Knowledge that Transforms

The conventional approach to social programme evaluation focuses on estimating mean impacts of programmes. Yet many interesting questions regarding the political economy of programmes, the distribution of programme benefits and the option values conferred on programme participants require knowledge of the distribution of impacts, or features of it. This paper presents evidence that heterogeneity in response to programmes is empirically important and that classical probability inequalities are not very informative in producing estimates or bounds on the distribution of programme impacts. We explore two methods for supplementing the information in these inequalities based on assumptions about participant decision-making processes and about the strength in dependence between outcomes in the participation and non-participation states. Dependence is produced as a consequence of rational choice by participants. We test for stochastic rationality among programme participants and present and implement methods for estimating the option values of social programmes.

In the standard portfolio problem, a shift in the distribution of the risky asset is “portfolio-dominated” if it reduces the demand for the risky asset by all risk-averse agents, irrespective of the risk-free rate. We show that the condition obtained by Landsberger and Meilijson (1993), while necessary, is not sufficient for portfolio dominance and we present an exact necessary and sufficient condition.

A common concern of evaluation studies is to learn the distribution of outcomes when a specified treatment policy, or assignment rule, determines the treatment received by each member of a specified population. Recent studies have emphasized evaluation of policies providing the same treatment to all members of the population. In particular, experiments with randomized treatments have this objective. Social programmes mandating homogeneous treatment of the population are of interest, but so are ones in which treatment varies across the population. This paper examines the use of empirical evidence on programmes with homogeneous treatments to infer the outcomes that would occur if treatment were to vary across the population. Experimental evidence from the Perry Pre-school Project is used to illustrate the inferential problem and the main findings of the analysis. Copyright 1997 by The Review of Economic Studies Limited.

The authors use a dynamic general equilibrium model to obtain quantitative estimates of the welfare cost of nominal wage contracting. They find that the welfare cost of such contracts can vary quite a lot depending on the degree of indexation, the size and persistence of monetary shocks, and the contract length. The size and persistence of technology shocks do not affect the welfare cost significantly. The elasticity of labor supply is important for the welfare cost. If the labor supply elasticity is small, the welfare cost of nominal wage contracts can be substantial. Copyright 1997 by The Review of Economic Studies Limited.

The subjective probabilities implied by Savage's (1954, 1972) Postulates are finitely but not countably additive. The failure of countable additivity leads to two known classes of dominance paradoxes, money pumps and indifference between an act and one that pointwise dominates it. There is a common resolution to these classes of paradoxes and to any others that might arise from failures of countably additivity. It consists of reinterpreting finitely additive probabilities as the "traces" of countably additive probabilities on larger state spaces. The new and larger state spaces preserve the essential decision-theoretic structures of the original spaces.