Conferences.

Thirteenth Annual Inter-American Seminar on Economics

The NBER's 13th Annual Inter-American Seminar on Economics took place in Santo Domingo, Costa Rica on November 16--17. Sebastian Edwards, NBER and University of California, Los Angeles, and James J. Heckman, NBER and University of Chicago, organized this year's program around the topic "Micro-data Research in Latin America":

James J. Heckman, and Carmen Pages, Inter-American

Development Bank, "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets"

(NBER Working Paper No. 7773) Discussant: Sebastian Edwards

Jaime Saavedra and Maximo Torero, GRADE, "Labor Market Reforms and Their Impact over Formal Labor Demand and Job Market Turnover: The Case of Peru"

Discussant: Costas Meghir, University College London 

Mauricio Cardenas, Fedesarrollo, and Adriana D. Kugler, Universitat Pompeu Fabra, "The Incidence of Job Security Regulations on Labor Market Flexibility and Compliance in Colombia"

Discussant: Maria Carolina Leme, IPEA, Rio de Janeiro 

David H. Autor, NBER and MIT, "Outsourcing at Will: Unjust Dismissal Doctrine and the Growth of Temporary Help Employment" (NBER Working Paper No. 7557)

Discussant: Alan B. Krueger, NBER and Princeton University 

Orazio P. Attanasio, NBER and University College London, and Miguel Szekely, Inter-American Development Bank, "A Dynamic Analysis of Household Decision Making in Latin America"

Discussant: Robert J. Willis, University of Michigan 

Maria Carolina Leme and Ricardo Paes de Barros, IPEA, Rio de Janiero, "The Case of Brazil"

Discussant: Petra E. Todd, NBER and University of Pennsylvania (No detail was available on this presentation at the time of publication)

Jaime Saavedra and Martin Valdivia, GRADE, "Household and Individual Decisionmaking over the Life Cycle: A First Look at Evidence from Peruvian Cohorts"

Discussant: David Bravo, Universidad de Chile

Derek A. Neal, NBER and University of Wisconsin, "Life Cycle Fertility and Welfare"

Discussant: Costas Meghir Jere R. Behrman, Piyali Sengupta, and Petra E. Todd, University of Pennsylvania "Progressing through PROGRESA: An Impact Assessment of Mexico's School Subsidy Experiment"

Discussant: Maria Carolina Leme

Orazio P. Attanasio, Costas Meghir, and Ana Santiago, University College London, "Using Economics to Understand the Mexican PROGESA Program"

Discussant: Petra E. Todd (No detail was available on this or the next presentation at the time of publication)

Cristian Aedo, ILADES, "Evaluating the Chile Joven Program"

Discussant: Jeffrey A. Smith, NBER and University of Western Ontario 

David Bravo, Dante Contreras, and Gustavo Crespi, Universidad de Chile, "Evaluating Training Programs for Small-Scale Entrepeneurs: A Pilot Study"

Discussant: Alan B. Krueger

David Bravo and Dante Contreras, "The Impact of Financial Incentives to Training Providers: The Case of Chile Joven"

Discussant: Jeffrey A. Smith

Heckman and Pages document the high level of job security protection in Latin American labor markets and analyze its impact on employment. They show that job security policies have a substantial impact on the level and the distribution of employment in Latin America, reducing employment and promoting inequality. The institutional organization of the labor market thus affects both employment and inequality.

Saavedra and Torero analyze the effect of several aspects of labor legislation that were modified in Peru after 1991. Through the progressive elimination of job stability regulations, the introduction of temporary contracts, and changes in the severance payment structure, firing costs diminished sharply. Simultaneously, nonwage lab or costs increased. Using data on 10 sectors observed bimonthly between 1987 and 1997 and data on establishments for 3 subperiods, the authors find that labor costs have a negative and significant effect on labor demand. The coefficient of their measure of firing costs, the expected severance payments, is negative and significant, and it decreases in the post-reform period. After the reforms, the price and output elasticities are larger and there is evidence of a speedier adjustment in labor demand. Using household surveys for Lima, the authors also find that mean tenure has fallen since 1992. The fall is larger--and statistically significant--for formal salaried workers than for informal workers.

Cardenas and Kugler examine the reduction in firing costs on worker turnover in Colombia. Its labor market reform of 1990, which reduced severance payments substantially, affected worker flows into and out of unemployment and reduced severance payments for all workers hired after 1990 and for those covered by the legislation (formal sector workers). The Colombian Household Surveys provide information about formal and informal sector activity and allow for estimating hazard rates for formal and informal workers, before and after the reform. The results indicate that hazard rates into and out of unemployment increased after the reform for formal sector workers (covered by the legislation) relative to informal workers (uncovered). Moreover, the increase in worker turnover was greater among younger, more educated workers employed in larger firms who were likely to have been affected most by the changes in the legislation.

The U.S. temporary help services (THS) industry grew at 11 percent annually between 1979 and 1995, five times more rapidly than nonfarm employment. Contemporaneously, courts in 46 states adopted exceptions to the common law doctrine of employment at will, limiting employers' discretion to terminate workers and opening them to litigation. Autor assesses whether the decline of employment at will and the growth of THS are causally related. To aid the analysis, he considers a simple model of employment outsourcing that shows that firms will respond to externally imposed firing costs by outsourcing positions requiring the least firm-specific skills rather than those with the highest expected termination costs. Autor's analysis indicates that one class of exception, the implied contractual right to ongoing employment, led to 14 to 22 percent growth in excess temporary help in adopting states. Unjust dismissal doctrines did not significantly contribute to employment growth in other business service industries. The decline of employment at will explains as much as 20 percent of the growth of THS between 1973 and 1995 and accounts for 336,000 to 494,000 additional workers employed in THS on a daily basis as of 1999.

Income inequality in Latin America has increased over the past several years. Attanasio and Szekely ask whether there is a supply-side explanation for this experience. Specifically, they explore whether the dynamics of inequality relate to life cycle or to cohort effects, and they ask what underlying household decisions are behind these cohort and life-cycle patterns. They also assess the role played by labor force participation, fertility, household arrangements, household formation, investment in education, and other related family decisions, and compare these with the role played by changes in the returns to schooling.

Over the last 40 years, Peru has achieved significantly lower fertility and mortality rates, bringing population growth rates down to less than 1.2 percent per year. These improvements have led to a demographic transition with lower dependency ratios. Saavedra and Valdivia find that household size is now smaller for the younger cohorts, in all but the households with less-educated heads. To explain these differences, they argue that reductions in fertility have not yet reached the less-educated. However, family living arrangements appear to change throughout the life cycle; for example, extended families are more common for households with very young (under 25) or older (over 60) heads. The authors also show that intergenerational family arrangements over time limit the ability of the life cycle hypothesis to explain household saving behavior. Peruvian households, especially the less-educated, smooth consumption over the life cycle, not only through the typical saving-dissaving mechanism, but also by smoothi ng income. Net cash transfers, or living arrangements between parents and their offspring, play an important role in this income smoothing.

Neal presents an economic model that captures Wilson's general hypothesis -- marriage markets matter -- while simultaneously fleshing out details of the interactions between sex ratios, male income, welfare generosity, and other factors that may influence nonmarital fertility. Neal's model highlights how marriage markets and government aid programs interact to determine choices about marriage and fertility. It shows how the existence of government aid shapes the effects of changes in marriage market conditions. Neal's model also illustrates how commonly used regression models may yield inferences about the links between marriage market conditions and observed family structures.

Behrman, Sengupta, and Todd study the effects of a new antipoverty program in Mexico called PROGRESA that provides families with monetary transfers contingent upon their children's regular attendance at school. The benefit levels are intended to offset the opportunity costs of not sending children to school and vary with the grade level and gender of the child. The authors show that the program effectively reduces drop-out rates and facilitates progression through the grades, particularly during the transition from primary school to secondary school. Their results also indicate that if children were to participate in the program between ages 6 and 14, the program would increase average educational attainment levels by 0.6 years and increase the share of children attending secondary school by about 19 percent.

Bravo, Contreras, and Crespi establish a method of evaluation tailored to training courses for small-scale entrepreneurs. They also develop measures of training success and design a questionnaire. They propose a pilot evaluation; document the selection of the samples (trained by FUNDES Chile and a control group); elaborate on the questionnaire and its application; and finally report their results.

Bravo and Contreras then offer empirical evidence on the impact of the introduction of a monetary incentive in the Chile Joven (youth labor training) Program. This program, initiated in 1991, focused on unemployed low-income youths between the ages of 15 and 24. Its goal was to raise the probability of employment of youths through job training and work experience. Starting in 1995, a financial incentive was added: an additional quantity of money went to training organizations for each beneficiary of the program who carried out his work experience under a labor contract in a private firm. The authors estimate that the probability that the beneficiaries will finish the work experience phase of their program is 11 percent. However, after controlling for differences in age, gender, occupational status, educational level, and geographical location of the beneficiaries, and for characteristics of the training received, and differences in the macroeconomic environment in a particular year, the impact of the monetar y incentive appears closer to 8 percent. On the other hand, when the authors estimate the impact using Matching Techniques, which allows the construction of a better control group, the impact of the incentive increases to 13 percent -- again, measured as the probability of the change in the labor status.

These papers will be printed in a special issue of the Journal of Development Economics.

Malaysia

The sixth in a series of country-specific meetings of the NBER Project on Economic and Financial Crises in Emerging Market Countries, directed by NBER President Martin Feldstein and Research Associate Jeffrey A. Frankel, both of Harvard University, took place in Cambridge on February 16. This gathering focused on Malaysia and was organized by Frankel, Dani Rodrik, NBER and Kennedy School of Government, and Wing Thye Woo, University of California, Davis. Like earlier NBER meetings on Mexico, Thailand, Brazil, Korea, and Indonesia, this occasion brought together academics, individuals representing the country, international bankers, and government officials in the hopes of developing an in-depth understanding of Malaysia's economic situation.

The day-long meeting was divided into four sessions. In Session 1, a panel consisting of Jomo Kwame Sundaram, University of Malaya, Dwight Perkins, Harvard University, Homi Kharas, the World Bank, and Woo discussed the exchange rate situation in Malaysia prior to mid-1997.

In Session 2, the experts discussed the currency contagion that occurred between July 1997 and August 1998. The panelists were Lin See Yan, LIN Associates, formerly of the Reserve Bank of Malaysia; Anoop Singh, International Monetary Fund; Edwin Truman, Institute for International Economics and formerly of the U.S. Treasury and the Federal Reserve System; and Takatoshi Ito, an NBER Research Associate on leave at the Ministry of Finance of Japan.

In Session 3, panelists Nor Mohd Yakop, the Malaysian Prime Minister's Department, Rodrik, Caroline Atkinson, Council on Foreign Relations and formerly of the U.S. Treasury, and Yung Chul Park, Korea University, considered the consequences of imposition of controls on capital outflows in September 1998.

In the fourth session, Yusuke Horiguchi, International Monetary Fund, Zainal Aznam, Institute of Strategic and International Studies, David Malpass, Bear Sterns Co., and Peter Garber, DeutscheBank Morgan Grenfell, discussed the aftermath of controls in 1999-2000 and the current outlook.

A summary of the other meetings appears on the NBER's web site at http://www.nber.org/crisis/. A summary of this meeting will also be provided at that site.

Currency Crisis Prevention

An NBER conference on Currency Crisis Prevention organized, by Sebastian Edwards, NBER and University of California, Los Angeles, and Jeffrey A. Frankel, NBER and Harvard University, took place on January 11-13. This conference is part of a larger NBER project on Currency Crises in Emerging Market Countries. More information about the other parts of the project is available at the NBER website at www.nber.org/crisis.

The discussion focused on these papers:

Sebastian Edwards, "Does the Current Account Matter?"

Discussant: Alejandro Werner, Bank of Mexico 

Luis Feilpe Cespedes, New York University; Roberto Chang, Rutgers University; and Andres Velasco, NBER and Harvard University, "Balance Sheets, Exchange Rate Regimes, and Credible Monetary Policy"

Discussant: Nouriel Roubini, NBER and New York University

Amartya Lahiri, University of California, Los Angeles, and Carlos A. Vegh, NBER and University of California, Los Angeles, "Fighting Currency Depreciation: Intervention or Higher Interest Rates?"

Discussant: Eduardo Borensztein, International Monetary Fund

Enrique G. Mendoza, NBER and Duke University, "Credit, Prices, and Crashes: Business Cycles with a Sudden Stop" and "Sudden Stop Economics in an Equilibrium Framework"

Discussant: Joshua Aizenman, NBER and Dartmouth College 

Giancarlo Corsetti, Yale University; Paolo A. Pesenti, Federal Reserve Bank of New York; and Nouriel Roubini, "The Role of Large Players in Currency Crises"

Discussant: Jaume Ventura, NBER and MIT

Linda S. Goldberg, Federal Reserve Bank of New York, "When Is U.S. Bank Lending to Emerging Markets Volatile?" (NBER Working Paper No. 8209)

Discussant: Simon Johnson, MIT

Roberto Rigobon, NBER and MIT, "Contagion: How to Measure It?" (NBER Working Paper No. 8118)

Kristin J. Forbes, NBER and MIT, "How Important Is Trade in the International Spread of Crises?"

Discussant: Enrique G. Mendoza.

Discussant: Federico Srurzenegger, Universidad Torcuato Di Tella 

Ethan Kaplan, Harvard University, and Dani Rodrik, NBER and Harvard University, "Did the Malaysian Capital Controls Work?" (NBER Working Paper No. 8142)

Discussant: Liliana Rojas-Suarez, Institute for International Economics

Discussant: Michael P. Dooley, NBER and University of California, Santa Cruz 

Rudiger Dornbusch, NBER and MIT, "Was Malaysia Different?"

Shang-Jin Wei, NBER and Brookings Institution, and Yi Wu, Georgetown University, "Negative Alchemy? Corruption, Composition of Capital Flows, and Currency Crises" (NBER Working Paper No. 8187)

Discussant: Martin Feldstein, NBER and Harvard University

Robert Dekle, University of Southern California, and Kenneth M. Kletzer, University of California, Santa Cruz, "Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia"

Discussant: Paolo A. Pesenti

Aaron Tornell, NBER and University of California, Los Angeles, "Financial and Monetary Policies in an Economy with Balance Sheet Effects"

Discussant: Charles W. Calomiris, NBER and Columbia University 

Anne O. Krueger, NBER and Stanford University, and Jungho Yoo, Korean Development Institute, "Chaebol Capitalism and the Currency-Financial Crisis in Korea"

Discussant: Jorge Braga de Macedo, NBER and OECD 

An inability to foresee the currency crises of the 1990s led to the development of "crisis early warning models." These models focused on a number of variables, including the level and currency composition of foreign debt, debt maturity, the weakness of the domestic financial sector, the country's fiscal position, its level of international reserves, political instability, and real exchange rate overvaluation. Edwards specifically investigates the behavior of the current account in emerging economies and its role, if any, in financial crises. He develops a dynamic model of current account sustainability and bases his empirical analysis on a massive dataset that covers over 120 countries during more than 25 years. He also analyzes important controversies related to the current account, including the extent to which current account deficits crowd out domestic savings.

Cespedes, Chang, and Velasco consider optimal interest rate policies in an open economy model, with balance sheet effects and overlapping wage contracts. They conclude that the optimal "flexible inflation targeting" policy under discretion involves a floating exchange rate and the partial reaction of home interest rates to external shocks. This policy yields higher welfare than one of strictly fixed nominal exchange rates. Other optimal inflation targeting policies under discretion also dominate fixed rates. These results hold in spite of the credibility advantage of fixing, and in spite of the presence of dollar liabilities and balance sheet effects.

Central banks typically respond to pressures on their currencies by a combination of foreign exchange market intervention and interest rate changes. Lahiri and Vegh build a simple model of a small open economy in order to understand this observed policy response and to investigate the optimal mix of these two policy instruments. Their model has two crucial features. First, the presence of nominal wage rigidities provides an incentive for the policymaker to prevent nominal exchange rate fluctuations. Second, the dependence of some firms on bank finance implies that higher domestic interest rates extract an output cost. The output effect of interest rate changes implies that, in general, policymakers would choose some combination of interest rate policy and direct market intervention to insulate the economy. Moreover, in the presence of costly intervention, the optimal policy response also involves allowing some currency fluctuation.

"Sudden stops" of capital inflows during emerging-markets crises have triggered unusually large declines in private expenditures, production, asset prices, and prices of nontradeable goods relative to tradeable goods. Mendoza suggests that these occurrences may be features of the equilibrium dynamics of a flexible-price economy with imperfect credit markets. Sudden stops occur when real or policy-induced shocks make liquidity constraints suddenly binding. Sudden stops are not reflected in long-run business cycle co-movements, but even so, their welfare costs can be significant. Mendoza offers an asset-pricing variation of his model as one explanation of the asset-pricing implications of sudden stops.

During recent episodes of financial turmoil, both policymakers and international institutions have voiced concerns about aggressive and possibly manipulative practices by high-leveraged institutions and large traders. Corsetti, Pesenti, and Roubini address these concerns by considering the role of large players in currency crises. The presence of a large trader may increase a country's vulnerability to a crisis. As small investors become more aggressive in their trading, a large trader's impact on the market depends not only on size, but also on reputation for quality of information. The authors present new econometric evidence on the correlation between exchange rate movements and the portfolio positions of big players, and undertake a comparative analysis of several recent crisis episodes in Thailand, Hong Kong, Malaysia, Australia, and South Africa. This evidence is largely consistent with the theory and does not contradict the conventional wisdom about aggressive practices by large traders. However, the question of whether and to what extent such practices are destabilizing requires further analysis.

Using bank-specific data on U.S. bank claims on individual foreign countries since the mid-1980s, Goldberg characterizes the size and portfolio diversification patterns of the U.S. banks engaging in foreign lending. She also explores the determinants of fluctuations in U.S. bank claims on a broad set of countries. Goldberg finds that U.S. bank claims on Latin American and Asian emerging markets, and on industrialized countries, are sensitive to U.S. macro-economic conditions. When the United States grows rapidly, there is substitution between claims on industrialized countries and claims on the United States. The pattern of response of claims on emerging markets to U.S. conditions differs across banks of different sizes and across emerging market regions. Moreover, Goldberg finds that unlike U.S. bank claims on industrialized countries, claims on emerging markets are not highly sensitive to local country GDP and interest rates.

The empirical literature on contagion has mainly used daily stock markets, interest rates, and exchange rates to measure the propagation of shocks across countries. Rigobon evaluates some of the techniques that frequently have been used to measure contagion. He argues that if the data suffer from heteroskedasticity (conditional or not), omitted variables, and simultaneous equation problems, then the conclusions drawn from most of the procedures could be biased. He therefore summarizes two new procedures developed to cope with these problems. One is aimed at testing for the stability of parameters, while the other estimates the contemporaneous relationship across countries consistently. Finally, Rigobon estimates the contemporaneous transmission mechanism between emerging stock markets and bond markets. He finds that regional variables, as well as trade linkages, provide one explanation for the strength of the propagation of shocks across bond markets, but these variables are not as important in stock markets .

Forbes examines the importance of trade in the international transmission of financial crises. She explains that trade can transmit crises via three distinct, and possibly counteracting, channels: a competitiveness effect (when changes in relative prices affect a country's ability to compete abroad); an income effect (when a crisis affects growth and the demand for imports); and, a bargain effect (when a crisis reduces import prices and acts as a positive supply shock). She then develops a series of statistics that measure each of these trade effects for a sample of 48 countries during 16 crises between 1994 and 1999. Of particular interest is the competitiveness statistic, which calculates how each crisis affects exports from other countries. Her results suggest that countries that compete with exports from a crisis country and also export to the crisis country (that is, experience both the competitiveness and income effects) had significantly lower stock market returns than other countries. Although trade does not fully explain stock market returns during recent crises, these trade effects are economically important and have a much larger impact than other macroeconomic variables.

The Asian financial crisis of 1997-8 wreaked havoc with the economies of some of the world's most successful performers. Three of the worst affected countries (Thailand, South Korea, and Indonesia) were forced to call in the International Monetary Fund (IMF). In return for financial assistance, these countries committed to many structural reforms. Malaysia took a different path, though. Instead of going to the IMF, Malaysian authorities imposed sweeping controls on capital-account transactions, fixed the exchange rate at a rate that represented a 10 percent appreciation relative to the level at which the ringgit had been trading, cut interest rates, and embarked on a policy of reflation. Kaplan and Rodrik ask whether the Malaysian gamble paid off. While Malaysia has recovered nicely since the crisis, so have Korea and Thailand, two countries that took the orthodox path. They conclude that some of the more pessimistic prognostications about the consequences of capital controls have not been borne Out, though.

In September 1998, Malaysia stepped up its restrictions on capital outflows and mandated the repatriation of offshore holdings in order to defend the currency and to free monetary policy from high offshore rates and low rates at home. Dornbusch asks whether Malaysia's performance was different from that of other crisis countries. Specifically, did the imposition of capital controls make for a less-hard landing? Dornbusch believes not. The controls were imposed late in the Asian crisis, when the situation in crisis countries had started to improve. Malaysia looked no different from the averages of Korea, Thailand Indonesia, and the Philippines. However, Malaysia's balance sheet situation was so much worse than that of the other countries that perhaps, if not for the controls, the outcome would have been far worse. Dornbusch reluctantly concludes that Malaysia is not a good candidate for examining the capital controls question; there is no evidence that controls did short-term damage, nor that they generated s hort-term benefits. However, there is ample evidence that capital controls shifted attention away from the leadership struggle.

Crony capitalism and self-fulfilling expectations by international creditors are often suggested as two rival explanations for currency crisis. Wei and Wu examine a possible link between the two that so far has not been explored: corruption may affect a country's composition of capital inflows in a way that makes it more likely to experience a currency crisis triggered or aided by international investors' self-fulfilling expectations. Using data on bilateral foreign direct investment (FDI) and bilateral bank loans, the authors find that corrupt countries tend to have a particular composition of capital inflows that is relatively light in FDI. Earlier studies have indicated that a country with such a capital inflow structure is more likely to run into a subsequent currency crisis (in part through self-fulfilling expectations of the international creditors). Thus, the authors illustrate one particular channel through which crony capitalism can increase the chance of a currency or financial crisis.

Dekle and Kletzer develop a model of the domestic financial inter-mediation of foreign capital inflows based on agency costs. In their model, a crisis evolves endogenously as the banking system becomes increasingly vulnerable through the renegotiation of firm debts. Firm revenues are subject to idiosyncratic firm-specific technology shocks, but there are no aggregate shocks. The model generates dynamic relationships between foreign capital inflows, domestic investment, firm debt, and the value of firm and bank equity. Prior to a crisis, foreign capital inflows and bank debt rise relative to investment and domestic production. The aggregate portfolio of the banking sector deteriorates, and the total value of bank equities declines progressively in proportion to the portfolio for goods producers. The authors compare the model's implications for the behavior of the economy before and after crisis to the experience of five East Asian countries. The comparison of three crisis countries -- Korea, Thailand, and Mal aysia -- to two near crisis countries -- Taiwan and Singapore -- lend support to the model.

Recent crises frequently have erupted in emerging markets without a major external shock and with seemingly strong macroeconomic fundamentals. In these episodes, a small incipient reduction in capital inflows has been followed by a significant real exchange rate depreciation. Since debt was largely denominated in foreign currency, the depreciation induced widespread bankruptcies and a collapse of new lending. Tornell presents a conceptual framework for evaluating some of the seemingly destructive financial and monetary policies implemented in emerging markets. He emphasizes that the policies implemented in countries that have experienced crises reflect neither sheer incompetence nor outright corruption. Moreover, he argues that some of the policies adopted were second-best-optimal given the environment faced by emerging economies. Crises were simply bad draws that did not have to happen; they were the price that had to be paid to attain faster growth.

Krueger and Yoo focus on the Korean experience and trace the roles of the chaebol, the earlier history of credit rationing and the buildup of domestic credit and foreign indebtedness prior to the crisis, the opening of the capital account, and the impact of exchange rate depreciation on financial crisis. The authors stress the role of each of the key variables. For example, if exchange rate depreciation were the largest factor leading to the deterioration of the banks' portfolios, then resorting to a genuinely floating exchange rate or preventing uncovered liabilities denominated in foreign exchange would greatly reduce the likelihood of future crises. Likewise, if bank lending practices resulted in a rapidly increasing proportion of nonperforming loans in the banking system, even if the exchange rate was not a significant factor, then improving bank lending practices as a preventive measure for future crises becomes much more important. And, if rigidities in the banking or financial system resulting from fa ilure to liberalize or regulate sufficiently were a major contributor, then the policy lessons might focus on the urgent need for liberalizing and strengthening banking and financial systems in emerging markets.

These papers will be collected in a conference volume, Preventing Currency Crises in Emerging Markets, forthcoming from the University of Chicago Press and edited by Edwards and Frankel. In advance of publication, some of the papers will be available at "Books in Progress" on the NBER's web site, www.nber.org.

Conference on E-Commerce

The NBER's first Conference on E-Commerce, organized by Research Associates Severin Borenstein, University of California, Berkeley, and Garth Saloner, Stanford University, was held in Bodega Bay, California on January 26 and 27. The following papers were discussed:

Dennis W. Carlton and Judith A. Chevalier, NBER and University of Chicago, "Free Riding and Sales Strategies for the Internet" (NBER Working Paper No. 8067)

Discussant: David Genesove, NBER and Hebrew University of Jerusalem 

Robert H. Gertner, NBER and University of Chicago, and Robert S. Stillman, Lexecon, Inc., "Vertical Integration and Internet Strategies in the Apparel Industry"

Discussant: Barry J. Nalebuff, Yale University

Steven N. Kaplan, NBER and University of Chicago, and Luis Garicano, University of Chicago, "The Effects of Business-to-Business E-Commerce on Transaction Costs" (NBER Working Paper No. 8017)

Discussant: Frank A. Wolak, NBER and Stanford University

Paul Resnick, University of Michigan, and Richard J. Zeckhauser, NBER and Harvard University, "Trust among Strangers in Internet Transactions: Empirical Analysis of eBay's Reputation System"

Discussant: Garth Saloner

Rama Katkar, Northwestern University, and David H. Lucking-Reiley, Vanderbilt University, "Public versus Secret Reserve Prices on eBay Auctions: Results of a Pokemon Field Experiment"

Discussant: Robert H. Porter, NBER and Northwestern University

Erik Brynjolfsson and Michael D. Smith, MIT, "Consumer Choice Behavior at Internet Shopbot"

Discussant: Catherine D. Wolfram, NBER and University of California, Berkeley

Florian Zettelmeyer, University of California, Berkeley; Fiona Scott Morton, NBER and Yale University; and Jorge Silva-Risso, J. D. Power and Associates, "Internet Car Retailing" (NBER Working Paper No. 7961)

Discussant: Andrea Shepard, NBER and Stanford University

Karen B. Clay and Eric D. Wolf, Carnegie Mellon University, and Ramayya Krishnan, Earlham College, "Pricing Strategies on the Web: Evidence from the Online Book Industry"

Discussant: Hal R. Varian, University of California, Berkeley

Austan Goolsbee, NBER and University of Chicago, "Competition in the Computer Industry: Online versus Internet"

Discussant: Scott Stern, NBER and MIT

Carlton and Chevalier examine manufacturers' decisions about whether and how to offer their products for sale over the Internet, focusing on three types of products: fragrances, DVD players, and side-by-side refrigerators. Their evidence suggests that manufacturers who limit distribution in the physical world also use various mechanisms to limit distribution online. In particular, these manufacturers attempt to prevent the sale of their products by online retailers who sell at deep discounts. Furthermore, the authors show that manufacturers who distribute their goods directly through manufacturer web sites tend to charge very high prices for the products.

Gertner and Stillman study how firms in the apparel industry have adapted to the Internet. They choose apparel because it is one of the leading categories of online sales and because various types of organizational form exist within the industry. For example, firms like The Gap are vertically integrated, but many other brands are owned by vendors and sold mainly through department stores and other third party retailers. Using data from 30 firms, the authors find that vertically integrated specialty retailers tended to start online sales sooner, regardless of whether the firm had pre-existing catalog operations. They also find that products of vertically integrated specialty retailers and catalog companies are more available online than the products of nonintegrated vendors.

Kaplan and Garicano study the changes in transaction costs related to the introduction of the Internet in transactions between firms (that is, business-to-business [B2B] e-commerce). They argue that B2B e-commerce likely reduces coordination costs and increases efficiency. The authors classify these efficiencies into three broad categories: process improvements, marketplace benefits, and indirect improvements. At the same time, B2B e-commerce affects incentive costs and possibly informational asymmetries. Using detailed data from one Internet-based firm, and less detailed data for one other firm, they find that process improvements and marketplace benefits are potentially large. There is little evidence that informational asymmetries are more important in the electronic marketplace than the existing physical ones, though.

One of the earliest and best-known Internet reputation systems is run by eBay, which gathers comments from buyers and sellers after each transaction. Resnick and Zeckhauser examine a large dataset from 1999 that reveals several interesting features of this system. For example, feedback was provided more than half the time, and it was almost always positive. Reputation profiles predicted future performance, but the net feedback scores that eBay displayed encouraged overly positive assessments of reputations and were far from the best predictor available. Further, although sellers with better reputations were more likely to sell their items, they enjoyed no boost in price, at least for the two sets of items that the authors examined. Finally, there was a high correlation between buyer and seller feedback, suggesting that the players both reciprocate and retaliate.

Sellers in eBay auctions have the opportunity to choose both a public minimum bid amount and a secret reserve price. Katkar and LuckingReilly ask whether the seller is made better or worse off by setting a secret reserve above a low minimum bid, as opposed to making the reserve public by using it as the minimum bid. In a field experiment, they auction 50 matched pairs of Pokemon cards on eBay, half with secret reserves and half with equally high public minimum bids. The authors find that secret reserve prices make sellers worse off by reducing the probability of the auction resulting in a sale, deterring serious bidders from entering the auction, and lowering the expected transaction price of the auction. They also show that some sellers choose to use secret reserve prices for reasons other than increasing their expected auction prices.

Internet shopbots allow consumers almost effortlessly to compare prices and service levels of dozens of competing retailers. Brynjolfsson and Smith analyze the choices of 20,227 shopbot consumers who choose among 33 competing retailer offers for books over a sample period of 69 days. They find that consumers are remarkably sensitive to how the total price for goods is allocated among the item price, the shipping cost, and tax; consumers are also quite sensitive to the ranking of retailer offerings with respect to price. Even in this setting, brand is important; in particular, consumers appear to use brand as a proxy for a retailer's credibility in terms of noncontractible aspects of the product, such as shipping time.

Zettelmeyer Morton, and SilvaRisso investigate the effect of Internet car referral services on dealer pricing of automobiles in California. Using data from J. D. Power and Associates and Autobytel.com, a major online auto referral service, they compare online transaction prices to regular "street" prices. They find that the average customer of this online service pays approximately 2 percent less for a car, which corresponds to about $450 for the average car. Fifteen percent of the savings is attributable to making the purchase at a low-price dealership affiliated with the web service. The remaining 85 percent of the savings seem to be a result of the bargaining power of the referral service and the lower cost of serving an online consumer. Consumers who indicate that they are ready to buy within two days of going online pay even lower prices. Consumers who use the web do better than at least 61 percent of offline consumers, the authors conclude.

Using data collected between August 1999 and January 2000 covering 399 books, including New York Times bestsellers, Clay, Krishnan, and Wolff examine pricing by 32 online bookstores. Over the sample period, they find no change in either price or price dispersion. The New York Times bestsellers have the lowest prices as a fraction of the publisher's suggested price, and the random books have the highest prices. The authors observe differentiation (or attempted differentiation) in selection in certain categories, overall selection, and price. A few online stores, usually branches of specialty physical stores, focus on depth of offering within a particular category such as computer books, children's books, or religious books. Other full-line stores focus on overall selection, carrying 90 percent or more of the books in the sample. For those offering low prices, most stores focus on marginally undercutting Amazon, usually by 10 cents or less. As of January 2001, some of these stores have gone out of business or c hanged their business model, though, and the surviving ones still appear to be at risk.

Using a new data source on computer purchases of almost 30,000 people, Goolsbee estimates the relative price sensitivity of individuals' choice of whether to buy a computer online or in a retail store. Goolsbee finds that the decision to buy online is sensitive to the relative price of computers in retail stores. Conditional on buying a computer, the elasticity of buying online with respect to retail store prices is about 1.5.

Health and Labor Force Participation over the Life Cycle: Evidence from the Past

The NBER held a conference on "Health and Labor Force Participation over the Life Cycle: Evidence from the Past" in Cambridge on February 2 and 3. Dora L. Costa, NBER and MIT, was the organizer and chose the following papers for discussion:

Joseph P. Ferrie, NBER and Northwestern University, "The Poor and the Dead: Socioeconomic Status and Mortality in the United States, 1850-60"

Discussant: Richard H. Steckel, NBER and Ohio State University Medical Discussant: Irwin Rosenburg, Tufts University

Chulhee Lee, Seoul National University, "Exposure to Disease, and Later Health and Mortality: Evidence from Civil War Medical Records"

Discussant: Ann McCants, MIT Medical Discussant: Nevin Scrimshaw, NBER and United Nations University

Sven E. Wilson, Brigham Young University, and Clayne L. Pope, NBER and Brigham Young University, "The Height of Union Army Recruits: Family and Community Influences"

Discussant: Claudia Goldin, NBER and Harvard University Medical Discussant: Irwin Rosenburg

Daniel Scott Smith, University of Illinois, Chicago, "Seasoning, Disease Environment, and Conditions of Exposure: New York Union Army Regiments and Soldiers"

Discussant: Michael R. Haines, NBE and Colgate University Medical Discussant: Charles Holmes, Partners HealthCare System

Werner Troesken and Patricia Beeson, University of Pittsburgh, "The Significance of Lead Water Mains in American Cities: Some Historical Evidence"

Discussant: Rebecca Menes, NBER and George Mason University Medical Discussant: Nevin Scrimshaw

Sven E. Wilson, "The Prevalence of Chronic Respiratory Disease in the Industrial Era: The United States, 1895-1910"

Discussant: Jc hn Brown, Clark University

Medical Discussant: Charles Holmes

Mario Sanchez, University of Chicago, "Geographical Mobility and the Effect of Migration on the Life Expectancy of Union Army Veterans"

Discussant: Robert Margo, NBER and Vanderbilt University

Chen Song, University of Chicago, and Louis Nguyen, Washington University, St. Louis, "The Effect of Hernias on the Labor Participation of Civil War Veterans"

Discussant: Peter Blanck, University of Iowa 

Tayatat Kanjanapipatkul, University of Chicago, "The Pensions and Labor Force Participation of Civil War Veterans and Nonveterans"

Discussant: William J. Collins, NBER and Vanderbilt University

Ferrie describes a new project that links individuals from the Mortality Schedules to the 1850 and 1860 Population Schedules of the federal censuses. This makes it possible to assess the link between individual and household characteristics and the probability of dying. The results reveal a strong and negative relationship between household wealth and mortality in 1860 and a somewhat weaker negative relationship between occupational status and mortality in 1850. The findings suggest that even when the U.S. population was largely rural and agricultural, changes in the distribution of income and wealth would have had a large impact on mortality rates and life expectancies.

Lee examines the effects of socio-economic factors and local disease environments on the medical experiences of Union army recruits while in service. The results suggest that prior exposure to unfavorable epidemiological environments reduced the chances of contracting and dying from disease while in service. Farmers and rural residents, who were healthier on average prior to enlistment because of their greater isolation from other people, were more likely to succumb to illness and to die from disease than nonfarmers and urban dwellers. Native recruits were subject to a greater risk of suffering illness than were foreigners, who were exposed to more infectious diseases during the course of immigration. More significantly, recruits from a county with a higher child death rate were less likely to contract disease than those from a low-mortality county. A closer examination of cause-specific mortality suggests that the most important link between the extent of prior exposure to disease and later health is the di fferent degree of immunity against pathogens. An alternative explanation is that people who lived in an unhealthy environment were better aware of how to avoid contracting disease than those with little experience of disease. The relationship between the extent of exposure to disease prior to enlistment and health while in service was stronger for the regiments organized from the Midwest and mid-Atlantic states and weaker for the regiments from New England and the South, presumably reflecting the regional differences in the severity of military missions, the extent of urbanization, and climate.

Wilson and Pope explore the early-life determinants of adult stature using a sample of 5,692 Union army recruits who were successfully linked to the U.S. Census of 1850 and were still children at that date. Potential early-life correlates of height include family-level factors (father's wealth, occupation, migration history, maternal literacy, and family size) and community-level factors (population, percent foreign born, school attendance rate, literacy rate, mortality rate, and level of manufacturing). The authors use county-level aggregate data to proxy the effect of community-level forces; they find particularly strong negative effects of population and the level of manufacturing. They also confirm previous work that shows the advantages of children growing up on farms, but they find that parental wealth has only a very modest effect. Somewhat surprisingly, the effect of county population is particularly strong within the farming class; this suggests the importance of exposure to disease rather than acce ss to high-quality food that comes with population density. The results also reveal significant catch-up growth between ages 16 and 20, with growth in this sample occurring at twice the rate that it occurs today. Thus, children in the antebellum North not only attained a smaller stature than modern populations, but also grew at a much slower average rate.

Smith analyzes a variety of individual and collective influences on disease mortality for 7,409 New York State soldiers and 258 regiments or other military organizations during the Civil War. He finds that individual soldiers and units shared the mortality experience associated with common place of origin, region of service during the war, and regiment. For example, soldiers from rural areas and men whose regiments served in the lower Mississippi Valley or along the Gulf of Mexico had elevated death rates from disease. Men who became Confederate prisoners of war suffered extremely high disease mortality. Smith argues that a seasoning process -- that is, moving from one location to another enhancing the risk of death during the first period of residence in a new environment -- was at work, because death rates declined with duration of service in the military. Background characteristics had the greatest influence on mortality during the initial year in the army. Finally, "disease environments" could be quite s mall. Enlisted men died from disease at three times the rate of officers. Since officers lived apart from the men, this differential is consistent with an emphasis on shared circumstances, rather than on individual factors.

Troesken and Beeson explore how many U.S. cities used lead water delivery services during the late nineteenth and early twentieth centuries and what factors influenced that choice. Their results indicate that 70 percent of all cities with populations greater than 30,000 in 1900 used lead service mains exclusively or in combination with some other type of main. The probability of using lead water mains was positively correlated with city size, a Midwestern location, and public ownership (publicly owned water companies used lead more often than did private water companies). The authors also explore how the use of lead service mains affected morbidity around the turn of the twentieth century. After deriving data from a large sample of Union Army veterans whose health was assessed when they applied for pensions, Troesken and Beeson find that Union army recruits living in cities that used lead service mains experienced more ailments associated with low levels of lead exposure, such as increased dizziness and hear ing problems. They did not suffer from more serious ailments associated with high levels of lead exposure, such as kidney problems, though.

In the late nineteenth and early twentieth centuries, several trends -- including very rapid urbanization and industrialization and a tenfold increase in cigarette production between 1880 and 1910 -- may have significantly affected the epidemiology of chronic respiratory diseases. Wilson uses actual physician diagnoses from 1895-1910 to characterize the prevalence of chronic conditions in both the upper and lower respiratory system, including asthma and chronic obstructive pulmonary disease (COPD), which is indicated as either emphysema or chronic bronchitis. Taking data from the medical exams performed on over 17,000 Union army veterans as they entered the pension system and applied for increases in support, he finds that the age-specific prevalence of respiratory disease (as measured by the percent of the sample ever diagnosed) among the Civil War veterans increased sharply between 1895 and 1910. Prevalence of both upper and lower respiratory conditions in the Civil War veterans generally increased with th e size of the veterans' city. Farmers had higher rates of illness, probably because of lower mortality, but also because they were exposed to a variety of organic agents that may have caused respiratory disease. There were strong regional differences in the prevalence of upper respiratory disease (as in modern times), with a lower prevalence in the New England and the mid-Atlantic states. Other than the high rates among farmers, occupational differences in disease were not pronounced, although laborers had consistently lower rates of COPD and asthma than artisans or professionals did.

Sanchez discusses the Union Army Migration Data set, a panel dataset of postbellum residential histories for 17,017 Union army veterans. The data, obtained from information that the recruit or his family provided to the Pension Bureau, are fairly representative of northern white males of military age during the Civil War. To learn how mobile postbellum Americans were, Sanchez estimates a rate of mobility across the life cycle. Integrating this rate over a ten-year interval, his results compare to those found using samples linked across censuses of population. Sanchez then tests the hypothesis that the migration experience influenced the life expectancy of those who moved by exposing migrants to a stressful environment. He confirms that, after controlling by age, occupation, and urban-rural status of the location of origin, the hazard risk of dying was 28 percent higher for migrants.

Song and Nguyen study workers' decisions to retire when confronted with health problems. Using the Union Army Census Data by linking the 1900 Census to the 1910 Census, and then using a groin hernia as a proxy for poor health, the authors find only weak evidence of the influence of hernias on the labor force decisions of the Civil War veterans. Age and monthly pension awards were both significantly positive predictors for retirement, though. Strong regional effects on retirement for veterans in the West and the Midwest relative to those residing in the Northeast were estimated, but there seemed to be no difference in the propensity to retire between veterans in the less versus more manually demanding occupations. These findings suggest that the presence of a groin hernia did not influence labor force decisions as much as age, wealth, and regional factors.

Kanjanapipatkul examines the impact of Civil War pensions on the labor force participation of the war's veterans and nonveterans. There is a substantial difference in the participation rate among the pensioners, closely corresponding to the variation in pension income. Pensions account for as much as a 15 percent reduction in the participation rate. The author also finds a significant impact of health and occupation, which supports previous findings about the declining elasticity of retirement with respect to pensions. Furthermore, a comparison of the participation rate between veterans and nonveterans reveals a strong regional difference in retirement behavior. The lower participation rate of Union veterans who received the pensions was not caused only by the pensions, but also by the lower participation rates in the northern states.

These papers and discussions will be published by the University of Chicago Press in an NBER Conference Volume. Its availability will be announced in a future issue of the NBER Reporter.