Knowledge that Transforms

Exchange traded funds (ETFs) are a new variety of mutual fund that first became available in 1993. ETFs have grown rapidly and now hold nearly $80 billion in assets. ETFs are sometimes described as more 'tax efficient' than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distributions of realized and taxable capital gains than most mutual funds. This paper provides an introduction to the operation of exchange traded funds. It also compares the pre-tax and post-tax returns on the largest ETF, the SPDR trust that invests in the S&P500, with the returns on the largest equity index fund, the Vanguard Index 500. The results suggest that between 1994 and 2000, the before- and after-tax returns on the SPDR trust and this mutual fund were very similar. Both the after-tax and the pre-tax returns on the fund were slightly greater than those on the ETF. These findings suggest that ETFs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low-cost index funds.

This paper analyzes how markets for old-age care respond to the aging of populations. We consider how the biological forces which govern the stocks of frail and healthy persons in a population interact with economic forces which govern the demand and supply for labor-intensive care.... We test our predictions empirically using state- and county-level evidence on the U.S. market for long-term care in nursing homes over the last three decades. (EXCERPT)

The Q-theory of investment says that a firm's investment rate should rise with its Q. We argue here that this theory also explains why some firms buy other firms. We find that 1. A firm's merger and acquisition (M&A) investment responds to its Q more -- by a factor of 2.6 -- than its direct investment does, probably because M&A investment is a high fixed cost and a low marginal adjustment cost activity, 2. The typical firm wastes some cash on M&As, but not on internal investment, i.e., the 'Free-Cash Flow' story works, but explains a small fraction of mergers only, and 3. The merger waves of 1900 and the 1920's, `80s, and `90s were a response to profitable reallocation opportunities, but the `60s wave was probably caused by something else.

We examine the impact of the coal boom of the 1970's and the coal bust of the 1980's on disability program participation. These shocks provide clear evidence that as the value of labor-market participation increases, disability program participation falls. For the Disability Insurance program, the elasticity of payments with respect to local earnings is between -0.3 and -0.4 and for Supplemental Security Income the elasticity is between -0.4 and -0.7. Consistent with a model where qualifying for disability programs is costly, the relationship between economic conditions and program participation is much stronger for permanent than for transitory economic shocks.

Economic inequality is of interest not only at some intrinsic level, but also for its close connections to diverse variables, ranging from economic indicators such as growth rates to sociopolitical outcomes such as collective action and conflict.It is only natural, then, to study the evolution of inequality in an economic system.It is fair to say that the dominant view on this topic is that inequality is the outcome of a constant battle between convergence and "luck" (Gary Becker and Nigel Tomes, 1979).Current asset inequalities may echo into the future, but their natural tendency is to die out (owing to a convex investment technology).Disparities are only sustained through ongoing stochastic shocks (see also David Champernowne, 1953;Glenn Loury, 1981).A second approach emphasizes that initial conditions determine final outcomes, owing principally to a nonconvex investment technology (see e.g.

We present a method for decomposing wholesale electricity payments into production costs, inframarginal competitive rents, and payments resulting from the exercise of market power. Using data from June 1998 to October 2000 in California, we find significant departures from competitive pricing during the high-demand summer months and near-competitive pricing during the lower-demand months of the first two years. In summer 2000, wholesale electricity expenditures were $8.98 billion up from $2.04 billion in summer 1999. We find that 21 percent of this increase was due to production costs, 20 percent to competitive rents, and 59 percent to market power.

In a recent provocative paper in this journal, Mark J. Kamstra et al. (2000) test and reject the hypothesis that the mean weekend return following changes in daylight saving time equals the mean weekend return throughout the rest of the year. The authors report that the average Friday-to-Monday return on daylight-saving weekends is 200–500 percent larger than the average negative return for the other weekends of the year. The Ž nding appears to hold not only in the United States and Canada where daylightsaving date patterns are similar, but also in the United Kingdom, whose patterns ostensibly differ from those in North America. The results also appear robust to alternative statistical methods based on time-varying conditional heteroscedasticity and/or bootstrapping. This paper provides further robustness tests of the results reported by Kamstra et al. I show that the difference between mean weekend returns for daylight-saving and non-daylightsaving weekends is signiŽ cant only for fall changes in daylight saving time and that the fall difference is driven by two outliers associated with international stock market crises. Two separate adjustments for the heteroscedasticity these outliers induce cause the signiŽ cance of the fall difference to vanish. The total sample (spring plus fall) difference remains marginally signiŽ cant for some indexes after heteroscedasticity adjustments with classical Ž xed-level hypothesis tests. However, Bayesian sample-size adjustments produce posterior odds ratios that consistently favor the null hypothesis of no daylight-saving anomaly over the alternative that the anomaly exists. I also fail to reject the hypothesis that daylight-saving and nondaylight-saving weekend returns have equal distributions. For these reasons, I question the robustness of the Ž ndings reported by Kamstra et al. (2000). Section I presents more details of my tests, and Section II summarizes my Ž ndings and discusses their interpretation.

Using Electoral Cycles in Police Hiring to Estimate the Effects of Police on Crime: Reply by Steven D. Levitt. Published in volume 92, issue 4, pages 1244-1250 of American Economic Review, September 2002

This paper seeks to understand the behavior of Greenspan's Federal Reserve in the late 1990s. Some authors suggest that the Fed followed a simple "Taylor rule," while others argue that it deviated from such a rule because it recognized that the "New Economy" permitted an easing of policy. We find that a Taylor rule based on inflation and unemployment does break down in the late 1990s. However, the Fed's behavior appears stable once one accounts for the falling NAIRU of the period. A rule based on inflation and the deviation of unemployment from the NAIRU captures the Fed's behavior through the entire period from 1987 to 2000.

This paper examines the role of bequests and inter vivos gifts in the U.S. economy, considering their importance in determining (i) the economy’s aggregate capital stock, (ii) the distribution of private net worth, and (iii) public policy outcomes and options. It focuses on several recent calibrated simulations.(This abstract was borrowed from another version of this item.)