Volume 15, Issue 3 -

This article presents a model of political insulation of bureaucracies. Political influence can harm competence because it lowers the incentives of bureaucrats to invest in competence. Politicians then want to adopt institutions that insulate the bureaucracy because this establishes a commitment to reward competence. Political leaders insulate the bureaucracy if public good provision is important compared to rent extraction or when political competition forces the political elite to internalize the welfare loss caused by patronage. Through this channel political reforms can lead to reforms of the bureaucracy. The theoretical findings are illustrated with existing empirical studies and data on central bank independence.

Two-sector general equilibrium models are built to investigate how the quality of rural property rights influences rural-urban migration and national welfare in developing countries. In the basic model where the urban wage rate is exogenously given, the impacts of strengthened rural property rights on rural-urban migration and national welfare are determined by comparisons of the rent-gaining effect and the productivity-enhancing effect. Specifically, if the rent-gaining effect dominates the productivity-enhancing effect, strengthened rural property rights will increase the number of rural-urban migrants and reduce national welfare. Otherwise, the opposite impacts are exerted if the productivity-enhancing effect dominates the rent-gaining effect. When we extend the basic model by considering the endogenously determined urban minimum wage rate, the urban minimum wage determination mechanism is also of great importance in determining the outcomes of the basic model. When we extend the basic model by introducing an urban informal sector, the value of labor’s marginal product of the urban informal sector also plays a role in determining the impact of strengthened rural property rights on national welfare. In addition, urban unemployment is also taken into account by the basic and extended models.

This paper provides causal estimates of the impact of service programs on those who serve, using data from a web-based survey of former Teach For America (TFA) applicants. We estimate the effect of voluntary youth service using a discontinuity in the TFA application process. Participating in TFA increases racial tolerance, makes individuals more optimistic about the life prospects of poor children, and makes them more likely to work in education.

This paper develops a two-country, two-sector model of trade where the only difference between two countries is the cost of human capital formation. It is shown that this difference completely shapes the pattern of trade. Trade, in turn, affects the distribution of human capital both at extensive and at intensive margins, income distribution, and welfare in each country. Since not all agents gain from trade, the paper also investigates the conditions under which trade between two countries becomes possible if the final decision in each country is based on majority voting. Finally, the paper shows that lowering the cost of human capital in one country has asymmetric effects on human capital formation and the income inequality between skilled and unskilled workers across countries.

We present experimental evidence from a correspondence test of racial discrimination in the labor market for recent college graduates. We find strong evidence of differential treatment by race: black applicants receive approximately 14% fewer interview requests than their otherwise identical white counterparts. The racial gap in employment opportunities is larger when comparisons are made between job seekers with credentials that proxy for expected productivity and/or match quality. Moreover, the racial discrimination detected is driven by greater discrimination in jobs that require customer interaction. Various tests for the type of discrimination tend to support taste-based discrimination, but we are unable to rule out risk aversion on the part of employers as a possible explanation.

This paper investigates the nexus between life insurance and suicide behavior by applying semiparametric instrumental variable regressions to OECD cross-country data from 1980 to 2002. The novelty of our analysis lies in the use of cross-country variations in the lengths of the suicide exemption period in policies and foreign market shares in life insurance industries as identifying instruments for life insurance demand. We find that, for the majority of observations, there exists a positive causality from life insurance demand to suicide. This result suggests the existence of adverse selection and moral hazards in life insurance markets in OECD countries.

This paper investigates the immigration impact on native outcomes using microlevel data for France. I find that immigration does not affect the wages of competing natives, but induces adverse employment effects. This finding is consistent with a wage structure that is rigid in France. The quality of the data allows to dig more deeply into the interpretation of the immigration impact. First, I show that immigrants displace native workers because they are more willing to work at lower wages due to lower outside options. Second, I find that natives on short-term contracts, who are less subject to wage rigidities, do experience wage losses due to immigration.

This paper analyzes how allowing pharmacies to negotiate discounts with parallel traders and producers affects the market share for parallel imports. Economic theory predicts that discount negotiations will promote products bought directly from the producers because producers have cost advantages, due to which they always underbid the marginal prices of parallel traders. A reform that allowed discount negotiations is found to reduce the market share for parallel imports by about 11 percentage points to reach 31%. The results clearly indicate that pharmacies have an important role in the choice between medically equivalent pharmaceuticals.

Endogenous merger waves are studied in vertically related industries where firms may engage in both vertical and horizontal mergers. It is shown that whether and how firms merge depends crucially on the balance between vertical and horizontal externalities, and the balance between upstream and downstream competition. Furthermore, firms may merge with or without any fundamental change in the underlying economic conditions.

The textbook competitive model of drug markets predicts that greater law enforcement leads to higher black market prices, but also to the unintended consequences of greater revenue and violence. These predictions are not in accord with the paradoxical outcomes evinced by recent history in some drug markets, where enforcement rose even as prices fell. We show that predictions of the textbook model are not unequivocal, and that when bandwagon effects among scofflaws are introduced, the simple predictions are more likely to be reversed. We next show that even simple models of noncompetitive black markets can elicit paradoxical outcomes. Therefore, we argue that instead of searching for assumptions that lead to paradoxical outcomes, which is the direction the literature has taken, it is better for policy analysis to choose appropriate assumptions for the textbook model. We finish with performing such an analysis for the case of banning menthol cigarettes. Under the most plausible assumptions enforcement will indeed spur violence, although the legal availability of electronic cigarettes may mitigate or reverse this conclusion.

This paper uses a regression discontinuity design to estimate the impact of the minimum legal drinking age (MLDA) laws on alcohol consumption and labor market outcomes of young adults. Using confidential data from the National Longitudinal Survey of Youth 1997 Cohort (NLSY97), I find that granting legal access to alcohol at age 21 leads to an increase in several measures of alcohol consumption. The discrete jump in the alcohol consumption at the MLDA has also negative spillover effects on the labor market outcomes of young adults. In particular, I document that the MLDA is associated with a 1 hour decrease in weekly working hours. However, the effect of the MLDA laws on wages is negative only under certain specifications. These results suggest that the policies designed to curb drinking may not only have desirable effects in reducing alcohol consumption among young adults but also have positive spillover effects on their labor market outcomes.

The international export and investment activities of firms have been widely studied by scholars. In particular, prior studies have focused on two main hypotheses about firms engaged in international activities such as exporting and investing abroad; namely, self-selection of more productive firms into international activities and learning-by-doing international activities. This paper is the first study that explores these hypotheses in regard to firms’ use of free trade agreements (FTAs). We first estimate the propensity score for firms’ use of FTA schemes, and find that larger firms are more likely to participate. Then, by conducting matching analysis using the propensity scores, we find that, at least in the short run, the use of FTAs does not change bilateral exports, bilateral imports and employment but does raise the share of local inputs.

We use a unique data set of all individuals who graduated from universities in Israel during the period 1995–2008 in order to investigate the widening of the gender wage gap during the years following graduation. It is found that the main explanation is having children, rather than skills or academic background. The results show that each additional child reduces a woman’s wage by 6.6%, and increases a man’s wage by 3.4%. Furthermore, we examine three channels that may explain the motherhood penalty: periods of non-employment, a shift to the public sector and lower-paying firms and the timing of births. Having children increases a woman’s period of non-employment while decreasing a man’s, and each month of non-employment due to maternity leave reduces a woman’s wage by 1.0%, while non-employment reduces a man’s wage by only 0.6%. Mothers tend to shift from the private to the public sector and from higher-paying to lower-paying firms, which offer a more flexible and more convenient work environment, at the cost of a lower salary. Finally, a delay in having children increases a woman’s wage while having little, if any, effect on a man’s wage. Furthermore, controlling for this variable reduces the estimated motherhood penalty.

One of the puzzling aspects of open-source software (OSS) development is its public good nature. Individual developers contribute to developing the software, but do not hold the copyright to appropriate its value. This raises questions regarding motives behind such effort. We provide an integrated model of developers’ incentives to describe OSS development and compare restrictive OSS licenses that force all modifications to be kept open with non-restrictive OSS licenses that allow proprietary ownership of modified works. Different incentives govern effort provision at different stages of the software development process. We show that open-source licenses can provide socially valuable software when a proprietary license fails to do so. We also show that restrictive OSS licenses generate greater effort provision in the design stage of software development relative to non-restrictive licenses. Endogenizing licensing choice, we find that a project leader chooses a non-restrictive OSS license if reputational concerns drive developers’ incentives, a proprietary license when there is a large population of users in the market and a restrictive OSS license if user population is small but reputational benefit is high. Our results resonate well with empirical findings and suggest additional testable implications about the relationship between licensing and software project characteristics. Finally, we also find that the market under-provides restrictive OSS licenses relative to the efficient level, suggesting the need for subsidizing restrictive licenses in some cases.

Test-based measures of school performance are increasingly used to inform both education policy and families’ school choice decisions. There are, however, concerns about the reliability of these measures. This paper assesses the extent to which cross-sectional differences in schools’ average achievement on standardized tests reflect transitory factors, using data from a 1999–2006 panel of public and private schools in British Columbia, Canada. Sampling variation and one-time mean reverting shocks are shown to be significant sources of cross-sectional variation in schools’ mean test scores. The results therefore suggest that public dissemination of information about schools’ average achievement on standardized tests could potentially mislead or confuse parents. These results should also encourage caution in the design of policies that attach monetary or nonmonetary rewards or sanctions to schools on the basis of test-based achievement and suggest a need for more sophisticated measures of school performance.

We analyze under what conditions competitive credit markets are efficient in providing loans to entrepreneurs who can start a new project after failure. An entrepreneur of uncertain talent chooses the riskiness of her project. If banks privately observe the entrepreneur’s risk choices, two equilibria coexist: (1) an inefficient equilibrium in which the entrepreneur realizes a low-risk project and has no access to finance after failure and (2) a more efficient equilibrium in which the entrepreneur first realizes high-risk projects and then, after continuous failures, a low-risk project. There is a non-monotonic relationship between bank information and potential credit market inefficiency. We discuss the implications for credit registers and entrepreneurial education.

The European Union (EU) Emissions Trading System (ETS) has implicitly made it more expensive to burn coal relative to natural gas because coal has a higher carbon content. Therefore, it is important to understand how much plants reduce their coal usage in response to higher coal prices to assess the effectiveness of the ETS in reducing carbon emissions. We analyze a novel panel of coal-burning large combustion plants from a subsample of eight EU countries and found that, holding constant the natural gas price, a 1% increase in the coal price results in a 0.36% decrease in coal consumption. At current ETS prices, this implies that the average large combustion plant in our sample EU countries is burning 7% less coal than it would be absent in the ETS. This suggests that the ETS has significantly reduced carbon emissions from coal-fired plants for the eight countries represented in our sample.