Volume 10, Issue 1

This paper investigates the large and unexpected increase in cigarette prices that followed the 1997 Master Settlement Agreement (MSA). We integrate key features of rational addiction theory into a discrete-choice model of the demand for a differentiated product. We find that following the MSA firms set prices on a more elastic region of their demand curves. Using these estimates, we predict prices that would be charged under a variety of industry structures and pricing rules. Under the assumptions of firms’ perfect foresight and constant marginal costs, we fail to reject the hypothesis that firms collude on a dynamic pricing strategy.

While the asymmetric treatment of positive and negative income creates clear tax incentives to shift income among a group of closely related corporations, attempts to document the impact of such behavior on economic outcomes are relatively sparse. We aim to provide evidence on tax-motivated transfers from a large dataset of Japanese corporate groups. Using company level data on 33,340 subsidiary time pairs from 1988, 1990, and 1992, we consider testable implications of income shifting in a theoretical model tailored to the Japanese institution of the early 1990s and empirically examine the spread of the profitability distribution, the attrition rate of loss-making subsidiaries, and the propensity to report zero profit. The findings suggest that income shifting was pervasive when Japan had not adopted a formal allowance for group-level tax. The result underscores the importance of accounting for the inter-relatedness of companies, in designing a corporate income tax.

Despite technological advances, an individual car's emissions still cannot be measured reliably enough to impose a Pigovian tax. This paper explores alternative market incentives that could be used instead. We solve for second-best combinations of uniform taxes on gasoline, engine size, and vehicle age. For 1,261 individuals and cars in the 1994 Consumer Expenditure Survey, we record the car's model, year, and number of cylinders. We then seek a corresponding car in data from the California Air Resources Board that shows the car's engine size, fuel efficiency, and emissions per mile. We calculate the welfare improvement from a zero-tax scenario to the ideal Pigovian tax, and we find that 71 percent of that gain can be achieved by the second-best combination of taxes on gas, size, and vintage. A gas tax alone attains 62 percent of that gain. These results are robust to variation in the elasticity of substitution among goods.

In this paper I consider the impact of attending a selective high school in the UK. Students are assigned to these schools on the basis of a test taken in primary school and, using data on these assignment test scores for a particular district, I exploit this rule to estimate the causal effects of selective schools on test scores, high school course taking and university enrollment. Despite the huge peer advantage enjoyed by selective school students, I show that four years of selective school attendance generates at best small effects on test scores. Selective schools do however have positive effects on course-taking and, more suggestively, university enrollment, evidence suggesting they may have important longer run impacts.

Most policies for pricing pollution under asymmetric information proposed in the literature to date are rarely – if ever – used in practice. This is likely due to their complexity. We investigate the scope for using somewhat simpler policies that are more closely related to pricing schemes already used by regulators in many jurisdictions. These schemes have a discrete block pricing (DBP) structure whereby a given unit price for pollution is applied up to a specified level of pollution for any given polluter, and a higher unit price is applied to any pollution from that polluter above the specified level. If the same price schedule is applied uniformly to all firms, we call it UDBP. We derive the optimal UDBP schedule for any given number of price blocks. We also derive the optimal limiting case of the UDBP schedule (with an infinite number of price blocks) as a uniform linear increasing marginal price schedule (ULIMP). The optimal ULIMP scheme strikes a balance between the information-related benefits of increasing marginal prices on one hand, and an increase in aggregate abatement cost, due to the non-equalization of marginal abatement costs across firms, on the other. In particular, the optimal schedule is steeper with larger aggregate uncertainty about marginal abatement costs, and flatter with more observable heterogeneity across firms. We then compare our price schemes with those proposed by Weitzman (1978) and Roberts and Spence (1976).

Matching university places to students is not as clear cut or as straightforward as it ought to be. By investigating the matching algorithm used by the German central clearinghouse for university admissions in medicine and related subjects, we show that a procedure designed to give an advantage to students with excellent school grades actually harms them. The reason is that the three-step process employed by the clearinghouse is a complicated mechanism in which many students fail to grasp the strategic aspects involved. The mechanism is based on quotas and consists of three procedures that are administered sequentially, one for each quota. Using the complete data set of the central clearinghouse, we show that the matching can be improved for around 20% of the excellent students while making a relatively small percentage of all other students worse off.

The literature on emissions trading and strategic behavior under the Kyoto Protocol typically claims that a sellers' cartel featuring countries of the former Soviet Union can be quite profitable for its members. Using a Cournot-type quota exchange model, we show that this conclusion is sensitive to the assumption that large permit buyers, like the EU and Japan, are supposed to behave as price takers. Our result is driven by the same mechanisms as those found in Salant, Switzer and Reynolds (1983). We also discuss alternative models of permit exchange.

In large-scale fundraising campaigns based on direct mailings, typically less than 5% of individuals donate to the charitable cause. We present evidence from two field experiments designed to measure the existence of transaction costs that inhibit charitable giving in such fundraising campaigns, and shed light on the nature of such transaction costs. The experiments are designed in conjunction with the Bavarian State Opera House. The first mail-out experiment was implemented over two stages using a within-subject design. We develop a theoretical framework that makes precise the identifying assumptions under which we can exploit this two-stage design to measure the following structural parameters among potential donors: (i) the share of donors who would make a strictly positive donation in the complete absence of transaction costs and (ii) the probability that a potential donor has sufficiently low transactions costs to make a strictly positive donation. Our results imply response rates to mail-out solicitations would almost double in the complete absence of transaction costs. The second field experiment provides more evidence on the nature of transaction costs. We distinguish between ex ante transaction costs, which prevent the choice problem from being considered and ex post transaction costs, which prevent choices being implemented. We find that the likelihood of a donation being made increases by 26% in response to even a small reduction in ex post transaction costs.

Previous studies on the measurement of learning-by-doing emphasize the importance of accounting for multi-vintage effects having an impact on firms' production costs through economies of scope. This study shows that accounting for cannibalization effects on the demand side is equally important for the adequate measurement of learning. Since multi-vintage firms anticipate the demand-side cannibalization effects in their production optimization, a previously omitted incentive to decrease production is captured having an impact on the measurement of learning by doing. We derive an empirical model from a dynamic oligopoly game of learning-by-doing and allow cannibalization effects to enter from the demand side. Using quarterly firm-level data for the dynamic random access memory semiconductor industry, we find support for cannibalization effects entering firms' pricing relations resulting in higher estimated learning effects.

We examine whether advertising increases household debt by studying the initial expansion of television in the 1950's. Exploiting the idiosyncratic spread of television across markets, we use micro data from the Survey of Consumer Finances to test whether households with early access to television saw steeper debt increases than households with delayed access. Results indicate that exposure to television advertising increases the tendency to borrow for household goods and the tendency to carry debt. Television access is associated with higher debt levels for durable goods, but not with the total amount of non-mortgage debt. We provide suggestive evidence that increased labor supply may drive our results. The role of media in household debt may be greater than suggested by existing research.

Why do women often choose family over career? Can't they, like men, have both? At work, women are still under-represented in high-powered professions in most societies. At home, women tend to devote more time to their families than their spouses do. What explains these imbalances? Our model builds upon the fact that women's fertility, unlike men's, declines sharply past age 35. As a result, women may prefer marrying early in order to secure a match rather than investing in their careers while delaying and potentially missing out on marriage. Women's failure to coordinate towards delaying marriage may explain the imbalances within the family and in the labor market.

We investigate if financial development eases firm level financing constraints in a cross-country data set covering much of the European economy. The cash flow sensitivity of investment is lower in countries with better-developed financial markets. To deal with potentially serious biases, we employ a difference-in-difference methodology. Subsidiaries of other firms have access to internal capital markets and hence depend less on the external financial environment. As predicted, the benefit of financial development is smaller in subsidiary firms. This shows that financial development can mitigate financial constraints, and sheds light on the link between financial and economic development.

How are hourly wages affected by the Earned Income Tax Credit? Using variation in state EITC supplements, I find that a 10 percent increase in the generosity of the EITC is associated with a 5 percent fall in the wages of high school dropouts and a 2 percent fall in the wages of those with only a high school diploma, while having no effect on the wages of college graduates. Given the large increase in labor supply induced by the EITC, this is consistent with most reasonable estimates of the elasticity of labor demand. Although workers with children receive a much larger EITC than childless workers, and the effect of the credit on labor force participation is larger for those with children, the hourly wages of both groups are similarly affected by an EITC increase. As a check on this strategy, I also use federal variation in the EITC across gender-age-education groups, and find that those demographic groups that received the largest EITC increases also experienced a drop in their hourly wages, relative to other groups.

We consider non-price advertising by retail firms that are privately informed as to their respective production costs. We construct an advertising equilibrium in which informed consumers use an advertising search rule whereby they buy from the highest-advertising firm. Consumers are rational in using the advertising search rule since the lowest-cost firm advertises the most and also selects the lowest price. Even though the advertising equilibrium facilitates productive efficiency, we establish conditions under which firms enjoy higher expected profit when advertising is banned. Consumer welfare falls in this case, however. Under free entry, social surplus is higher when advertising is allowed. In addition, we consider a benchmark model of price competition; we provide comparative-statics results with respect to the number of informed consumers, the number of firms and the distribution of costs; and we consider the possibility of sequential search.

We analyze non-price advertising by retail firms, when the firms are privately informed about their respective costs of production. In a static advertising game, an advertising equilibrium exists in which lower-cost firms select higher advertising levels. In this equilibrium, informed consumers rationally employ an advertising search rule in which they buy from the highest-advertising firm since lower-cost firms also select lower prices. In a repeated advertising game, colluding firms face a trade-off: the use of advertising can promote productive efficiency, but only if sufficient current or future advertising expenses are incurred. At one extreme, if firms pool at zero advertising, they sacrifice productive efficiency but also eliminate current and future advertising expenses. Focusing on symmetric perfect public equilibria for the repeated advertising game, we establish conditions under which optimal collusion entails pooling at zero advertising. More generally, full or partial pooling is observed in optimal collusion. Such collusive agreements reduce consumer welfare, since they restrict informed consumers' ability to locate the lowest available price in the market.

We analyze the demand for medical care and precautionary saving in a framework with uncertainty surrounding the incidence of illness and the effectiveness of medical treatments and a representation of preferences that disentangles ordinal preferences, risk preferences, and intertemporal smoothing preferences. We consider a “pure consumption” model with exogenous health capital and a model where young consumers invest in preventive care to increase their future health stock. In both cases, we establish conditions for the different sources for uncertainty to induce precautionary saving and we evaluate how uncertainty affects the demand of curative and preventive care. We also show that given the self-insurance function of preventive care, consumers' welfare may increase with the degree of uncertainty surrounding health care effectiveness.

This paper uses data from a nationwide survey administered during late 2009 and early 2010 to estimate a random utility model of household preferences for broadband Internet service. Reliability and speed are important service characteristics: the representative household is willing to pay $20 per month for more reliable service; $45 for an improvement in speed from slow to fast; and $48 for an improvement in speed from slow to very fast. A representative household would be willing to pay $79 per month for a fast, reliable Internet service. Internet valuations increase with experience, and there has been an estimated two- to three-fold increase in consumer surplus per household between 2003 and 2010. If experience causes increased valuation, targeted programs that educate households about the benefits from broadband, expose households to the broadband experience and/or directly support the initial take-up of broadband have potential to increase overall penetration in the United States.

Households often rely on professionals with specialized knowledge to make important financial decisions. In many cases, the professional’s financial interests are at odds with those of the client. We explore this problem in the context of personal bankruptcy. OLS, fixed effects, and IV estimates all show that attorneys play a central role in determining whether households file under Chapter 7 or Chapter 13 of the bankruptcy code. We present evidence suggesting that some attorneys maximize profits by steering households into Chapter 13 bankruptcy even when the households’ objective financial benefits are low and the probability of case dismissal is high. An attorney-induced Chapter 13 filing increases household legal fees and reduces the probability of long-term debt relief.

I develop an equilibrium matching model where heterogeneous workers and firms learn about match quality and bargain over wages. The model generalizes Jovanovic (1979) to the case of heterogeneous workers and firms. Equilibrium wage dispersion arises due to productivity differences between workers, technological differences between firms, and heterogeneity in beliefs about match quality. Under a simple CRS technology, the equilibrium wage is additively separable in worker- and firm-specific components as well as in the posterior mean of beliefs about match quality. This parallels the “person and firm effects” empirical specification of Abowd et al (1999) and others. The model predicts a negative correlation between estimated person and firm effects, which is consistent with most previous empirical evidence. I estimate the equilibrium wage function and test the model's empirical predictions using linked employer-employee data from the U.S. Census Bureau. I find empirical support for many of the model's predictions and estimate that dispersion in beliefs about match quality explains over 20 percent of observed earnings variation.

The legitimacy of democratic systems requires the protection of minority preferences while ideally treating every voter equally. During the 2006 student elections at Columbia University, we asked voters to rank the importance of different contests and to choose where to cast a single extra "bonus vote," had one been available — a simple version of Storable Votes. We then constructed distributions of intensities and electoral outcomes and estimated the probable impact of the bonus vote through bootstrapping techniques. The bonus vote performs well: when minority preferences are particularly intense, the minority wins at least one contest with 15-30 percent probability; when the minority wins, aggregate welfare increases with 85-95 percent probability. The paper makes two contributions: it tests the performance of storable votes in a setting where preferences were not controlled, and it suggests the use of bootstrapping techniques when appropriate replications of the data cannot be obtained.

The market for pets in the U.S. is important economically and socially. Pets differ from standard economic goods in significant ways, and the market displays a number of interesting problems, most notably pet overpopulation. Despite this, the market has been ignored by economists. This paper develops a dynamic model of the market for pets and uses it to study the problem of pet overpopulation. The positive predictions of the model square well with key features of the markets for dogs and cats in the U.S. The model is used to understand, from a welfare economic perspective, the sense in which there is overpopulation of pets and the underlying causes of the problem. The paper also employs the model to consider what policies might be implemented to deal with the problem. A calibrated example is developed to illustrate these corrective policies and quantify the potential welfare gains.

For the purpose of understanding the underlying mechanisms behind intergenerational associations in income and education, recent studies have explored the intergenerational transmission of abilities. We use a large representative sample of Swedish men to examine both intergenerational and sibling correlations in IQ. Since siblings share both parental factors and neighbourhood influences, the sibling correlation is a broader measure of the importance of family background than the intergenerational correlation. We use IQ data from the Swedish military enlistment tests. The correlation in IQ between fathers (born 1951-1956) and sons (born 1966-1980) is estimated to 0.347. The corresponding estimate for brothers (born 1951-1968) is 0.473, suggesting that family background explains approximately 50% of a person's IQ. Estimating sibling correlations in IQ, we thus find that family background has a substantially larger impact on IQ than has been indicated by previous studies examining only intergenerational correlations in IQ.

We study how the duration of paid parental leave affects the accumulation of cognitive skills among children. Using a reform which extended parental leave benefits from 12 to 15 months for Swedish children born after August 1988 we evaluate the effects of prolonged parental leave on children's test scores and grades at age 16. We show that, on average, the reform had no effect on children's scholastic performance. However, we do find positive effects for children of well-educated mothers, a result that is robust to a number of different specifications. We find no corresponding heterogeneity relative to parental earnings or fathers' education, or relative to other predictors of child performance. We find no effects on intermediate outcomes such as mothers' subsequent earnings, child health, parental fertility, divorce rates, or the mothers' mental health. Overall the results suggest positive causal interaction effects between mothers' education and the amount of time mothers spend with their children. Since the institutional context is one in which the alternative is subsidized day care, the results imply that subsidizing longer parental leave spells rather than day care reinforce the relationship between maternal education and school outcomes.

Detailed data on private providers of long-term community-based residential services for persons with developmental disabilities permit investigation of the causes of frontline worker turnover. The endogeneity of turnover with compensation variables is accounted for in the estimation using instrumental variables. Turnover is determined by resident characteristics, frontline-worker compensation, and establishment characteristics. The share of higher-need residents and agency size predict higher turnover, while compensation and non-profit status are associated with lower turnover. Our findings indicate that public policies to reduce turnover through compensation subsidization can be effective. Our preferred estimates suggest an approximate one-quarter increase in total compensation would cut turnover by one-third.

Since the mid-1990s, there has been a steady decrease in the labor force participation of married women with children under the age of six. There is little empirical evidence that changes in demographics are responsible for the falling participation rates. Rather, it appears that this trend is concentrated amongst women with children under the age of two and that federal maternity leave mandates are most responsible. I estimate the effect of the Family and Medical Leave Act (FMLA) on participation by using the FMLA as a natural experiment and exploiting state-level differentiation in maternity leave statutes. Theoretically, maternity leave statutes intend to preserve job tenure for expecting mothers. However, if an employed mother on maternity leave learns that her value for staying at home exceeds her value from working, she will exit the labor force once the leave expires. Difference-in-differences estimates show that after the FMLA, employed and expecting married mothers who live in an area without state-mandated maternity leave are 2.7 percentage points more likely to leave the labor force after taking maternity leave than those who live in an area with state-mandated maternity leave. As a sensitivity test, I evaluate married women without infant children and single women as additional control groups to estimate difference-in-difference-in-differences effects of the FMLA. Altogether, the increase in the proportion of mothers leaving the labor force due to federally-mandated maternity leave accounts for almost two-thirds of the overall fall in labor force participation.

We conduct a comprehensive analysis of Mexican-American entrepreneurship. We find that low levels of education and wealth explain the entire gap between Mexican immigrants and non-Latino whites in business formation rates; together with language ability, these factors explain nearly the entire gap in business income. Legal status represents an additional barrier for Mexican immigrants, reducing business ownership rates by 0.7 percentage points. Human and financial capital deficiencies limit business ownership and business success among second and third-generation Mexican-Americans to a lesser extent. These findings have implications for the debates over the assimilation of Mexican-Americans in the United States.

User sanctions influence the legal risk for consumers who engage in illegal drug markets. If a reduction in user sanctions leads to an increase in consumption, drug prices will rise unless supply is perfectly elastic. In equilibrium, a change in consumption associated with decreasing user sanctions could be relatively small if supply is upward sloping. Using a novel dataset with rich transaction-level information, this paper evaluates the impact of recent changes in user sanctions for marijuana on marijuana prices. The results suggest that lower legal risks for users are associated with higher marijuana prices in the short-run, which ceteris paribus, implies an upward sloping supply curve, higher consumption, and higher profits for drug dealers. The findings have important implications for the current policy debates regarding decriminalization of marijuana.

In this paper, we propose technology uncertainty as a new factor relevant to market collusion. We analyze an infinitely repeated quantity game where, for each firm, the marginal productivity of the input employed in the production process is affected by an unobservable shock. Each firm faces technology uncertainty, measured by the variance of the shocks, in every period. We show that, under both grim trigger strategies and optimal punishments, technology uncertainty enhances cartel stability, suggesting that, in industries characterized by technology uncertainty, the actions of the antitrust authorities should be intensified. We also show that collusion is less likely when technology shocks are highly correlated, implying that regulators interested in deterring collusion should promote the formation of industrial clusters.

On October 1, 2009, the State of Maryland enacted a statute that prohibits the use of minimum resale price maintenance (RPM). This was in response to the Supreme Court's 2007 Leegin decision that held that RPM should be evaluated under the rule of reason rather than be considered per se illegal. The Maryland statute provides a natural experiment that can be used to analyze the effect of RPM on retail prices. We analyze the effect of the statute on video game prices in Maryland. Video games were used for this analysis because video game manufacturers have been known to impose RPM. Employing a difference-in-differences approach, we find no effect of the Maryland statute on video game prices.

Using some new international data sets to produce both across-country econometric estimates as well as case studies of South American and southern European countries, we find that Social Security policies vary according to economic and demographic factors but that very different political histories can result in the same Social Security policy. We find weak partial correlation between democracy and the size of Social Security budgets, on how those budgets are allocated, or how economic and demographic factors affect Social Security. If there is any observed difference between democracies and non-democracies, it is that the former spend a little less of their GDP on Social Security, grow their budgets a bit more slowly, and cap their payroll tax more often, than do economically and demographically similar non-democracies. Democracies and non-democracies are equally likely to have benefit formulas inducing retirement and, conditional on GDP per capita, equally likely to induce retirement with a retirement test vs. an earnings test.

Each year, the United States conducts approximately 20,000 inspections of manufacturing plants under the Clean Air Act. This paper compiles a panel dataset on plant-level inspections, fines, and emissions to understand whether these inspections actually reduce air emissions. We find plants reduce air emissions by fifteen percent, on average, following an inspection under the Clean Air Act. Plants that belong to industries that typically have low abatement costs respond more strongly to an inspection than those who belong to industries with high abatement costs.

I consider two flexible models of earnings dynamics suggested in the recent literature and alternative approaches to the treatment of left-censored observations to examine trends in the permanent and transitory variances of earnings of Canadian male workers from 1985 to 2005. I find that both permanent and transitory variances were higher in the 2000s than in the late 1980s or 1990s. In contrast to the late 1980s and the recession period of the early 1990s, both components of variance grew at a similar pace during the post-recession period, and the share of each component in the total variance remained fairly stable. The results are robust to the choice of a model. The study is based on a large sample from a uniquely rich longitudinal administrative dataset.

This paper studies WIC eligibility and participation. These outcomes are related to economic conditions, Medicaid, cash welfare, and WIC policies, and demographic characteristics. The analysis uses state level data from 1983 to 2006, a period that covers significant expansion in the Medicaid program, the transition from AFDC to TANF, and significant changes in economic conditions. The results show that take-up has increased more than eligibility over this time period. Separating eligibility and participation is important because a number of state characteristics have opposite effects on these outcomes. Economic conditions, the Medicaid expansions, and immigration in the post-TANF period are shown to be associated with WIC eligibility and participation.

I study the political sustainability of the welfare state in an environment where immigration is the main demographic force and where governments choose immigration policy. Voters anticipate their children's prospects of economic mobility and the future political consequences of today's policies. The skill distribution evolves due to intergenerational skill upgrading and immigration. I consider three regimes: permanent migration with citizenship granted by jus soli, permanent migration with jus sanguinis, and temporary migration. The main finding is that under permanent migration and jus soli there exists equilibria where redistribution is sustained indefinitely, despite constant skill upgrading. This is not the case in the other regimes. The crucial insight is that unskilled voters trade-off the lower wages from larger unskilled immigration with the increased political support for redistribution provided by the children of the current immigrants. These mechanisms are relevant for the ongoing debates over comprehensive immigration reform in the U.S, and elsewhere.

Job-related stress might affect smoking behavior because smoking may relieve stress and stress can make individuals more present-focused. Alternatively, individuals may both self-select into stressful jobs and choose to smoke based on unobserved factors. We use data from the Health and Retirement Study to examine how job stress affects the probability that smokers quit and the number of cigarettes smoked for current smokers. To address the potential endogeneity of job stress based on time invariant factors, we include individual fixed effects, which control for factors such as ability to handle stress. Occupational fixed effects are also included to control for occupational characteristics other than stress; time dummies control for the secular decline in smoking rates. Using a sample of people who smoked in the previous wave, we find that job stress is positively related to continuing to smoke among recent smokers. The results indicate that the key impact of stress is on the extensive margin of smoking, as opposed to the number of cigarettes smoked.

We show that a production subsidy to low-carbon energy can have a perverse effect on emissions. The subsidy causes a shift in the composition of production towards the cleaner energy, but it also causes an offsetting consumption effect: energy consumption rises because the subsidy causes the equilibrium price of energy to fall. The net effect on emissions can be positive if the low-carbon energy is not significantly cleaner than the high-carbon energy it displaces. We derive a necessary and sufficient condition for this perverse effect in the context of a competitive energy market. We calibrate an example for an ethanol subsidy in the U.S. and find that this policy is likely to cause an increase in carbon emissions for most plausible parameter values.

This paper studies the magnitude of intergenerational income mobility in less developed, high inequality Chile. Following a known methodology where fathers' incomes are predicted from standard income determinants such as education and occupation, we get comparable estimates of the intergenerational income elasticity in the range of 0.57 to 0.74 and 0.63 to 0.76 for ages 25-40 and 31-40, respectively. These values place Chile at the high end of the available international evidence. Considering Chile's high income inequality, this finding supports the hypothesis proposed in the literature of an inverse relationship between cross-sectional income inequality and intergenerational income mobility.

We compare, through a laboratory experiment using salient financial incentives, misrepresentations of performance under target-based compensation with those under both a linear piece-rate and a tournament-based bonus system. An anagram game was employed as the experimental task. Results show that productivity was similar and statistically indistinguishable under the three schemes. In contrast, whether one considers the number of overclaimed words, the number of work/pay periods in which overclaims occur, or the number of participants making an overclaim at least once, target-based compensation produced significantly more cheating than either of the other two systems. While earlier research has compared cheating under target-based compensation with cheating under non-performance-based compensation, which offers no financial incentive to cheat, this is the first study that compares cheating under target-based schemes to cheating under other performance-based schemes. The results suggest that cheating as a response to incentives can be mitigated without giving up performance pay altogether.

We analyze the effects of accidents and liability obligations on the incentives of car manufacturers to monopolize the markets for their spare parts. We show that monopolized markets for spare parts lead to inefficiently high prices for spare parts. Furthermore, monopolization induces the manufacturers to choose inefficiently high qualities. The key for these results is the observation that high prices for spare parts entail a negative external effect inasmuch as liability obligations imply that consumers of competing products have to pay the high prices as well.

What makes households use internet banking? Bank adoption of internet banking technology has been widely considered, but relatively few papers address consumer usage of internet banking. This study looks at the determinants of internet banking usage among credit union members in the Western United States. We use call report data from the National Credit Union Administration to calculate the rate of internet banking usage among a credit union's members, which allows us to examine whether variations in institutional characteristics, local economic conditions and membership criteria have an impact on the internet usage rates among members of different credit unions. We find that members in credit unions that were early internet technology adopters have higher usage rates, and that the contribution to usage rates varies among types of online services offered.

The density of fuel filling stations influences consumers' utility of private car transport. We investigate the technology choice of firms and consumers in a formal model of the private transport market. Two competing technologies exist; today's internal combustion engine based on fossil fuels, and tomorrow's hydrogen car. Due to network externalities, several market equilibria may exist, of which one is likely to Pareto dominate the other(s). Thus, a lock-in situation is possible. On the other hand, if either the costs of establishing hydrogen filling stations are too high or the hydrogen car technology is still in its infancy, the only equilibrium is the current internal combustion engine equilibrium. Hence, apart from internalizing the environmental externality on gasoline cars, the government has no reason to intervene before the technology is ripe.

This paper takes a first step toward understanding the working of the online market for reviews. Most online review firms rely on unpaid volunteers to write reviews. Can a for-profit online review firm attract productive volunteer reviewers, limit the number of ranting or raving reviewers, and marginalize fake reviewers? This paper sheds light on this issue by studying reviewer productivity and restaurant ratings at Yelp, where reviewers are encouraged to establish a social image, and two competing websites, where reviewers are completely anonymous. Using a dataset of nearly half a million reviewer accounts, we find that the number (proportion) of prolific reviewers on Yelp is an order of magnitude larger than that on either competing site, more productive reviewers on all three websites are less likely to give an extreme rating, and restaurant ratings on Yelp tend to be much less extreme than those on either competing site.

In this paper we develop an equilibrium search and matching model where two-person families as well as singles participate in the labor market. We show that equilibrium entails wage dispersion among equally productive risk-averse workers. Marital status as well as spousal labor market status matters for wage outcomes. In general, employed members of two-person families receive higher wages than employed singles. The model is applied to a welfare analysis of alternative unemployment insurance systems, recognizing the role of spousal employment as a partial substitute for public insurance. The optimal system involves benefit differentiation based on marital status as well as spousal labor market status.

Economists use public goods experiments to develop and test theories of individual preferences and institutional design. Previous work demonstrates many participants in public goods experiments contribute to the public good out of confusion. We design experiments to provide insights on the consequences and causes of confusion. We establish that confusion amounts to more than statistical noise and does not dissipate with repetition (i.e. learning). Confused subjects use experimental parameters and the behavior of other players as cues, which confounds treatment effects and traditional strategies to identify other-regarding preferences through exogenous parameter changes and the modeling of reactions to other subjects’ decisions. We argue that confusion stems from an inaccurate understanding of game incentives (“failure of game form recognition”), which is a consequence of the framing and inadequate payoff information in standard instructions. Modified instructions can substantially reduce confusion, and, in turn, change the distribution of contributions to the public good.

We show that partnering with venture capitalists may be a curse to entrepreneurs in that it reduces their profits in the commercialization phase. Agents rationally infer that a likely reason an entrepreneur who has received managerial assistance (from a venture capitalist) refrains from a lucrative IPO and instead opts for an acquisition may be the low quality of his technology (which is unfixable), rather than of his management (which may be fixable). This leads to lower acquisition prices and greater IPO underpricing. From a social welfare standpoint, venture capital services are under-utilized and technologies are under-commercialized.

During the 1940s, the diversion of 55% of the workforce to wartime production, the induction of over 10 million young men into the armed forces, and the entry of millions of female, young, and elderly workers into the workplace subjected the labor force to large shocks. Also during the 1940s, the wage distribution compressed sharply and the returns to education fell. This paper uses wage changes between occupations to link wartime labor market shocks to the decline in the return to education and the decline in wage inequality. Wartime production favoring semi-skilled labor and the occupation-biased nature of the draft combined to compress both the lower and upper tails of the male wage distribution and the upper portion of the female wage distribution.

This paper is the first to document how the magnitude of affirmative action preferences in college admissions has varied across U.S. regions and across time and to illustrate how affirmative action practiced by "nearby" colleges varies. Two new contributions are established: 1) evidence of substantial variation in affirmative action at students' nearby colleges and 2) initially higher levels of affirmative action in the Northeast and Midwest in 1972, with affirmative action increasing in the South and West and declining in the Northeast and Midwest by 1992.

We analyze the impact of mandatory access on a race for investments and show that for a low (high) access price, firms wait (preempt each other). An access price increase tends to accelerate investment in general but may delay the first investment. While the first best cannot be achieved with a time-invariant access tariff, simple instruments such as ending access at a preset date or granting access holidays can improve efficiency. The former forces earlier investment when it would happen too late otherwise, while the latter allows for lower access prices later in order to delay a business-stealing second investment.

This paper considers the problem of an imperfectly informed regulator constrained in his choice of environmental regulation by the political opposition of those affected by the policy. We compare the value of two types of information to the regulator: the social cost of pollution and the profitability of firms present in the economy. We find that in environments where small increases in the losses to regulated firms greatly affect the regulator's ability to implement the policy, it is most valuable to learn the types of firms whereas it is most valuable to learn the social cost of pollution when small increases in losses are relatively ineffectual.

To control Medicaid's expenditure on prescription drugs, 1990 legislation established a rebate program guaranteeing Medicaid a rebate on each unit purchased by Medicaid participants. The rebate is the difference between the minimum price and the average manufacturer price (minimum price rule) or a proportion of the average manufacturer price (average price rule). We characterize the optimal pricing strategy of a third-degree price discriminating monopolist under these rules. Under the minimum price rule, the minimum price gross of rebate always increases whereas prices gross of rebate in at least some of the markets always decrease. In contrast, under the average price rule, these prices may move in the same direction in all markets, with all increasing in some circumstances and all decreasing in others. We also examine the effects of such provisions on social welfare. We analyze a modified version of our minimum price rule model suitable for applications beyond Medicaid.

We analyze individual-level data on cigarette smoking from 23 national cross-sectional surveys conducted by the Gallup Poll from 1944 through 2004. We estimate standard two-part models of cigarette demand as a function of demographics, income, and cigarette prices. Over the sixty year time-span covered in our data, smoking participation falls from almost 50 percent to 22 percent. We find that the influences of key demographic factors on cigarette demand change over time: the gender difference in smoking rates almost disappears, the black-white difference reverses, a strong gradient with schooling emerges, and a negative income elasticity emerges.

This paper examines the potential impact of policies to promote dietary health in the context of a tax-financed universal health care (TFUHC) system, as found in Canada and many other countries, in which a universal level of treatment is set by government policy. I construct a model in which a low quality diet raises the risk of disease, and disease in turn causes a loss of labor productivity. Low quality diets are less expensive than high quality diets, so dietary choices are worse for lower income households. The effect of disease can be partly offset by medical treatment. I show that dietary choices under TFUHC are distorted by a moral hazard problem which leads to diets that are lower in quality than is first-best. I then examine three different policy interventions to address the dietary distortion: a reduced level of treatment; risk-based premiums for health care; and a quality-based tax on food. I calibrate the model with Canadian data on type 2 diabetes and derive the net benefit and distributional impact for each policy.

This paper analyses how institutions aimed at coordinating economic interactions may emerge. Starting from a hypothetical state of nature, agents can delegate the task of enforcing cooperation to one of them in exchange for a proper compensation. Both individual and collective commitment problems stand in the way of institution formation. These problems imply first that a potentially efficient institution may fail to emerge and also that if it emerges, it may do so inefficiently. We show that big and untrustworthy societies are more likely to support institutions whereas their emergence is more difficult in small and trusting societies, but if institutions do emerge, they tend to be more inefficient in the former type of societies. Finally, we show that the threat of secession by a subset of agents may alleviate the latter problem.

Standard economic theory suggests that more choice is usually better. We address this claim and investigate whether people can cope with the increasing number of television programs and watch the amount of TV they find optimal for themselves or whether they are prone to over-consumption. We find that heavy TV viewers do not benefit but instead report lower life satisfaction with access to more TV channels. This finding suggests that an identifiable group of individuals experiences a self-control problem when it comes to TV viewing.

This paper analyzes the pattern of consumption taxes in a two period model with habit formation and myopia. An individual’s second-period needs increase with first period consumption. However, myopic individuals do not see this habit formation relation when they take their saving decision. The first-best solution is decentralized by a simple “Pigouvian” (paternalistic) consumption tax (along with suitable lump-sum taxes). In a second-best setting, when personalized lump-sum transfers are not available, consumption taxes may have conflicting paternalistic and redistributive effects. Taxes should discourage consumption of goods that entail negative externalities (unforeseen habits), but instead they discourage less the consumption of goods that are proportionately consumed by individuals with high net social marginal utility of income. Both myopic and farsighted individuals may benefit more from the second-best policy as the proportion of myopic agents in society increases.

This article examines the impact of education on political participation in 15 European countries. We use data from the European Social Survey and find that education is positively associated with voter turnout and information acquisition about politics and currents affairs. However, when we use exogeneous changes in compulsory schooling to instrument education, we observe a statistically significant causal relationship in the case of information acquisition but not voter turnout.

Many online systems for bilateral transactions elicit performance feedback from both transacting partners. Such bilateral feedback giving introduces strategic considerations. We focus on reciprocity in the giving of feedback: how prevalent a strategy of giving feedback is only if feedback is first received from one's trading partner. The overall level of feedback activity clearly depends on the prevalence of the reciprocation strategy: in a market with many reciprocators and few unconditional feedback providers, the equilibrium quantity of feedback can be quite low. We estimate the prevalence of such reciprocation in one market, eBay. Reciprocation cannot be directly distinguished from late feedback that was not conditioned on the partner having provided feedback. We develop a model that distinguishes the two by exploiting information about the timing of feedback provision when the partner does not provide feedback. We find that buyers and sellers on eBay used the “reciprocate only” strategy about 20-23% of the time. We also measure the extent to which the prevalence of these strategies changes with the experience levels of the two parties and with the item price.

In the past three decades, several case studies have documented specific industries and instances whereby collusion was welfare-enhancing rather than harmful as is usually assumed. Specifically, two distinct “efficient cartel” hypotheses claim that inter-firm coordination can increase economic efficiency in industries with a large degree of avoidable fixed costs and/or variable output. This paper performs the first systematic empirical test of these hypotheses via an examination of cartel performance under the National Industrial Recovery Act of 1933, a two-year cartel experiment in the United States. While I find a wide variation in welfare changes during cartelization, there is no compelling evidence that differences in fixed costs are the cause. I do, however, find robust empirical support for the hypothesis that industries with highly variable output experience higher welfare gains (or less negative welfare declines) under collusion.

Sibling correlations are broader measures of the impact of family and community influences on individual outcomes than intergenerational correlations. Estimates of such correlations in income show that more than half of the family and community influences that siblings share are uncorrelated with parental income. We employ a data set with rich family information to explore what factors in addition to traditional measures of parents’ socio-economic status can explain sibling similarity in long-run income. Measures of family structure and social problems account for very little of sibling similarities beyond that already accounted for by income, education and occupation. However, when we add indicators of parental involvement in schoolwork, parenting practices and maternal attitudes, the explanatory power of our variables increases from about one-quarter (using only traditional measures of parents’ socio-economic status) to nearly two-thirds.

On June 19, 2007, a non-profit organization released ratings of companies’ plans for measuring, reporting, and reducing their greenhouse gas emissions. We explore the capital market impacts of this information event. In contrast to much of the related literature, our study examines climate change information and a plausibly exogenous event. We find that the information had an economically important and statistically significant impact on capital market returns. Poorly rated firms suffered market penalties. In contrast, we find limited benefits for firms receiving good ratings. We also uncover suggestive evidence that the economic mechanism driving our results is not a direct consumer demand effect.

This paper investigates the impact of customs unions (CUs) on the ability of countries to multilaterally cooperate within an economic environment characterized by trade-flow volatility. We find that the initiation of CU talks results in an easing of multilateral trade tensions, especially with regard to the employment of “special”-protection instruments, such as anti-dumping duties or safeguards. However, once the CU agreements come into force, a retreat to a more protectionist trading environment becomes necessary so that multilateral cooperation does not break down. Interestingly, in comparison with the pre-CU world, the utilization of “special”-protection tools in the post-CU world is more severe for “high” import volumes, but is less frequent overall. Moreover, “normal” protection remains low, largely unchanged from the pre-CU era.

The present recession has brought into stark focus this question: Which occupations are more vulnerable to job loss? Since shocks to the economy affect employment across multiple occupations, we employ a new approach to assess the vulnerability of jobs due to such shocks by measuring how diversified an occupation is across sectors. Using U.S. employment data between the years 1999 and 2005, which include the downturn in the aftermath of the internet bust and the subsequent recovery, we find that an occupation spread across multiple industries is less volatile in terms of both numbers employed and the average wage. The result is robust to occupation size. Including various measures of an occupation's "footloose" nature and geographical mobility does not affect the results. The evidence presented distills a key lesson from a previous downturn and recovery, and could improve our understanding of issues relating to business cycles, offshoring and higher education.

This article considers how legal status affects agricultural labor market outcomes and food prices. Using both propensity score matching and treatment effects regression analysis, undocumented immigrants are found to make 5 to 6% less on average and to have significantly lower probabilities of aid program participation than their documented immigrant counterparts. Magnitudes of differences depend on the permanence of legal status, with naturalized citizens and green card holders benefiting more from their legal status than those with other forms of work authorization. Results suggest that a new program granting amnesty to undocumented immigrant farmworkers, reminiscent of the Seasonal Agricultural Worker program under the Immigration Reform and Control Act, would have minimal effects on farmworker outcomes especially in the short term, and that if employers pass labor cost increases to consumers via food prices, effects on consumers would be similarly minimal.

This paper provides a formal analysis of the evolution of cooperation in the management of common property resources. We develop a dynamic model that includes moral norms or a sense of 'identity,' and show that cooperation may – but need not – be an equilibrium outcome in the absence of intervention by a managing agency or punishment by peers. We demonstrate that outside intervention has ambiguous effects when identity matters – it may reduce welfare of the agents harvesting the stock.

We measure the accident externality from driving in the spirit of Edlin and Karaca-Mandic (2006). We collect data that parallel those used in Edlin and Karaca-Mandic and apply their empirical method to gain further insights about the accident externality. Consistent with Edlin and Karaca-Mandic, we find larger external costs for higher density roads, although the sizes largely depend on the variable definition and the model specification. One intriguing result is that per-vehicle external costs are considerably smaller in Japan than those in the U.S. In Kyoto, for example, an additional driver increases accident costs for other drivers by $248--$802, while it is $1,725--$2,432 in California where the traffic density is approximately the same. However, on a per-mile basis, much closer externalities are obtained. This finding indicates that the large externality in high-density roads underscored in Edlin and Karaca-Mandic is partly attributed to the fact that U.S. drivers drive longer distances, comparatively speaking.

The intent of the Financial Services Modernization Act of 1999 (FSM) was to strengthen the overall financial services sector by allowing financial firms to diversify across industries within the financial sector. Similar to other studies of the reaction to this Act, we observe that investors consider the FSM to be good news. More interestingly, we also observe that systematic risk increased for some types of firms, but decreased for others as barriers were lowered. This finding is consistent with the idea that the reduction of regulation may increase systematic risk, but that the effects of deregulation on risk may be mitigated by anticipated effects of diversification. Specifically, bank holding companies that chose to diversify into other financial industries experienced increases in systematic risk while those that did not diversify realized decreases in systematic risk. Overall, we find that the systematic risk of financial firms converged and increased in the past few years as firms expanded into non-traditional businesses. In addition, we find that the Act reduced systematic risk for some firms, specifically those that diversified their product lines with insurance products.

I study strategic behavior under ‘credit-based insurance.' It is assumed that higher consumer credit scores are associated with lower risk for insurable losses. Even when default is costless, some borrowers repay loans as a signal of low risk-type to insurers. There are multiple equilibria and equilibrium refinement techniques have no bite. The equilibrium amount of debt is indeterminate. For low credit scores, equilibrium involves randomization between default and repayment. This can explain the ‘hockey-stick' shape of interest rates observed in several markets. Perfect information about consumer risk-type can lead to credit-market failure and lower welfare.

The cost of international trade matters. As traditional barriers to trade continue to diminish in importance, additional ways to lower trade costs become increasingly important to promoting international trade. Migrants can help lower trade costs between their country of birth and their country of residence by providing an information channel that reduces friction and facilitates trade relations. This paper applies a gravity model to a large set of data about developed and developing countries to estimate the extent of the relationship between migrants and trade. The results suggest that both immigrants and emigrants are significantly related to higher trade volumes. Immigrants seem to be especially good at facilitating trade in differentiated goods, for which information costs are particularly important.

Empirical studies in the job displacement literature have found that workers face significant earnings losses on average when they are permanently displaced from jobs. Previous work also finds that the costliness of job loss varies widely and that some of this variation may result from the differences between layoffs and plant closings. Layoffs provide hiring firms worker specific information about productivity but plant closings do not. This paper extends the understanding of the costs of job loss by presenting a theoretical motivation that indicates that labor market conditions can influence the information contained in a layoff. The empirical results from the Displaced Worker Supplement support this model and suggest that when the local unemployment rate is high, less information is transmitted by a layoff concerning worker quality, for the sample of white-collar workers.

We report results from a Cournot triopoly experiment conducted with different subject pools: German students, Malaysian students, and Malaysian managers. We find that Malaysian students perform significantly more competitively than both Malaysian managers and German students. Moreover, the Nash equilibrium point quite accurately describes the behavior of German students and Malaysian managers but not of Malaysian students, even though the quantities selected by Malaysian students are closer to the Nash equilibrium than to the collusive or competitive quantities.

Climate mitigation policy should be imposed over a long period, and spur innovation of new technologies in order to make stabilization of green house gas concentration economically feasible. The government may announce current and future policy packages that stimulate current R&D in climate-friendly technologies. However, once climate-friendly technologies have been developed, the government may have no incentive to implement the pre-announced future policies, that is, there may be a time inconsistency problem. We show that if the government can optimally subsidize R&D today, there is no time inconsistency problem. Thus, lack of commitment is not an argument for higher current R&D subsidies than the first-best subsidy. If the offered R&D subsidy is lower than the optimal subsidy, the current (sub-game perfect) carbon tax rate exceeds the first-best carbon tax rate.

This paper examines the determinants of governors' salaries for the forty-eight contiguous states. State budgetary variables, personal income, population, unemployment rate and state government employment are the primary determinants of governors' compensation. There appears to be a large amount of convergence among salaries over the forty year sample period; the states with lower pay in 1961 experienced faster growth in their governor's compensation. Thus, findings support the view that a governor's pay is based primarily on the responsibility measured by the economic size of the state and the size of a state's government.

In many communities, land-use and open-space preservation have become important concerns. Using a large dataset containing every home sale in the state of Massachusetts over 8 years, this paper simultaneously measures the impact of the mix of land-uses in the immediate neighborhood of a home on property values and the impact of a locally-implemented program, the Community Preservation Act (CPA), which provides funds for local open-space and historic preservation as well as affordable housing. I exploit the panel nature of the dataset to conduct a difference-in-differences analysis using local as well as house level fixed effects to overcome omitted variables bias. My results indicate that, on average, passage of the CPA reduces property values by about 1.5% in Massachusetts towns. However, when I allow the CPA effect to differ by county, I find some heterogeneity -- it increases property values in some communities and reduces them in others. Variation in local spending priorities appears to have little impact on property values or the effect of the CPA. Finally, I find that cropland and pasture, as well as low-density residential development, are the most preferred local land-uses, and that homes are more expensive as one increases distance to highways and active rail lines.

We examine asymmetric complementary good pricing under sequential moves when a price leader (firm A) produces a main product, whereas a price follower (firm B) produces an enhancer for the main product. We show that under sequential moves there is an additional pricing regime “pseudo complements" besides the two cases obtained under simultaneous pricing, namely, (i) “independent pricing" and (ii) “bundling pricing." Under the pseudo complements regime, firm A behaves as if it is an independent monopolist, whereas firm B behaves as if the two products are strict complements. We characterize several properties of the pseudo complements regime. We show that the double mark-up problem persists in the pseudo complement regime. However, when firm A incorporates firm B's function into product A, it alleviates the double mark-up problem. We also explore how the main product's quality improvement affects the follower's R&D incentives.

This paper estimates the effect of a generous demogrant for individuals age 70 and older that started in 2001 in Mexico City on the labor supply and time use of beneficiaries and of non-elderly family members who live with them. Using a triple differences approach, I find that the program has no significant effect on the time use of eligible individuals, except for the sharp decrease in the housework participation of elderly women who live with another potential beneficiary. Individuals 60 to 69 years old change their time use only if they live with a potential beneficiary, but not because they expect to receive the demogrant themselves in a few years. In particular, men in their 60s seem to retire early if they live with someone who qualifies for the transfer. Both men and women 18 to 59 years old increase their labor supply if they live with an eligible man, but decrease it if they live with an eligible woman. These results are consistent with income in the hands of elderly women being shared more with younger family members than income in the hands of elderly men.

I use the Displaced Worker Survey and bilateral trade data to assess the impact of import competition from low-wage countries on displaced workers' unemployment duration and re-employment wages. While low-wage imports have almost no effect on unemployment duration for workers displaced from an industry with the average length of the quality ladder, I find that a ten percentage point increase in low-wage imports leads to a 5.6 week longer jobless spell duration for workers displaced from an industry with a short quality ladder. Similarly, a ten percentage point increase in low-wage imports leads to a 7.2 percent decline in re-employment wages for workers displaced from an average ladder industry, but it leads to an 11.3 percent decline in re-employment wages for workers displaced from a short ladder industry. I show evidence that greater low-wage imports raise the likelihood of sectoral relocation upon re-employment, leading to loss of sector specific human capital.

Labor market imperfections are commonly believed to be a major reason for imposing trade impediments. In this paper, I introduce labor market rigidities that are prevalent in continental European countries into the well-known protection for sale model proposed by Grossman and Helpman (1994). I show that contrary to commonly held views, imperfections in the labor market do not necessarily increase equilibrium trade protection. A testable equilibrium trade protection equation is also derived. The findings in this paper are hence particularly relevant for empirical tests of trade policy determinants in economies with more regulated labor markets.

Regulation often takes the form of a standard that can be met through the implementation of any of a number of different policies. This paper examines how the authority to set the standard and the authority to choose the combination of policies to meet the standard should be allocated between a central government and local governments. In the context of the United States, for example, should standards regarding such public goods as the environment or education be set and implemented by the federal government, by individual state governments, or by both? Because decisions about setting and/or meeting the standard can be non-contractible, an incomplete contracting approach is used. A central finding is that "conjoint federalism" (the central government sets the standard while the local governments meet the standard), which is the regulatory structure often used in federations such as the United States and the European Union, can be the least efficient form, while a reverse form of delegation, in which local governments choose their own individual standards which the central government then decides how to collectively meet, can be the most efficient.

We examine the effect of more stringent environmental regulation on the dynamic structure of a deterministic competitive industry with endogenous entry and exit where firms invest in reduction of their future compliance cost. The level of regulation is exogenously fixed and constant over time. The compliance cost of a firm at each point of time depends on its current output, its accumulated past investment and the level of regulation. We outline sufficient conditions under which industries with more stringent regulation are associated with higher investment in compliance cost reduction and higher shake-out of firms over time; the opposite may be true under certain circumstances. Our analysis indicates that the effect of a change in regulation on market structure may be lagged over time.

As conventional trade barriers fall, nations may increasingly resort to product standards to protect domestic industries. While ostensibly protecting their citizens from the environmental and health side-effects of a particular product, countries could enact standards that are facially-neutral, but impose greater compliance costs on foreign producers. This paper examines the impact of trade liberalization on standard setting by using a two-country Cournot duopoly model in which the Domestic government imposes a standard to mitigate a consumption externality. The standard increases production costs for both Domestic and Foreign firms, especially for the latter. The paper finds that one cannot make an unequivocal connection between falling tariffs and subsidies and rising standards. If the initial tariffs or subsidies are prohibitive, reducing subsidies and tariffs to allow minimal import penetration will generally create incentives for the Domestic government to impose higher standards. If the ex ante tariffs are not prohibitive, however, it is only optimal for the government to raise standards following tariff cuts if (i) tariff revenues are an important component of the welfare calculus and the ex ante tariff rate is high, or (ii) the standard's effect on the per unit externality is large. Likewise, if the initial subsidies are small enough to allow imports the government should only raise standards following subsidy reductions if the per unit externality is substantial, or the standard's impact on the per unit externality is large.

The establishment of a tradable permit market requires the regulator to select a level of aggregate emissions and then distribute the associated permits to specific groups. Both these decisions create opportunities for rent seeking. In this paper, we use a contest model to analyse the incentives to rent seek for pollution permits and to analyse the consequences for social welfare. We find differences in firms' rent-seeking choices compared to a conventional rent-seeking contest. We see that a fundamental aspect of firms' incentives to rent seek depends on the market value of the permits, that is, the value of the ex post reallocated rents. This impact depends on the responsiveness of the regulator to aggregate rent-seeking effort. The responsiveness, in some cases, may improve welfare by reducing the per-unit value of permits, which may lower the rent-seeking effort more than it increases the damages experienced from the additional emissions.

In a small open economy with heterogeneous firms, in which tariffs determine the mass of active firms, the gains from trade liberalization depend positively on the level of firm vertical heterogeneity (quality heterogeneity) and negatively on transportation costs. The benefits from temporary protection depend on the quality gap: for a given mass of backward firms, the relative gains from protection increase with their quality and decrease with the quality of advanced firms; for given production quality levels, the relative advantage of protection increases with the mass of backward firms.

This paper discusses the literature on strategic use of debt models and tests the seminal models of Persson & Svensson (1989) and Alesina & Tabellini (1990) on a dataset of Flemish municipalities. The literature on strategic deficit and debt behaviour originates from the question whether or not incumbent policymakers run higher budget deficits than they would if they were confident of re-election. In this paper, we introduce a vote function to estimate the probability of electoral defeat and present evidence of strategic debt in line with Persson & Svensson (1989), but only for leftist governments with expected vote percentages below 49%. There is no indication that rightist governments without re-election prospects are sensitive to strategic debt behaviour.

This paper explores the interrelations between budget deficits and structural reforms in a monetary union. The analysis considers the international spillovers generated by both policies. We show that efforts to achieve fiscal policy coordination within the Eurozone reduce member countries' incentives to carry out much-needed structural reforms. As a consequence, this cooperation can turn out to be welfare-reducing if it is not extended to the implementation of structural reforms.

The literature on manias and bubbles is dominated by spectacular collapses and the question of whether they could have been foreseen. What is not widely known, though, is that there was at least one giant and wildly speculative investment episode that was successful in that it produced above-market profits for original investors. The British railway mania of the 1830s involved real capital investment comparable, as a fraction of GDP, to about $2 trillion for the U.S. today. It faced withering skepticism and criticism, much of it very reasonable, as its supposedly rosy prospects were based on extrapolation from the brief experience of just a couple of successful early railways. Yet by the mid-1840s, it was seen as a success.The example of the railway mania of the 1830s serves as a useful antidote to claims that bubbles are easy to detect or that all large and quick jumps in asset valuations are irrational. This episode also suggests the need to reexamine much of the work on business cycles and the diffusion of technologies. The standard literature in this area, starting from Juglar and continuing through Schumpeter to more recent authors, almost uniformly ignores large investment mania, whose nature does not fit the stereotypical pattern.

We conducted two field experiments in a tree-thinning setting. In one experiment, we switched the pay of a randomly chosen half (the treatment group) from hourly wages to piece-rate pay. Workers in the control group were paid hourly wages throughout. In the second experiment, workers were switched from hourly to piece-rate pay all at once. The difference-in-difference and before-after estimates suggest that the productivity increase was on the order of 20-23 percent. Although the sample size is small, the estimates are statistically significant and robust. While the quality did not drop, the study highlights the measurement costs in setting up the right level of piece rates. We also discuss the strengths and weaknesses of using randomized control (and treatment) groups or not in conducting field experiments within firms.

The practice of female genital cutting (FGC) has a long history in Africa and it is thought that over 130 million females alive today have undergone the practice. In this paper, we model FGC as a pre-marital investment. We show how the rat-race nature of the marriage market may result in inefficiently high equilibrium levels of FGC. We argue that in this case, regulation results in a (potential) Pareto improvement and that even weak regulation can be effective in eradicating FGC.

In an extended version of d'Aspremont and Jacquemin's (1988) R&D competition model, we identify a region where the game is a prisoner's dilemma in that region firms' optimal strategy still prescribes to invest in R&D. However, they would obtain a higher profit by not investing at all. A standard Folk Theorem argument suggests that firms implicitly tend to collude and refrain from investing in R&D when their interaction is repeated. When this happens, social welfare shrinks, but we argue that promoting joint research constitutes a remedy to the lack of innovation efforts, rather than the excess thereof.

This paper provides a rationale for “split decisions” in antidumping cases. A split decision occurs when the U.S. government simultaneously investigates multiple countries for dumping the same product but imposes antidumping duties on only a subset of these countries. In the U.S., 76% of antidumping petitions filed between 1980 and 2004 involved two or more countries accused of dumping the same product. Among these multi-country investigations, roughly 30% concluded with a split decision in the final stage of an investigation. The model in this paper shows that selectively applying antidumping duties against foreign countries that are selling increased quantities of imports at a price below long run average total cost improves the importing country's welfare. Imperfectly competitive firms in different countries face stochastic demand and are subject to capacity constraints. As a result, foreign firms dump when they face weak demand in their own markets. In response to the shift in a foreign country's export supply, the importing country's optimal rent-shifting tariff against the foreign country with weak demand increases while its optimal tariff against other countries falls. This paper suggests an economic rationale behind the differential treatment afforded to different countries accused of dumping.

Previous empirical work on the link between domestic and foreign investment has provided mixed results. This may partly be due to the level of aggregation of the data. In this paper, we argue that the impact of FDI on the domestic capital stock depends on the structure of industries. Using industry-level data on the stock of German FDI, we test our predictions. We use panel cointegration methods which address the potential endogeneity of FDI. We find evidence for a positive long-run impact of FDI on the domestic capital stock.

Literature notes many factors as affecting capital flows, but the effects of these flows over the recipient economies and the overall effect over growth are highly debatable. This study claims that although capital flows may be required for the increase in output, other forces are causing this growth and creating the demand for capital. We construct a model in which growth requires both decisions of firms regarding training of managers in order to expand, representing the absorption capacity of the firms, and capital for the firms’ expansion. The model shows that in early stages of development when output is low, capital inflows are increasing with an increase in the output, but are not the cause for the output growth. However, when output is higher, an increase in the output is associated with financial outflows since the local savings are increasing by more than the local demand for capital. Although we cannot empirically test the model, we use cross-country regressions to show that capital flows are in-line with the predictions of the model and manage to explain half of the variations in net FDI flows per capita using the stage of development. Many policies regarding capital flows may be, therefore, irrelevant.

A large body of evidence indicates that increased alcohol availability leads to increased consumption of alcohol. From 1995 to 2008, fourteen states relaxed or repealed their bans on the Sunday sale of packaged alcohol. This paper leverages these repeals to provide quasi-experimental evidence on the effect of Sunday sales bans on alcohol related crash fatalities. Previous published studies in this area have found conflicting results regarding the effect of Sunday sales on traffic accidents and fatalities, but these studies have focused on repeals in single states, cities, or provinces; are outdated; or have failed to control for underlying changes in traffic fatalities that may be correlated with repeals but are due to other factors affecting traffic safety. Drawing upon data from the lower 48 states from the Fatality Analysis Reporting System (FARS), this paper finds that only the repeal in New Mexico led to an increase in fatalities. The effect is evident only in New Mexico because this repeal led to larger increases in drinking in New Mexico than in other states, residents of New Mexico drive more than residents of the other repeal states, and there is a greater fraction of traffic fatalities involving alcohol in New Mexico than in the other repeal states.

We investigate how economic integration in North America has altered the pattern of foreign direct investment (FDI) to and from Canada. The theoretical analysis suggests that while the Canadian-U.S. free trade agreement should generate less FDI, the addition of Mexico in the North American Free Trade Agreement (NAFTA) produces the opposite effect. The fall in trade costs results in investment diversion from the U.S. and Canada, yet lower fixed costs may increase FDI even in those countries via an increased incentive to locate production facilities abroad rather than only domestically. Using a difference-in-differences estimator, we find that U.S. FDI in Canada as well as Canadian FDI in the U.S. have expanded disproportionately since NAFTA, suggesting that the latter effect dominates.

An estimated 33 million people are infected with the HIV virus, with 67% of them in Sub-Saharan Africa. Despite this, knowledge about HIV prevalence in Africa is limited and imperfect. Although population-based testing in recent years has provided reliable information about current prevalence in the general population, we have little reliable data on prevalence in early years of the epidemic. This paper suggests a new methodology for estimating HIV prevalence and incidence using inference from mortality data. This methodology can be used to generate prevalence estimates from early in the epidemic. This information is valuable for understanding how the epidemic has evolved over time and is also likely to be helpful in analyses that explore how policy affects the epidemic or how HIV affects other country-level outcomes.

This paper investigates an asymmetric duopoly model with R&D competition and product positioning. We find that an inefficient (small) firm may engage in R&D more intensively than an efficient (large) firm in spite of economies of scale in R&D activities. Contrary to the findings of previous studies, competition is more likely to have a positive effect on the investments of the small firm than on those of the large firm. We also find that improving the efficiency of the inefficient firm can reduce both social and consumer surplus.

The banking literature suggests that the low performance of the banking sector can spread to real economic activities, especially small businesses. Many previous studies insist that the Japanese experience of the 1990s supports this argument. However, many studies of small businesses are often insufficient since they depend on aggregate data, even though small businesses are likely to face difficult constraints in their activities when financial problems are severe. In this study, we use firm-level data on small businesses and investigate whether bank-dependent small businesses face severe constraints on their activities, which lowers performance. Our results differ from the findings of previous work in this area. First, we show that per the widely used TANKAN statistics, the focus of many existing studies, is misleading and that a majority of respondents in this survey (at least 71%) report no worsening in the lending attitude of financial institutions in the so-called credit crunch period of 1998-1999 (or even in the 2000-2001 period). Second, using detailed firm level panel data from the Credit Risk Database, we find no significant reductions in the loans for the majority of small businesses. Third, while we do find evidence that bank-dependent firms increased reliance on internal funds during the period of the credit crunch (1998-2001), we find no evidence that this negatively impacted firm performance (as reflected in firm growth and profitability measures).

This paper examines whether a permanent increase in the supply of immunisations reduces or intensifies the gender bias in immunisation against female children in India. It also investigates the effect of duration of exposure to the supply shock on gender bias. The variation in the implementation of the Integrated Child Development Services (ICDS) programme across both regions and time is exploited for the analysis. Estimations use data from the 2005-06 Measure DHS survey in India. We find that the increased supply of vaccinations due to the programme initially increases the gender inequality in immunisation but that this increase disappears over time. Our results indicate that the programme has saved approximately 1.72-1.84 million children, of which about 70% are boys.

Recent literature in economics has highlighted that competition and symbolic awards can provide non-monetary incentives. In this paper, we report on a step contest that we carried out at a large Swedish workplace in order to test whether competition for symbolic awards can be used to promote physical exercise. Each individual was equipped with a pedometer and registered the number of steps daily during a four week period. Participants competed both in teams and individually and the winning team and individual received symbolic prizes. To evaluate the effect of the competition, we randomized teams into a control group and two treatment groups. We found that the step contest significantly increased both the fraction of subjects that completed the step contest and the number of steps. The number of steps was about 1,000 steps higher in the main treatment group than in the control group (an increase by about 10 percent). This is a conservative estimate as the dropouts on average walked fewer steps than individuals completing the study. In an additional treatment, we also included a daily step goal in the contest. The step goal had no additional significant effect on the number of steps, which may be due to the relatively low step goal used (7,000 steps per day).

The payday loan industry is one of the fastest growing segments of the consumer financial services market in the United States. We design an environment similar to the one that payday loan customers face and then conduct a laboratory experiment to examine what effect, if any, the existence of payday loans has on individuals’ abilities to manage and to survive financial setbacks. Our primary objective is to examine whether access to payday loans improves or worsens the likelihood of financial survival in our experiment. We also test the degree to which people’s use of payday loans affects their ability to survive financially. We find that payday loans help the subjects to absorb expenditure shocks and therefore survive financially. However, subjects whose demand for payday loans exceeds a certain threshold level are at a greater risk than a corresponding subject in the treatment in which payday loans do not exist.

Using micro data for India from 1983 to 2005, this paper finds that the tertiary (college)-secondary (high school) wage premium has been increasing in India over the past decade and that this increase differs across age groups. The increase in wage premiums has been driven mostly by younger age groups while older age groups have not experienced any significant increase. Using a demand and supply model with imperfect substitution across age groups (developed in Card and Lemieux, 2001), this paper demonstrates that workers are not perfect substitutes across age groups. The paper finds that the increase in the wage premium has come mostly from demand shifts in favor of workers with a tertiary education. More importantly, the growth rate of demand for tertiary educated workers relative to secondary educated workers was fairly stable in the 1980s and the 1990s. However, the relative supply played an important role not only in determining the extent of increase in wage premium, but also its timing. The increase in relative supply of tertiary workers during 1983-1993 negated the demand shift; as a result, the wage premium did not increase much. But during 1993-1999, the growth rate of the relative supply of tertiary workers decelerated, while relative supply became virtually stagnant during 1999-2004. Both these periods saw an increase in the wage premium as the countervailing supply shift was weak.

This paper uses a contest approach to characterize a probabilistic, non-price contest between potential consumers of rent-controlled apartments. The model extends upon the rent control model of Glaeser and Luttmer (2003) as well as the rent-seeking contributions of Hurley (1998), Dixit (1987), and Hirshleifer (1989) to consider the roles of chance and endogenously-chosen efforts in the allocation of rent-controlled apartments. Nash equilibrium effort levels for each consumer-type imply that the effort-inducing cost of rent control is greater than the misallocative cost. Further, misallocative costs are lower under the effort contest interpretation than under random allocation, as high willingness to pay consumers allocates more effort. The relationship between effort contest and misallocation influences the policy’s overall social cost.

Changes in the structure of agriculture have led some to rethink the purpose and nature of farm support programs, yet taxpayers are often left unheard in this debate. This paper determines how people would vote on particular farm policies and identifies the determinants of support/opposition to farm programs. Our results show the majority of people support farm subsidies, but voting outcomes are sensitive to the costs of the policy and the magnitude of the payouts to farmers. We find people act altruistically toward small farmers and that people are averse to inequality. Furthermore, we found the public’s attitude toward maintaining a secure food supply is a significant determinant of support for farm programs. Finally, we found that information about farmers’ average incomes and average production levels across different farm sizes had little effect on people’s willingness to subsidize small or large farmers.

The literature of the “second-best” demonstrated the difference between exogenous price and quantity distortions. However, it is not always realistic to assume that distortions are beyond the policy makers’ control. Are price and quantity distortions different even if they are endogenized using a political economy setting? In this paper, I postulate a government that uses trade and pollution policy to maximize a weighted welfare function where domestic producers get a higher weight than consumers. International trade is regulated by either a tariff or a quota, and pollution is regulated using a pollution tax. I find that if the government has full control on both trade and pollution policy, endogenously created quantitative distortions (quantitative restrictions) have the same effect as price distortions (tariffs).

This paper uses data from the Stockholm Birth Cohort Study to document intergenerational associations in drunk driving between fathers and their children. The proportion of sons with a record of drunk driving is 2.3 times larger for sons whose fathers have a conviction for drunk driving than for sons whose fathers have not been convicted. For daughters, the proportion is 7.8 times larger. The average number of convictions is twice as large for sons whose fathers have a conviction for drunk driving than for sons whose fathers have not been convicted. For daughters, the average number of convictions is 15.3 times larger. We argue that these intergenerational associations in drunk driving have important implications for treatment strategies and public policy.

Social networks are commonly understood to play a large role in the labor market success of immigrants. Using 2000 U.S. Census data, this paper examines whether access to native networks, as measured by marriage to a native, increases the probability of immigrant employment. We start by confirming that in both least squares and instrumental variables frameworks, marriage to a native indeed increases immigrant employment rates. Next, we show that the returns to marrying a native are not likely to arise solely from legal status acquired through marriage or characteristics of native spouses. We then present several pieces of evidence suggesting that networks obtained through marriage play an important part in explaining the relationship between marriage decisions and employment.

A model of military conscription with costly deferments is developed. Deferments may enable the induction of only those with the lowest reservation wages, avoiding the usual misallocation of resources with conscription versus a volunteer military. With costly deferments, the tradeoff between conscription and a volunteer military involves the cost of deferments with the former and the higher deadweight cost of taxation with the latter. Among the results are: 1) conscription is socially preferable to a volunteer military only if a large percentage of eligible individuals is demanded by the military; 2) if conscription is used when it is socially cheaper than a volunteer military, welfare is improved if deferments have lower social benefits; and 3) ignoring other costs of conscription (e.g., higher turnover and reduced investment in human capital), the U.S. in World War II may have been near the point at which conscription and a volunteer military were of equal social cost.

There has been much attention recently to public-private partnerships and the involvement of NGOs in public good provision. This paper re-examines the effect of ownership of a public good on investment incentives when contracts are incomplete. In the presence of maintenance costs, it is shown that the leading result in the literature by Besley and Ghatak (2001) does not carry through. In some circumstances, project ownership should be allocated to the party that values the project relatively less. The model is applied to the case of environmental conservation and investigates the advantages of Payments for Environmental Services from the point of view of investment incentives in conservation.