Knowledge that Transforms

We compare how new pharmaceuticals are priced in the price-regulated Swedish market with how they are priced in the U.S. market, as studied by Lu and Comanor (1998). We collect a data set consisting of all new chemical entities (NCEs) launched in Sweden between 1987 and 1997, and test the same models as Lu and Comanor. In line with their results, we find that introductory prices depend on the degree of therapeutic innovation. Contrary to the results from the U.S. market, Swedish real prices for NCEs fall substantially over time for all classes of therapeutic innovation. Also contrary to the findings of Lu and Comanor, we find no effect of the presence of branded substitutes on either introduction prices or price dynamics. Our results indicate that the price regulation discourages price competition between brandname drugs.

This paper uses a rich employer-employee matched data set to investigate the existence and the extent of nonprofit and part-time wage and compensation differentials in child care. The empirical strategy adjusts for workers' self-selection into the for-profit or the nonprofit sector and into full-time or part-time work, as well as for unobserved worker heterogeneity, using a discrete factor model. We find differences between the regimes (full-time for-profit, full-time nonprofit, part-time for-profit, part-time nonprofit) in the manner in which human capital characteristics of the workers are rewarded. There is substantial variation in wages as a function of employee characteristics, and there is variation in wages within sectors. The results indicate that part-time jobs are good jobs in center-based child care, and there exist nonprofit wage and compensation premia, which support the property-rights hypothesis.

This paper examines the effect of drug prohibition on the black market prices of cocaine and heroin. The paper examines the ratio of retail to farmgate price for cocaine, heroin, and several legal goods, and it compares legal versus black market prices for cocaine and heroin. The results suggest that cocaine and heroin are substantially more expensive than they would be in a legalized market, but to a lesser degree than suggested in previous research.

Recently many papers have used the arrest rate to measure punishments in crime-rate regressions. However, arrest rates account for only a portion of the criminal sanction. Conviction rates and time served are theoretically important, but rarely used, and excluding them generates omitted variable bias if they are correlated with the arrest rate. This paper uses the most complete set of conviction and sentencing data to show that arrest rates are negatively correlated with these normally excluded variables. Consequently, previous estimates of arrest-rate effects are understated by as much as 50%. Also, conviction rates, but not sentence lengths, have significant explanatory power in standard crime-rate regressions.

This paper studies the influence of R&D in the U.S. federal laboratory system, the world's largest, on firm research. Our results are based on a sample of 220 industrial research laboratories that work with a variety of federal laboratories and agencies and are owned by 115 firms in the chemicals, machinery, electrical equipment, and motor vehicles industries. Using an indicator of their importance to R&D managers, we find that cooperative research and development agreements (CRADAs) dominate other channels of technology transfer from federal laboratories to firms. With a CRADA industry laboratories patent more, spend more on company-financed R&D, and devote more resources to their federal counterparts. Without this influence, patenting stays about the same, and only federally funded R&D increases, mostly because of government support. The Stevenson-Wydler Act and amendments during the 1980s introduced CRADAs, which legally bind federal laboratories and firms together in joint research. In theory the agreements could capitalize on complementarities between public and private research. Our results support this perspective and suggest that CRADAs may be more beneficial to firms than other interactions with federal laboratories, precisely because of the mutual effort that they demand from both parties.

We use high-frequency interest-rate data for a group of Latin American and Asian countries to analyze the behavior of volatility through time. We focus on volatility comovements across countries. Our analysis relies on univariate and bivariate switching volatility models. We compare the results from the switching models with those from rolling-standard-deviation models. We argue that the switching models are superior. Our results indicate that high-volatility episodes are, in general, short-lived, lasting from 2 to 7 weeks. We also find some evidence of interest-rate volatility comovements across countries.

Stigma is a negative attribute of real estate acquired by environmental contamination and reflected in its value (Elliot-Jones, 1996). Using a model of neighborhood turnover with external economies, we show that both temporary stigma and long-term stigma are possible equilibrium outcomes after the discovery and cleanup of a hazardous waste site. The existence and duration of stigma are examined using hedonic price techniques with data from housing sales prices in Dallas County, Texas. We find that results depend critically on distance from the hazardous waste site. Neighborhood turnover due to changes in the level of poverty also appears likely.

We examine the effects of reference income on the behavior of young male physicians. Using a unique panel of data, we relate physicians' reference and actual incomes to their subsequent income growth. Reference income has a strong positive effect on subsequent income for physicians who are below their reference points, but not for physicians who are at or above their reference points. Loss aversion, which posits a kink in utility at the reference point, explains this puzzling pattern. Physicians respond strongly to shortfalls from the reference point—they take unappealing actions to boost earnings—because the marginal utility of income is steep in that range. Competing prominent theories, tested here, fail to explain these relationships.

Since the publication (1976) of the classic Lucas critique, researchers in empirical macroeconomics have endeavored to specify models that capture the underlying dynamic decision-making behavior of consumers and firms who require forecasts of future events. Recently, a number of researchers have developed simple models that have become the workhorses for monetary policy analysis. The models vary considerably with regard to optimizing foundations and explicit treatment of expectations. However, relatively little effort has been devoted to testing the empirical importance of the Lucas critique for these simple models. Can one find specifications that are policy-invariant? This paper develops and implements a set of tests for several monetary policy models used extensively in the literature. In particular, we attempt to test the robustness of optimizing versus nonoptimizing models to changes in the monetary policy regime. We present evidence that shows that some forward-looking models from the recent literature may be less stable than their better-fitting backward-looking counterparts.

A youth homicide reduction initiative in Boston in the mid- 1990s poses particular difficulties for program evaluation because it did not have a control group and the exact implementation date is unknown. A standard methodology in program evaluation is to use time series variation to compare pre- and postprogram outcomes. Such an approach is not valid, however, when the timing of program implementation or effect is unknown. To evaluate the Boston initiative, we adapt from the time series literature an unknown-breakpoint test to test for a change in regime. Tests for parameter instability provide a flexible framework for testing a range of hypotheses commonly posed in program evaluation. These tests both pinpoint the timing of maximal break and provide a valid test of statistical significance. We evaluate the results of the estimation using the asymptotic results in the literature and with our own Monte Carlo analyses. We conclude there was a statistically significant discontinuity in youth homicide incidents (on the order of 60%) shortly after the intervention was unveiled.