Knowledge that Transforms

Inviting political scientists to tell economists how they could do better work is an act of disciplinary generosity. The reality is that contemporary political science is a net importer of ideas and methods from other disciplines, and from none more than economics. Indeed, some of the most exciting research in political science in the past 40 years has involved the incorporation of ideas from economics. We have neither the space nor the mandate to summarize that research here, but refer interested readers to Gary J. Miller's (1997) extensive review. Our aim here is to offertwo modest case studies of specific instances of overlap between the interests and research efforts of economists and political scientists. Our first case study focuses on describing and explaining participation in the workforce, the polity, and many other social activities and organizations. Our second case study focuses on the impact of political processes and institutions on macroeconomic policies and performance. In both these instances the work of economists has been quite fruitful—but also, we think, hampered by a characteristic overreliance on standard economic models and methods. However, in both areas, recent developments may point the way toward a more constructive research style combining the theoretical and empirical rigor of economics with a broader and more eclectic approach familiar to political scientists.

When a firm offers several tariff options to its customers, the possibility arises that they will make an ex post mistake in tariff choice. This occurs since consumers cannot commit to a certain purchase level at the time they subscribe to the service option and, thus, they might find out later that a different choice of tariff could have resulted in a lower payment for their actual level of consumption. This is a common feature of increasingly important subscriptions markets, in which buyers and sellers maintain long-term, nonanonymous relations and where learning induces interesting dynamics. On the one hand, buyers may learn their taste over time, thus making the right choice as times goes by; on the other hand, the seller may design options to identify the “type” of each buyer and, if possible, to extract a higher proportion of their consumer surplus by offering tariff options that are better tailored to the profile of the consumer. This paper focuses on the first type of learning. In turn I document buyer behavior in a subscriptions market using data from a tariff experiment run by South Central Bell (SCB) in Kentucky during the second half of 1986. The most frequently studied case of subscriptions markets is the choice among Optional Calling Plans (OCPs) in the telephone industry. This paper shows that, contrary to the conven-

Nonmarket goods such as unpaid household labor, leisure, health and longevity, and the environment are important components of the standard of living. They represent a large fraction of all activities. Prime-aged men and women spend 17 percent of their day in leisure activities, and 5 and 13 percent of their time, respectively, in unpaid housework compared to 23 and 13 percent of their time, respectively, in paid work. The quantity of nonmarket goods is rising over time. In the United States, life expectancy at birth is now 77 years, having risen by 29 years since 1900. In Los Angeles County between 1980 and 1998, average annual daily exceedences of the national smog standard declined by 60 days from 71 to 11. Falling big-city murder rates merit national news headlines. Studies of living standards have focused on the tremendous change in the quantity of nonmarket goods but have assumed that the value of nonmarket goods, except for unpaid labor, has remained constant. This assumption underlies most health studies (e.g., David Cutler and Elizabeth Richardson, 1997; Kevin M. Murphy and Robert H. Topel, 2003; William T. Nordhaus, 2003). Nordhaus (2003) valued declines in mortality since 1900 using a constant value of life. Even the Boskin CPI Commission (Michael J. Boskin et al., 1998) discussed trends in the quantity of nonmarket goods (i.e., pollution and crime progress) without mentioning incorporating such goods’ implicit prices into a broader CPI measure. There is no reason to think that implicit prices or the willingness to pay for nonmarket goods has remained constant. Rising real and shadow wages have made both leisure and unpaid household labor more expensive. Rising incomes have also made such normal goods as safety, health, a temperate climate, and the environment more valuable. We document the price dynamics of nonmarket goods by estimating repeat cross-sectional hedonic regressions. We focus on two important and measurable nonmarket goods: job fatality risk and climate. In both cases we find that both price and quantity have been rising. This evidence is consistent with rising valuation. We use our estimates of job-risk compensating differentials to construct new evidence on long-run trends in value of life. Accounting for price changes affects how we view the retrospective and prospective benefits of medical innovations. A rising value of life implies that marginal improvements in safety and in longevity are becoming more valuable. We report evidence that the price of living in a temperate winter and summer climate has significantly increased over time.

The sharp decline in the stock prices of several firms at which employees held a large fraction of their 401(k) plan assets in company stock, including Enron, Global Crossing, Lucent, and Polaroid, has sparked a public-policy debate about investment options in 401(k) plans. At many large firms, particularly those with retirement saving plans that combine elements of an Employee Stock Ownership Plan (ESOP) with a traditional 401(k), a substantial fraction of defined-contribution retirement-plan assets are held in company stock. Such undiversified holdings are a source of concern because they raise the volatility of the retirement wealth for employees and expose some workers to the prospect of very small retirement values. Holding an undiversified position in employer stock may be particularly costly because of the potential correlation between company stock returns and the value of the worker’s human capital, which may depend on the company’s prospects. This paper reviews the extent of undiversified company-stock investments in 401(k) plans, evaluates the cost of such investments from an employee’s perspective, and discusses a range of policy actions that could address the excessive concentration of retirement plan assets.

We examine retail and wholesale prices for a large supermarket chain over seven and one-half years. We find that prices fall on average during seasonal demand peaks for a product, largely due to changes in retail margins. Retail margins for specific goods fall during peak demand periods for that good, even if these periods do not coincide with aggregate demand peaks for the retailer. This is consistent with “loss-leader” models of retailer competition. Models stressing cyclical demand elasticities or cyclical firm conduct are less consistent with our findings. Manufacturer behavior plays a limited role in the countercyclicality of prices.