Knowledge that Transforms

“Defensive medicine” is a potentially serious social problem: if fear of liability drives health care providers to administer treatments that do not have worthwhile medical benefits, then the current liability system may generate inefficiencies much larger than the costs of compensating malpractice claimants. To obtain direct empirical evidence on this question, we analyze the effects of malpractice liability reforms using data on all elderly Medicare beneficiaries treated for serious heart disease in 1984, 1987, and 1990. We find that malpractice reforms that directly reduce provider liability pressure lead to reductions of 5 to 9 percent in medical expenditures without substantial effects on mortality or medical complications. We conclude that liability reforms can reduce defensive medical practices.

We show that a manufacturer facing uncertain demand and selling through a competitive retail market may wish to support adequate retail inventories by preventing the emergence of discount retailers. In our model, discounters offer low prices made possible by low probability of being saddled with unsold inventories in the event of slack demand. Full-price retailers are compensated for a higher probability of unsold inventories by a higher retail price when they sell. We show that preventing discounting increases the manufacturer's wholesale demand and profits, and we delineate demand conditions under which equilibrium inventory holding and consumer welfare increase.

We study the effect of public insurance for children on their utilization of medical care and health outcomes by exploiting recent expansions of the Medicaid program to low-income children. These expansions doubled the fraction of children eligible for Medicaid between 1984 and 1992. Take-up of these expansions was much less than full, however, even among otherwise uninsured children. Despite this take-up problem, eligibility for Medicaid significantly increased the utilization of medical care, particularly care delivered in physicians' offices. Increased eligibility was also associated with a sizable and significant reduction in child mortality.

We explore the role that choice of comparison groups plays in explaining impasse in teacher contract negotiations. We hypothesize that the negotiators select “comparable” districts in a biased fashion such that teachers' salaries in districts that unions view as comparable are higher than teachers' salaries in districts that school boards view as comparable. We also predict that strike activity is positively related to the difference in the salary levels of the unions' and boards' lists of comparables. We test these predictions using a unique combination of subjective survey and field data on teacher contract negotiations in Pennsylvania. Both hypotheses are supported by the data.

Historically, lenders have been accused of “redlining” minority neighborhoods as well as refusing to lend to minority applicants. Considerable bank regulation is designed to prevent both actions. However, the strong correlation between race and neighborhood makes it difficult to distinguish the impact of geographic discrimination from the effects of racial discrimination. Previous studies have failed to untangle these two influences, in part, because of severe omitted variable bias. The data set in this paper allows the distinct effects of race and geography to be identified, and it shows that the evidence for redlining is weak.

We develop a model of electoral competition in which citizens choose whether or not to run as candidates. A winner implements her favorite policy. The equilibrium number of candidates depends negatively on the cost of running and positively on the benefits of winning. For some parameter values all equilibria under plurality rule have exactly two candidates, whose positions are distinct. Two-candidate elections are more likely under plurality rule than under a runoff system (cf. Duverger's Law). The candidates' positions are less differentiated under a runoff system. There exist equilibria under both systems in which some candidates have no chance of winning.

Increased HIV risk creates incentives for people with low sexual activity to reduce their activity, but may make high-activity people fatalistic, leading them to reduce their activity only slightly, or actually increase it. If high-activity people reduce their activity by a smaller proportion than low-activity people, the compo-sition of the pool of available partners will worsen, creating positive feedbacks, and possibly multiple steady states. Early public health efforts may allow socie-ties to reach more favorable steady states. Nearly 18 million people have been infected by HIV [WHO 1995], the majority through heterosexual transmission in devel-oping countries. Prevalence among 30- to 40-year-olds in some districts of Uganda is 40 percent [Barnett and Blaikie 1992], and prevalence among prostitutes in Nairobi reached 80 percent by 1987 [Over and Piot 1993]. 1 Surveys of sexual activity and epidemiological models sug-gest that the behavior of a small group of highly sexually active people is critical to the spread of the epidemic [Hethcote and Yorke 1984; Over and Piot 1993]. However, most epidemiological models treat behavior as independent of prevalence. This may be in part because there are little data on how prevalence affects the rate of partner change, and in part because the available evi-dence suggests that people have reacted differently to the epi-demic. Although some people have adopted safer behavior in response to increased prevalence [McKusick et al. 1985; Ahituv, Hotz, and Philipson 1993], there is anectodal evidence of fatalism among some TV drug users and homosexuals in developed coun-tries, and prostitution has continued at high levels in parts of Africa and Asia. 2 This paper integrates formal analyses of behavioral choice and epidemiological dynamics in heterogeneous populations. Un-surprisingly, increases in the probability of infection from an additional partner will create incentives for people with low sex-

We study a barter economy in which each good is produced in two qualities and no trader can distinguish between the qualities of those goods he neither consumes nor produces. We show that in competitive equilibrium there exists a (unique) good—the one for which the discrepancy between qualities is smallest—that serves as the medium of exchange: this good mediates every trade. Equilibrium is inefficient because production of the medium would be lower if it were not for its mediating role. Introducing fiat money enhances welfare by eliminating this distortion. However, high inflation drives traders back to the commodity medium.

Despite a surplus of candidates for most teaching jobs, a strong academic record does little for an applicants job prospects. This does not appear to result from lukewarm interest on the part of such applicants or choosiness about the positions they accept. Administrators' lack of interest in these candidates may reflect the weakness of competitive pressures in public education. Policies intended to improve teacher quality need to consider incentives on both the demand and supply sides of the market.

We present a model of consumer search with learning in which cost shocks have different short- and long-range effects on prices. In the short run, consumers confuse general cost shocks, common to all firms in the industry, with firm-specific shocks. In the case of a general cost increase, this promotes an excessive propensity to search, restraining the amount by which prices increase in the short run. Conversely, in the case of an idiosyncratic cost increase, consumers search too little, causing the prices of high-cost firms to overshoot.