Avi Simhon

The Division of Labor, Inequality and Growth

We present a model that links the division of labor and economic growth with the division of wealth in society. When capital market imperfections restrict the access of poor households to capital, the division of wealth affects individual incentives to invest in specialization. In turn, the division of labor determines the dynamics of the wealth distribution. A highly concentrated distribution of wealth leads to a low degree of specialization, low productivity, and low wages. In that case workers are unable to accumulate enough wealth to invest in specialization. Hence, in a highly unequal society, there is a vicious cycle in which the degree of specialization, productivity and wages stay low, wealth and income inequality stays high and the economy stagnates. By contrast, greater equality increases investment in specialization and leads to a greater division of labor and higher long run development.

The Economics of Collective Brands

We consider the consequences of a shared brand name such as geographical names used to identify high quality products, for the incentives of otherwise autonomous firms to invest in quality. We contend that such collective brand labels improve communication between sellers and consumers, when the scale of production is too small for individual firms to establish reputations on a stand alone basis. This has two opposing effects on member firms’ incentives to invest in quality. On the one hand, it increases investment incentives by increasing the visibility and transparency of individual member firms, which increases the return from investment in quality. On the other hand, it creates an incentive to free ride on the group’s reputation, which can lead to less investment in quality. We identify parmater values under which collective branding delivers higher quality than is achievable by stand alone firms.

Cross-Country Productivity Comparisons: The "Revealed Superiority" Approach

This paper proposes a novel non-parametric methodology for comparing total factor productivity (TFP) across countries and over time. It develops the principle of revealed superiority along the lines of Samuelsons principle of revealed preferences. Specifically, we compare the aggregate actual profits in each country to the hypothetical profits it would have earned if, facing its own prices, it had employed another countrys inputs and produced its output. We show that our procedure reveals the “true” TFP ranking under relatively mild assumptions. We apply our method by ranking a panel of the 25 richest economies relative to one another and over time and find that the United States enjoys the highest TFP whereas Singapore has the lowest.

Investment in quality under asymmetric information with endogenously informed consumers

Abstract When sellers are privately informed about quality, signaling models can successfully explain an equilibrium correlation between prices and exogenous quality but do not account for incentives to invest in quality improvement. This paper shows that sellers may be motivated to invest in quality if consumers, though initially uninformed, may acquire costly information before buying. The equilibrium has the attractive feature that incentives to invest are greater the less costly it is for consumers to become informed.

Inflation Rate Variability and the Phillips Curve

This paper studies the relationship between inflation and unemployment by focusing on the effect of inflation rate uncertainty on real wages, employment and output. The effect of inflation on employment is shown to depend on the relationship between the mean rate of inflation and the variability of its forecasts. This can explain why the Phillips curve is negatively slopped in some periods and undetermined or positively slopped in others. Copyright 2001 by Blackwell Publishing Ltd.

Changing the Cost of Children and Fertility: Evidence from the Israeli Kibbutz

Prior to 1996, Israelis in collective communities (kibbutzim) shared the costs of raising children equally. This paper examines the impact of privatizing costs of children on the behavior of young couples using universal microdata on kibbutz members. Exploiting variation in the increase in cost sharing across kibbutzim, we estimate that lifetime fertility declined by 0.59 children in the cohorts of affected parents. We also examine the exit decisions of members, and find that couples were most likely to leave the kibbutz if they were either higher income or lower fertility. This pattern is also observed among Israeli emigrants, in which higher educated and lower fertility couples are more likely to leave Israel.

Seasonality and the Effect of Advertising on Price

This paper lays out an econometric strategy for estimating the effect of advertising on prices, by exploiting seasonal demand and imperfect targeting. We present two simple models of duopoly where firms choose prices and advertising. In times of high demand for the product, a larger fraction of consumers who obtain an advertisements are interested in the product, and so the effectiveness of advertising is greater, and firms advertise more. We use this to justify IV estimation of price on log advertising (and trend), in which monthly dummies are used as instruments. Using Israeli data we find a sufficiently large degree of advertising seasonality to justify estimation by the LIML or Fuller-k method. Among those industries, only a few exhibit a significant response of price to advertising. The interpretation of these results depends on the nature of the marginal cost curve: under constant returns to scale a negative response is consistent with informative advertising, and a positive with brand enhancing advertising. Under sufficiently increasing returns to scale, informative advertising will lead to a price increase, yet for some of the products we are able choose among these two types of advertising based on knowledge of the likely cost structure of the industry. Nevertheless, in almost all cases, significant and insignificant, the magnitude of the measured response is very small.

Raising the Financial Costs of Children and Fertility Responses: Evidence from the Kibbutz

Prior to 1996, Israelis in collective communities (kibbutzim) shared the costs of raising children equally. This paper examines the impact of the privatization of kibbutzim on fertility behavior among members. We find that fertility declined by 6-15 percent following the shift to privatization. In light of the massive change in financial costs associated with childbearing due to privatization, our results suggest that financial considerations may be a more modest factor in fertility decisions than generally regarded.

Simultaneous Search: Between Search and Walras

We present a general equilibrium model where the Walrasian labor market is replaced by a setup in which unemployed workers search for employment opportunities.