Knowledge that Transforms

The concept of the Good Society--grounded in principles of reciprocity and the Golden Rule--is as ancient as human civilization. To many the concept may appear in conflict with the goings-on of financial markets. This may be especially true after the financial crisis. Financial theory and financial legislation cannot ignore this apparent conflict, but must instead find ways to reduce it. When teaching economics it is important to convey how individuals and organizations impose rules and standards which help reconcile their deeply-held beliefs with their business practices.

Crainich, Eeckhoudt, and Trannoy (2013) show that mixed risk lovers are prudent. I show that common risk loving utility functions may not exhibit mixed risk loving—as is typical for risk aversion and mixed risk aversion—and thus these traits should be carefully distinguished. In particular, risk lovers may be imprudent.

Immigrants residing among many coethnics are especially likely to receive SSI for a disability when they belong to high SSI take-up immigrant groups. After showing that this relationship cannot be fully explained by differences in health, we consider the likely sources of these network effects by separately examining their role in the decision to apply for SSI and, conditional on applying, their role in determining who ultimately receives benefits. Our results suggest that networks may increase the probability of applying for SSI despite minor disabilities, but it is unlikely that network effects are driven by egregious lies on applications.

In many economic models, objects of interest are functions which satisfy conditional moment restrictions. Economics does not restrict the functional form of these models, motivating nonparametric methods. In this paper we review identification results and describe a simple nonparametric instrumental variables (NPIV) estimator. We also consider a simple method of inference. In addition we show how the ability to uncover nonlinearities with conditional moment restrictions is related to the strength of the instruments. We point to applications where important nonlinearities can be found with NPIV and applications where they cannot.

The control function approach is a convenient method of estimation in simultaneous equation systems. This requires that the system can be expressed in triangular form with variables satisfying a conditional mean independence restriction. Linear simultaneous models with additive errors can always be expressed in this form. However, in nonlinear nonadditive simultaneous systems, conditional independence requires a strong additional restriction known as control function separability. We argue that nonadditive models are a key characteristic of simultaneous models of economic behavior with unobserved heterogeneity. We review alternative “system” approaches and document the biases that occur when the control function approach is used inappropriately.

This paper responds to the comment of Di Tella and Dubra (2013). We first clarify that the model of Alesina and Angeletos (2005) admits two distinct types of multiplicity: one that is at the core of their contribution, and a separate one that is at work in Di Tella and Dubra's example. We then proceed to show how Alesina and Angeletos's results are robust to alternative specifications of the voting mechanism.

We analyze the optimal policy of an antitrust authority towards horizontal mergers when merger proposals are endogenous and firms choose among alternative mergers. In our model, the optimal policy of an antitrust authority that seeks to maximize expected consumer surplus imposes a tougher standard on “larger” mergers, i.e., those involving firms with a larger pre-merger market share. The optimal policy is a response to a bias in firms' proposal incentives: firms always propose a larger merger when it is better for consumers than a smaller one, but sometimes will propose the larger one even when it is worse for consumers.

A popular environmental policy is to pay forest owners for avoiding deforestation on their land. This is an example of “payments for ecosystem services” (PES). This paper shows that liquidity constraints can limit the effectiveness of PES programs. If an individual would have cut down trees to sell them, his opportunity costs are more front-loaded than the stream of PES income. If credit constrained, he might decline the program even if the net present value (NPV) of the PES income exceeds the NPV of his opportunity costs. I present evidence consistent with this prediction using data on forest owners in Uganda.

In August 2006, the Italian government released one-third of the nation's prison inmates via a national collective pardon. We test for a discontinuous break in national crime rates corresponding to the mass release. We also test for the effect of the return of the incarceration rate to its predicted steady state level on national crime rates. Finally, we exploit regional variation in prison releases based on the province of residence of pardoned inmates. All three sources of variation yield substantial incapacitation effect estimates and suggest that the crime-preventing effects of incarceration diminish with increases in the incarceration rate.

This paper argues that the possibility of bailouts to financial intermediaries distorts the supply price of capital and creates an argument for taxing financial bonuses separately from other sources of income. We develop a model of financial contracting where intermediaries compete for workers whose actions affect productivity and risk-taking in the financial sector. This derives the second-best optimum and market equilibrium. The optimal taxes that we propose increase both equity and efficiency compared to the pure market outcome.