Knowledge that Transforms

We analyze situations in which a group of agents (and possibly a designer) have to reach a decision that will affect all the agents. Examples of such scenarios include the selection of a candidate, the location of a nuclear reactor or the siting of a major sports event. To address the problem of reaching a decision, we propose a one-stage multi-bidding mechanism in which agents submit bids to determine the winning project. All Nash equilibria of this mechanism are efficient and immune to any coalitional deviations. Moreover, the payoffs attained in equilibrium by the agents satisfy intuitively appealing lower bounds. (JEL D78, D62) 1 Reaching decisions about the location of noxious facilities, such as dump-sites, environmentally hazardous plants, nuclear power generators and the like, is a highly contentious issue. For instance, in February 2000, the US Senate decided that nationwide nuclear waste would be shipped to the Yucca mountain site in Nevada (conditional to it being approved as a high-level nuclear waste repository). Despite the attractive compensation package, the State of Nevada voiced vehement opposition. President

We decompose labor-productivity growth into components attributable to (1) technological change (shifts in the world production frontier), (2) technological catch-up (movements toward or away from the frontier), and (3) capital accumulation (movement along the frontier). The world production frontier is constructed using deterministic methods requiring no specification of functional form for the technology nor any assumption about market structure or the absence of market imperfections. We analyze the evolution of the cross-country distribution of labor productivity in terms of the tripartite decomposition, finding that technological change is decidedly nonneutral and that both growth and bipolar international divergence are driven primarily by capital deepening.

The relative strengths of vertical and horizontal tax externalities turn on the balance between the interest responsiveness of the supply of savings and demand for capital, the extent to which immobile factors are taxed by the states, and the strength of preferences between federal and state expenditures. The vertical externality will dominate if the aggregate tax base of the federation is responsible to the state tax instrument. Tax interactions in federations are more complex than has often been supposed.

Some previous studies have emphasized differences between labor-supply responses on the extensive margin (participation) and intensive margin (hours worked) (e.g., James J. Heckman, 1993; Jean Kimmel and Thomas J. Kniesner, 1998). Recent tax and welfare policy changes provide a potentially more convincing way of identifying these responses than is available in other nonexperimental data. The Earned Income Tax Credit (EITC) changes during the 1990– 1996 period sharply altered the budget sets of single mothers over a short period of time. These changes in incentives are likely to be unrelated to differences across individuals in the desire to work and thus are likely to be exogenous to labor-supply decisions. This lack of exogeneity is harder to claim for wage differences across people, which are the main alternative source of identifying variation. In addition to preference heterogeneity, wages are driven by supply and demand factors that one must account for to obtain valid estimates using wage variation. The EITC unequivocally encourages single parents to work at least some hours during a year because it shifts out the budget set at all positive hours points. This first prediction is clearly confirmed by the data. In addition, theory implies that the EITC will decrease hours worked among those already working because most recipients are on the plateau or phase-out portions of the credit schedule. For these recipients, the EITC reduces or does not affect the after-tax wage while at the same time discouraging work through the income effect of the credit payment. However, recent hours-worked patterns for EITC-eligible individuals do not appear to fit this second prediction. Hours and weeks worked by likely recipient groups have not fallen. This paper analyzes this puzzling finding, building on earlier work by Nada Eissa and Jeffrey Liebman (1996) and Meyer and Dan T. Rosenbaum (1999). This study shows that nearly all of the laborsupply adjustment of single mothers occurs at the extensive margin, not the intensive margin. This finding raises the issue of what model features are needed to explain both participation and hours but leaves the answer to be provided in future work. This finding also suggests that the large literature simulating alternative policies for low-wage workers such as the EITC may be misleading because nearly all work has used models that imply similar responses on participation and hours margins.

Last-Minute Bidding and the Rules for Ending Second-Price Auctions: Evidence from eBay and Amazon Auctions on the Internet by Alvin E. Roth and Axel Ockenfels. Published in volume 92, issue 4, pages 1093-1103 of American Economic Review, September 2002

This paper describes the design and behavior of an experimental economy with the structure of the Ramsey-Cass-Koopmans model of optimal growth. The experiment includes three different implementations of the model: a decentralized implementation with multiple agents and a market for capital, a treatment where individual subjects are placed in the role of social planners, and a treatment where the social planner consists of five agents making a joint decision. The findings highlight the role of market institutions in facilitating convergence to the optimal steady state.

Subsidizing the cost of education is one of the most common, and expensive, activities of governments. While primary and secondary schooling is available tuition-free in the United States, among post-secondary students the direct cost of schooling is quite heterogeneous. First, tuition prices vary widely across schools. During the 2000-2001 academic year, college tuitions varied from zero at some community colleges to over $27,000 at Ivy League institutions. Second, institutions heavily discount these sticker prices for many students, using detailed information on family finances and academic merit to engage in finely tuned price discrimination.' Third, the federal and state governments provide individual subsidies, such as the Pell Grant and low-interest Stafford loan, that are portable across institutions. The standard model of human capital clearly predicts that such cost subsidies will raise the optimal level of schooling. While the theoretical predictions are clear, it is an empirical question how much a given dollar of subsidy affects behavior. Answering this empirical question is a challenge, since eligibility for subsidies is certainly not random and, in fact, is likely to be correlated with many other determinants of schooling. As a result, estimates based on the cross-sectional correlation of aid eligibility with schooling are subject to multiple sources of bias. This paper examines work that has used quasi-experimental methodology to isolate exogenous sources of variation in schooling costs in order to determine their effect on schooling decisions.

Rising educational attainment and research intensity in recent decades suggest that the U.S. economy is far from its steady state. This paper develops a model reconciling these facts with the stability of U.S. growth rates. In the model, long-run growth arises from the worldwide discovery of ideas, which depends on population growth. Nevertheless, constant growth can temporarily proceed at a faster rate, provided research intensity and educational attainment rise steadily over time. Growth accounting reveals that these factors explain 80 percent of recent U.S. growth, with less than 20 percent coming from world population growth.

One of the most sizable and least predictable shocks to economic opportunities in developing countries is major illness. We investigate the extent to which families are able to insure consumption against major illness using a unique panel data set from Indonesia that combines excellent measures of health status with consumption information. We find that there are significant economic costs associated with major illness, and that there is very imperfect insurance of consumption over illness episodes. These estimates suggest that public disability insurance or subsidies for medical care may improve welfare by providing consumption insurance.