Knowledge that Transforms

This paper shows that the body of appointed officials that a new democracy inherits from the previous regime is a key determinant of the extent of electoral fraud and clientelistic spending in new democracies. I develop a model that predicts that appointed officials have stronger incentives to influence voters during national level elections because of their career concerns. I test the implications of the model using data from Indonesia's transition to democracy. Both the pattern of alignment of electoral results between village and district levels and the pattern of subsequent turnover of appointed village heads corroborate the predictions of the model. ( JEL D72, H77, H83, O17, O18)

The US population will age rapidly for several decades and then more slowly, with less aging than most rich nations. Health of the elderly has greatly improved, but disability stagnated after 2000. Retirement age reversed its decline in the mid-1990s and health status leaves ample room for increased elder labor supply. Many older people have inadequate retirement savings and face additional risks including uncertainty about both public and private pensions and health insurance. Population aging may cause a small decline in rates of return. The main problem is the impact of population aging on public programs for the elderly.

This paper studies a New Keynesian business cycle model with agents who are averse to ambiguity (Knightian uncertainty). Shocks to confidence about future TFP are modeled as changes in ambiguity. To assess the size of those shocks, our estimation uses not only data on standard macro variables, but also incorporates the dispersion of survey forecasts about growth as a measure of confidence. Our main result is that TFP and confidence shocks together can explain roughly two thirds of business cycle frequency movements in the major macro aggregates. Confidence shocks account for about 70 percent of this variation. (JEL D81, D84, E12, E32)

We model the strategic provision of advice in environments where a principal's optimal action depends on an unobserved, binary state of interest. Experts receive signals about the state and each recommends an action. The principal and all experts dislike making errors in their decision and recommendations, respectively, but may have different costs of different errors. Is it in the principal's interest to let experts share information? Although sharing improves experts' ability to avoid errors, we identify a simple environment in which any principal, regardless of how he trades off the different errors, is worse off if he permits information sharing.

The paper reports the architecture of a continuous combinatorial auction. Preferences are based on sets of items and feasibility requires the nonintersection of sets. Countdown clocks replace eligibility and activity requirements typical of rounds-based auctions. Bids remain in the system to be combined with new bids to form winning collections. Increment requirements dictate improvements over appropriate collections of existing bids. The auction evolved from experimental methods and operates at high levels of efficiency. Field applications are reported and result in natural equilibration in a few hours as opposed to days or weeks required by round-based architectures.

Online education has flexibility and cost advantages over in-class teaching and these advantages will grow with improvements in information technology. We consider likely market structures given that the quality aspects of online education exhibit endogenous fixed costs. Concentration in the market for courses could be high, as it is currently in the market for textbooks. The not-for-profit sector will exhibit lower costs, lower concentration, and possibly zero price.

This paper experimentally investigates whether money illusion generates substantial nominal inertia. Building on the design of Fehr and Tyran (2001), we find no evidence that agents choose high nominal payoffs over high real payoffs. However, participants do select prices associated with high nominal payoffs within a set of maximum real payoffs as a heuristic to simplify their decision task. The cognitive challenge of this task explains the majority of the magnitude of nominal inertia; money illusion exerts only a second-order effect. The duration of nominal inertia depends primarily on participants' best response functions, not the prevalence of money illusion. (JEL C91, D21, D83, E31, E41, E52, L11)

A principal delegates multiple decisions to an agent, who has private information relevant to each decision. The principal is uncertain about the agent's preferences. I solve for max-min optimal mechanisms—those which maximize the principal's payoff against the worst case agent preference types. These mechanisms are characterized by a property I call “aligned delegation”: all agent types play identically, as if they shared the principal's preferences. Max-min optimal mechanisms may take the simple forms of ranking mechanisms, budgets, or sequential quotas. (JEL D44, D83, J16)

Adaptive Coding is the property of the brain to adjust its response to statistical properties of the environment. Its effect is an improved discrimination among signals under the constraints on the dynamic range of its response. It can thus be considered the neural correspondent of Rational Attention, which models how a rational decisionmaker allocates attention among different informative signals. There is strong evidence of existence of widespread adaptive coding. Adaptive coding introduces a dependence of choice from the environment which is not observed in behavior. We discuss potential solutions and propose Hebbian learning as a potentially satisfactory answer.

Acemoglu et al. (2008) document that the correlation between income per capita and democracy disappears when including time and country fixed effects. While their results are robust for the full sample, we find evidence for significant but heterogeneous effects of income on democracy: negative for former colonies, but positive for non-colonies. Within the sample of colonies we detect heterogeneous effects related to colonial history and early institutions. The zero mean effect estimated by Acemoglu et al. (2008) is consistent with effects of opposite signs in the different subsamples. Our findings are robust to the use of alternative data and estimation techniques. (JEL D72, O17, O47)