Knowledge that Transforms

From page 382-- "I [the author] wish to argue that the analysis provided by the neoclassical model may not be an adequate guide to policy, even if certain of its predictions are correct. Instead, I [the author] direct attention to an alternative explanation of the effects of changes in the level of public debt, which leads to very different conclusions about the welfare consequences of such policies. According to this view, 'Ricardian equivalence' fails because of imperfect financial intermediation. Some economic units are liquidity constrained, which is to say that they are unable to borrow against their future income at a rate of interest as low as that at which the government borrows. Increased government borrowing can benefit such parties, insofar as they effectively receive a highly liquid asset, government debts, in exchange for giving the government an increased claim on their future income, their own claim to which represented a highly illiquid asset. A higher public debt, insofar as it implies a higher proportion of liquid assets in private sector wealth, increases the flexibility of the private sector in responding to variation in both income and spending opportunities, and so can increase economic efficiency."

This paper presents an experimental test of the proposition that government contributions to public goods, funded by lump-sum taxation, will completely crowd out voluntary contributions. It is found that crowding-out is incomplete and that subjects who are taxed are significantly more cooperative. This is true even though the tax does not affect the Nash equilibrium prediction. This result is taken as evidence for alternative models that assume people experience some private benefit from contributing to public goods.

The information contained in one model's forecast compared to that in another can be assessed from a regression of actual values on predicted values from the two models. The authors do this for forecasts of real GNP growth rates for different pairs of models. The models include a structural model (the Fair model), various versions of the vector autoregressive model, and various versions of a model the authors call the "autoregressive components" model. The authors' procedure requires that forecasts make no use of future information and they have been careful to try to insure this, including using the version of the Fair model that existed in 1976, the beginning of their test period.

We study the selection of an equilibrium for coordination games: symmetric, simultaneous move, complete information games which have multiple, Pareto-ranked Nash equilibria. We design and experiment to explore regularities in the observed outcomes for this class of games. With replication, we find that the Nash equilibrium concept accurately predicts the strategies chosen by players in these games. However, the equilibrium outcome is not always the Pareto-dominant equilibrium so that coordination failures can arise. Moreover, we find that altering the payoffs of a dominated strategy can influence the selection of a Nash equilibrium. Our results are consistent with a modified version of Harsanyi's tracing procedure in which players initially place some positive probability that their opponent is a cooperative player even though the cooperative strategy may be dominated by another strategy.

A social exchange approach to voluntary cooperation is developed on the assumption that voluntary cooperative behavior is motivated by social approval, which is conceptualized as an emotional activity. The associated unique Nash equilibrium may have attractive welfare properties and provides an understanding of spontaneous norm emergence. Furthermore, the opening of a market or government intervention for the collective good is shown to affect voluntary cooperation negatively.

This paper tests the rationality of individual price forecasts in a panel of professional forecasters. Here, unlike in most previous studies, rationality is not rejected. The results here differ because (1) using individual forecasts avoids aggregation bias, (2) comparison of forecasts to initial data avoids bias due to data revision, (3) the professional forecasters have economic incentives to state their expectations accurately, and (4) a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used.

Taylor's series and logarithmic estimates of health state-dependent utility functions both imply that job injuries reduce one's utility and marginal utility of income, thus rejecting the monetary loss equivalent formulation. Injury valuations have unitary income elasticity, and the valuation of nonincremental risk changes and effects of base risks follow economic predictions.

In the absence of significant news, hedging strategies were blamed for the stock market crash of October 1987; but traditional models cannot explain how a relatively small amount of selling could cause so large a price drop. The authors develop a rational expectations model in which prices play an important role in shaping expectations; markets are much less liquid in their model than in traditional models. Discontinuities (or "crashes") can occur even with relatively little hedging. The model is consistent with theories as disparate as Keynes' "beauty contest" insights and Thom's "catastrophe" analysis and suggests means to reduce volatility.

The randomly assigned risk of induction generated by the draft lottery is used to construct estimates of the effect of veteran status on civilian earnings. These estimates are not biased by the fact that certain types of men are more likely than others to service in the military. Social Security administrative records indicate that, in the early 1980s, long after their service in Vietnam had ended, the earnings of white veterans were approximately 15 percent less than the earnings of comparable nonveterans.