Knowledge that Transforms

By taking sets of utility functions as primitive, we define an ordering over assumptions on utility functions that gauges their measurement requirements. Cardinal and ordinal assumptions constitute two levels of measurability, but other assumptions lie between these extremes. We apply the ordering to explanations of why preferences should be convex. The assumption that utility is concave qualifies as a compromise between cardinality and ordinality, while the Arrow-Koopmans explanation, supposedly an ordinal theory, relies on utilities in the cardinal measurement class. In social choice theory, a concavity compromise between ordinality and cardinality is also possible and rationalizes the core utilitarian policies.

The introduction of Medicare in 1965 was the single largest change in health insurance coverage in U.S. history.Many economists and commentators have conjectured that the introduction of Medicare may have also been an important impetus for the development of new drugs that are now commonly used by the elderly and have substantially extended their life expectancy.In this paper, we investigate whether Medicare induced pharmaceutical innovations directed towards the elderly.Medicare could have played such a role only if two conditions were met.First, Medicare would have to increase drug spending by the elderly.Second, the pharmaceutical companies would have to respond to the change in market size for drugs caused by Medicare by changing the direction of their research.Our empirical work finds no evidence of a "first-stage" effect of Medicare on prescription drug expenditure by the elderly.Correspondingly, we also find no evidence of a shift in pharmaceutical innovation towards therapeutic categories most used by the elderly.On the whole, therefore, our evidence does not provide support for the hypothesis that Medicare had a major effect on the direction of pharmaceutical innovation.

A new field of “forensic economics” has begun to emerge, applying price-theoretic models to uncover evidence of corruption in domains previously outside the purview of economists. By emphasizing the incentives that yield corruption, these approaches also provide insight into how to reduce such behavior. This paper contributes to this agenda, highlighting how the structure of gambling on college basketball yields pay-offs to gamblers and players that are both asymmetric and nonlinear, thereby encouraging mutually beneficial effort manipulation through “point shaving.” Initial evidence suggests that point shaving may be quite widespread. The incentives for gambling-related corruption derive from the structure of basketball betting. To highlight a simple example, the University of Pennsylvania played Harvard on March 5, 2005, and was widely expected to win. Rather than offering short odds on Penn winning the game, bookmakers offered an almost even bet (bet $11 to win $10) on whether Penn would win relative to a “spread.” In this example, the spread was 14.5, meaning that a bet on Penn would win only if Penn won the game by 15 or more points, while a bet on Harvard would be successful if Harvard either won, or lost by 14 or fewer points. The incentive for corruption derives directly from the asymmetric incentives of players, who care about winning the game, and gamblers, who care about whether a team beats (or covers) the spread. Indeed, the example above is ripe for corruption: the outcome that maximizes the joint surplus of the Penn players and the gambler occurs when Penn wins the game, but fails to cover the spread (and the gambler has bet on Harvard). The contract required to induce this outcome simply involves the gambler offering a contingent payment to the player, with the contingency being that he pays only if Penn fails to cover the spread. Given the player’s (approximate) indifference over the size of the winning margin, even small bribes may dominate his desire to increase the winning margin above 14 points, and this, in turn, yields large profits for the gambler who has bet accordingly. The betting market offers a simple technology for the gambler to commit to paying this outcomecontingent bribe: he can simply give the player the ticket from a $1,000 bet on his opponent not covering the spread. Such attempts to shave the winning margin below the point spread are colloquially referred to as “point shaving” and form the focus of my inquiry. I start by outlining the type of corruption that theory suggests will be most prevalent:

Under the Agreement on Trade-Related Intellectual Property Rights, the World Trade Organization members are required to enforce product patents for pharmaceuticals. In this paper we empirically investigate the welfare effects of this requirement on developing countries using data for the fluoroquinolones subsegment of the systemic anti-bacterials segment of the Indian pharmaceuticals market. Our results suggest that concerns about the potential adverse welfare effects of TRIPS may have some basis. We estimate that the withdrawal of all domestic products in this subsegment is associated with substantial welfare losses to the Indian economy, even in the presence of price regulation. The overwhelming portion of this welfare loss derives from the loss of consumer welfare.

What stands out in retrospect about U.S. monetary policy during the Greenspan Era is the ongoing movement away from mechanistic restrictions on the conduct of policy, together with a willingness on occasion to depart even from what more flexible guidelines dictated by contemporary conventional wisdom would imply, in the interest of carrying out the Federal Reserve System's dual mandate to pursue both stable prices and maximum employment. Part of this change was procedural -for example, the elimination of money growth targets. The most substantive demonstration of policy flexibility came in the latter half of the 1990s, as unemployment fell below 6% (in 1994), then below 5% (in 1997), and then remained below 5% for more than four years, yet the Federal Reserve did not tighten monetary policy. This policy stance was consistent with a view of the economy, including faster productivity growth and increased exposure to international competition, that Chairman Greenspan had articulated nearly a decade before.

A multivariate regime-switching model for monetary policy is confronted with U.S. data. The best fit allows time variation in disturbance variances only. With coefficients allowed to change, the best fit is with change only in the monetary policy rule and there are three estimated regimes corresponding roughly to periods when most observers believe that monetary policy actually differed. But the differences among regimes are not large enough to account for the rise, then decline, in inflation of the 1970s and 1980s. Our estimates imply monetary targeting was central in the early 1980s, but also important sporadically in the 1970s.

Rasmusen et al. (1991) and Segal and Whinston (2000) show that an incumbent monopolist might prevent entry of a more efficient competitor by exploiting externalities among buyers. We show that their results hold only when downstream competition among buyers is weak. Under fierce downstream competition, if entry took place, a free buyer would become more competitive and increase its output and profits at the expense of buyers that sign an exclusive deal with the incumbent. Anticipating that orders from a single buyer would trigger entry, no buyer will sign the exclusive deal and entry will occur. This result is robust across different specifications of the game.

Multiple innovators can and do come up with the same invention independently. A famous case is the telephone: two hours after Alexander Graham Bell filed a patent application for it, another application for the same invention arrived at the patent office. Many scholars, such as Ilkka Rahnasto (2003) and Hal R. Varian et al. (2004), argue that since Bell’s time, simultaneous innovation has become increasingly common. We feel, and our discussions with industry practitioners confirm, that the simultaneous model of innovation characterizes especially network industries such as consumer electronics, the Internet, software, telecommunications, and payment systems, where standardization limits the possible paths for future technologies and so firms concentrate their R&D activities on the same fields. We suggest that simultaneous or independent invention has major implications for intellectual property (IP) policy. In particular, the possibility of simultaneous innovation changes the patenting decision: firms tap patents for a defensive purpose, since the choice is no longer between patenting or resorting to trade secrecy, but between patenting or letting competitors patent. By exploiting the vulnerability of innovative firms to rival innovation, it is possible to design a welfareimproving patent system that induces innovators to patent rather than keep their innovations secret. Taking the simultaneous nature of innovation seriously also changes the way one should think about the relationship between IP and competition policies.

Firms are, for the most part, absent from the modern theory of optimal taxation. Their disappearance dates from the foundational models developed by Peter A. Diamond and James A. Mirrlees (1971) in which firms are simply mechanical vehicles for combining productive inputs into output in cost-minimizing proportions. i In contrast, firms play a central role in all modern tax systems, mostly for a reason eloquently stated by Richard M. Bird (1996): “The key to effective taxation is information, and the key to information in the modern economy is the corporation. ” In most countries, firms remit the majority of tax revenues to the government, either with regard to taxes legally owed by businesses or through withholding of taxes legally owed by employees or other businesses. ii Even when businesses are not required to remit taxes, they are often required to file information reports that can facilitate monitoring of tax liabilities. The lack of a theoretical framework that features firms handcuffs rigorous welfare analysis of a number of important policy issues. One such example is the comparative evaluation of a uniform retail sales tax (RST) versus a value-added tax (VAT). In the standard model, these two taxes—both remitted entirely by businesses—are equivalent consumption

Some international organizations are governed by unanimity rule, others by (simple or qualified) majority rules. Standard voting models, which assume that the decisions made by voting are perfectly enforceable, have a hard time explaining the observed variation in governance mode, and in particular the widespread occurrence of the unanimity system. We present a model whose main departure from standard voting models is that the organization cannot rely on external enforcement mechanisms: each country is sovereign and cannot be forced to comply with the collective decision or, in other words, the voting system must be self-enforcing. The model identifies conditions under which the organization adopts the unanimity rule, and yields rich comparative-statics predictions on the determinants of the mode of governance.