This paper argues that long-run trends in geographic segregation are inconsistent with models where residential choice depends solely on local public goods (the Tiebout hypothesis). We develop an extension of the Tiebout model that predicts as mobility costs fall, the heterogeneity across communities of individual public good preferences and of public good provision must (weakly) increase. Given the secular decline in mobility costs, these predictions can be evaluated using historical data. We find decreasing heterogeneity in policies and proxies for preferences across (i) a sample of U.S. municipalities (1870–1990); (ii) all Boston-area municipalities (1870–1990); and (iii) all U.S. counties (1850–1990).
Employee stock options (ESO’s) are a ubiquitous form of compensation in corporate America. By the late 1990’s, ESO’s outstanding at large corporations averaged 7 percent of total outstanding shares, with top executives holding approximately one-third of total ESO’s (John Core and Guay, 2001). Empirical evidence suggests that firms use ESO’s to align employees’ and shareholders’ interests, attract and retain employees, and compensate employees for their labor while simultaneously raising capital from employees (Core and Guay, 1999, 2001; Kevin J. Murphy, 1999). There is currently an intense debate nationally and internationally among standard-setters, politicians, investors, corporate executives, and academics about whether to require corporations to deduct the estimated value of ESO grants as a business expense in reported income. Existing accounting standards require firms to expense most forms of pay, such as salaries, cash bonuses, and the value of stock grants, but allow firms to choose whether to expense the value of ESO grants. Until very recently, nearly all firms chose not to expense ESO’s. However, firms that do not expense ESO’s must publicly disclose in the financial statement footnotes what reported income would have been if the ESO’s were expensed. In a recent sample of large growth firms, Christine Botosan and Marlene Plumlee (2001) find that mandatory expensing of ESO’s would have resulted in a 14-percent median reduction in firms’ earnings per share. Firms are also required to disclose details of top-executive ESO compensation in the annual proxy statement. Underlying the ESO debate is the concern that the choice among alternative financialaccounting treatments have real economic consequences. A large literature beginning with Ross Watts and Jerold Zimmerman (1978) provides evidence that accounting choice can impose economic costs on firms when contracts (e.g., debt and executive compensation contracts) or influential external parties (e.g., tax authorities) rely on reported accounting numbers (see Thomas Fields et al. [2001] for a survey of this literature). Accounting choice can also have economic consequences if investors fixate on particular numbers, such as reported earnings, resulting in security mispricing and misallocation of capital. Proponents of mandatory expensing argue that ESO’s reflect a cost of acquiring employee labor, and that expensing ESO’s conveys this information to outsiders consistently with other labor costs. Some argue that the absence of ESO expense results in stock mispricings, because investors fixate on reported earnings and fail to understand or utilize supplemental footnote disclosures about the true economic cost of ESO grants. Others argue that, when investors and boards of directors fixate on accounting earnings, the absence of ESO expense exacerbates ineffective corporate governance and allows management to use ESO’s to extract excessive compensation. Proponents of this view argue that expensing ESO’s will reign in management compensation by putting it under a brighter light. Opponents of expensing ESO’s argue that deducting the cost of ESO’s from earnings conveys an impression of weaker financial results to investors and, under the assumption that investors fixate on reported earnings, could raise the firms’ cost of financing and stifle corporate investment and innovation. There is also a concern that external parties, such as taxing authorities, might use changes in financial-accounting treatment as a cue to alter regulatory and tax policy.
Daniel Kahneman received the Nobel Prize in economics sciences in 2002, December 8, Stockholm, Sweden. This article is the edited version of his Nobel Prize lecture. The author comes back to the problems he has studied with the late Amos Tversky and to debates conducting for several decades already. The statement is based on worked out together with Shane Federik the quirkiness of human judgment. Language: ru
My first exposure to the psychological assumptions of economics was in a report that Bruno Frey wrote on that subject in the early 1970's. Its first or second sentence stated that the agent of economic theory is rational and selfish, and that his tastes do not change. I found this list quite startling, because I had been professionally trained as a psychologist not to believe a word of it. The gap between the assumptions of our disciplines appeared very large indeed. Has the gap been narrowed in the intervening 30 years? A search through some introductory textbooks in economics indicates that if there has been any change, it has not yet filtered down to that level: the same assumptions are still in place as the cornerstones of economic analysis. However, a behavioral approach to economics has emerged in which the assumptions are not held sacrosanct. In the following I comment selectively on the developments with regard to the three assumptions, on both sides of the disciplinary divide.
Returns to Education: Evidence from U.K. Twins by Dorothe Bonjour, Lynn F. Cherkas, Jonathan E. Haskel, Denise D. Hawkes and Tim D. Spector. Published in volume 93, issue 5, pages 1799-1812 of American Economic Review, December 2003
Starting from an example of the Allies' decision to feint at Calais and attack Normandy on D-Day, this paper models misrepresentation of intentions to competitors or enemies. Allowing for the possibility of bounded strategic rationality and rational players' responses to it yields a sensible account of lying via costless, noiseless messages. In some leading cases, the model has generically unique pure-strategy sequential equilibria, in which rational players exploit boundedly rational players, but are not themselves fooled. In others, the model has generically essentially unique mixed-strategy sequential equilibria, in which rational players' strategies protect all players from exploitation.
Changes in the Distribution of Children's Family Income over the 1990's by Rebecca M. Blank and Robert F. Schoeni. Published in volume 93, issue 2, pages 304-308 of American Economic Review, May 2003
The Role of the Family in Immigrants' Labor-Market Activity: An Evaluation of Alternative Explanations: Comment by Francine D. Blau, Lawrence M. Kahn, Joan Y. Moriarty and Andre Portela Souza. Published in volume 93, issue 1, pages 429-447 of American Economic Review, March 2003
The persistently large number of uninsured, roughly 40 million per year since 1993, continues to elicit bipartisan policy interest. Coverage-expansion proposals without mandates, by far the most common since the defeat of the Clinton plan, must address risk-pooling realities in private markets. Insurers have strong financial incentives to segment risks and minimize pooling of heterogeneous risks, and narrow risk-pooling will diminish the adequacy of premium subsidies based on income alone, at least for higher-risk individuals. The current debate over flat tax credits and the non-group market is a case in point (Blumberg, 2001; Center for Studying Health System Change, 2002; Jack Hadley and James D. Reschovsky, 2002). We, along with nine other teams, were asked to develop a proposal that would expand coverage in a large and creative way (see Holahan et al., 2001). The proposal we developed would subsidize low-income individuals and families but also addresses the issue of inefficient and inequitable risk-pooling.
Macroeconomists have for some time been aware that the New Keynesian Phillips curve, though highly popular in the literature, cannot explain the persistence observed in actual inflation. We argue that one of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model, is highly problematic. Fuhrer and Moore's 1995 formulation generates inflation persistence, but this is a consequence of their assuming that workers care about the past real wages of other workers. Making the more reasonable assumption that workers care about the current real wages of other workers, one obtains the standard formulation with no inflation persistence.