-cycle model, many low-lifetime-income households accumulate little wealth relative to their incomes compared to households with high lifetime income. I use data from the Panel Study of Income Dynamics and a correlated random-effects generalized-method-of-moments estimator to decompose the rich-poor gaps in wealth-to-permanent-income ratio into the portions attributable to differences in characteristics such as labor market earnings, income uncertainty, observed demographics, and the utilization of transfer programs which may have stringent income and liquid-asset tests, and those attributable to differences in the estimated coefficients on the respective characteristics. The results suggest that wealth-to-permanent-income ratios are increasing in permanent labor income and income uncertainty, but that transfer income, with or without asset tests, discourages liquid-asset accumulation. The decompositions indicate that most of the rich-poor wealth gap is attributable to differences in average characteristics and not coefficients. The leading factor driving the gap between the rich and poor in the ratio of liquid wealth to permanent income is asset-tested transfer income, whereas the leading factor driving the gap in the ratio of net worth to permanent income is labor-market earnings.

This paper examines the effect of information technology (IT) on the relative demand for educated workers in U.S. industries from 1960 to 1996. After decomposing this effect into IT use and adoption, I find that the use of IT is complementary with educated workers, and that educated workers have a comparative advantage in the adoption of IT. In total, IT use and adoption effects account for almost 40% of the acceleration in demand for educated workers since 1970. Moreover, the adoption of IT explains about one-third of the total IT effect on the acceleration in skill upgrading in the 1970s.

This paper analyzes first-price sealed-bid auctions of standing timber organized by the French forest service, Office National des Forêts (ONF). A feature of these auctions is that they are held with random reserve prices. We consider an auction model with a random reserve price within the independent-private-value paradigm. After establishing the identification of the model, we estimate the underlying bidders' private-value distribution by using a simple two-step nonparametric procedure. This procedure allows the computation of the winners' informational rents as well as the optimal reserve price. We then simulate a first-price sealed-bid auction with the optimal announced reserve price. Empirical results show that the optimal reserve price allows the ONF to extract more of bidders' willingnesses to pay. Moreover, our results show that, though sales do not vary much, profits for the ONF would significantly increase and less timber would be sold.