Knowledge that Transforms

In contrast to the believed similarity in their health outcomes, workers in different Western countries report very different rates of work disability. Using new data from the United States and the Netherlands, we offer a partial resolution to this paradox. We find that observed differences in reported work disability largely stem from the fact that Dutch respondents have a lower threshold in reporting whether they have a work disability than American respondents. For those who do not suffer from pain, work disability is similar in both countries once thresholds are the same. For respondents with pain, however, a significant difference remains.

In models where anticipations of future endogenous variables influence current behavior, there exists an infinity of solutions under the assumption of rational expectations. This problem has been dealt with, in the study of macro-economic models, by the implicit or explicit use of one of three additional requirements: optimality; consistency with alleged economic behavior; or conformity of the endogenous variables to an imposed stationarity condition. These requirements have coincided in existing models, leading to the choice of a unique solution, a forward solution. The purpose of this paper is to review the problem, characterize the solutions, and examine whether these requirements are acceptable. Section I presents a simple model and derives the set of solutions; the model makes no claim to generality, but has the major advantage that the issues are easily understood in this simple case. Section II discusses the requirement of consistency with economic behavior. Section III discusses the requirement of stationarity, and Section IV provides some conclusions.

This paper investigates the normative criteria that guide the allocation of a policy task to an elected politician versus an independent bureaucrat. The bureaucrat is preferable for technical tasks for which ability is more important than effort, or if there is great uncertainty about whether the policymaker has the required abilities. The optimal allocation of redistributive tasks is ambiguous, and depends on how the bureaucrat can be instructed. But irrespective of the normative conclusion, the politician prefers not to delegate redistributive policies.

This paper is based on a long-term research program with Rachel Kranton on the implications of identity for economic behavior.Our previous joint papers ( Akerlof and Kranton (2000), ( 2002) and ( 2005)) have explored implications outside of macroeconomics of utility functions dependent on people's notions of what ought to be.Some of this paper-especially Section IV ("Norms: The Missing Motivation") and Section X ("Economic Methodology")-has been directly taken from our joint manuscript: The Missing Motivation: Economics Made Human (Akerlof and Kranton (2006)).I am especially grateful to Professor Kranton for extending to me the invitation to join this project, after she had the initial insight in the spring of 1996 that concerns regarding identity were missing from economic theory.I have also benefitted from conversations with Robert Shiller, with whom I am co-authoring work on behavioral macroeconomics.