Knowledge that Transforms

Could racial wealth inequality have been reduced if freed slaves had been granted land following the Civil War? This paper exploits a plausibly exogenous variation in policies of the Cherokee Nation and southern United States to identify the impact of free land on the size of the racial wealth gap. Using data on land, livestock, and home ownership, I find evidence that former slaves who had access to free land were absolutely wealthier and experienced lower levels of racial wealth inequality in 1880 than former slaves who did not. Furthermore, their children continued to experience these advantages in 1900.

Similar to other markets in which deviations from Jevons' “law of one price” is the norm rather than the exception, the retail wine market in the United States is characterized by large price dispersions. Drawing on a large sample of retail prices from wine-searcher.com we find an average per-wine coefficient of variation of 23 percent. Some of this is due to differential market conditions, especially state regulations. Our evidence suggests that dispersion also depends positively on price levels, after controlling for consumer, market, and state heterogeneity.

This paper develops a theory of expectations-driven business cycles based on learning. Agents have incomplete knowledge about how market prices are determined and shifts in expectations of future prices affect dynamics. Learning breaks the tight link between fundamentals and equilibrium prices, inducing periods of erroneous optimism or pessimism about future returns to capital and wages which subsequent data partially validate. In a real business cycle model, the theoretical framework amplifies and propagates technology shocks. Moreover, it produces agents' forecast errors consistent with business cycle properties of forecast errors for a wide range of variables from the Survey of Professional Forecasters. JEL: C53, D83, D84, E32, E37

Each week, the Dutch Postcode Lottery (PCL) randomly selects a postal code, and distributes cash and a new BMW to lottery participants in that code. We study the effects of these shocks on lottery winners and their neighbors. Consistent with the life-cycle hypothesis, the effects on winners' consumption are largely confined to cars and other durables. Consistent with the theory of in-kind transfers, the vast majority of BMW winners liquidate their BMWs. We do, however, detect substantial social effects of lottery winnings: PCL nonparticipants who live next door to winners have significantly higher levels of car consumption than other nonparticipants. JEL: D14, D91, H23, H27

We investigate the effect of lane kilometers of roads on vehicle-kilometers traveled (VKT) in US cities. VKT increases proportionately to roadway lane kilometers for interstate highways and probably slightly less rapidly for other types of roads. The sources for this extra VKT are increases in driving by current residents, increases in commercial traffic, and migration. Increasing lane kilometers for one type of road diverts little traffic from other types of road. We find no evidence that the provision of public transportation affects VKT. We conclude that increased provision of roads or public transit is unlikely to relieve congestion. (JEL R41, R48)

It is instructive to read the article that Katharine Coman published in the first issue of the American Economic Review to gain insight into the problems of collective action related to irrigation in the American West. One gains further understanding of the problems Coman identifies by using a social-ecological system (Ostrom 2007, 2009) to organize the diverse variables identified by Coman. One gains a general lesson from this analysis that changing the formal governance structure of irrigation is not sufficient to ensure efficient investment in facilities or that farmers are able to acquire property and make a reasonable living. Building knowledge and trust are, however, essential for solving collective-action problems. (JEL B31, N51, Q15, Q25)

Christopher A. Pissarides delivered his Prize Lecture on 8 December 2010 at Aula Magna, Stockholm University.(This abstract was borrowed from another version of this item.)

Estimating the cost of regulation is difficult. Firms sometimes reveal costs indirectly, however, when they exploit loopholes to avoid regulation. We apply this insight to fuel economy standards for automobiles. These standards feature a loophole that gives automakers a bonus when they equip a vehicle with flexible-fuel capacity. Profit-maximizing automakers will equate the marginal cost of compliance using the loophole, which is observable, with the unobservable costs of strategies that genuinely improve fuel economy. Based on this insight, we estimate that tightening standards by one mile per gallon would have cost automakers just 9–27 per vehicle in recent years. (JEL L51, L62, Q48)

The failure of many paintings to sell in art auctions indicates the presence of reserve prices set by sellers. This paper examines the relationship between sale rates and price surprises over time in art auctions. Using data on contemporary and impressionist art, we show that while sale rates appear to have little relationship to current prices, there exists a strong positive relationship of sale rates to unexpected aggregate price changes, which is reminiscent of a Phillips curve. As a result, sale rates provide a useful quantity indicator of the strength of the art market. The data also indicate that sale rates revert to "normal" very quickly following a price surprise. We estimate an empirical model to measure normal sale rates. We also find evidence that the reserve price is set on average at about 70% of the auctioneer's low estimate, as published in the auction catalog.

Public policies for pollution control, including climate change policies, sometimes allow polluters in one sector subject to an emissions cap to offset excessive emissions with pollution abatement in another sector. The government may find it more costly to verify offset claims than to verify compliance with emissions caps. Concerns about such enforcement difficulties may lead regulators to restrict the use of offsets. We demonstrate that allowing offsets may increase pollution abatement and reduce illegal pollution, even if the government has a fixed enforcement budget. We explore circumstances that may make allowing pollution offsets an attractive option when enforcement is costly.