Knowledge that Transforms

Bilateral trade deficits are a perennial policy issue. Former Deputy Assistant U.S. Trade Representative for Japan and China, Merit Janow (1994 p. 55), notes that during the first George Bush administration, “High deficits coupled with the continuing allegations from U.S. business interests about the closed nature of the Japanese market were resulting in serious domestic political pressures for improved access to the Japanese market.” Recently Robert C. Feenstra et al. (1998 p. 1) made similar comments vis-a-vis China: “Some analysts have interpreted the large U.S.–China bilateral trade deficit as prima facie evidence of unacceptably high levels of protectionism in China, and have advocated stringent entry conditions for China’s admission into WTO.” Given the policy salience of bilateral trade deficits, it is peculiar that no one has ever examined them empirically for a broad set of countries. One reason for the scant study is that economists are naturally (and sensibly) loath to accept the terms of the policy debate, which considers bilateral trade deficits ipso facto harmful. A second reason is that economists believe there may be very natural explanations for bilateral imbalances. One such explanation finds its origins in macroeconomic identities that equate current-account deficits to an excess of investment over saving. From this, it may be argued that bilateral imbalances will arise naturally in trade between countries in aggregate surplus and those in aggregate deficit. Indeed, this is the principal explanation that the profession has given policymakers, and it forms the foundation of many U.S. bilateral trade initiatives such as the Structural Impediments Initiative and the Framework talks. Janow (1994 p. 55) observes that “there was (and is) little disagreement among economists that the causes of large aggregate and bilateral deficits are largely attributable to macroeconomic factors” [italics added]. A second account may rely on what may be termed “triangular trade,” in which cross-country differences in the patterns of demand and supply mean that a country will run bilateral deficits with those countries that are unusually important suppliers of the goods for which the deficit country happens to be an unusually strong demander. In this paper, we use the canonical “gravity model” of bilateral trade to form predictions about bilateral trade balances. We develop two key variants of the model, in which bilateral trade imbalances arise due to aggregate macroeconomic imbalances or due to “triangular trade,” and we implement these empirically for a broad set of countries. Our results paint a dismal picture. The central explanations that economists provide to explain bilateral balances perform miserably. There are two key failures. First, actual bilateral trade imbalances are much larger than those predicted; there is a “mystery of excess trade balances.” Second, even after we allow for both macroeconomic imbalances and idiosyncrasies in the structure and levels of demand and production, the models perform poorly in explaining bilateral trade balances. These failures of economists’ standard explanations of bilateral trade imbalances require that we move beyond the simple gravity framework to consider alternative explanations: homogeneous goods, highly specialized intermediates, and the role of policy.

Faced with aging populations, tax rates on labor income rose in most industrial countries in the 1970's and 1980's, in large part to fund burgeoning social-security systems. The growth of the welfare state coincided with increased returns to education, and thus broader wage differentials between workers with relatively high levels of skills or education and those without. This paper provides a theoretical framework which connects these phenomena. We show that the aging of the population and the return to education both affect the politicaleconomy determination of tax rates and the generosity of transfers in a democratic framework. Using panel data on the United States and nine European countries, we provide supportive empirical evidence.

One, Two, (Three), Infinity, ...: Newspaper and Lab Beauty-Contest Experiments by Antoni Bosch-Domènech, José G. Montalvo, Rosemarie Nagel and Albert Satorra. Published in volume 92, issue 5, pages 1687-1701 of American Economic Review, December 2002

In an important paper, Timothy J. Feddersen and Wolfgang Pesendorfer (1996) investigate the “swing voter’s curse.” In a model of elections in which voters have common preferences and private information, they show that, when indifferent, less informed voters are better off abstaining than voting for either alternative, even without a cost of voting—the “swing voter’s curse.” They go on to show that even though significant abstention occurs in large electorates, the outcome of the election is almost always the same as with perfect information. Unfortunately, the proof of the proposition that establishes the “swing voter’s curse” phenomenon contains an error. In this comment we identify the error and give a correct proof of the proposition.

Economists measure the cost of protection in terms of static efficiency, growth rates and firm- or industry-level productivity effects. This survey is devoted exclusively to the literature on the static efficiency. A key preliminary point to note is that estimates in this literature are not derived econometrically from pre- and post- liberalization data. Instead, they are based on simulations of partial- or general-equilibrium models that are parameterized using estimates from the literature and calibrated around a pre-liberalization base year. This paper explores alternate measures of protection and thei welfare costs.

A key feature of modern dynamic economies is imperfect competition. Some imperfect competition is due to institutions such as patents and copy-rights that allow Þrms to exercise market power over the sale of products they invent. Some imperfect competition is due to various forms of increas-ing returns to scale and product differentiation. Since market power is an essential feature of innovation and growth in the new economy (as it was in the old economy) we need to know how imperfect competition affects the conventional wisdom on tax policy. We argue that it has particularly striking implications for the taxation of capital. The current consensus among economists is that investment should be lightly taxed with most tax revenues coming from labor and consumption taxation; see Kenneth L. Judd (1999) for a discussion of this literature. These analyses assume perfect competition in all markets. Even though imperfect competition is common, economists generally prefer competitive models since analyses with imperfect competition usually get mired in strategic details

The research for which George Akerlof, Mike Spence, and I are being recognized is part of a larger research program which, today, embraces hundred, perhaps thousands, of researchers around the worl...

Which is the tighter constraint on private sector investment: weak property rights or limited access to external finance? From a survey of new firms in post-communist countries, we find that weak property rights discourage firms from reinvesting their profits, even when bank loans are available. Where property rights are relatively strong, firms reinvest their profits; where they are relatively weak, entrepreneurs do not want to invest from retained earnings.

Survey evidence on the importance of bequests is fairly consistent. Dorothy Projector and Gertrude Weiss (1966), using the 1963 Survey of Financial Characteristics of Consumers, reported that only 17 percent of families had received any inheritance. Paul Menchik and Martin David (1983), using probate records of men who died in Wisconsin between 1947 and 1978, estimated that the average intergenerational bequest amounted to less than one-fifth of average household wealth in 1967 and about 10 percent of the average household wealth of families 65 or over in age. Michael Hurd and Gabriella Mundaca (1989) found from the 1984 Survey on the Economic Behavior of the Affluent data that only 12 percent of households in the top 10 percent of the income distribution reported that more than half their wealth came from gifts or inheritances, and only 9 percent in the 1983 Survey of Consumer Finances. However, William Gale and J. K. Scholz (1994), using the 1983 Survey of Consumer Finances, estimated that at least 51 percent of household wealth is accounted for by inheritances and other intentional wealth transfers. II. Data Sources and Methods

In a recent publication in this journal, YeonKoo Che and Seung-Weon Yoo (2001) have derived important implications of optimal contracts for teams by considering repeated interactions among multiple agents. First, in Proposition 1 they have argued that in a static setting the optimal contract displays the feature of relative performance evaluation (henceforth, RPE), which means that the wage of an agent is decreased when his peer performs well. Second, they have shown that in a dynamic setting the optimal contract may be based on joint performance evaluation (henceforth, JPE), which means that the wage of an agent is increased when his peer performs well, even in the parameter range in which RPE is optimal in a static setting.