Knowledge that Transforms

The core theory of behavior in Economics, which structures inquiry and provides a framework for empirical analysis, is largely responsible for the success of the discipline. Behavioral Economics (BE) challenges this theory, but has failed to provide a coherent alternative. Consequently the influence of BE has been limited. In what follows we argue that Evolutionary Psychology (EP), suitably adapted, can provide at least a partial foundation for BE. Its methods offer a way of generating theories of the origins of anomalous behaviors and of testing those theories. I. Behavioral Economics BE has been most successful in documenting failures of the rational actor model (e.g. failures of expected utility theory, irrational cooperation, and time inconsistent preferences). However, attempts to incorporate these observations into theory have been ad hoc: either an anomalous behavior is induced by modifying the utility function or the behavior is simply assumed and implications derived. The lack of theoretical foundations causes a number of problems for BE. First, empirical analysis can show the inadequacy of mainstream theory, but it does little to help develop alternatives. Second, without a

We study the residential choice of siblings who are altruistic towards their parents. The first-born child’s location choice influences the behavior of the second-born child and can shift some of the burden of providing care for the parents from one child to the other. These strategic considerations lead to an equilibrium location pattern with firstborn children locating further away from their parents than second-born children. We also analyze the location choices empirically using German data. These data confirm our theoretical predictions.

This paper sheds light on the difficulties of pension reforms by analyzing the citizens´opinions on different aspects of the welfare state and its redistributive programs. We focus on the pension system, reporting the results of a questionnaire conducted in Germany and Italy in the Fall 2001. Our questionnaire was designed to shed light on the following issues: Are citizens aware of the unsustainability of the pension system and informed of its costs? Are reforms opposed by a majority or by a powerful minority? Which reform options seem politically more feasible and why? Which groups of citizens are more likely to favor reforms? We find that citizens are aware of unsustainability but lack information about the cost of the PAYG system. The status quo is a majoritarian outcome along many dimensions: most reform proposals lack a mojority and there is limited scope of packaging as reformers rarely support more than one reform option. Later retirement is the easier reform in Italy while opting-out of the PAYG system is popular in Germany, but only of accompanied by mandatory savings and with no transition burdan.

According to a common argument, the presence of strong intellectual property rights spurs innovation, which then leads to fiercer competition, higher economic growth and increasing benefits for the average consumers. We argue that, in the case of intellectual property rights, this has lead to misconceptions and abuses. Current legislation on intellectual property confuses the protection of property rights on objects in which ideas are embodied with the attribution of monopoly power on the idea itself and, furthermore, with restrictions on the usage of such goods on the part of the buyers. This implies that both patent and copyright laws should be dramatically altered. To back up our claim we provide theoretical arguments, even for the most extreme case in which goods are produced at a positive fixed cost and zero marginal cost.

Financial Aid, Borrowing Constraints, and College Attendance: Evidence from Structural Estimates by Michael P. Keane. Published in volume 92, issue 2, pages 293-297 of American Economic Review, May 2002

This paper evaluates the importance of microeconomic irreversibilities for aggregate dynamics using a real-business-cycle (RBC) model characterized by investment irreversibilities at the establishment level. The main finding is that investment irreversibilities do not play a significant role in an otherwise standard real-business-cycle model: Even though investment irreversibilities are crucial for establishment-level dynamics, aggregate fluctuations are basically the same under fully flexible or completely irreversible investment.

Testing Mixed-Strategy Equilibria When Players Are Heterogeneous: The Case of Penalty Kicks in Soccer by P.-A. Chiappori, S. Levitt and T. Groseclose. Published in volume 92, issue 4, pages 1138-1151 of American Economic Review, September 2002

In this paper, we propose a new measure of horizontal equity that overcomes many of the shortcomings of previous proposed measures. Our starting point is the observation that a well-behaved social welfare function need not evaluate global' (vertical equity) differences in after-tax income using the same weights it applies to local' (horizontal equity) differences, even though this constraint has been applied in the past. Following work on the structure of individual preferences, we show that a social welfare function can imply different preferences toward horizontal and vertical equity. Adopting the general approach to the measurement of inequality developed by Atkinson (1970), we use such a social welfare function to derive measures of inequality that are decomposable into components naturally interpreted as indices of horizontal and vertical equity. In particular, the former index measures deviations from the fundamental principle that equals be treated equally. Finally, we apply our new measure to two tax-return data sets, evaluating the degree to which the horizontal equity of the US personal income tax has changed over time, and how horizontal equity would be altered by one version of recent proposals to do away with the so-called marriage penalty.'