Economics →
- 22 May 2007
- Working Paper Summaries
Strategy-Proofness versus Efficiency in Matching with Indifferences: Redesigning the NYC High School Match
One of the goals of school matching systems is to limit the extent to which students and parents feel it necessary to "game the system" to be accepted at a favored school. Several years ago, the authors of this paper assisted the New York City Department of Education in redesigning the way it matched over 90,000 students entering public high schools each year. The situation in New York City is a hybrid: Some schools actively rank potential students, others have no preferences, and still others fall in between. This paper concentrates on the welfare considerations and incentives that arise in school choice due to the fact that many students are regarded by schools as equivalent. The research develops and expands on economic theory demanded by the design of school choice mechanisms. Key concepts include: As economists are more often asked to design practical markets and allocation mechanisms, they will increasingly navigate two-way feedback between theory and design. The paper raises new theoretical questions. It would be helpful to have answers before the next major design or redesign of school matching systems. Closed for comment; 0 Comments.
- 17 May 2007
- Working Paper Summaries
The Price of Capital: Evidence from Trade Data
Is the price of capital higher across different countries? Motivated by the fact that most countries import the bulk of machinery and equipment, Alfaro and Ahmed used an alternative trade data to capture differences in the price of capital goods across countries. On this basis they found evidence that capital goods are more expensive in poor countries. Key concepts include: Findings were consistent with conventional wisdom: The price and cost of capital in poor countries is high. Given that most countries import the bulk of their machinery equipment from a small number of industrialized countries, investment distortions might be a factor in the observed differences in physical capital intensity across countries. Higher prices might inhibit the diffusion of technologies from rich to poor countries. Closed for comment; 0 Comments.
- 16 May 2007
- Working Paper Summaries
On The General Relativity of Fiscal Language
The failure to distinguish economics from linguistics is distressingly common in fiscal policy and theoretical research. Like measures of time and distance, standard fiscal measures such as deficits, taxes, and transfer payments depend on one’s reference point, reporting procedure, language, and labels. Green and Kotlikoff’s paper provides a general proof that such standard fiscal measures are economically ill-defined and instead reflect the arbitrary labeling of underlying fiscal conditions. Key concepts include: Official reports of deficits dramatically influence policy decisions while diverting attention from fundamental and meaningful measures of fiscal policy. Analyses based on standard fiscal measures and on derivative measures such as disposable income, private asserts, and personal saving represent exercises in linguistics, not economics. Closed for comment; 0 Comments.
- 15 May 2007
- Working Paper Summaries
How is Foreign Aid Spent? Evidence from a Compelling Natural Experiment
Foreign aid is viewed as a transfer of resources that can be used to generate meaningful growth in the recipient country's economy. How this aid is ultimately spent, therefore, determines how effective it is in achieving its purposes. Yet economists to date possess little understanding of how foreign aid trickles through a country's economy. This paper examines a foreign aid windfall that poorer Muslim countries have systematically received from rich, oil-producing Arab states. When the price of oil skyrocketed during the 1973-1986 oil crisis (and again after 2001), OPEC nations took a substantial portion of the money they received and gave it away as foreign aid, mostly to Muslim nations. When the price of oil crashed and income plunged in the oil-producing countries, the aid dried up. Werker, Ahmed, and Cohen examined the short-term effect of foreign aid on aggregate demand, the components of gross domestic product, and the balance of payments. Key concepts include: Oil-driven bonuses in foreign aid from wealthy Arab oil producers to poor Muslim countries were mostly consumed on imported non-capital goods. The aid crowded out domestic savings and did little to attract foreign investment. Long-term economic growth was unaffected. The popular critique that aid is "wasted" did not jibe with the data. Every component of the domestic economy, including investment, was raised in the short term. Foreign aid may be an effective tool of fiscal policy that can be used to smooth the business cycle in developing countries. But a challenge remains: How can the temporary stimulus be converted into lasting economic growth? Closed for comment; 0 Comments.
- 07 May 2007
- Research & Ideas
Rediscovering Schumpeter: The Power of Capitalism
Economist Joseph Schumpeter was perhaps the most powerful thinker ever on innovation, entrepreneurship, and capitalism. He was also one of the most unusual personalities of the 20th century, as Harvard Business School professor emeritus Thomas K. McCraw shows in a new biography. Read our interview and book excerpt. Key concepts include: Schumpeter's ideas on capitalism, entrepreneurship, and innovation still have great resonance to students and businesspeople today. Closed for comment; 0 Comments.
- 30 Apr 2007
- Research & Ideas
All Eyes on Slovakia’s Flat Tax
The flat tax is an idea that's burst to life in post-communist Eastern and Central Europe, especially in Slovakia. But is the rest of the world ready? A new Harvard Business School case on Slovakia's complex experience highlights many hurdles elsewhere, as HBS professor Laura Alfaro, Europe Research Center Director Vincent Dessain, and Research Assistant Ane Damgaard Jensen explain in this Q&A. Key concepts include: Despite successful examples of tax reduction, introducing a flat tax in the U.S. or Western Europe is a long way off. Slovak reforms have clearly been attractive to foreign investors. Neighboring Austria, for instance, has lowered its corporate tax rate from 34 percent to 25 percent. One lesson to be learned from Slovakia is that any changes to fundamental tax habits need to be thoroughly explained to all individuals and groups affected by it. Flat taxes were relatively easier to introduce in Central and Eastern Europe because tax collection was limited under the communist regimes. With a flat tax, tax revenues were likely to increase. Closed for comment; 0 Comments.
- 14 Feb 2007
- Op-Ed
Tata-Corus: India’s New Steel Giant
By acquiring Anglo-Dutch steel firm Corus, India's Tata Steel is now one of the world's top five steel makers. Professor Tarun Khanna says the fact that the deal is the largest out of India and generated by the private sector makes this a notable event. But now comes the hard part—making the merger work. Can Tata avoid mistakes made by Chinese companies? From The Economic Times/India Times. Key concepts include: Tata's acquisition of Corus is notable not only for creating a new steel giant, but also because this deal was a private sector venture far from Indian government influence. Tata should be able to make the merger work by virtue of its position of financial strength as well as previous cross-border experiences. The West should not underestimate this heretofore relatively unknown competitor. Closed for comment; 0 Comments.
- 07 Feb 2007
- Research & Ideas
Dividends from Schumpeter’s Noble Failure
Before influential Harvard economist Joseph Schumpeter wrote the seminal Capitalism, Socialism and Democracy, there came the difficult-to-digest Business Cycles. Although the book was a failure, professor Thomas K. McCraw, who has written a forthcoming Schumpeter biography, believes Business Cycles developed Schumpeter's thinking on capitalism and ultimately changed the practice of business history. Excerpted from Business History Review. Closed for comment; 0 Comments.
- 02 Feb 2007
- Working Paper Summaries
Do Employment Protections Reduce Productivity? Evidence from U.S. States
Business leaders and policymakers often claim labor market rigidities reduce productivity and competitiveness by altering production choices from their unconstrained best. These theories are tested using the adoption of employment protection regulations by U.S. state courts over the last three decades. Consistent evidence is found following the introduction of the employment regulations that 1) firm production choices are altered, 2) firm employment turnover declines, and 3) firm productivity declines. Entrepreneurship rates also decline in the states after the court decisions. The interpretation of the results, however, is somewhat clouded by very large employment growth that follows the regulations too. Key concepts include: Employment protection regulations lead to reductions in firm employment changes. These regulations are also associated with lower firm productivity and entry rates, consistent with the regulations distorting production choices. These results require further verification as the employment growth following the regulations appears implausibly large. Closed for comment; 0 Comments.
- 19 Dec 2006
- Working Paper Summaries
The Political Economy of Capitalism
Capitalism is often defined as an economic system where private actors are allowed to own and control the use of property according to their own interests, and where the invisible hand of the pricing mechanism coordinates supply and demand in markets in a way that is automatically in the best interests of society. Government, in this perspective, is often described as responsible for peace, justice, and tolerable taxes. Bruce Scott argues in this chapter that for a capitalist system to evolve in an effective developmental sense through time, it must have two hands, not one: an invisible hand that is implicit in the pricing mechanism, and a visible hand that is explicitly managed by government through a legislature and a bureaucracy. Inevitably the actions of the visible hand imply a strategy, no matter how implicit, shortsighted, or incoherent that strategy may be. Key concepts include: Government has two quite different roles to play in a capitalist economy, as an administrator of an ongoing system and as an innovator. Political leaders have prime responsibility for mobilizing the power to promote changes to the system. Capitalism has two hands, first the familiar if invisible hand of price mechanisms that coordinate economic actors within current frameworks, and second the visible hand of government, where it is both an administrator and an innovator. The visible hand of the state must be able to intervene in order to modernize market frameworks in a timely way, while at the same time administering and enforcing existing rights and responsibilities as a complement to the invisible hand. Closed for comment; 0 Comments.
- 13 Nov 2006
- Working Paper Summaries
A New Framework for Analyzing and Managing Macrofinancial Risks of An Economy
The vulnerability of a national economy to volatility in the global markets for credit, currencies, commodities, and other assets has become a central concern of policymakers, credit analysts, and investors everywhere. This paper describes a new framework for analyzing a country's exposure to macroeconomic risks based on the theory and practice of contingent claims analysis. (A contingent claim is any financial asset for which future payoff depends on the value of another asset.) In this framework, the sectors of a national economy are viewed as interconnected portfolios of assets, liabilities, and guarantees that can be analyzed like puts and calls. The framework makes it transparent how risks are transferred across sectors, and how they can accumulate in the balance sheet of the public sector and ultimately lead to a default by the government. Key concepts include: The high cost of international economic and financial crises highlights the need for a comprehensive framework to assess the robustness of countries' economic and financial systems. Contingent claims analysis provides a natural framework for analysis of mismatches between an entity's assets and liabilities, such as currency and maturity mismatches on balance sheets. Policies or actions that reduce these mismatches will help reduce risk and vulnerability. This framework is useful to both the public and private sectors. Closed for comment; 0 Comments.
- 01 Nov 2006
- Working Paper Summaries
Male Circumcision and AIDS: The Macroeconomic Impact of a Health Crisis
The AIDS epidemic is a humanitarian disaster that has struck sub-Saharan Africa with particular severity, but its macroeconomic impact is much less certain. Though conflicting theories abound, empirically-based studies on the link between HIV prevalence rates and economic growth have shown no consensus. Given the significant medical evidence that male circumcision can reduce the risk of contracting HIV in Africa, tribal circumcision practices provide an "experimental" setting to test the impact of the AIDS epidemic on the overall economy. Key concepts include: AIDS has not had a measurable impact on key economic variables in Africa such as gross domestic product per capita, savings rates, and fertility. Youth literacy levels may have increased more slowly than they would have in the absence of AIDS, suggesting that HIV may decrease investment in education. The AIDS epidemic may have led to an increase in malnutrition, perhaps supporting the hypothesis that AIDS has contributed to the persistence of poverty in Africa. While the impact of the epidemic on growth has not been as large as the world feared, governments of high-AIDS countries need to establish educational and nutritional outreach. Closed for comment; 0 Comments.
- 27 Sep 2006
- Working Paper Summaries
How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages
Does FDI help developing countries as much as we think? While theoretical models imply that FDI is beneficial for a host country's development—a belief widely shared among policymakers—the empirical evidence does not support this view. This paper bridges the gap between theoretical and empirical literature with a model and calibration exercises that examine the role of local financial markets. Ultimately, Alfaro and colleagues contribute to existing research that emphasizes how local policies and institutions may actually limit the potential benefits that FDI could provide to a host country. Key concepts include: Research shows that an increase in FDI leads to higher growth rates in financially developed countries compared to rates observed in financially poor countries. Local conditions, such as the development of financial markets and the educational level of a country, affect the impact of FDI on economic growth. Policymakers should exercise caution when trying to attract FDI that is complementary to local production. The best connections are between final and intermediate industry sectors, not necessarily between domestic and foreign final goods producers. Human capital plays a critical role in achieving growth benefits from FDI. Closed for comment; 0 Comments.
- 18 Sep 2006
- Research & Ideas
When Words Get in the Way: The Failure of Fiscal Language
Professor Jerry Green and coauthor Laurence J. Kotlikoff agree with the long-made argument that the deficit and related fiscal measures are basically labeling conventions with no intrinsic meaning. So why, they wonder, aren't economists getting the message? Key concepts include: Common fiscal measures and terms such as "the deficit" hold no intrinsic meaning, yet governments continue to use them as the basis to build economic policy. By relying on these terms and measures, economists can't truly explain the affects of the underlying fiscal policy. Generational accounting accurately describes what is really happening with economic policy: the redistribution of spending power from young and future generations to older ones. Closed for comment; 0 Comments.
- 05 Sep 2006
- Working Paper Summaries
Optimal Reserve Management and Sovereign Debt
One of the puzzles in the study of emerging markets is understanding why developing countries accumulate reserves as a means to avoid a financial crisis, rather than work to reduce their sovereign debt. In 2005, for example, reserve accumulation totaled 20 percent of gross domestic product in low- and middle-income countries but only about 5 percent in high-income countries. The costs and benefits of reserve accumulation still aren't clear, nor do economists agree on the optimal level of foreign reserves that sovereign countries should hold. By testing a model of a small, open economy with non-contingent debt and reserve assets, Alfaro and Kanczuk explored the issue in depth. Key concepts include: For economists to better understand high levels of foreign reserves holdings, future research should model additional constraints on a sovereign country's ability to reduce its debt. Political economy explanations may better address reserve accumulation in emerging markets. Closed for comment; 0 Comments.
- 05 Sep 2006
- Working Paper Summaries
International Financial Integration and Entrepreneurship
Why does entrepreneurship flourish in some countries and struggle in others? Economists and policymakers are divided on whether the rapid rate of global financial integration, specifically the explosive growth of foreign direct investment, helps or hurts local entrepreneurs and domestic economies. To see the differential effects of restrictions on capital mobility on entrepreneurship, Alfaro of HBS and Charlton of the London School of Economics analyzed data on 24 million firms—listed and unlisted—in nearly 100 countries in 1999 and 2004. Key concepts include: Contrary to the fears of many, capital mobility has not hindered entrepreneurship: Instead, international financial integration is related to greater firm activity. Countries with fewer barriers to international capital have a higher proportion of small firms. By the same token, firms tend to be older in less financially integrated countries. International financial integration might increase the total amount of capital in the economy and improve the availability of capital and credit. Thanks to FDI, local firms could benefit from linkages with foreign firms. This work did not look at growth or the overall welfare effects of capital liberalization on individual countries, an important area for future research. Closed for comment; 0 Comments.
- 23 Aug 2006
- Op-Ed
The Real Wal-Mart Effect
Critics are lining up to take shots at Wal-Mart's treatment of workers and a host of other alleged knocks against society. But the critics miss one big point, says Pankaj Ghemawat: Wal-Mart's overall impact benefits the economy and lower-income consumers. Key concepts include: While Wal-Mart has many problems, the company's overall economic impact is positive both for the overall economy and for low-income consumers. The real Wal-Mart conflict isn't between capital and labor. It is a battle involving consumers and cost-efficient producers against traditional retailers, organized labor, and community activists. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
Information Dispersion and Auction Prices
How can auctions be used most effectively? Government and industry traditionally use auctions to price and allocate assets and contracts with high but unknown value. Millions of people use Internet auctions for goods that are often of unknown value (e.g., used goods, unknown brands). This paper asks: Do bidders behave in the way auction theory predicts they should? And, what are the effects of different types of information on prices? To answer these questions, Yin combined theory, econometric modeling, and survey data. Key concepts include: Reputation lends credibility to the information about the product; both are important when analyzing auction prices. Information in auctions is dispersed among many participants. In analysis, this dispersion is a more important source of uncertainty than any information asymmetry between buyer and seller. Closed for comment; 0 Comments.
- 05 Jul 2006
- Working Paper Summaries
Empirical Tests of Information Aggregation
While neither buyers nor sellers may be certain of the worth of used goods, both may possess private information about the value. Do prices become more informative as the number of bidders grows? Using data from a sample of eBay auctions for computers, Yin looked at how and under what conditions auction prices converge to the common value of a given item. Key concepts include: Ebay prices do become more meaningful as the number of bidders increases; however, there is insufficient evidence to conclude that they aggregate information as fully as they could, given the number of bidders. Even partial information aggregation by eBay auction prices suggests a potential efficiency gain over one-to-one trade of used goods with uncertain common values Closed for comment; 0 Comments.
Repugnance as a Constraint on Markets
While some kinds of transactions are repugnant at certain times and places, they are considered perfectly acceptable in other situations. This essay examines a wide range of examples, including the buying and selling of kidneys for transplantation. Repugnance has important consequences for the transactions and markets we see. Key concepts include: Distaste for certain kinds of transactions can be a real constraint on markets and how they are designed, every bit as real as the constraints imposed by technology or the requirements of incentives and efficiency. Discussion is essential. Just as economists see very few tradeoffs as taboo, non-economists often decline to discuss tradeoffs at all, preferring to focus on the repugnance of transactions like organ sales. The laws against buying or selling kidneys reflect a reasonably widespread repugnance, making it difficult for arguments that focus only on the gains from trade to make headway in changing these laws. But that does not mean that gains from exchange can't be realized. Behavioral economics has been concerned mostly with how individuals make choices. But attitudes about repugnance shape whole markets, and therefore shape what choices people face, and so may be an important way that "behavioral" considerations affect the economy. Closed for comment; 0 Comments.