risk ; probability ; consumers ; information

It is often argued that the same expenditures on military procurement would produce a more effective defense if larger numbers of less sophisticated (and thus cheaper) weapons were purchased. This paper shows that such a result can occur even if the military derives no private consumption value from technically sophisticated weapons. Rather the organization of the decision-making process itself can produce this result. This suggests some possible solutions through organizing decision making in a different fashion.

The phenomenal growth in our public deficits over the past twenty years is a matter of public and professional concern (see Symposium, 1989). While this concern may indeed be well founded (particularly given current deficit levels), public deficits are not always bad. Certainly in times of deep recessions, short-term deficit financing can stimulate aggregate demand, increase national income, and reduce unemployment in a Keynesian fashion (see Richard Startz, 1989). Second, long-term deficit financing may be needed to sustain a long-term path of optimal consumption (see Peter Diamond, 1965). Third, public deficits (including pay-as-yougo Social Security) can offer welfare gains for significant subsets of consumers who have been liquidity constrained (R. Glenn Hubbard and Kenneth Judd, 1986), who have been unable to purchase indexed private annuities (Alan Blinder, 1988), or who have been unable to sufficiently diversify their investment portfolios away from human capital (Robert Merton, 1983). Finally, Robert Barro (1979) has argued that public deficits may be an important policy instrument to insure intertemporal welfare maximization when public expenditures are stochastic and public taxes are economically inefficient; taxes can be smoothed to reduce the lifetime excess burden of public financing. The concern today is not that we have deficits, but rather that we may be overdoing a good thing. If this is the issue, then we need to ask: Why, and what can be done about it? This is my agenda here. I. The Political Economy of Recent Deficits

It is often argued that the same expenditures on military procurement would produce a more effective defense if larger numbers of less sophisticated (and thus cheaper) weapons were purchased. This paper shows that such a result can occur even if the military derives no private consumption value from technically sophisticated weapons. Rather, the organization of the decision-making process itself can produce this result. This suggests some possible solutions through organizing decision-making in a different fashion.

This paper tests the rationality of individual price forecasts in a panel of professional forecasters. Here, unlike in most previous studies, rationality is not rejected. The results here differ because (1) using individual forecasts avoids aggregation bias, (2) comparison of forecasts to initial data avoids bias due to data revision, (3) the professional forecasters have economic incentives to state their expectations accurately, (4) a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used.