Knowledge that Transforms

A basic premise of representative democracy is that all those subject to policy should have a voice in its making. However, policies enacted by electorally accountable governments often fail to reflect the interests of disadvantaged minorities. This paper exploits the institutional features of political reservation, as practiced in Indian states, to examine the role of mandated political representation in providing disadvantaged groups influence over policy-making. I find that political reservation has increased transfers to groups which benefit from the mandate. This finding also suggests that complete policy commitment may be absent in democracies, as is found in this case.

This paper studies the evolution of sectoral concentration in relation to the level of per capita income. We show that various measures of sectoral concentration follow a U-shaped pattern across a wide variety of data sources: countries first diversify, in the sense that economic activity is spread more equally across sectors, but there exists, relatively late in the development process, a point at which they start specializing again. We discuss this finding in light of existing theories of trade and growth, which generally predict a monotonic relationship between income and diversification.

Expert Opinion and Compensation: Evidence from a Musical Competition by Victor A. Ginsburgh and Jan C. van Ours. Published in volume 93, issue 1, pages 289-296 of American Economic Review, March 2003

This paper studies the ability of nonmarket institutions to invest optimally in forward intergenerational goods (FIGs), such as education and the environment, when agents are selfish or exhibit paternalistic altruism. We show that backward intergenerational goods (BIGs), such as social security, play a crucial role in sustaining investment in FIGs: without them investment is inefficiently low, but with them optimal investment is possible. We also show that making the provision of BIGs mandatory crowds out the voluntary provision of FIGs, and that population aging can increase investment in FIGs.

Charitable Bequests and Taxes on Inheritances and Estates: Aggregate Evidence from across States and Time by Jon M. Bakija, William G. Gale and Joel B. Slemrod. Published in volume 93, issue 2, pages 366-370 of American Economic Review, May 2003

Banning affirmative action from college admissions cannot prevent an admissions office that cares about diversity from achieving it in ways other than explicitly considering race. We model college admissions where candidates from two groups with different average qualiÞcations compete for a Þxed number of seats. Under affirmative action, an admissions office that cares both about quality and diversity admits the best-qualiÞed candidates from each group. Under a ban, it may promote diversity by partially ignoring candidates’ qualiÞcations and therefore not admitting the best-qualiÞed candidates from either group. A ban always reduces diversity and may also lower quality. (JEL J71 ,J 15, I28)

Using a new data set consisting of six years of real-time exchange-rate quotations, macroeconomic expectations, and macroeconomic realizations, we characterize the conditional means of U.S. dollar spot exchange rates. In particular, we find that announcement surprises produce conditional mean jumps; hence high-frequency exchange-rate dynamics are linked to fundamentals. The details of the linkage are intriguing and include announcement timing and sign effects. The sign effect refers to the fact that the market reacts to news in an asymmetric fashion: bad news has greater impact than good news, which we relate to recent theoretical work on information processing and price discovery.

The Future of the IMF and World Bank: Panel Discussion by Stanley Fischer, Allan H. Meltzer, Jeffrey D. Sachs and Nicholas Stern. Published in volume 93, issue 2, pages 45-50 of American Economic Review, May 2003

Inviting political scientists to tell economists how they could do better work is an act of disciplinary generosity. The reality is that contemporary political science is a net importer of ideas and methods from other disciplines, and from none more than economics. Indeed, some of the most exciting research in political science in the past 40 years has involved the incorporation of ideas from economics. We have neither the space nor the mandate to summarize that research here, but refer interested readers to Gary J. Miller's (1997) extensive review. Our aim here is to offertwo modest case studies of specific instances of overlap between the interests and research efforts of economists and political scientists. Our first case study focuses on describing and explaining participation in the workforce, the polity, and many other social activities and organizations. Our second case study focuses on the impact of political processes and institutions on macroeconomic policies and performance. In both these instances the work of economists has been quite fruitful—but also, we think, hampered by a characteristic overreliance on standard economic models and methods. However, in both areas, recent developments may point the way toward a more constructive research style combining the theoretical and empirical rigor of economics with a broader and more eclectic approach familiar to political scientists.

When a firm offers several tariff options to its customers, the possibility arises that they will make an ex post mistake in tariff choice. This occurs since consumers cannot commit to a certain purchase level at the time they subscribe to the service option and, thus, they might find out later that a different choice of tariff could have resulted in a lower payment for their actual level of consumption. This is a common feature of increasingly important subscriptions markets, in which buyers and sellers maintain long-term, nonanonymous relations and where learning induces interesting dynamics. On the one hand, buyers may learn their taste over time, thus making the right choice as times goes by; on the other hand, the seller may design options to identify the “type” of each buyer and, if possible, to extract a higher proportion of their consumer surplus by offering tariff options that are better tailored to the profile of the consumer. This paper focuses on the first type of learning. In turn I document buyer behavior in a subscriptions market using data from a tariff experiment run by South Central Bell (SCB) in Kentucky during the second half of 1986. The most frequently studied case of subscriptions markets is the choice among Optional Calling Plans (OCPs) in the telephone industry. This paper shows that, contrary to the conven-