the empirical content of the roy model this paper clarifies and extends the classical roy model of self selection and earnings inequality the original roy model based on the assumption that log skills are normally distributed is shown to imply that pursuit of comparative advantage in a free market reduces earnings inequality compared to the earnings distribution that would result if workers were randomly assigned to sectors aggregate log earnings are right skewed even if one sectoral distribution is left skewed most major implications of the log normal roy model survive if differences in skills are log concave however few implications of the model survive if skills are generated from more general distributions we consider the identifiability of the roy model from data on earnings distributions the normal theory version is identifiable without regressors or exclusion restrictions sectoral distributions can be identified knowing only the aggregate earnings distribution for general skill distributions the model is not identified and has no empirical content with sufficient price variation the model can be identified from multimarket data cross sectional variation in regressors can substitute for price variation in restoring empirical content to the roy model

critical evidence on comparative advantage north north trade in a multilateral world there are two principal theories of why countries trade comparative advantage and increasing returns to scale which is most important in practice the large volume of intra oecd trade is frequently cited as critical evidence on this question it is argued that comparative advantage unlike scale economies is incapable of accounting for the large volume of trade between seemingly similar economies this is a theoretical claim in this paper i show that it is possible to give an account of this trade based on comparative advantage the elements that may give rise to a large volume of north north trade are traced to identifiable features of technology and endowments

economic growth comparative advantage and gender differences in schooling outcomes evidence from the birthweight differences of chinese twins abstract data from two surveys of twins in china are used to contribute to an improved understanding of the role of economic development in affecting gender differences in the trends in levels of and returns to schooling observed in china and in many developing countries in recent decades in particular we explore the hypothesis that these phenomena reflect differences in comparative advantage with respect to skill and brawn between men and women in the context of changes in incomes returns to skill and or nutritional improvements that are the result of economic development and growth

price and quality of industrial products some results of an empirical investigation this paper deals with two issues using danish data on western european goods a test is presented in order to determine whether the concept of quality should be considered unidimensional as in the classical literature or multidimensional as in the characteristics approach the second issue is the relationship between price and technical quality previous studies have shown this relationship to be positive but rather weak in this paper some doubt is thrown on the methodology of these studies a test of the relationship between price and quality is given using data on individual characteristics

a simple model of sectoral adjustment despite the significance of limited labour mobility across sectors few attempts have been made to produce dynamic models of sectoral adjustment which are consistent with perfect foresight and yet flexible enough to allow for a variety of dynamic experiments this paper proposes a simple perfect foresight model of two sector economies in which aggregate sectoral movement of labour takes place through the process of demographic change the model is tractable enough that one can easily examine the effects of intertemporally complicated relative price shocks both exogenous and endogenous under a variety of assumptions on technology

the distribution of talent and the pattern and consequences of international trade i study the interaction between imperfect labor contracts and international trade in a setting in which workers have private information about their own abilities when an individual s contribution to firm output can be measured accurately in some activities but not in others the most able workers select occupations in which their pay most closely reflects their own performance in a world economy with two otherwise similar countries that have different distributions of talent the country with the more heterogeneous labor force exports the good that is produced by the most talented individuals in this country trade exacerbates the polarization of the labor force and often worsens the distribution of income

trade inequality and the endogenous sorting ofheterogeneous workers abstract i present a new general equilibrium framework to quantify the effect of international trade on labor market outcomes such as the skill premium and reallocation of workers for a large number of countries worker level comparative advantage based on workers heterogeneous productivities is the key feature of the framework i use household level microdata to quantify key aspects of the model for 32 countries i find that the calibrated decline in trade costs during 2000 2007 increased between educational type inequality in most countries regardless of country level comparative advantages the worker level comparative advantage across sectors and occupations determines both the direction and the magnitude of the effect of trade on labor market outcomes i also find that trade liberalization during 2000 2007 significantly contributed to the decline in manufacturing employment and job polarization in high income countries in addition the model shows that the china effect measured by a decline in trade costs with china and an increase in china s manufacturing productivity during 2000 2007 increased inequality in most countries

sorting it out international trade with heterogeneous workers each worker brings a bundle of skills to the workplace for example quantitative and communication skills since employers must take this bundle as a package deal they choose workers with just the right mix of skills we show that international differences in the distribution of worker skill bundles for example japan s abundance of workers with a modest mix of both quantitative and teamwork skills have important implications for international trade industrial structure and domestic income distribution formally we model two dimensional worker heterogeneity and show that the second moments of the distribution of skills are critical as in the roy model

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

skill distribution and comparative advantage a comparison of china and india summary this paper empirically examines the different comparative advantages of china and india in relation to their different skill distribution patterns by utilizing industry export data on china and india from 1983 to 2000 we find that a country with a greater dispersion of skills i e india especially in the earlier years has higher exports in industries with shorter production chains while a country with a more equal dispersion of skills i e china especially in the later years has higher exports in industries with longer production chains the causal relationship is fairly robust and skill sorting mechanism seems to work behind

unobservable skill dispersion and comparative advantage abstract this paper investigates a theoretical mechanism linking comparative advantage to the distribution of skills in the working population we develop a tractable multi country multi industry model of trade with unobservable skills in the labour market and show that comparative advantage derives from i cross industry differences in the substitutability of workers skills and ii cross country differences in the dispersion of skills we establish the conditions under which higher skill dispersion leads to specialization in industries characterized by higher skill substitutability across tasks the main results are robust when the model is extended to allow for partial observability of skills finally we use distributions of literacy scores from the international adult literacy survey to approximate cross country productivity differences due to skill dispersion and we carry out a quantitative assessment of the impact of skill dispersion on the pattern of trade

population aging and comparative advantage abstract in this paper we show that demographic differences between countries are a source of comparative advantage in international trade since many skills are age dependent population aging decreases the relative supply and increases the relative price of skills which depreciate with age thus industries relying on skills in which younger workers are relatively more efficient will be more productive in countries with a younger labor force and less productive in countries with an older population building upon the neuroscience and economics literature we construct industry level measures of intensities in various age dependent skills and show that population aging leads to specialization in industries which use age appreciating skills intensively and erodes comparative advantage in industries for which age depreciating skills are more important

quality indicators in theory and in fact abstract in recent literature it has been suggested that consumers need have no knowledge of product quality as a number of quality indicators or signals may be used as substitutes very little attention has been paid to the empirical verification of these studies the present paper is devoted to the issue of how well these indicators perform using market data provided by consumer magazines from 3 countries the results strongly indicate that price is a poor quality indicator the paper also presents some evidence which suggests that seller reputation and easily observable characteristics are also poor indicators

lancaster s principle of efficient choice an empirical note abstract lancaster s principle of efficient choice is submitted to an empirical examination using data from consumer reports the results give only moderate support for that principle

escaping nash inflation an ordinary differential equation ode gives the mean dynamics that govern the convergence to self confirming equilibria of self referential systems under discounted least squares learning another ode governs escape dynamics that recurrently propel away from a self confirming equilibrium in a model with a unique self confirming equilibrium the escape dynamics make the government discover too strong a version of the natural rate hypothesis the escape route dynamics cause recurrent outcomes close to the ramsey commitment inflation rate in a model with an adaptive government

the importance of bundling in a gorman lancaster model of earnings the idea that the labor market of individuals can be decomposed into payments to separate productive attributes has an enduring appeal in economics assuming that demographic groups differ only in their endowments of productive characteristics it is possible to rationalize observed demographic earnings differentials without invoking the arguments that characteristics specific to a particular demographic group are direct objects of employer demand by aggregating skills over all demographic groups it is possible to produce a theory of the market determination of the prices of skills held in different amounts by different demographic groups this paper considers conditions under which characteristics are uniformly priced across sectors of a multisector economy the paper presents empirical evidence that rejects uniform pricing of characteristics as a description of the us labor market bundling may account for this evudence but other hypotheses do as well authors

self confirming equilibrium and the lucas critique we examine the role of off path superstitions in macro economics and show how a false belief about off path play is the key element underlying both the lucas critique and the game theoretic concept of self confirming equilibrium however the impact of false beliefs in these two cases is different in the lucas case a policy maker s incorrect beliefs about off path play can lead to the adoption of mistaken policy innovation however the consequences of such an innovation provide evidence that the belief that motivated them was wrong in contrast play may never escape an undesirable self confirming equilibrium as the action implied by the mistaken belief does not generate data that contradicts it escape from the self confirming equilibrium requires that players do a sufficient amount of experimentation with off path actions

the missing link the ricardian approach to the factor endowments theory of trade this paper views all interpersonal trade as ricardian while all international trade reflects each country s factor endowment the model provides the logical link betwe en heckscher ohlin and ricardo the strength of the model is that it allows simpler and more robust theorems about trade welfare and fac tor payments factor price equalization holds universally and stolper samuelson is not tied to the number of goods or factors a key resul t is that the old mill theorem that the small country gains all from trade is incorrect trade patterns with three factors and two goods a re completely characterized copyright 1988 by american economic association

learning hypothesis testing and rational expectations equilibrium abstract foster and young 2003 provide a model of learning by hypothesis testing that spends almost all of the time approximating nash equilibria of a repeated game here i extend this learning model to a macroeconomic setting where agents decisions are informed by hypotheses they hold regarding the economy they periodically test these hypotheses against observed data and replace them if they fail under certain conditions agents who learn in this way spend a large fraction of the time approximating rational expectations equilibria

product quality and imperfect information this paper considers markets in which consumers are imperfectly informed about both product prices and quality levels offered by firms we characterize necessary and sufficient conditions for existence of the various equilibrium configurations of price and quality that can arise in two paradigm cases when all consumers prefer higher quality and when all consumers prefer lower quality our results suggest that firms will exploit imperfect information by charging noncompetitive prices as well as by offering other than ideal quality in the former case but only by changing noncompetitive prices in the latter case

on the fragility of sunspot equilibria under learning and evolutionary dynamics abstract in this article we investigate the possibility of sunspot equilibria to emerge from a process of learning and adaptation on agents beliefs we consider both finite state markov sunspots and sunspots in autoregressive form and derive conditions for the existence of an heterogeneous equilibrium where only a fraction of agents condition their forecasts on the sunspot we then show that when the fraction of agents conditioning their forecasts on a sunspot changes over time under evolutionary dynamics these restrictions need to evolve endogenously with population shares we argue that such requirement questions the possibility of sunspot equilibria to emerge through a process of evolution and adaptation on agents beliefs in order for a sunspot equilibrium to emerge all agents must simultaneously coordinate on the same sunspot variable at the same time

human capital investment and the gender division of labor in a brawn based economy we use a model of human capital investment and activity choice to explain facts describing gender differentials in the levels and returns to human capital investments these include the higher return to and level of schooling the small effect of healthiness on wages and the large effect of healthiness on schooling for females relative to males the model incorporates gender differences in the level and responsiveness of brawn to nutrition in a roy economy setting in which activities reward skill and brawn differentially empirical evidence from rural bangladesh provides support for the model and the importance of the distribution of brawn

indexing product quality issues theory and results jn the concept of quality and the efficiency of markets for consumer products hjorth andersen 1984 strongly condemns the use of overall productquality rankings such as those published by consumer reports as a basis for scientific research his primary criticism is that creating an index of quality as a weighted average of subscores is usually misleading he claims that this averaging process is unjustified except for brands that occupy approximately the same rank position on each attribute this article reviews hjorth andersen s arguments and identifies several important related questions on the use of published quality ratings in academic research statistical theory is developed to demonstrate that hjorth andersen s conclusions are limited and to examine the precise conditions under which his conclusions hold empirical evidence is presented that reveals the statistical frequency in real markets of the logical conditions deduced using our theory our conclusions differ significantly from those drawn by hjorthandersen a debate about the efficacy of quality indices is relevant not only to academic research but also to consumer welfare and strategic marketing planning consumer welfare and choice is affected by published quality ratings archibald haulman and moody 1983 beales et al 1981 thorelli and thorelli 1977 commercial importance is evident from the widespread distribution of magazines like consumer reports the consumer testing movement started in 1927 by chase and schlink has spread to agencies in more than 50 nations these agencies are members of the international organization of consumers unions iocu and the combined circulation of their magazines is in the millions published quality ratings also influence academic research our literature review identified more than 30 studies that use objective quality ratings as data from which to draw inferences about price versus quality tradeoffs advertising versus quality interactions price versus quality changes over product life cycles brand switching market efficiency and rational consumer judgments since this review concentrated on the marketing and economics literature it is likely that the role of published quality ratings in academic research has been underestimated in any case academic researchers can and should assist product testing agencies in understanding sources of potential error in their quality scales strategic research such as that conducted by the strategic planning institute at harvard university has focused management attention on the influence of product quality on market performance measures like market share and rate of return on investment for example phillips chang and buzzell 1983 indicate that product quality influences a firm s market share directly and its rate of return on investment indirectly through market share see also day 1986 farris and reibstein 1979 urban et al 1984 it is important that future research define coherently and measure accurately the construct of quality

imperfect factor mobility and the distribution of income abstract when labor is imperfectly mobile between industries workers may have a special interest in commercial policies that increase the price of the output of the industry in which they are employed this proposition is investigated in a two good model in which the degree of labor mobility is measured by the elasticity of a convex input transformation curve the existence of such a transformation curve is justified by a model in which individual workers have differing relative and absolute efficiencies in different industries the results are extended to the case of many industries

height skills and labor market outcomes in mexico abstract taller workers are paid higher wages a prominent explanation for this pattern is that physical growth and cognitive development share childhood inputs inducing a correlation between adult height and two productive skills strength and intelligence this paper explores the relative roles of strength and intelligence in explaining the labor market height premium among mexican men while cognitive test scores account for a limited share of the height premium roughly half of the premium can be attributed to the educational and occupational choices of taller workers taller workers obtain more education and sort into occupations with greater intelligence requirements and lower strength requirements suggesting a possible role for cognitive skill

gresham s law of model averaging an agent operating in a self referential environment thinks the parameters of his model might be time varying in response he estimates two models one with time varying parameters and another with constant parameters forecasts are then based on a bayesian model averaging strategy which mixes forecasts from the two models in reality structural parameters are constant but the unknown true model features expectational feedback which the agent s reduced form models neglect this feedback allows the agent s fears of parameter instability to be self confirming within the context of a standard linear present value asset pricing model we use the tools of large deviations theory to show that the agent s self confirming beliefs about parameter instability exhibit markov switching dynamics between periods of tranquility and periods of instability however as feedback increases the duration of the unstable state increases and instability becomes the norm even though the constant parameter model would converge to the constant parameter rational expectations equilibrium if considered in isolation the mere presence of an unstable alternative drives it out of consideration

the comparison of multi dimensioned distributions of economic status the literature on inequality measurement has been largely concerned with single dimensioned indicators this paper explores some of the issues which arise when there are several dimensions to inequality and these are not readily reduced to a single index concentrating particularly on the two dimensioned case we make use of results on multi variate stochastic dominance in portfolio theory extending these and applying them to the measurement of inequality the use of the dominance conditions is illustrated by an application to the international distribution of income and life expectancy

a sorted tale of globalization white collar jobs and the rise of service offshoring abstract we study how the rise of unaffiliated trade in services with china and india has impacted u s labour markets the topic has two understudied aspects it deals with service trade most studies deal with manufacturing trade and it examines the historical first of u s workers competing with educated but low wage foreign workers our empirical agenda is made complicated by the endogeneity of service imports and the endogenous sorting of workers across occupations to develop an estimation framework that deals with these we imbed a partial equilibrium model of trade in tasks within a general equilibrium model of occupational choice the model highlights the need to estimate labour market outcomes using changes in the outcomes of individual workers and in particular to distinguish workers who switch up from those who switch down switching down means switching to an occupation that pays less on average than the current occupation we apply these insights to matched cps data for 1996 2007 the cumulative 10 year impact of rising service imports from china and india has been as follows 1 downward occupational switching increased by 7 percentage points from 21 to 28 and upward occupational switching increased by 6 percentage points from 17 to 23 2 transitions to unemployment were imprecisely measured to have increased by half a percentage point potentially raising the white collar unemployment rate from 3 0 to 3 5 3 the earnings average across all white collar workers fell by a small 1 however for the sub population of workers who switched down or became unemployed earnings fell by 15 and 47 respectively 4 service exports had partially offsetting effects on switching and unemployment

learning and model validation this paper studies adaptive learning with multiple models an agent operating in a self referential environment is aware of potential model misspecification and tries to detect it in real time using an econometric specification test if the current model passes the test it is used to construct an optimal policy if it fails the test a new model is selected as the rate of coefficient updating decreases one model becomes dominant and is used almost always dominant models can be characterized using the tools of large deviations theory the analysis is used to address two questions posed by sargent s phillips curve model

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

trade and divergence in education systems this article presents a theory on the endogenous choice of education policy and the two way causal relationship between trade and education systems a country s education system determines its talent distribution and comparative advantage the possibility of trade by raising the returns to the sector of comparative advantage in turn induces countries to further differentiate their education systems and reinforces the initial pattern of comparative advantage specifically the nash equilibrium choice of education systems by two countries interacting strategically are necessarily more divergent than their autarky choices and yet less than what is socially optimal for the world

benefits from u s monetary policy experimentation in the days of samuelson and solow and lucas a policy maker knows two models of ination unemplo yment dynamics one implies an exploitable trade o the other does not the policy maker s prior probability over the two models is part of his state vector bayes law converts the prior probability into a posterior probability at each date and gives the policy maker an incentive to experiment for two models calibrated to u s data through the early 1960s we isolate the component of government policy that is due to experimentation by comparing the outcomes from two bellman equations the rst of which experiments and learns the second of which learns but doesn t experiment we interpret the second as an anticipated utility model and study how well its outcomes approximate those from the experiment and learn bellman equation the approximation is good for our calibrations the benets from purposeful experimentation are small

heterogeneous trade costs and wage inequality a model of two globalizations abstract we develop a model for analyzing the distributional effects of two globalizations and their interdependence we distinguish between two trade cost reductions i trade liberalizations in the 1980s which increased trade in low skill intensive goods denoted l globalization and ii reductions in communication costs due to the it revolution which raised trade in middle skill intensive goods during the 1990s denoted c globalization we consider a north south trade economy in which the north is skill abundant a freely traded final good is produced using high skill services and a bundle of inputs inputs differ on the intensity of middle and low skill workers required to be produced and are subject to heterogeneous trade costs in the north we find that wage inequality increases in the l globalization during the c globalization wage polarization emerges the relative wage of high to middle skill workers increases while the relative wage of middle to low skill workers is hump shaped we find a complementarity between the two globalizations wage polarization is delayed by the extent of trade in the l globalization in the south we find that wage inequality increases in both globalizations finally we show how asymmetric participation in the c globalization of two southern countries generates a discontinuous pattern of specialization the southern country participating in the c globalization specializes in the least and most skill intensive traded inputs

trade and the political economy of redistribution this paper shows how international trade affects the support for policies which redistribute income between workers across sectors and how the existence of such policies changes the support for trade liberalization workers who are imperfectly mobile across sectors vote on whether to subsidize ailing sectors thereby redistributing income but also distorting the labor allocation we present three main findings first redistributive policies are more likely to arise in a small open than in a closed economy for a broad range of parameters second if a redistributive policy is adopted in both situations income differences across sectors tend to be lower in the open economy third the possibility to redistribute income across sectors raises the political support for trade liberalization in the first place

information remedies for consumer protection consumer protection regulation has come under increasing fire from the congress courts and the business community in response regulators have begun to innovate with market interventions that are more compatible with economic incentives these incentive compatible techniques include establishing property rights mandating performance standards instead of design standards increasing competition and encouraging and mandating information disclosure information disclosure allows consumer self protection compatible with individual preferences information is also compatible with sellers incentives inducing them to compete on the basis of information disclosed in addition this competition increases the incentive to generate and disseminate additional product information thereby repeating the cycle in this way information remedies rely on private economic incentives to achieve regulatory goals rather than on expensive direct enforcement by the regulator diagnosis of an information problem and evaluation of alternative remedies requires a number of steps analysis of information production and distribution identification of market failures and their implications for resource allocation in the information and product markets and analysis of alternative remedies in light of these market failures

staggered updating in an artificial financial market abstract we consider an environment in which traders search for trading opportunities and update their forecast rules at random intervals by ols the staggering of this updating process across traders allows differences in opinion to persist over time generating nontrivial price dynamics the nature of these dynamics is sensitive to the degree of overparameterization of forecast rules relative to market fundamentals