Effective Evidence-Informed Policy: A Partnership among Government, Implementers, and Researchers

Evidence matters for the effectiveness of public policies,but important informational frictions—that is, resistanceto obtaining or using information on the subject at hand—sometimes prevent it from shaping policy decisions.Hjort et al. (2021) showed that reducing those frictionscan change not only political leaders’ beliefs but alsothe policies they implement. One-way information, fromresearch to policy, may sometimes be insufficient, though.Policymakers may be agnostic about the effectiveness ofan intervention, or they may not know which of its featuresrequire adjustment. A process of policy experimentationmay be needed (Duflo 2017), in which policies arerigorously evaluated at a small scale, the findings of those evaluations inform the policy design, and a new evaluation determines the effectiveness of a fine-tuned version of the intervention, with the assessment continuing until the program is ready to be scaled up. This process requires very close collaboration among government, implementers, and researchers. The means by which evidence is produced is also important. A frequent criticism of researcher-designed interventions is that results may not be relevant. One reason is that pilot programme’s participants or circumstances may be atypical, with the result that the experimental treatment, even if implemented with fidelity, may not achieve similar outcomes in other settings (Al Ubaydli et al. 2017; Vivalt 2017). A second reason is that governments may lack the capability to implement with fidelity interventions tested in randomized control trials. A partnership between policymakers and researchers can help attenuate these concerns. A recent experience in Colombia provides a good example of such a partnership at work. “Let’s All Learn to Read” is an ambitious programme to improve literacy skills among elementary schoolchildren (Grades K–5). Spearheaded by the Luker Foundation, a local nongovernmental organisation, in collaboration with the Secretary of Education of Manizales (Colombia), the programme began with a systematic data collection effort in the municipality’s public primary schools to understand why students were failing to acquire the most basic academic skills. This led to several interventions over many years during which multidisciplinary teams of researchers working in close collaboration with local stakeholders and policymakers designed and evaluated different features of the programme.

Equilibrium Unemployment: The Role of Discrimination

U.S. labor markets are increasingly diverse and persistently unequal between genders, races and ethnicities, skill levels, and age groups. We use a structural model to decompose the observed differences in labor market outcomes across demographic groups in terms of underlying wedges in fundamentals. Of particular interest is the potential role of discrimination, either taste-based or statistical. Our model is a version of the Diamond-Mortensen-Pissarides model extended to include a life cycle, learning by doing, a nonparticipation state, and informational frictions. The model exhibits group-specific wedges in initial human capital, returns to experience, matching efficiencies, and job separation rates. We use the model to reverse engineer group-specific wedges that we then feed back into the model to assess the fraction of various disparities they account for. Applying this methodology to 1998–2018 U.S. data, we show that differences in initial human capital, returns to experience, and job separation rates account for most of the demographic disparities; wedges in matching efficiencies play a secondary role. Our results suggest a minor aggregate impact of taste-based discrimination in hiring and an important role for statistical discrimination affecting particularly female groups and Black males. Our approach is macro, structural, unified, and comprehensive.

Trade Finance and Payment Methods in International Trade

International transactions are riskier than domestic transactions for several reasons, including, but not limited to, geographical distance, longer shipping times, greater informational frictions, contract enforcement, and dispute resolution problems. Such risks stem, fundamentally, from a timing mismatch between payment and delivery in business transactions. Trade finance plays a critical role in bridging the gap, thereby overcoming greater risks inherent in international trade. It is thus even described as the lifeline of international trade, because more than 90% of international transactions involve some form of credit, insurance, or guarantee. Despite its importance in international trade, however, it was not until the great trade collapse in 2008–2009 that trade finance came to the attention of academic researchers. An emerging literature on trade finance has contributed to providing answers to questions such as: Who is responsible for financing transactions, and, hence, who would need liquidity support most to sustain international trade? This is particularly relevant in developing countries, where the lack of trade finance is often identified as the main hindrance to trade, and in times of financial crisis, when the overall drying up of trade finance could lead to a global collapse in trade.

A note on pessimism in education and its economic consequences

Investigating interaction of the lumpy nature of educational investments and informational frictions on returns to and costs of education, I show that pessimistic beliefs can be self-confirmed in equilibrium. Among some of its consequences, I argue that the commonly pursued research methods may not always identify the true underlying skill distributions.

Learning about the Neighborhood

We develop a model to analyze information aggregation and learning in housing markets. Households enter a neighborhood by buying houses and consuming each other’s final goods. In the presence of pervasive informational frictions, housing prices serve as important signals to households and capital producers about the neighborhood’s economic strength. Our model provides a novel amplification mechanism in which noise from housing markets propagates throughout the local economy via learning because of the complementarity in households’ decisions, distorting migration into the neighborhood and the supply of capital and labor. We provide consistent evidence based on the recent U.S. housing cycle.

Intellectual Property Protection and Financial Markets: Patenting versus Secrecy*

Firms rely on patenting and trade secrecy to protect their intellectual property. We study how changes in the trade-off between patenting and secrecy affect firms’ stock liquidity and financing outcomes. We show that an international trade agreement (TRIPS) that strengthened patent protection led to a 10.2% increase in patenting, accompanied by a 14.0%–27.1% improvement in stock liquidity for firms in patent-reliant industries. This in turn allows the affected firms to increase equity financing by 1.9% and reduce leverage by 5.9%. Our results suggest that policies that promote use of patenting over secrecy can reduce informational frictions in equity markets.

The impact of university reputation on employment opportunities: Experimental evidence from Bolivia

Higher education enrolment and graduation rates have increased rapidly inter-generationally across much of the world, offering employers the promise of more knowledgeable recruits and promising individuals new means of social advancement. In the case of Bolivia, the labour force is becoming more heterogeneous over time, which could imply positive effects induced by a closer match between labour supply and recruiters’ needs. However, we show that this is not the case. We revisit the transition mechanisms from college to the workplace, positing recruiters’ interpretations of educational credentials as a crucial determining factor for employability in the formal sector. In a two-branch correspondence study, 2848 fictitious CVs were sent to 1424 formal firms in the three main urban Bolivian areas. We find a large university reputation premium. Applicants from well-valued universities are around 40% more likely to receive a positive response – a 2.25 percentage point advantage from a 7.87% baseline likelihood. Thus, the increasingly heterogeneous labour force is generating additional informational frictions in the labour market, rather than promoting a more efficient matching process. JEL Codes: I25, J24, C93