Knowledge that Transforms

More than three hundred paired audits at new-car dealerships reveal that dealers quoted significantly lower prices to white males than to black or female test buyers using identical, scripted bargaining strategies. Ancillary evidence suggests that the dealerships' disparate treatment of women and blacks may be caused by dealers' statistical inferences about consumers' reservation prices, but the data do not strongly support any single theory of discrimination. Copyright 1995 by American Economic Association.

Trade on international financial markets allows people to insure country-specific risk and smooth consumption intertemporally. Equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment. The authors incorporate nontraded goods in the model and find that the implications for aggregate consumption, investment, and the trade balance are consistent with business-cycle properties of industrialized countries. However, the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level. Taste shocks produce price-quantity relationships more consistent with the data. Copyright 1995 by American Economic Association.

The paper examines labor-market returns to a two- and four-year college education. Analysis of the 1972 National Longitudinal Survey of Youth; Observation that the average person who attended a two-year college earned about 10-percent more than those without any college education; Comparison with the wages of those who attended a four-year college education.

The Heckscher-Ohlin-Vanek (HOV) theorem, which predicts that countries will export products that are made from factors in great supply, performs poorly. However, deviations from HOV follow pronounced patterns. Trade is missing relative to its HOV prediction. Also, rich countries appear scarce in most factors and poor countries appear abundant in all factors, a fact that squares poorly with the HOV prediction that abundant factors are exported. As suggested by the patterns, HOV is rejected empirically in favor of a modification that allows for home bias in consumption and international technology differences. Copyright 1995 by American Economic Association.

The persistence of cooperation in public-goods experiments has become an important puzzle for economists. This paper presents the first systematic attempt to separate the hypothesis that cooperation is due to kindness, altruism, or warm-glow from the hypothesis that cooperation is simply the result of errors or confusion. The experiment reveals that, on average, about half of all cooperation comes from subjects who understand free-riding but choose to cooperate out of some form of kindness. This suggests that the focus on errors and 'learning' in experimental research should shift to include studies of preferences for cooperation as well. Copyright 1995 by American Economic Association.

Regressions of multiple-period changes in the log exchange rate on the deviation of the log exchange rate from its 'fundamental value' display evidence that long-horizon changes in log nominal exchange rates contain an economically significant predictable component. To account for small-sample bias and size distortion in asymptotic tests, inference is drawn from bootstrap distributions generated under the null hypothesis that the log exchange rate is unpredictable. The bias-adjusted slope coefficients and R[superscript]2's increase with the forecast horizon, and the out-of-sample point predictions generally outperform the driftless random walk at the longer horizons. Copyright 1995 by American Economic Association.

This paper adopts a principal-agent framework to determine how a central banker's incentives should be structured to induce the socially optimal policy. In contrast to previous findings using ad hoc targeting rules, the inflation bias of discretionary policy is eliminated and an optimal response to shocks is achieved by the optimal incentive contract, even in the presence of private central-bank information. In the one-period model that has formed the basis for much of the literature on discretionary monetary policy, it is shown that the optimal contract ties the rewards of the central banker to realized inflation. Copyright 1995 by American Economic Association.