Robert Pindyck, MIT and NBER; and Neng Wang, Columbia University
The Economic and Policy Consequences of Catastrophes
What is the likelihood that the United States will experience a devastating catastrophic event over the next few decades - something that would substantially reduce the capital stock, GDP and wealth? What does the possibility of such an event imply for the behavior of economic variables such as investment, interest rates, and equity prices? And how much should society be willing to pay to reduce the probability or likely impact of such an event? Pindyck and Wang address these questions using a general equilibrium model that describes production, capital accumulation, and household preferences, and includes as an integral part the possible arrival of catastrophic shocks. Calibrating the model to average values of economic and financial variables yields estimates of the implied expected mean arrival rate and impact distribution of catastrophic shocks. They also use the model to calculate the tax on consumption society would accept to reduce the probability or impact of a shock.
Jan De Loecker, Princeton University and NBER; and Frederic Warzynski, Aarhus University
Markups and Firm-level Export Status
Estimating markups has a long tradition in industrial organization and international trade. Economists and policymakers are interested in measuring the effect of various competition and trade policies on market power, typically measured by markups. The empirical methods that were developed in empirical industrial organization often rely on the availability of very detailed market-level data with information on prices, quantities sold, characteristics of products, and more recently supplemented with consumer-level attributes. Often, both researchers and government agencies cannot rely on such detailed data, but still need an assessment of whether changes in the operating environment of firms had an impact on markups and therefore on consumer surplus. De Loecker and Warzyniski derive an equation to estimate markups using standard production plant-level data based on the insight of Hall (1986) and the control function approach of Olley and Pakes (1996). Their methodology allows for various underlying price setting models, dynamic inputs, and does not require measuring the user cost of capital or assuming constant returns to scale. They rely on the methodology to explore the relationship between markups and export behavior using plant-level data. They find that 1) markups are estimated significantly higher when controlling for unobserved productivity; 2) exporters charge on average higher markups; and 3) firms' markups increase (decrease) upon export entry (exit).
Jeff Furman, Boston University and NBER; Fiona Murray, MIT; and Scott Stern, Northwestern University and NBER
Growing Stem Cells: The Impact of US Policy on the Geography and Organization of Scientific Discovery
Furman, Murray, and Stern investigate the impact of the August 2001 U.S. administration stem cell research policy on the extent and nature of scientific output. The policy enabled the first U.S. federal funding for human embryonic stem cell (hESC) research; however, it precluded the use of federal funds for all but a narrow (and scientifically unpromising) set of pre-existing stem cell lines. The authors evaluate the specific impact of this policy on 1) the extent of U.S. stem cell research relative to the international community and 2) the consequences of this policy for the composition of follow-on research in the United States. A particular challenge in this research is in identifying a counterfactual estimate of the production of human embryonic stem cell research that would have occurred had the policy shock not been implemented. To address this issue, they develop multiple control samples, including a particularly novel sample based on the production of research in RNA Interference (RNAi), a scientific breakthrough in a closely related field in cell biology that occurred in the same year as human embryonic stem cell research (1998) and that, like HESC research, also pioneered in the United States. Their estimates suggest that the production of human embryonic stem cell research in the United States was approximately 35-40 percent lower following the policy shift than it would have been in the absence of the shift. This decline appears to have been largely concentrated in the years 2001-3. The impact of the policy is lessened, both in the sense of economic and statistical magnitude, in the later years of the sample. Publications by faculty in elite journals and those involving U.S. collaborations with the rest of the international community do not experience a long-term decline. These results suggest that life sciences research in the United States is relatively robust in the face of such nuanced shocks and that such shocks engender a significant behavioral response on the part of U.S. scientists.