Researchers using cross-sectional data have failed to produce systematic evidence that teacher salaries affect student outcomes. These studies generally do not account for non-pecuniary job attributes and alternative wage opportunities, which affect the opportunity cost of choosing to teach. When we employ the methodology used in previous studies, we replicate their results. However, once we adjust for labor market factors, we estimate that raising teacher wages by 10% reduces high school dropout rates by 3% to 4%. Our findings suggest that previous studies have failed to produce robust estimates because they lack adequate controls for non-wage aspects of teaching and market differences in alternative occupational opportunities.

The application of spatial econometrics techniques to microlevel data of firms or households is problematic because of potentially large sample sizes and more-complicated spatial weight matrices. This paper provides the first application to actual household-level data of a new generalized-moments (GM) estimation technique developed by Kelejian and Prucha. The results based on this method, which is computationally feasible for any size data set, track those generated from the more conventional maximum-likelihood approach. The GM approach is shown to have the added advantage of easily allowing estimation of a more flexible functional form for the spatial weight matrix.

A basic relationship of the standard general equilibrium trade model relating product-price changes to factor-price changes is used—together with other economic relationships based on this model—to investigate empirically the importance of changes in trade, technology, and factor endowments in accounting for the shifts in relative wages of less-educated workers compared to more-educated workers from 1967 to 1996. In the early part of the period when wage inequality decreased, the dominant explanatory factor seems to have been a relative increase in the supply of highly educated labor. However, since the late 1970s, none of the three economic forces considered can alone account for the observed changes in relative wages, prices, outputs, net exports, and factor-use ratios. In particular, both education-biased technical progress that was greater in industries that intensively used more-educated labor and increased import competition in industries that intensively used less-educated labor seem to have played important roles in bringing about the increase in wage inequality during the 1980s and 1990s.

This paper tests for the presence of habit formation using household data. A simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time. When the condition is estimated with food consumption data from the Panel Study on Income Dynamics (PSID), the results yield no evidence of habit formation at the annual frequency. This finding is robust to a number of changes in the specification. It also holds for several proxies for nondurables and services consumption created by combining PSID variables with weights estimated from Consumer Expenditure Survey data. (JEL D12, D91, E21)

College educated couples are increasingly located in large metropolitan areas. These areas were home to 32 percent of all college educated couples in 1940, 39 percent in 1970, and 50 percent in 1990. We investigate whether this trend can be explained by increasing urbanization of the college educated or the growth of dual career households and the resulting severity of the colocation problem. We argue that the latter explanation is the primary one. Smaller cities may therefore experience reduced inflows of human capital relative to the past and thus become poorer.

We create an environment in which congestion forces agents to match inefficiently early. We then introduce one of two centralized clearinghouse mechanisms. One of these has been successfully used to halt this kind of unraveling in a number of labor markets, while the other has failed. When it is costly for firms and workers to be mismatched compared with the costs of matching early, the experimental observations reproduce the field observations. Furthermore, the experiment permits us to observe the transition between a decentralized and a centralized market, both when the centralized market fails to control unraveling and when it succeeds, at a level of detail unavailable in field data.

This paper proposes an unobserved fundamental component of volatility as a measure of risk. This concept of fundamental volatility may be more meaningful than the usual measures of volatility for market regulators. Fundamental volatility can be obtained using a stochastic volatility model, which allows us to `filter’ out the signal in the volatility information. We decompose four FTSE100 stock index related volatilities into transitory noise and unobserved fundamental volatility. Our analysis is applied to the question as to whether derivative markets destabilise asset markets. We find that introducing European options reduces fundamental volatility, while transitory noise in the underlying and futures markets does not show significant changes. We conclude that, for the FTSE100 index, introducing a new options market has stabilised both the underlying market and existing derivative markets.

This paper is a brief evaluation of the Eurosystem's monetary-policy regime after its first year, in particular of the extent to which it is similar to inflation targeting as practiced by an increasing number of central banks. I examine the Eurosystem's goals, framework for monetary-policy decisions and communication with outsiders. Criteria for evaluation are whether the goals are unambiguous and appropriate; whether the decision framework is efficient in collecting and processing information and reaching decisions that are appropriate relative to the goals; and whether the communication is effective in motivating decisions, simplifying external evaluation and thereby improving transparency and accountability. I also consider whether the actual instrument setting has been appropriate, given the informaion available at the times of decision.

This study proposes using correlations between neighboring children in their later socioeconomic status to bound the proportion of inequality in socioeconomic outcomes that can be attributed to disparities in neighborhood background. We apply this approach to educational attainment data from the Panel Study of Income Dynamics, which has sampled neighboring children and followed them into adulthood. We find that, once the effects of a few readily observed family background characteristics are accounted for, the correlation between neighboring children in their eventual educational attainment is only about 0.1. Given that even this figure is inflated by neighbors' similarity in unmeasured aspects of family background, the results suggest a limited role for neighborhood factors in accounting for inequality in educational attainment.

This study examines the relation between the market value of equity and nonfinancial pollution measures (sulfur dioxide emissions) that capture firms' exposure to future environmental liabilities. I find that a nonfinancial pollution proxy is value-relevant for high-polluting electric utilities targeted for air pollution abatement by Phase One of the 1990 Clean Air Act Amendments (CAAA). On average, these utilities' exposure to (unbooked) future environmental liabilities decreased their mean 1990 share price by 16 percent. Moreover, the value relevance of the nonfinancial pollution proxy (1) increased in response to the passage of the stringent 1990 CAAA environmental legislation, and then (2) declined as the market subsequently reduced estimated compliance costs in response to changing economic and technological factors. Utilities not targeted by Phase One of the 1990 CAAA faced minimal exposure to future environmental liabilities and I find no significant relation between their pollution indicators and share prices. I also find that investors in the high-polluting rate-regulated utilities that were targeted by Phase One positively value a favorable regulatory climate.