In Defense of Usury Laws

Usury law is often criticized by economists for curtailing lending and thus creating deadweight costs. This paper shows that if moral hazard leads to credit rationing, a just-binding usury law creates a deadweight gain.  This property also holds in most market-clearing equilibria. Independent of social insurance benefits, or curbing present-biased preferences, interest rate caps have merit.     

Decision theory analysis of audit discovery sampling*

Abstract. Discovery sampling is a frequently used auditing technique. The objective of discovery sampling is to decide whether to accept or reject an audit population for which acceptance is appropriate only if the occurrence rate of serious errors is very low. This objective is met by auditing a sample and accepting only if the sample is free of serious errors. This paper first develops a Bayesian decision theory approach to the discovery sampling problem. Using this approach the auditor optimizes sampling effort according to a decision model that explicitly includes such factors as risk of failure of accepting too high an error rate, losses from wrong decisions, sampling costs, and prior distribution of the error rate. The form of the loss function used includes both linear and quadratic loss functions as special cases. Methods and formulas applicable to various prior distributions for the error rate are obtained. Detailed results are derived for two state-prior and gamma-prior distributions. A minimax approach that removes the need to elicit a complete prior distribution is then developed. Explicit formulas are obtained for both the admissible sample size range and for the minimax sample size. A comparison of results indicates that the minimax approach is nearly as efficient as approaches that require elicitation of prior problem rate distributions. Further analysis generalizes the methods by showing that for the Bayesian and minimax methods, analytical results can be derived for various forms of loss functions. Résumé. Le sondage de dépistage est une technique fréquemment utilisée en vérification qui a pour objectif de déterminer s'il faut accepter ou rejeter une population pour laquelle l'acceptation n'est appropriée que si la fréquence d'erreurs graves est très faible. L'objectif est réalisé au moyen de la vérification d'un échantillon et de son acceptation seulement si l'échantillon est exempt d'erreurs graves. L'auteur met d'abord au point une méthode inspirée de la théorie bayesienne de la décision, adaptée au problème du sondage de dépistage. En utilisant cette méthode, le vérificateur optimise le travail d'échantillonnage conformément à un modèle de décision qui comprend explicitement des facteurs tels que le risque d'échec ou le risque d'acceptation d'un taux d'erreur trop élevé, les pertes attribuables à de mauvaises décisions, les coûts d'échantillonnage et la distribution a priori du taux d'erreur. Des formes de fonction de perte utilisées, celles linéaires et quadratiques constituent des cas spéciaux. L'auteur obtient des méthodes et des formules applicables aux diverses distributions a priori du taux d'erreur. Il dérive les résultats analytiques pour les distributions a priori binômiale et gamma. L'auteur met ensuite au point une méthode minimax supprimant la nécessité d'obtenir une distribution a priori complète. Il obtient des formules explicites pour la fourchette de tailles d'échantillons admissibles ainsi que pour la taille de l'échantillon minimax. Une comparaison des résultats indique que la méthode minimax est presque aussi efficace que les méthodes qui exigent l'obtention de distributions a priori de taux d'erreurs. Le prolongement de l'analyse permet de généraliser les méthodes; il démontre en effet que pour les méthodes bayesienne aussi bien que minimax, les résultats analytiques peuvent être dérivés pour diverses formes de fonctions de perte.     

Explaining House Price Dynamics: Isolating the Role of Nonfundamentals

This paper examines the role of nonfundamentals‐based sentiment in house price dynamics, including the well‐documented volatility and persistence of house prices during booms and busts. To measure and isolate sentiment's effect, we employ survey‐based indicators that proxy for the sentiment of three major agents in housing markets: home buyers (demand side), home builders (supply side), and lenders (credit suppliers). After orthogonalizing each sentiment measure against a broad set of fundamental variables, we find strong and consistent evidence that the changing sentiment of all three sets of market participants predicts house price appreciation in subsequent quarters, above and beyond the impact of changes in lagged price changes, fundamentals, and market liquidity. More specifically, a one‐standard‐deviation shock to market sentiment is associated with a 32–57 basis point increase in real house price appreciation over the next two quarters. These price effects are large relative to the average real price appreciation of 71 basis points per quarter observed over the full sample period. Moreover, housing market sentiment and its effect on real house prices is highly persistent. The results also reveal that the dynamic relation between sentiment and house prices can create feedback effects that contribute to the persistence typically observed in house price movements during boom and bust cycles.     

SCHOOL CHOICE: SUPPORTERS AND OPPONENTS

We examine the attitudes of Ohio homeowners about school choice, which includes open enrollment programs, school vouchers, tuition tax credits, and charter schools. Previous studies examine more limited forms of choice and investigate fewer possible influences. Overall we report at least five new findings and five findings that contradict previous studies. We find the strongest predictors of opposition for school choice are people having graduate degrees and living in high‐performing public school districts. We find people living in blue collar areas and using private schools to be the strongest predictors of support. Males tend to oppose choice and African Americans support it. We find no role for income, the convenience of alternative schools, or the protection of house values in support for school choice. Overall we report at least five new findings and five findings that contradict previous studies. (JEL H44, I22)     

Immigration of Nurses

This paper examines the effects of immigration on a specific occupation, registered nurses (RNs). To learn whether immigrant nurses reduced the earnings of RNs, we applied techniques developed by Goldin (1994) and Borjas, Freeman, and Katz (1996), but found the effect of immigrant penetration either positive or insignificant. We also found that the supply of immigrant RNs was far more elastic than the supply coming from natives. It is often argued that it will be hard to detect negative effects on wages and employment of natives in local markets, because natives will avoid a market which many immigrants have entered. This study finds no support for this hypothesis in this market, based on data that measures the rate of entry of RNs exactly. We find no adverse effect of immigration on native workers in this occupation.     

CONTRACTING FOR AN INNOVATION UNDER BILATERAL ASYMMETRIC INFORMATION*

We analyze licensing contracts between informed innovators and developers exerting profit‐increasing effort. Those contracts must simultaneously induce innovators to convey information on the value of their ideas, while inducing developers to exert effort and protecting the innovators' intellectual property rights. We show that the best innovators signal themselves by taking more royalties even if it reduces the developers' share of returns and their incentives. Moreover, royalties are more likely to be used when property rights are easy to enforce and pre‐contractual evidence on innovation quality is hard to produce.     

TIME CONSISTENCY AND SELLER COMMITMENT IN INTERTEMPORAL MOVIE DISTRIBUTION: AN EMPIRICAL STUDY OF THE VIDEO WINDOW*

We study the determinants of the ‘video window’ (the interval between a movie's theatrical and video releases), based on a sample of 1,157 films released on video between 1988 and 1997. For subsets of films having shorter theater run lengths (1 to 17 weeks), windows were generally longer than, and largely invariant to, measures of the time required to exhaust the theater market. One interpretation of our results is that U.S. movie distributors resolved a time consistency problem by coordinating their behavior to maintain longer windows than would have otherwise resulted, but different explanations are also plausible.     

MARKETS FOR ORGANS: THE QUESTION OF SUPPLY

Organ transplantation holds the potential to substantially restore the health of many otherwise terminally ill patients. That potential, however, is currently being denied full realization by a chronic and severe shortage of cadaveric organs that are made available for this use. In recent years, medical practitioners, social scientists, and others have debated the virtues of allowing markets for cadaveric organs to form as a way to end the current shortage. In this debate, market opponents have argued, inter alia, that (1) organ collections may fall with payment of positive prices and (2) the price required to equilibrate organ supply and demand would be high. On the other hand, proponents of organ markets have argued that financial inducements could save many lives and that the equilibrium price is likely to be low. While dozens of papers have been published debating this issue, to date no one has provided any empirical evidence to resolve these important questions of supply. This paper provides preliminary evidence suggesting that potential donors would be relatively responsive to financial inducements and, accordingly, that the price required to eliminate the current shortage of organs is surprisingly low. (JEL 118, L50)     

DEMOCRACY AND GLOBALIZATION

The relationship between democracy and globalization has been a subject of both scholarly and policy debate. Some argue that the two go hand in hand – that unrestricted international transactions encourage political accountability and transparency and that politically free societies are least likely to restrict the mobility of goods and services. But others argue that democracies, in which special interests that suffer from foreign competition have voice, are more likely to have closed markets, and vice versa. Our analysis differs from its predecessors in three ways. We seek to uncover general patterns by considering as long a period as possible and all countries with the relevant data. We consider multiple dimensions of globalization, analyzing both trade liberalization and capital account liberalization. And we estimate these relationships using an instrumental variables strategy that allows us to confront the issue of simultaneity. Our findings support the existence of positive relationships between democracy and globalization.