Knowledge that Transforms

Forward-looking agents care about expected future utility flows, and hence have higher current felicity if they are optimistic. This paper studies utility-based biases in beliefs by supposing that beliefs maximize average felicity, optimally balancing this benefit of optimism against the costs of worse decision making. A small optimistic bias in beliefs typically leads to first-order gains in anticipatory utility and only second-order costs in realized outcomes. In a portfolio choice example, investors overestimate their return and exhibit a preference for skewness; in general equilibrium, investors' prior beliefs are endogenously heterogeneous. In a consumption-saving example, consumers are both overconfident and overoptimistic.

The market for developing country sovereign debt has become increasingly competitive. Is this necessarily good for welfare? Or, is there scope for benefi-cial government intervention to reduce competition, and promote coordination, among creditors? This paper reviews recent theoretical work on the market for developing country sovereign debt that shows that competition can reduce welfare. Further, it argues that while private sector creditor organizations have been successful at coordinating existing creditors in history, government inter-vention to discourage entry by new creditors may be welfare improving today. In the past three decades, the market for developing economy sovereign lending has grown increasingly competitive. Advances in telecommunications and the removal of capital market regulations have reduced the costs of doing business. At the same

Risk Aversion and Incentive Effects: Comment by Glenn W. Harrison, Eric Johnson, Melayne M. McInnes and E. Elisabet Rutström. Published in volume 95, issue 3, pages 897-901 of American Economic Review, June 2005

Demand Reduction in Multi-Unit Auctions: Evidence from a Sportscard Field Experiment: Reply by Richard Engelbrecht-Wiggans, John A. List and David H. Reiley. Published in volume 95, issue 1, pages 472-476 of American Economic Review, March 2005

For more than one hundred years, economists have discussed the concept of positional goods—that the utility conferred by many, perhaps even most, goods depends not only on the amount the individual consumes, but also on the amount others consume (e.g., Thorstein Veblen, 1899; James Duesenberry, 1949; John K. Galbraith, 1958; Robert Frank, 1985). While economic interest in “positional goods” is increasing (e.g., Mark Pingle and Mike Mitchell, 2002; Kenneth Arrow et al., 2004; Ed Hopkins and Tatiana Kornienko, 2004), the literature remains largely theoretical rather than empirical. If status concerns affect all items in the utility function equally (leisure as well as goods), the positional effect would operate like a lump-sum tax, reducing well-being without changing the allocation of time or money (Arrow et al., 2004). However, if positional concerns are stronger for some things than for others, then in order to understand how people can become better off in well-being, not simply in wealth, we must investigate how interpersonal competition interacts with material gains (Frank, 1997). Evidence about what goods are more positional than others is essential for correct policy recommendations (Gregory Besharov, 2002), but little is actually known about the relative positional rankings of items in the typical consumer’s utility function. Four hypotheses proposed in the literature are:

Do Faculty Serve as Role Models? The Impact of Instructor Gender on Female Students by Eric P. Bettinger and Bridget Terry Long. Published in volume 95, issue 2, pages 152-157 of American Economic Review, May 2005

Different beliefs about the fairness of social competition and what determines income inequality influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how the interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will choose low redistribution and low taxes. In equilibrium, effort will be high and the role of luck will be limited, in which case market outcomes will be relatively fair and social beliefs will be self-fulfilled. If, instead, a society believes that luck, birth, connections, and/or corruption determine wealth, it will levy high taxes, thus distorting allocations and making these beliefs self-sustained as well. These insights may help explain the cross-country variation in perceptions about income inequality and choices of redistributive policies.

In the United States, two-thirds of the nonelderly population is covered by employerprovided health insurance (EHI). According to a Kaiser Family Foundation national survey (2003), the cost of EHI has increased by over 59 percent since 2000 with no accompanying increase in the scale or scope of benefits. These increases in health insurance premiums may have significant effects on labor markets, including changes in the number of jobs, hours worked per employee, wages, and compensation packages. Indeed, it is possible that a significant portion of the increase in the uninsured population may be a consequence of employers shedding this benefit as health insurance premiums rise. Understanding how labor-market characteristics affect adjustments to increased health insurance costs is of vital policy importance. Some proposals to cover the uninsured rely on “employer mandates” requiring employers to cover eligible workers. Other proposals provide tax credits for the purchase of non-employer health insurance. The effects of these proposals on employment, wages, and health insurance coverage will be driven by the elasticities of labor supply and demand, institutional constraints on wages and compensation packages, and how much workers value the increase in health insurance costs. Since employers provide such coverage voluntarily, if workers fully value these benefits and are able to sort between firms based on their preferences, then (in the absence of other institutional constraints) they will bear the cost of the increase via reduced wages, with no accompanying change in employment, employment costs, or employee utility. There are many reasons to believe, however, that firms are limited in their ability to offset increases in the price of health insurance premiums through lower compensation, so that increases in the cost of providing health insurance may affect both employment and the structure of work. Identifying the magnitude of these effects empirically is difficult both because of data availability and because of multiple avenues for causality. In this paper we uncover the causal effect of increases in the cost of benefits on labor-market outcomes by exploiting an exogenous source of variation in the cost of providing health insurance: the recent “medical malpractice crisis” in which malpractice costs for physicians grew dramatically in some states but not in others. The growth in malpractice payments affects malpractice insurance premiums and health insurance premiums, but it should not affect other aspects of employment (see Baicker and Chandra, 2005b). Using this source of variation, we examine the effect of increases in health insurance premiums on employment patterns, earnings, and health insurance coverage. We find that the cost of increases in health insurance premiums is borne in large part by workers through increased unemployment and also through decreased hours for those workers moved from full-time jobs with benefits to parttime jobs without. These results have strong implications for the distributional impact of health-care reforms. * Both authors: Economics Department, Dartmouth College, 6106 Rockefeller Hall, Hanover, NH 03755, Dartmouth Medical School, and National Bureau of Economic Research (e-mails: [email protected], achandra@ dartmouth.edu). We thank Alan Garber, Seth Seabury, Jonathan Skinner, and Douglas Staiger for helpful conversations that have influenced this research program, and Derek Neal, Aaron Yelowitz, and conference participants at the Berger Conference for very insightful comments. We are grateful for funding from NIA-P01 AG19783-02. The opinions in this paper are those of the authors and should not be attributed to the NIA or NBER. 1 Based on tabulations of population under age 65 from the March Current Population Survey for 1988–2003. 2 There is a wide literature estimating the wage–fringe trade-off. A $1 increase in the value of fringes may be offset by a $1 reduction in wages—or a $1/(1 tax rate) reduction for tax-favored benefits. For example, Jonathan Gruber (1994) demonstrates that the passage of the Pregnancy Discrimination Act in 1978 resulted in employers shifting the entire cost of the mandate onto employees.

On 1 October 2002, the State of Alaska increased taxes on malt beverages from $0.35 per gallon to $1.07 per gallon, increased taxes on wine from $0.85 per gallon to $2.50 per gallon, and increased taxes on distilled spirits from $5.60 per gallon to $12.80 per gallon. The net effect is that the tax on a standard serving rose from about 3 cents for beer, 2 cents for wine, and 4 cents for spirits to a uniform tax of 10 cents per standard serving of each type of alcohol beverage. This paper uses primary data on alcoholic beverage prices in Alaska to study a very basic question: What was the impact of the tax hikes on prices? An alcohol tax hike is often viewed as a public health policy tool to discourage excessive alcohol consumption and alcohol-related problems such as drunk driving. The impact of a tax hike on alcoholic beverage prices is a key link in the chain of the causality from the tax to public health. Economic theory and previous empirical studies, mainly of taxes on goods other than alcoholic beverages, do not provide very much guidance on what to expect following a tax hike. It is an empirical question. To answer the question, I conducted telephone surveys, just before and a year after the tax hike, of on-premise and off-premise alcohol retail establishments across Alaska.

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