Knowledge that Transforms

We study optimal income taxation in a spatial equilibrium model with heterogeneous locational preferences, labor supply decisions, and competitive housing and labor markets. Expressions characterizing the optimal tax schedule in each community are provided that capture the fiscal externalities associated with migration and the effects of redistribution between households and landlords. Correlation between skill and locational preferences yields optimal transfers to poor areas, while sorting based on comparative advantage can motivate transfers in either direction. A calibration to areas targeted by the US Empowerment Zone program yields sizable optimal spatial transfers that are sensitive to assumed levels of migration responsiveness. (JEL H21, H23, H24, J24, J31, R23)

This paper identifies a credit-supply contraction that arises endogenously after trade liberalization. Banks with loan portfolios concentrated in sectors exposed to competition from China face an increase in nonperforming loans after China’s entry into the World Trade Organization. As a result, they reduce the supply of credit to firms, irrespective of the firm’s sector of operation. This cut in credit translates into lower employment, investment, and output. Through this mechanism, the financial channel amplifies the shock to firms already hit by import competition from China and passes it on to firms in sectors expected to expand upon trade liberalization. (JEL D22, F14, G21, G31, G32, L25, P33)

This paper examines how central bank policies influence mortgage pricing in the United Kingdom. It shows that lenders price discriminate by offering two-part tariffs of interest rates and origination fees, and during unconventional monetary policies like the Funding for Lending Scheme, lenders reduced interest rates while increasing fees. Using a model of mortgage demand and lender competition, we find that central bank policies increased mortgage lending. Additionally, banning origination fees would reduce lending, as fees help lenders capture surplus while allowing them to price discriminate across borrowers with different sensitivities to rates and fees. (JEL E43, E52, E58, G21, G28, R31)

We test the effectiveness of a behavioral program grounded in the idea that status granting and self-persuasion might yield a robust behavioral change in disadvantaged adolescents. We enlist socially connected senior middle school students with high emotional intelligence as “student-teachers” and entrust them with delivering a curriculum to their junior peers. The program empowers student-teachers, leading them to improve their social environment. It reduces disciplinary incidents and antisocial behavior among student-teachers and their friendship networks. The intervention significantly enhances the likelihood of admission to selective high schools for student-teachers, offering a cost-effective way to help disadvantaged adolescents escape neighborhood disadvantages. (JEL H52, I21, I24, I28, J13, O15)

Ethnically diverse countries are more prone to conflict, but why do some groups engage in conflict, while others do not? I show that civil conflict in Africa is explained by ethnic groups’ cultural distance to the central government: an increase in cultural distance, proxied by linguistic distance, increases an ethnicity’s propensity to fight over government power. To identify this effect, I leverage within-ethnicity variation in linguistic distance resulting from power transitions between ethnic groups over time. I provide evidence that the effects can be attributed to differences in preferences over both the allocation and the type of public goods. (JEL D74, H41, J15, N47, O15, O17, Z13)

Many US colleges now use test-optional admissions. A frequent claim is that by not seeing standardized test scores, a college can admit a student body it prefers, say, with more diversity. But how can observing less information improve decisions? This paper proposes that test-optional policies are a response to social pressure on admission decisions. We model a college that bears disutility when it makes admission decisions that “society” dislikes. Going test optional allows the college to reduce its “disagreement cost.” We analyze how missing scores are imputed and the consequences for the college, students, and society. (JEL I23, I28)

Can diversity lead to greater research focus on populations underrepresented in science? Between 1960 and 1990, 76 all-male US universities transitioned to coeducation. Using a generalized difference-in-differences design, we find that coeducation led to a 44 percent increase in gender-related research publications. This increase is driven by research focused on female subjects and gender differences. While coeducation led to a compositional shift with more women and researchers interested in gender topics, much of the increase comes from male incumbent researchers shifting their research focus toward gender-related topics. The results support interaction with more diverse students and peers as key underlying mechanisms. (JEL I23, J16, O31, O34)

We study one benefit to firms of selling subscriptions: the prospect that consumers will continue to pay for subscriptions they no longer value. We use comprehensive data from a large payment card network to document that months during which cards are replaced, when active renewal is required, are associated with much higher rates of cancellation. Using two stylized models of consumer inertia—driven by inattention or switching costs—we estimate that these cancellation frictions roughly double seller revenues on average, holding fixed initial subscribers. We use the estimated models to explore the impact of possible regulatory remedies. (JEL D12, D18, L81, L88)

A large literature has examined how best to target antipoverty programs to those most deprived in some sense (e.g., consumption). We examine the potential trade-off between this objective and targeting those most impacted by such programs. We work in the context of an NGO cash transfer program in Kenya, employing recent advances in machine learning methods and dynamic outcome data to learn proxy means tests that jointly target both objectives. Targeting solely on the basis of deprivation is not attractive in this setting under standard social welfare criteria unless the planner’s preferences are extremely redistributive. (JEL C45, D63, I31, I38, L31, O15)

We provide a new foundation of risk aversion by showing that this attitude is fully captured by the propensity to seize insurance opportunities. In our main results, we first characterize Arrow-Pratt (1963–1964) risk aversion in terms of propensity to full insurance and the stronger notion of risk aversion of Rothschild and Stiglitz (1970) in terms of propensity to partial insurance. We then extend the analysis to comparative risk aversion by showing that the classical notion of Yaari (1969) corresponds to comparative propensity to full insurance, while the stronger notion of Ross (1981) corresponds to comparative propensity to partial insurance. (JEL D81, G22, G52)