Knowledge that Transforms

This paper studies both theoretically and empirically the determinants of group formation and of the degree of participation when the population is heterogeneous, both in terms of income and race or ethnicity. We are especially interested in whether and how much the degree of heterogeneity in communities influences the amount of participation in different types of groups. Using survey data on group membership and data on US localities, we find that, after controlling for many individual characteristics, participation in social activities is significantly lower in more unequal and in more racially or ethnically fragmented localities. We also find that those individuals who express views against racial mixing are less prone to participate in the groups the more racially heterogeneous their community is.

Economists usually assume that monetary incentives improve performance, and psychologists claim that the opposite may happen. We present and discuss a set of experiments designed to test these contrasting claims. We found that the effect of monetary compensation on performance was not monotonic. In the treatments in which money was offered, a larger amount yielded a higher performance. However, offering money did not always produce an improvement: subjects who were offered monetary incentives performed more poorly than those who were offered no compensation. Several possible interpretations of the results are discussed.

Work by Kaplan and Zingales provides both theoretical arguments and empirical evidence that investment-cash �ow sensitivities are not good indicators of �nancing constraints. Fazzari, Hubbard, and Petersen {this Journal} criticize those �ndings. In this note we explain how the Fazzari et al. criticisms are either very supportive of the claims in earlier work by Kaplan and Zingales or incorrect. We conclude with a discussion of unanswered questions. Fazzari, Hubbard, and Petersen {1988} (hereinafter, FHP {1988}) introduce a methodology to identify the presence of �nancing constraints based on the differential sensitivity of corporate investment to cash �ow. Kaplan and Zingales {1997} (hereinafter, KZ) provide both theoretical arguments and empirical evidence that this differential sensitivity is not a valid measure of �nancing constraints. Fazzari, Hubbard, and Petersen {2000} (hereinafter, FHP {2000}) criticize those �ndings. In this note we explain that the main arguments in FHP {2000} are, in fact, quite supportive of KZ’s main conclusion, while the speci�c criticisms in FHP {2000} are unjusti�ed. I. POINTS OF AGREEMENT FHP {2000} admit that �nancially distressed �rms are likely to have lower investment-cash �ow sensitivities than less �nancially constrained �rms. This is exactly the point that the KZ model makes: investment-cash �ow sensitivities are not necessarily monotonic in the degree of �nancing constraints. The only disagreement FHP {2000} have with KZ is how pervasive the nonmonotonicity result is. But this is ultimately an empirical question. FHP {2000} also recognize that the literature on investmentcash �ow sensitivities has not been based on a solid theoretical foundation. As KZ point out, the practice of (1) splitting the sample according to a measure of �nancing constraints and then

We combine two experiments and a survey to measure trust and trustworthiness—two key components of social capital. Standard attitudinal survey questions about trust predict trustworthy behavior in our experiments much better than they predict trusting behavior. Trusting behavior in the experiments is predicted by past trusting behavior outside of the experiments. When individuals are closer socially, both trust and trustworthiness rise. Trustworthiness declines when partners are of different races or nationalities. High status individuals are able to elicit more trustworthiness in others.

Partisan politics and random election outcomes generate policy uncertainty and partisan business cycles. To reduce policy uncertainty, society must design the policy-making environment to overcome electoral uncertainty and partisanship. I show that delegating policy to an independent policy board with discretionary powers will produce substantial policy smoothing and lower policy uncertainty relative to a simple model in which elected officials set policy. Board members are chosen in a partisan, noncooperative environment; yet in the benchmark model, policy variability is eliminated, and the cooperative bargaining solution is replicated.

In recent times there has been a renewed interest in relationships between redistribution, growth, and welfare. Land reforms in developing countries are often aimed at improving the poor's access to land, although their effectiveness has often been hindered by political constraints on implementation. In this paper we use panel data on the sixteen main Indian states from 1958 to 1992 to consider whether the large volume of legislated land reforms have had an appreciable impact on growth and poverty. We argue that such land reforms have been associated with poverty reduction.

This paper studies repeated communication regarding a multidimensional collective decision in a large population. When preferences coincide but beliefs about the consequences of the various decisions diverge, it is shown, under some specific assumptions, that public communication causes the disagreement between beliefs either to vanish or to become one-dimensional at the limit. Multidimensional disagreement indeed allows for many directions of communication, including some that are orthogonal to the conflict, along which agents can communicate credibly. The possible convergence toward a one-dimensional conflict where no further communication takes place may be related to the empirically observed geometry ofthe political conflict in many countries.

The rapid rise in sales over the Internet and the fact that most Internet buyers pay no sales tax has ignited a considerable debate over taxes and the Internet. This paper uses new data on the purchase decisions of approximately 25,000 online users to examine the effect of local sales taxes on Internet commerce. The results suggest that, controlling for observable characteristics, people living in high sales taxes locations are significantly more likely to buy online. The results are quite robust and cannot be explained by unobserved technological sophistication, shopping costs, or other alternative explanations. The magnitudes in the paper suggest that applying existing sales taxes to Internet commerce might reduce the number of online buyers by up to 24 percent.

This paper considers how identity, a person's sense of self, affects economic outcomes. We incorporate the psychology and sociology of identity into an economic model of behavior. In the utility function we propose, identity is associated with different social categories and how people in these categories should behave. We then construct a simple game-theoretic model showing how identity can affect individual interactions. The paper adapts these models to gender discrimination in the workplace, the economics of poverty and social exclusion, and the household division of labor. In each case, the inclusion of identity substantively changes conclusions of previous economic analysis.

There is a long-standing trade-off in bioculture between concentrating on high-yield varieties and maintaining sufficient diversity to lower the risks of catastrophic infection. The paper uses a simple ecology-based model of endogenous disease to indicate how a local decision to plant more of a widely grown crop creates negative externalities by increasing the probability that new pathogens will evolve to attack the crop globally. Society's basic issue concerns where to locate on an efficiency frontier between economic profitability and a standard formula for ecological entropy-proved here to be a rigorous measure of “generalized resistance” to crop-ecosystem failure.