Knowledge that Transforms

economic outcomes. This literature typically focuses on investigating whether there are racespecific effects present for a particular outcome (years of school, hiring, loan applications) within a particular domain (education, labor markets, housing markets) at a particular point in time. In this paper, I discuss the need to model and measure the cumulative effects of discrimination. For simplicity, I talk about black/white racial differences, but the discussion can be applied to other group comparisons. The paper builds on the discussion of cumulative discrimination found in Blank et al. (2004). Cumulative discrimination is the measure-

Recent bank failures are followed by significant and permanent negative declines in real county income. These declines are larger for small failures than for large failures per dollar of assets, are larger for bank failures than thrift failures, and are larger for bank closures than assisted mergers. More interestingly, the failure of even healthy banks has significant and permanent negative effects on economic activity.

President in April 1994. This paper argues that the federal form of governance, which allowed for locally elected provincial governments with significant fiscal policy responsibilities, was essential for this successful transition. An appropriately structured federal constitution can allow for democratic rule by the (often poor) majority, while protecting to a significant degree the economic interests of the previous ruling (usually rich) minority. A federal constitution must resolve three

This paper studies how to protect future generations from expropriation and to induce optimal investment in intergenerational public goods (IPGs), by introducing constitutional restrictions on the tax base. The type of tax-base restrictions that we consider places limits on the tax instruments that the government can use to raise revenue, but not on the level of expenditures or debt. We show that the introduction of a constitutional amendment requiring that IPGs and debt be financed with land taxes makes intergenerational expropriation impossible and, for many cases of interest, induces optimal investment in IPGs. We also show that a weaker constitutional amendment requiring that IPGs be financed with land taxes, but imposing no restrictions on how to finance the debt, has a positive impact on IPGs, but not on expropriation. The paper also studies the political feasibility of these reforms. We show that the first reform is not politically feasible since it hurts current generations, but the weaker reform can induce a Pareto improvement.

High nominal gas prices, new awareness of threats to national security, and growing concern about global warming have reignited discussion of ways to reduce gasoline consumption in the United States. Debate centers on changing two policies already in place: the federal gas tax and Corporate Average Fuel Economy (CAFE) standards. Two influential recent reports find that increasing the gas tax would attain a given reduction in gas consumption at lower cost than would tightening CAFE standards (National Research Council, 2002; Congressional Budget Office, 2003). The gas tax has this advantage because it encourages not just increases in fuel efficiency, but also reductions in miles driven. In contrast, CAFE standards actually encourage more driving, because increases in fuel efficiency reduce the cost of gas per mile driven. We also compare the costs of the gas tax and CAFE standard but take into account interactions with preexisting tax distortions. Many papers examine the effects of these tax interactions in other contexts, but to our knowledge none of them considers the CAFE standard (see e.g., Lars Bovenberg and Ruud de Mooij, 1994; Ian Parry, 1995; Lawrence Goulder, 1995; Bovenberg and Goulder, 1996; Parry et al., 1999; Don Fullerton and Gilbert Metcalf, 2001). These interactions reduce the cost of the gas tax but increase the cost of CAFE, thus expanding the cost advantage enjoyed by the gas tax. This difference does not arise because the gas tax raises revenue, while the CAFE standard does not. Rather, this result is similar to that in West and Williams (2004a), which showed that, since gasoline and leisure are relative complements, raising the gas tax will increase labor supply, generating additional efficiency gains. In this paper, we estimate a consumer demand system using data from the Consumer Expenditure Survey and the California Air Resources Board and find that miles driven and leisure are relative complements. Thus, the gas tax encourages labor supply by raising the cost per mile driven, producing an additional efficiency gain. Conversely, because CAFE reduces the cost per mile, it discourages labor supply and yields an additional efficiency loss. While the induced changes in labor supply are tiny relative to the labor market, they are still substantial relative to the gas market and thus have a dramatic effect on the relative costs of the two policies. Our point estimates imply that they reduce the social marginal cost of the gas tax (starting from the status quo gas tax rate and ignoring the benefits of reduced gas consumption) by almost 30 percent, while increasing the marginal cost of CAFE by nearly 60 percent. This result implies that the case for raising the gas tax rather than tightening the CAFE standard is far stronger than previous studies suggest. Indeed, it strongly suggests that any tightening at all of the CAFE standard would lower welfare unless the benefits of reduced gas consumption have been seriously underestimated.

Holt and Laury (2002) used a menu of ordered lottery choices to make inferences about risk aversion under various payment conditions. The main results of that paper were: (a) subjects are risk averse, even for relatively small payments of less than $5; (b) risk aversion increases sharply with large increases in the scale of cash payoffs; and (c) there is no significant effect from increasing the scale of hypothetical payment. With a few exceptions noted in the paper, all treatments began with a low-payment choice, followed by a choice with hypothetical payments that had been scaled up (by 20 , 50 , or 90 ), followed by a real-cash decision with the same high payment scale (20 , 50 , or 90 ), followed by a single, final, low (1 ) real payment choice. Those in the 90 treatment could earn amounts ranging from $9.00 to $346.50 in this task. As Glenn W. Harrison et al. (2004) correctly note, this design confounds order and treatment effects since the high real payment choice was always completed after the low real and high hypothetical payment tasks. In a new experiment reported below, we first seek to replicate Harrison et al.’s finding that the order effect (participating in a low-payment choice before making a high-payment choice) magnifies the scale effect. In a second treatment, each subject completes the menu of lottery choices under just one payment condition (1 or 20 , real or hypothetical), thereby eliminating any order effects. I. New Data

Anecdotes are often quite suggestive. A graduate student in economics who was serving as a teaching assistant once reported that his major professor came into his office and told him that he was spending too much of his time helping his undergraduate students and not enough time on his research. Was the professor expressing a preference for time spent on teaching over research? Or was the professor suggesting to the student that the academic market rewards research more than teaching? Regardless, the underlying message that gets transferred from such an experience, as early as graduate education and perhaps throughout a career, is that teaching is not as important or valuable as research. Such strong conclusions, however, should not be based on anecdotal evidence. Whether economics professors are less interested in teaching and more interested in research is an empirical question worthy of study. Although teaching and research choices made by economics faculty members reflect both preferences and choice sets, in this study we focus on preferences and use a national survey to compare the teaching and research views of economists with faculty members in other major disciplines.

In traditional economic models, individual utility depends only on absolute consumption. These models lie at the heart of claims that pursuit of individual self-interest promotes aggregate welfare. Recent years have seen renewed interest in economic models in which individual utility depends not only on absolute consumption, but also on relative consumption. In contrast to traditional models, these models identify a fundamental conflict between individual and social welfare. The conflict stems from the fact that concerns about relative consumption are stronger in some domains than in others. The disparity gives rise to expenditure arms races focused on positional goods—those for which relative position matters most. The result is to divert resources from nonpositional goods, causing welfare losses. Compelling theoretical and empirical evidence confirms the importance of relative consumption in individual valuations. In light of this evidence, we must question the wisdom of economic policy recommendations stemming from models that ignore relative consumption.

The paper shows how time considerations, especially those concerning contract duration, affect incomplete contract theory. Time is not only a dimension along which the relationship unfolds, but also a continuous verifiable variable that can be included in contracts. We consider a bilateral trade setting where contracting, investment, trade, and renegotiation take place in continuous time. We show that efficient investment can be induced either through a sequence of constantly renegotiated fixed-term contracts; or through a renegotiation-proof “evergreen” contract—a perpetual contract that allows unilateral termination with advance notice. We provide a detailed analysis of properties of optimal contracts.

We study security-bid auctions in which bidders compete for an asset by bidding with securities whose payments are contingent on the asset's realized value. In formal security-bid auctions, the seller restricts the security design to an ordered set and uses a standard auction format (e.g., first- or second-price). In informal settings, bidders offer arbitrary securities and the seller chooses the most attractive bid, based on his beliefs, ex post. We characterize equilibrium and show that steeper securities yield higher revenues, that auction formats can be ranked based on the security design, and that informal auctions lead to the lowest possible revenues.