Knowledge that Transforms

This paper modifies the modern explanation of Giffen behavior by incorporating the classical emphasis on subsistence. Specifically, the calculated redirection of consumption priorities by those reduced to subsistence income levels is embodied in the utility function, and the biological necessity of consuming sufficient nutrition to support health is modeled as a subsistence constraint. This methodology is then applied to the potato culture that existed in Ireland prior to the 1845-48 famine. It is suggested that the evolution of this culture was shaped by subsistence-driven behavior similar to the behavior that underlies the Giffen effect.

Bequest to and marriage of children can lead to a Pareto-inefficient allocation. The inefficiency (or market failure) arises because one family, making a bequest to its own child, ignores the contribution to the utility of the other family whose child enters the marriage. This note shows that an assortative mating rule based on bequests can improve or even restore Pareto efficiency when parents take account of the rule in deciding the amount of bequests to their own children.

The California One-Variety Cotton Law is an important example of technological regulation, in this case intended to serve as a de facto quality control and to mitigate externalities in production that can arise from the mixing of cottonseed at the gin. This paper describes and interprets the economic history of the law, presents a theoretical model of its economic effects, and provides quantitative estimates of the impacts on output, prices, and economic welfare, following a partial deregulation under a 1978 amendment to the law. The analysis shows that large social costs have arisen from concentrating control over the genetic base for California cotton production in the hands of a single government cotton breeder and restricting production to the use of a single selection of a single variety. Some of these costs have been eliminated by the partial deregulation in 1978 to permit private breeders to compete in the provision of genetic material, but production is still restricted to the Acala variety of cotton. While the regulation has benefited some, perhaps even a majority, of the industry participants, it has been increasingly harmful to some other growers and costly overall. The persistence of this costly regulation may be due to the distribution of its impacts: the partial deregulation yielded large increases in aggregate producer surplus but many growers experienced small losses.

Tax-supported churches were established in most American colonies. Public Congregationalist churches in New England were not privatized until the early nineteenth century. After privatization, demand for preachers rose rapidly. There is weaker evidence that church membership also rose quickly. The increase in preachers came almost totally from private denominations. The privatization of religion was further accompanied by a change in methods of finance.

This paper describes a contract theory of public finance of college education that explains why everyone pays for the college education of a lucky minority. The contract provides gambles that families desire. Optimizing the contract determines the taxes paid by all members of society, fees paid by those whose children go to college, the fraction of children who are admitted to college, and the quality of college education. Changes in wealth lead to changes in taxes and admissions, but fees and quality are invariant. The practice of using a cutoff level of precollege achievement to determine admission to college is justified by the theory.

This paper develops the quantitative implications of optimal fiscal policy in a business cycle model. In a stationary equilibrium, the ex ante tax rate on capital income is approximately zero. The tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks; thus there is no presumption that optimal labor tax rates follow a random walk. Most of the welfare gains realized by switching from a tax system like that of the United States to the Ramsey system come from an initial period of high taxation on capital income. Copyright 1994 by University of Chicago Press.

Using a game-theoretic approach, we examine possible equilibrium explanations of the often-observed phenomenon that two neighboring restaurants offering similar menus nevertheless experience vastly different demands. The essential aspect of this analysis is the presence of a consumption externality that makes the popularity itself a factor in the determination of the relative attractiveness of the restaurants.

Selection dynamics are often used to distinguish stable and unstable equilibria. This is particularly useful when multiple equilibria prevent a priori comparative static analysis. This paper reports an experiment designed to compare the accuracy of the myopic best-response dynamic and an inertial selection dynamic. The inertial selection dynamic makes more accurate predictions about the observed mutual best-response outcomes.

In this paper, a model of optimal employment contracting describes differences across countries in firing restrictions and short-time compensation systems for workers forced to work shorter hours to avoid layoff. The model predicts that the existence of a short-time compensation (STC) system will generate major fluctuations in working hours only if the STC system is more generous than the traditional unemployment insurance system. A test performed for 10 OECD countries shows that in countries with generous STC systems, the speed of adjustment of total hours worked is higher than in the United States, despite a much slower adjustment in the number of workers employed. On the other hand, in countries with less generous STC systems, hours adjustments are far from compensating the slower employment adjustments.