Knowledge that Transforms

According to the terms-of-trade theory, governments use trade agreements to escape from a terms-of-trade-driven prisoner's dilemma. We use the terms-of-trade theory to develop a relationship that predicts negotiated tariff levels on the basis of pre-negotiation data: tariffs, import volumes and prices, and trade elasticities. We then confront this predicted relationship with data on the outcomes of tariff negotiations associated with the accession of new members to the World Trade Organization. We find strong and robust support for the central predictions of the terms-of-trade theory in the observed pattern of negotiated tariff cuts. (JEL F11, F13)

We develop a human capital model with borrowing constraints explicitly derived from government student loan (GSL) programs and private lending under limited commitment. The model helps explain the persistent strong positive correlation between ability and schooling in the United States, as well as the rising importance of family income for college attendance. It also explains the increasing share of undergraduates borrowing the GSL maximum and the rise in student borrowing from private lenders. Our framework offers new insights regarding the interaction of government and private lending, as well as the responsiveness of private credit to economic and policy changes. (JEL D14, H52, I22, I23, J24)

Fuel economy standards change the composition of the vehicle fleet, potentially influencing accident fatality risks. I estimate the direction and magnitude of this impact, introducing a correction for selection on driver behavior. A policy application using my new estimates shows that the present distinction between light trucks and cars in fuel economy rules has very negative consequences for overall safety: Each MPG increment to the standard results in an additional 150 fatalities per year in expectation. My correction for selection is pivotal in this finding. I then demonstrate a simple alternative regulation that can produce near-zero changes in accident fatalities.

This paper examines the equilibrium price effects of the privatization of housing assets that were previously owned and allocated by the state. I develop a theoretical framework that shows that privatization can have ambiguous effects on prices in the private market, and that the degree of misallocation of the assets prior to privatization determines the subsequent price effects. I test the predictions of the model using a large-scale housing reform in China. The results suggest that the removal of price distortions allowed households to increase their consumption of housing and led to an increase in equilibrium housing prices. (JEL L33, O18, P25, R31, R38)

This paper studies the impact of a regional free trade agreement, MERCOSUR, on technology upgrading by Argentinean firms. To guide empirical work, I introduce technology choice in a model of trade with heterogeneous firms. The joint treatment of the technology and exporting choices shows that the increase in revenues produced by trade integration can induce exporters to upgrade technology. An empirical test of the model reveals that firms in industries facing higher reductions in Brazil's tariffs increase investment in technology faster. The effect of tariffs is highest in the upper-middle range of the firm-size distribution, as predicted by the model. (JEL F13, F15, O19, O24, O33).

This paper utilizes a Norwegian experiment with exogenous wage changes to study teachers' turnover decisions. Within a completely centralized wage setting system, teachers in schools with a high degree of teacher vacancies in the past got a wage premium of about 10 percent during the period 1993–94 to 2002–03. The empirical strategy exploits that several schools switched status during the empirical period. In a fixed effects framework, I find that the wage premium reduces the probability of voluntary quits by six percentage points, which implies a short run labor supply elasticity of about 1¼.

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market breakdown. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that liability or verifiability yield efficiency, we find that liability has a crucial, but verifiability at best a minor, effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated. (JEL D12, D82)

I present a tractable dynamic model of political economy where disagreements about the composition of public spending result in implementation of short-sighted policies. Excessive taxation reduces the return to physical capital and hence investment rates, which slows down growth along the transition. In the long run, output, consumption and welfare are inefficiently low. The larger is the degree of polarization, the greater is the inefficiency. Political stability mitigates the effects of polarization by making the incumbent internalize the dynamic inefficiencies introduced by the choice of growth-retarding policies. JEL: D72, E22, E23, E62, H25, O16, O17

This paper investigates the relationship between relative earnings and giving in a two-stage, real-effort experiment. In the first stage, four players compete in a tournament that determines their earnings. In the second stage, they decide whether to make a transfer to one or more of their group members. Our main finding is that those ranked first are significantly less likely to give than those ranked second. This difference disappears if individuals learn about the second stage after earning their income or if earnings are randomly determined. This suggests that our main finding is driven by selection based on other-regarding preferences. JEL: D64, J31