Knowledge that Transforms

During the World War II and Korean War era, the U.S. military freely distributed cigarettes to overseas personnel and provided low-cost tobacco products on domestic military bases. In fact, even today the military continues to sell subsidized tobacco products on its bases. Using a variety of instrumental variables approaches to deal with nonrandom selection into the military and into smoking, we provide substantial evidence that cohorts with higher military participation rates subsequently suffered more premature mortality. More importantly, we show that a large fraction, 35 to 79 percent, of the excess veteran deaths due to heart disease and lung cancer are attributable to military-induced smoking.

The property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives, while bargaining is ex post efficient. In contrast, transaction cost economics emphasizes ex post inefficiencies. In the present paper, a party may invest and acquire private information about the default payoff that it can realize on its own. Inefficient rent seeking can overturn prominent implications of the property rights theory. In particular, ownership by party B may be optimal, even though only the indispensable party A makes an investment decision.

After more than a decade of negotiations and planning under the Framework Convention on Climate Change (FCCC), the first binding international agreement to control the emissions of greenhouse gases has come into effect in the Kyoto Protocol. The first budget period of 2008–2012 is at hand. Moreover, the scientific evidence on greenhouse warming strengthens steadily as observational evidence of warming accumulates. The institutional framework of the Protocol has taken hold solidly in the European Union’s Emissions Trading Scheme (ETS), which covers almost half of Europe’s carbon dioxide emissions. Notwithstanding this apparent success, the Kyoto Protocol is widely seen as somewhere between troubled and terminal. Early troubles came with the failure to include the major developing countries along with lack of an agreedupon mechanism to include new countries and extend the agreement to new periods. The major blow came when the United States withdrew from the treaty in 2001. By 2002, the Protocol covered only 30 percent of global emissions, while the hard enforcement mechanism in the ETS accounts for about 8 percent of global emissions. Even if the current Protocol is extended, models indicate that it will have little impact on global temperature change. Unless there is a dramatic breakthrough or a new design, the Protocol threatens to be seen as a monument to institutional overreach. Nations are now beginning to consider the structure of climate-change policies for the period after 2008 to 2012. Some countries, states, cities, companies, and even universities are adopting their own climate-change policies. Are there, in fact, alternatives to the scheme of tradable emissions permits embodied in the Protocol? The fact is that alternative approaches have not had a serious hearing among natural scientists or among policymakers. What are some alternatives? For global public goods, there are three potential approaches: command-and-control regulation, quantity-oriented market approaches, and taxor price-based regimes. Of these, only the tradable-quantity and the price-like regimes have any hope of being reasonably efficient. Under a tradable-quantity approach, an agreement proceeds by setting limits on emissions by different countries. The limits are partially or wholly transferable among countries. This is the approach taken under the Kyoto Protocol. This approach has very limited international experience under existing protocols such as the CFC (chlorofluorocarbon) mechanisms and somewhat broader experience under national trading regimes, such as the U.S. sulfur dioxide regime. A radically different approach is to use harmonized prices, fees, or taxes as a method of coordinating policies among countries. This approach has no international experience in the environmental area, although it has modest experience nationally in such areas as the U.S. tax on ozone-depleting chemicals. On the other hand, the use of harmonized, price-type measures has extensive international experience in fiscal and trade policies, such as with the harmonization of taxes in the European Union and harmonized tariffs in international trade. These thoughts on the structure of international agreements to control global warming should not be regarded as negotiating strategies

Does European Unemployment Prop Up American Wages? National Labor Markets and Global Trade: Comment by Jürgen Meckl. Published in volume 96, issue 5, pages 1924-1930 of American Economic Review, December 2006

This paper reports an experiment that elicits subjects' initial responses to 16 dominance-solvable two-person guessing games. The structure is publicly announced except for varying payoff parameters, to which subjects are given free access. Varying the parameters allows very strong separation of the behavior implied by leading decision rules. Subjects' decisions and searches show that most subjects understood the games and sought to maximize payoffs, but many had simplified models of others' decisions that led to systematic deviations from equilibrium. The predictable component of their deviations is well explained by a structural nonequilibrium model of initial responses based on level-k thinking.

Helping Infant Economies Grow: Foundations of Trade Policies for Developing Countries by Bruce Greenwald and Joseph E. Stiglitz. Published in volume 96, issue 2, pages 141-146 of American Economic Review, May 2006

Water utilities are reminiscent of network industries and are characterized by important fixed costs. These factors contribute to a single firm serving an area justifying public intervention on pricing. About one fourth of U.S. water utilities is private and subject to regulation. Regulators are unlikely to be perfectly informed and regulation is unlikely to be costlessly implemented. These inherent imperfections have lead economists to consider the incentive properties of regulatory procedures using the economics of information. See David Baron (1989). The empirical literature on regulation has focused on evaluating the effects of regulation on prices, firms ’ costs, efficiency and innovation in sectors such as airline, electricity and energy as surveyed by Paul Joskow and Nancy Rose (1989). Few of these empirical studies rely on the socalled theory of regulation. Regarding the water industry, there is an abundant literature on residential water demand, firms ’ cost and their efficiency given their public versus private nature. Relying on a model with asymmetric information and a sample of California water utilities, Frank Wolak (1994) assesses the consumer welfare loss due to asymmetric information and shows that the model with asymmetric information provides a superior description of the cost and demand data than the model under perfect

There are substantial differences between open-source projects and traditional innovative efforts in private firms. Private firms usually pay their workers, direct and manage their efforts, and control the output and intellectual property created. In an open-source project, however, a body of original material is made publicly available for others to use, under certain conditions. Contributions to open-source projects are made by a diverse array of individual contributors, and for-profit corporations, who must often agree to make enhancements to the original material widely available for nominal cost. This paper empirically examines the dynamics of contributions to open-source software projects. We show that the share of corporate contributions in a sample of approximately 100 open-source projects between 2001 and 2004 is greater in larger and growing projects.

We demonstrate the existence of multiple dimensions of private information in the long-term care insurance market. Two types of people purchase insurance: individuals with private information that they are high risk and individuals with private information that they have strong taste for insurance. Ex post, the former are higher risk than insurance companies expect, while the latter are lower risk. In aggregate, those with more insurance are not higher risk. Our results demonstrate that insurance markets may suffer from asymmetric information even absent a positive correlation between insurance coverage and risk occurrence. The results also suggest a general test for asymmetric information.

China has achieved tremendous economic progress in the last three decades, but there is much work to be done to make the economy resilient to large shocks, ensure the sustainability of its growth, and translate this growth into corresponding improvements in the economic welfare of its citizens. We discuss the complex challenges that Chinese policymakers face in striking the right balance in terms of speed and coordination of reforms. We argue that China's current stage of development, along with its rising market orientation and increasing integration with the world economy, may make the incremental and piecemeal approaches to reforms increasingly untenable and, in some cases, could even generate risks of their own. The present favorable domestic and external circumstances provide an excellent window of opportunity for bolder reforms and for tackling some deep-rooted problems without causing much economic disruption.