Economic Network

American Economic Journal:


Vol. 9, Issue 4 — November 2017



(6) The Coevolution of Segregation, Polarized Beliefs, and Discrimination: The Case of Private versus State Education
Gilat Levy and Ronny Razin
In this paper we analyze the coevolution of segregation into private and state schools, beliefs about the educational merits of different schools, and labor market discrimination. In a dynamic model, we characterize a necessary and sufficient condition on initial levels of segregation and beliefs under which full polarization of beliefs and long-run labor market discrimination are sustainable. The model suggests a new perspective on the long-term effects of different policy interventions, such as integration, school vouchers and policies that are directly targeted toward influencing beliefs.
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(7) Cap and Escape in Trade Agreements
Mostafa Beshkar and Eric W. Bond
We propose a model of flexible trade agreements in which verifying the prevailing contingencies is possible but costly. Two types of flexibility emerge: contingent protection, which requires governments to verify the state of the world, and discretionary protection, which allows governments to set tariffs unilaterally. The structure of the GATT/WTO agreement provides these two types of flexibility through a mechanism that we call Cap and Escape. Governments may choose tariffs unilaterally below the negotiated cap, but escaping from the cap requires state verification. We show that this framework explains key features of the GATT/WTO agreements, including the substantial variation across sectors and countries in the level of negotiated tariffs, and the rate at which different flexibility measures are used.
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(8) Management Quality and Firm Hierarchy in Industry Equilibrium
Cheng Chen
I incorporate a monitoring-based firm hierarchy into an industry equilibrium model with heterogeneous firms. I then use the theory to study aggregate impacts of an economy-wide improvement in monitoring efficiency. This shock generates a selection effect, which favors more hierarchical (i.e., more layers) firms. Interestingly, these implications depend on firms‘ heterogeneous choices about their hierarchy and completely disappear when firms are homogeneous in terms of the number of layers inside the hierarchy.
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(9) Persistence and Change in Culture and Institutions under Autarchy, Trade, and Factor Mobility
Marianna Belloc and Samuel Bowles
Differences among nations in culture (preferences including social norms) and institutions (contracts) may result in specialization and gains from trade even in the absence of exogenous differences in factor endowments or technologies. Goods differ in the kinds of contracts that are appropriate for their production, and so strategic complementarities between contracts and social norms may result in a multiplicity of cultural-institutional equilibria. The resulting country differences in culture and institutions provide the basis for comparative advantage. In our evolutionary model of endogenous preferences and institutions, transitions among persistent cultural-institutional configurations occur as a result of decentralized and uncoordinated contractual or behavioral innovations by employers or employees. We show that the gains from trade raise the cost of deviations from the prevailing culture and institutions. As a result, trade liberalization impedes decentralized transitions, even to Pareto-improving cultural-institutional configurations. International factor mobility has the opposite effect.
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(10) Partner Uncertainty and the Dynamic Boundary of the Firm
Thomas Hellmann and Veikko Thiele
We develop a new theory of the dynamic boundary of the firm where asset owners may want to change partners ex post. We identify a fundamental trade-off between (i) a „displacement externality“ under non-integration, where a partner leaves a relationship even though his benefit is worth less than the loss to the displaced partner, and (ii) a „retention externality“ under integration, where a partner inefficiently retains the other. With more asset specificity, displacement externalities matter more and retention externalities less, so that integration becomes more attractive. Wealth can resolve ex post inefficient partner arrangements, but may weaken ex ante incentives for specific investments.
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(11) Welfare Consequences of Information Aggregation and Optimal Market Size
Kei Kawakami
We analyze the welfare implications of information aggregation in a trading model where traders have both idiosyncratic endowment risk and asymmetric information about security payoffs. The optimal market size balances two forces: (i) the risk-sharing role of markets, which creates a positive externality amongst traders, against (ii) the information-aggregation role of prices, which leads to prices that are more correlated with security payoffs, thereby undermining the hedging function of markets. Our analysis indicates that a market with infinitely many traders may not be the right welfare benchmark in the presence of risk aversion and information aggregation.
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(12) Centralized Decision Making and Informed Lobbying
Rafael Costa Lima, Humberto Moreira and Thierry Verdier
We address the trade-off between centralized and decentralized decision making subject to influence from privately informed lobbies. We focus on informative equilibria with separating differentiable contribution schedules and identify an information transmission effect under centralized structures. Such effect decreases capture and increases welfare when lobbies have „aligned preferences.“ The opposite effect holds for „polarized preferences.“ We present two examples of this framework: local public goods and customs union agreements. Finally, we compare the policy outcomes from this political economy perspective to those under a normative mechanism design approach, and extend our analysis to the discussion of pooling equilibria.
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