Since the start of economic reforms in 1978, China has experienced the largest increase in income inequality of all countries for which comparable data are available. According to the World Bank (1997), China’s Gini coefficient increased from 28.2 in 1981 to 38.8 in 1995 based on official survey data. Another study that used internationally standard definitions for incomes estimated China’s Gini ratio at 38.2 in 1988 and 45.2 in 1995, a level that already surpassed many developing economies in Asia (Azizur Khan and Carl Riskin, 1998). Are these income inequality changes the consequence of institutional reforms that replaced egalitarian rewards with work incentives, employment contracts, and labor mobility? This paper uses household survey data collected by China’s State Statistical Bureau (SSB) to investigate the sources and causes of this rising inequality. By analyzing Gini ratios and generalized entropy measures, I decompose the overall inequality into three sectoral components: ( i ) inequality within rural areas, ( ii ) inequality within urban areas, and (iii ) sectoral disparity. The data indicate that increases in rural – urban income differentials have been the driving factor behind the rising overall inequality in China. I argue that urbanbiased policies and institutions, including labor mobility restrictions, welfare systems, and financial policies of inflation subsidies and investment credits to the urban sector, are responsible for the long-term rural–urban divide and the recent increases in disparity.
Is the Impact of Health Shocks Cushioned by Socioeconomic Status? The Case of Low Birthweight by Janet Currie and Rosemary Hyson. Published in volume 89, issue 2, pages 245-250 of American Economic Review, May 1999
Psychological studies show that most people are overconfident about their own relative abilities, and unreasonably optimistic about their futures (e.g. Shelly E. Taylor and J.D. Brown, 1988; Neil D. Weinstein, 1980). When assessing their position in a distribution of peers on almost any positive trait-- like driving ability (Ola Svenson, 1981 ), income prospects, or longevity-- a vast majority of people say they are above the average, although of course, only half can be (if the trait is symmetrically distributed). This paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting-- entry into competitive games or markets. Many empirical studies show that most new businesses fail within a few years. For example, using plant level data from the U.S. Census of Manufacturers spanning 1963-1982, Timothy Dunne et al. (1988) estimated that 61.5 percent of all entrants exited within five years and 79.6 percent exited within 10 years. Most of these exits are failures (see also Dunne et al., 1989a, 1989b; D. Shapiro and R.S. Khemani, 1987).
The Medicare program of health care for the aged now costs more than $5, 000 per enrollee, a national cost of more than $200 billion a year. The official projections that these costs will rise rapidly from 2.5% of GDP now to 5.5% of GDP in 2030 and 7% of GDP in 2070 assume that structural changes in health care will prevent the even more rapid growth of spending that would occur if past trends continue. These GDP shares are equivalent to increasing the payroll tax rates that rise from 5% of total wages now to 14% of total wages by 2070. Alternatively, if the increased Medicare spending is financed by an across-the-board increase in income tax rates, all tax rates would rise by 46 percent (e.g., from 28% to 41%). If Medicare costs continue to be tax financed, the sharp increase in Medicare costs would cause a substantial increase in the deadweight loss of the tax system. Even with quite favorable assumptions, the increased deadweight loss is likely to be almost as large as the direct increase in the health care costs themselves. This paper analyzes an alternative life cycle approach to paying for the cost of health care of the aged: a system of investment-based individual Retiree Health Accounts (RHAs) to which the government deposits funds during individuals' working years. At retirement the individual could use the accumulated fund to purchase a fee-for-service plan like the current Medicare package, to pay for membership in an HMO, or to establish a medical savings account with a high deductible insurance policy. Using data from the Social Security administration, I estimate that annual RHA deposits equal to about 1.4% of total payroll would eventually be enough to pay for the full increase in the cost of Medicare, obviating a nine percentage point payroll tax increase.
This paper studies a general-equilibrium model of a dynamic economy with menu costs. Each firm's productivity is exposed to idiosyncratic and aggregate productivity shocks around a trend, and the money supply to monetary shocks around a trend. All consumption, pricing, and production decisions are based on optimizing behavior. There exists a staggered Markov perfect equilibrium with prices determined by a two-sided (s, S) markup strategy. The paper analyzes the optimal markup strategy and investigates the dynamics of the price index and the aggregate output. The welfare consequences of the uncertain aggregate productivity and money supply are also examined. (JEL E31, E32)
I develop a model in which a firm's only asset is its name, which summarizes its reputation, and study the forces that cause names to be valuable, tradeable assets. An adverse selection model in which shifts of ownership are not observable guarantees an active market for names with either finite or infinite horizons. No equilibrium exists in which only good types buy good names. The reputational dynamics that emerge from the model are more realistic than those in standard game-theoretic reputation models, and suggest that adverse selection plays a crucial role in understanding firm reputation. (JEL C70, D80, L14)
Quality Improvement in Health Care: A Framework for Price and Output Measurement by Irving Shapiro, Matthew D. Shapiro and David W. Wilcox. Published in volume 89, issue 2, pages 333-337 of American Economic Review, May 1999
We evaluate the voluntary export restraint (VER) that was initially placed on exports of automobiles from Japan in 1981. We evaluate the impact this policy had on U.S. consumer welfare, firm profits, and forgone tariff revenue from its initiation through 1990. (JEL F13)
This paper reconsiders the impact of immigrants over time in the US by using the technique of generational accounting introduced by Auerbach et al. Generational accounting considers not only the net contribution of immigrants to balance but also the size of this impact in relation to the overall balance. It further compares changes in immigration policy to other policies. From the analysis three conclusions were formulated. 1) Whether immigration contributes to or helps alleviate stress depends on the future generations. If the entire imbalance currently estimated for the US is placed on future generations then the presence of new immigrants reduces the burden of the natives. 2) Fiscal gain from immigration is reduced when a policy of fiscal responsibility is followed. The gain is dependent on the extent to which government purchases rise with the immigrant population. 3) The impact of immigration on balance is extremely small in relation to the size of the overall imbalance itself. Thus immigration should not be perceived as a major source of the existing imbalance or as a potential solution to it.
Trading volume on the world’s markets seems high, perhaps higher than can be explained by models of rational markets. For example, the average annual turnover rate on the New York Stock Exchange (NYSE) is currently greater than 75 percent and the daily trading volume of foreign-exchange transactions in all currencies (including forwards, swaps, and spot transactions) is roughly one-quarter of the total annual world trade and investment flow (James Dow and Gary Gorton, 1997). While this level of trade may seem disproportionate to investors’ rebalancing and hedging needs, we lack economic models that predict what trading volume in these market should be. In theoretical models trading volume ranges from zero (e.g., in rational expectation models without noise) to infinite (e.g., when traders dynamically hedge in the absence of trading costs). But without a model which predicts what trading volume should be in real markets, it is difficult to test whether observed volume is too high. If trading is excessive for a market as a whole, then it must be excessive for some groups of participants in that market. This paper demonstrates that the trading volume of a particular class of investors, those with discount brokerage accounts, is excessive. Alexandros V. Benos (1998) and Odean (1998a) propose that, due to their overconfidence, investors will trade too much. This paper tests that hypothesis. The trading of discount brokerage customers is good for testing the overconfidence theory of excessive trading because this trading is not complicated by agency relationships. Excessive trading in retail brokerage accounts could, on the other hand, result from either investors’ overconfidence or from brokers churning accounts to generate commissions. Excessive institutional trading, too, might result from overconfidence or from agency relationships. Dow and Gorton (1997) develop a model in which money managers, who would otherwise not trade, do so to signal to their employers that they are earning their fees and are not “simply doing nothing.” While the overconfidence theory is tested here with respect to a particular group of traders, other groups of traders are likely to be overconfident as well. Psychologists show that most people generally are overconfident about their abilities (Jerome D. Frank, 1935) and about the precision of their knowledge (Baruch Fischhoff et al., 1977; Marc Alpert and Howard Raiffa, 1982; Sarah Lichtenstein et al., 1982). Security selection can be a difficult task, and it is precisely in such difficult tasks that people exhibit the greatest overconfidence. Dale Griffin and Amos Tversky (1992) write that when predictability is very low, as in securities markets, experts may even be more prone to overconfidence than novices. It has been suggested that investors who behave nonrationally will not do well in financial markets and will not continue to trade in them. There are reasons, though, why we might expect those who actively trade in * Graduate School of Management, University of California, Davis, CA 95616. This paper is based on my dissertation at the University of California-Berkeley. I would like to thank Brad Barber, Hayne Leland, David Modest, Richard Roll, Mark Rubinstein, Paul Ruud, Richard Thaler, Brett Trueman, and the participants at the Berkeley Program in Finance, the National Bureau of Economic Research behavioral finance meetings, the Conference on Household Financial Decision Making and Asset Allocation at The Wharton School, the Western Finance Association meetings, and the Russell Sage Institute for Behavioral Economics, and seminar participants at the University of California-Berkeley, the Yale School of Management, the University of California-Davis, the University of Southern California, the University of North Carolina, Duke University, the University of Pennsylvania, Stanford University, the University of Oregon, Harvard University, the Massachusetts Institute of Technology, Dartmouth College, the University of Chicago, the University of British Columbia, Northwestern University, the University of Texas, UCLA, the University of Michigan, and Columbia University for helpful comments. I would also like to thank Jeremy Evnine and especially the discount brokerage house which provided the data necessary for this study. Financial support from the Nasdaq Foundation and the American Association of Individual Investors is gratefully acknowledged. 1 The NYSE website (http://www.nyse.com/public/ market/2c/2cix.htm) reports 1998 turnover at 76 percent.