Knowledge that Transforms

This paper presents a theoretical and empirical analysis of the role of life expectancy for optimal schooling and lifetime labor supply. The results of a simple prototype Ben-Porath model with age-specific survival rates show that an increase in lifetime labor supply is not a necessary, or a sufficient, condition for greater life expectancy to increase optimal schooling. The observed increase in survival rates during working ages that follows from the “rectangularization” of the survival function is crucial for schooling and labor supply. The empirical results suggest that the relative benefits of schooling have been increasing across cohorts of U.S. men born between 1840 and 1930. A simple quantitative analysis shows that a realistic shift in the survival function can lead to an increase in schooling and a reduction in lifetime labor hours.

We study a two-stage model where the agent has preferences over menus as in Dekel, Lipman, and Rustichini (2001) in the first period and then makes random choices from menus as in Gul and Pesendorfer (2006) in the second period. Both preference for flexibility in the first period and strictly random choices in the second period can be, respectively, rationalized by subjective state spaces. Our main result characterizes the representation where the two state spaces align, so the agent correctly anticipates her future choices. The joint representation uniquely identifies probabilities over subjective states and magnitudes of utilities across states. We also characterize when the agent completely overlooks some subjective states that realize at the point of choice.

International audience

We consider the invertibility (injectivity) of a nonparametric nonseparable demand system. Invertibility of demand is important in several contexts, including identification of demand, estimation of demand, testing of revealed preference, and economic theory exploiting existence of an inverse demand function or (in an exchange economy) uniqueness of Walrasian equilibrium prices. We introduce the notion of “connected substitutes” and show that this structure is sufficient for invertibility. The connected substitutes conditions require weak substitution between all goods and sufficient strict substitution to necessitate treating them in a single demand system. The connected substitutes conditions have transparent economic interpretation, are easily checked, and are satisfied in many standard models. They need only hold under some transformation of demand and can accommodate many models in which goods are complements. They allow one to show invertibility without strict gross substitutes, functional form restrictions, smoothness assumptions, or strong domain restrictions. When the restriction to weak substitutes is maintained, our sufficient conditions are also “nearly necessary” for even local invertibility.

Branch selection is a key decision in a cadet's military career. Cadets at USMA can increase their branch priorities at a fraction of slots by extending their service agreement. This real-life matching problem fills an important gap in the market design literature, providing strong empirical legitimacy to a series of elegant theoretical works on matching with contracts. Although priorities fail a key substitutes condition, the agent-optimal stable mechanism is well defined, and in contrast to the current USMA mechanism it is fair, stable, strategy-proof, and respects improvements in cadet priorities. Adoption of this mechanism benefits cadets and the Army. This new application shows that the matching with contracts model is practically relevant beyond traditional domains that satisfy the substitutes condition.

The impact of R&D on growth through spillovers has been a major topic of economic research over the last thirty years. A central problem in the literature is that firm performance is affected by two countervailing “spillovers” : a positive effect from technology (knowledge) spillovers and a negative business stealing effects from product market rivals. We develop a general framework incorporating these two types of spillovers and implement this model using measures of a firm's position in technology space and productmarket space. Using panel data on U.S. firms, we show that technology spillovers quantitatively dominate, so that the gross social returns to R&D are at least twice as high as the private returns. We identify the causal effect of R&D spillovers by using changes in federal and state tax incentives for R&D. We also find that smaller firms generate lower social returns to R&D because they operate more in technological niches. Finally, we detail the desirable properties of an ideal spillover measure and how existing approaches, including our new Mahalanobis measure, compare to these criteria.

Fiscal foresight --the phenomenon that legislative and implementation lags ensure that private agents receive clear signals about the tax rates they face in the future --is intrinsic to the tax policy process.This paper develops an analytical framework to study the econometric implications of fiscal foresight.Simple theoretical examples show that foresight produces equilibrium time series with nonfundamental representations, which misalign the agents' and the econometrician's information sets.Economically meaningful shocks to taxes, therefore, cannot generally be extracted from statistical innovations in conventional ways.Econometric analyses that fail to align agents' and the econometrician's information sets can produce distorted inferences about the effects of tax policies.The paper documents the sensitivity of econometric inferences of tax effects to details about how tax information flows into the economy.We show that alternative assumptions about the information flows that give rise to fiscal foresight can reconcile the diverse empirical findings in the literature on anticipated tax changes.