Knowledge that Transforms

This Paper develops a model of economic growth and activity locating endogenously on a 3-dimensional featureless global geography. The same economic forces influence simultaneously growth, convergence, and spatial agglomeration and clustering. Economic activity is not concentrated on discrete isolated points but instead a dynamically-fluctuating, smooth spatial distribution. Spatial inequality is a Cass-Koopmans saddlepath, and the global distribution of economic activity converges towards egalitarian growth. Equality is stable but spatial inequality is needed to attain it.

In Corbae, Temzelides, and Wright (2001) (hereafter, CTW) we proposed a new version of the framework that uses bilateral matching to model the exchange process, and in particular to model the use of money as a medium of exchange. Our version does not have agents meeting exogenously and at random, but rather has agents meeting endogenously. That is, agents are matched at each date subject to a stability condition that requires, roughly, that no agents prefer to be paired with each other or to be unmatched, rather than to be paired with the partners they get along the equilibrium path. While similar in spirit to the cooperative matching concept introduced by David Gale and Lloyd Shapley (1962), we had to generalize their framework to dynamic models because we are interested in monetary economics. Here we present a version of the solution concept in CTW, specialized in some ways but also generalized to include extrinsic uncertainty (sunspots). We then discuss some applications of endogenous matching models to issues that have previously been addressed using random matching, including the existence of sunspot equilibria and the efficiency of inside versus outside money. One of our main goals is to show how endogenous matching is a useful alternative to random matching. This may be interesting to those who think that bilateral trade is a reasonable friction upon which to build a theoretical foundation for monetary economics but perhaps think that random matching is an extreme and unrealistic simplification. Another goal is to provide examples where it makes a difference for substantive results how we model the matching process, and also examples where it does not. I. Endogenous Matching

A special exemption from the 1986 Age Discrimination Act allowed colleges and universities to enforce mandatory retirement of faculty at age 70 until 1994. We construct a survey that permits us to compare faculty turnover rates before and after the law changed at a large sample of institutions with defined contribution pension plans. After the elimination of compulsory retirement the retirement rates of 70- and 71-year-olds fell by two-thirds and were comparable to rates of 69-year-olds. These findings indicate that U.S. colleges and universities will experience a rise in the number of older faculty over the coming years.

Think about Richard Scarry’s Cars and Trucks and Things That Go. Think about what that book would have looked like in sequential decades of the last century had Richard Scarry been alive in each of them to delight and amuse children and parents. Each subsequent decade has seen the development of ever more specialized vehicles. We started with the Model T Ford. We now have more models of backhoe loaders than even the most precocious fouryear-old can identify. What relevance does this have for economics? In the late 1960’s there was a shift in the job description of economic theorists. Prior to that time microeconomic theory was mainly concerned with analyzing the purely competitive, general-equilibrium model based upon profit maximization by firms and utility maximization by consumers. The macroeconomics of the day, the so-called neoclassical synthesis, appended a fixed money wage to such a generalequilibrium system. “Sticky money wages” explained departures from full employment and business-cycle fluctuations. Since that time, both microand macroeconomics have developed a Scarry-ful book of models designed to incorporate into economic theory a whole variety of realistic behaviors. For example, “The Market for ‘Lemons’ ” explored how markets with asymmetric information operate. Buyers and sellers commonly possess different, not identical, information. My paper examined the pathologies that may develop under these more realistic conditions. For me, the study of asymmetric information was a very first step toward the realization of a dream. That dream was the development of a behavioral macroeconomics in the original spirit of John Maynard Keynes’ General Theory (1936). Macroeconomics would then no longer suffer from the “ad hockery” of the neoclassical synthesis, which had overridden the emphasis in The General Theory on the role of psychological and sociological factors, such as cognitive bias, reciprocity, fairness, herding, and social status. My dream was to strengthen macroeconomic theory by incorporating assumptions honed to the observation of such behavior. A team of people has participated in the realization of this dream. Kurt Vonnegut would call this team a kerass, “a group of people who are unknowingly working together toward some common goal fostered by a larger cosmic influence.” In this lecture I shall describe some of the behavioral models developed by this kerass to provide plausible explanations for macroeconomic phenomena which are central to Keynesian economics. For the sake of background, let me take you back a bit in time to review some history of macroeconomic thought. In the late 1960’s the New Classical economists saw the same weaknesses in the microfoundations of macroeconomics that have motivated me. They hated its lack of rigor. And they sacked it. They then held a celebratory bonfire, with an article entitled “After Keynesian Macroeconomics.” The new version of macroeconomics that they produced became standard in the 1970’s. Following its neoclassical synthesis predecessor, New Classical macroeconomics was based on the competitive, general-equilibrium model. But it differed in being much more zealous in insisting that all decisions—consumption and labor supply by † This article is a revised version of the lecture George A. Akerlof delivered in Stockholm, Sweden, on December 8, 2001, when he received the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. The article is copyright © The Nobel Foundation 2001 and is published here with the permission of the Nobel Foundation.

Height is consulted as a latent indicator of early nutrition and lifetime health status. Height is observed to increase in recent decades in populations where per capita national income has increased and public health activities have grown. Height is determined by genetic make up and realized in part through satisfactory nutrition and health related care and conditions. Alternative instrumental variables (IV) are explored which proxy price and income constraints which are expected to influence the latter reproducible human capital investments in height. I report OLS and IV estimates of the partial effect of height on log hourly wages in recent national surveys from three countries: Ghana, Brazil and the United States. I conclude that the human capital productivity effect of height estimated by parent education IVs in the US and Ghana are many times larger than the OLS estimates, and in Ghana and Brazil the regional price IVs estimates also imply a substantially larger human capital wage effects of height compared with the OLS estimates. The OLS estimates of height effects on wages are dominated by the genetic variation in height, and appear to understate substantially the human capital returns to health and nutrition inputs which increase adult height.

This paper examines three sets of explanations for variations in the strength of patent protection across sixty countries and a 150-year period. Wealthier nations are more likely to have patent systems, to allow patentees a longer time to put their patents into practice, and to ratify treaties assuring equal treatment of other nations. But they are also likely to charge higher fees and limit patent protection in some important ways. Countries with democratic political institutions are consistently more likely to have patent protection appear to be determined by historical factors. The origin of a country's commercial law appears particularly important in explaining the presence of restrictions on patentees' privileges and discriminatory provisions against foreign patentees.

Technological Change, Entry, and Stock-Market Dynamics: An Analysis of Transition in a Monopolistic Industry by Bipasa Datta and Huw Dixon. Published in volume 92, issue 2, pages 231-235 of American Economic Review, May 2002

This paper treats racial integration as an innovation in economic process in which economic entities find it advantageous to utilize potentially more productive inputs previously unavailable due to law, custom, or managerial discretion. Data on the racial integration of Major League Baseball and Atlantic Coast Conference basketball are employed to address this issue. The central question examined is which type of team integrated first—losers or winners? The results strongly support the idea that entrepreneurship trumps competitive rivalry; that is, winning teams led the process of racial integration.

Welfare, Employment, and Income: Evidence on the Effects of Benefit Reductions from California by V. Joseph Hotz, Charles H. Mullin and John Karl Scholz. Published in volume 92, issue 2, pages 380-384 of American Economic Review, May 2002