Katharine Coman's “Some Unsettled Problems of Irrigation,” published in March 1911 in the first issue of the American Economic Review, addressed issues of water supply, rights, and organization. These same issues have relevance today, in the face of growing concern about the availability of fresh water worldwide. The central point of this article is that appropriative water rights and irrigation districts that emerged in the American West in the late nineteenth and early twentieth centuries in response to aridity to facilitate agricultural water delivery, use, and trade raise the transaction costs today of water markets. These markets are vital for smooth reallocation of water to higher-valued uses elsewhere in the economy and for flexible response to greater hydrological uncertainty. This institutional path dependence illustrates how past arrangements to meet conditions of the time constrain contemporary economic opportunities. They cannot be easily significantly modified or replaced ex post.

For more than a decade, an MIT-trained economist has meticulously recorded the results of nearly 75,000 deliveries of bagels and donuts to corporate offices. These bagels and donuts are left in workplaces in the morning, along with a list of prices and a lockbox. Office workers purchase the products on the honor system. Later that day, the uneaten goods and the lock box are collected and the relevant data for each office are recorded in a spreadsheet. These data provide a unique opportunity for understanding the extent to which individuals behave honestly in this setting and the factors that influence the level of honesty. An analysis of the discrepancy between the prices of the goods consumed and the actual payments deposited in the lock box yields a number of insights. First, the base payment rate is quite high. On average, payments represent almost 90 percent of the posted price. In a model of pure self-interest, one would expect very low payment rates, because there would seem to be many opportunities for individuals to take the products with almost no chance of their nonpayment being detected. Moderating the tendency to take the products without paying is the fact that low payment rates will increase the probability the delivery company stops serving the company. Paying for one’s bagels and donuts, viewed in this light, is a public good for other office workers. Thus, one might expect a strong negative relationship between office size and payment rates, which is not present in the data. Rather, the data appear more consistent with a model in which there are internal, nonpecuniary costs associated with stealing the bagels and donuts, i.e., people overwhelmingly pay for the products because it would be wrong not to do so. The observed payment rates are systematically related to a variety of observable factors. For instance, payment rates fall in response to increases in the posted price. This is consistent with the increase in financial costs pushing some marginal consumers to be willing to sustain the moral cost associated with not stealing the goods or paying less than full price. Payment rates are higher when many of the bagels and donuts go uneaten, suggesting that the marginal consumer pays a lower share of the posted price than the inframarginal consumer. Purchasers of donuts appear to be more likely to pay less than the full price. There is a sharp and persistent increase in the payment rate following the September 11 terrorist attacks.

Using Electoral Cycles in Police Hiring to Estimate the Effects of Police on Crime: Reply by Steven D. Levitt. Published in volume 92, issue 4, pages 1244-1250 of American Economic Review, September 2002

Some previous studies have emphasized differences between labor-supply responses on the extensive margin (participation) and intensive margin (hours worked) (e.g., James J. Heckman, 1993; Jean Kimmel and Thomas J. Kniesner, 1998). Recent tax and welfare policy changes provide a potentially more convincing way of identifying these responses than is available in other nonexperimental data. The Earned Income Tax Credit (EITC) changes during the 1990– 1996 period sharply altered the budget sets of single mothers over a short period of time. These changes in incentives are likely to be unrelated to differences across individuals in the desire to work and thus are likely to be exogenous to labor-supply decisions. This lack of exogeneity is harder to claim for wage differences across people, which are the main alternative source of identifying variation. In addition to preference heterogeneity, wages are driven by supply and demand factors that one must account for to obtain valid estimates using wage variation. The EITC unequivocally encourages single parents to work at least some hours during a year because it shifts out the budget set at all positive hours points. This first prediction is clearly confirmed by the data. In addition, theory implies that the EITC will decrease hours worked among those already working because most recipients are on the plateau or phase-out portions of the credit schedule. For these recipients, the EITC reduces or does not affect the after-tax wage while at the same time discouraging work through the income effect of the credit payment. However, recent hours-worked patterns for EITC-eligible individuals do not appear to fit this second prediction. Hours and weeks worked by likely recipient groups have not fallen. This paper analyzes this puzzling finding, building on earlier work by Nada Eissa and Jeffrey Liebman (1996) and Meyer and Dan T. Rosenbaum (1999). This study shows that nearly all of the laborsupply adjustment of single mothers occurs at the extensive margin, not the intensive margin. This finding raises the issue of what model features are needed to explain both participation and hours but leaves the answer to be provided in future work. This finding also suggests that the large literature simulating alternative policies for low-wage workers such as the EITC may be misleading because nearly all work has used models that imply similar responses on participation and hours margins.

In his path-breaking 1937 article, Ronald Coase first identified the determinants of a firm's scope as an important research question. Although Coase's question initially attracted little attention, it has emerged over the last 25 years as a central issue in industrial organization. Much of the literature on firm scope since Coase uses the transaction-cost economics approach (henceforth, the TCE) pioneered by Oliver Williamson (1975, 1979, 1985) and Benjamin Klein et al. (1978). The TCE starts with the assumption that market transactions are plagued by incomplete contracts and the development of lock-in among trading partners. Lock-in leads the value of the relationship to exceed the value of the trading partners' outside alternatives creating what Klein et al. called quasi-rents. Contractual incompleteness gives contracting parties the ability to engage in opportunistic behavior to increase their share of these quasi-rents, leading to efficiency losses in market transactions. Internal procurement, on the other hand, involves its own inefficiencies, most notably the costs of bureaucracy and lowpowered incentives. According to the TCE, the optimal organizational form is found by comparing the efficiencies of these distinct transactional modes. Its primary prediction is that, as market transactions become characterized by increasing levels of quasi-rents and incompleteness in contracts, the likelihood of integration should increase. More recently, a great deal of attention has focused on an alternative theory of firm scope, the property-rights theory (henceforth, the PRT), pioneered by Sanford Grossman and Oliver Hart (1986) and Hart and John Moore (1990) (see also Hart, 1995). Like the TCE, the PRT starts with the assumption that contracts are incomplete and that lock-in often develops among trading partners. It then focuses on how ownership of physical assets, which confers residual rights of control over the assets, alters the efficiency of trading relations. In the process of doing so, the PRT produces a theory that differs from the TCE in three ways. The first is methodological rather than substantive: the PRT is substantially more formal than the (largely verbal) TCE. Second, the PRT focuses on distortions in ex ante investments, in contrast to the ex post haggling costs that are a major focus of the TCE.1 Third, the PRT assumes that efficiency losses are of the same nature in all ownership structures. That is, ownership of physical assets affects the parties' abilities to engage in opportunistic behavior not only in market transactions, but also within the firm. A very large empirical literature exists lending support to the TCE (for one survey, see Howard A. Shelanski and Peter G. Klein [1995]). In a typical study, some measure of lock-in, such as the specificity of the product procured or investments made, is related to the choice of whether to integrate. The strong association that this literature has found between specificity and integration has made the TCE

The U.S. government established a national weather organization in 1870. Changes in Great Lakes cargo and hull losses, and shipping rates from Chicago to Buffalo, provide evidence of the value of storm warnings on the Great Lakes. Nearly half of the Great Lakes storm-warning stations were closed during the fall of 1883 because of appropriations reductions. This exogenous shock permits the econometric estimation of the value of storm-warning locations on the Great Lakes. The results indicate that the social rate of return for weather expenditures during the Weather Bureau's founding period was at least 60 percent.

The U.S. government established a national weather organization in 1870. Changes in Great Lakes cargo and hull losses, and shipping rates from Chicago to Buffalo, provide evidence of the value of storm warnings on the Great Lakes. Nearly half of the Great Lakes storm-warning stations were closed during the fall of 1883 because of appropriations reductions. This exogenous shock permits the econometric estimation of the value of storm-warning locations on the Great Lakes. The results indicate that the social rate of return for weather expenditures during the Weather Bureau's founding period was at least 60 percent.