Knowledge that Transforms

We derive the asymptotic sampling distribution of various estimators frequently used to order distributions in terms of poverty, welfare, and inequality. This includes estimators of most of the poverty indices currently in use, as well as estimators of the curves used to infer stochastic dominance of any order. These curves can be used to determine whether poverty, inequality, or social welfare is greater in one distribution than in another for general classes of indices and for ranges of possible poverty lines. We also derive the sampling distribution of the maximal poverty lines up to which we may confidently assert that poverty is greater in one distribution than in another. The sampling distribution of convenient dual estimators for the measurement of poverty is also established. The statistical results are established for deterministic or stochastic poverty lines as well as for paired or independent samples of incomes. Our results are briefly illustrated using data for four countries drawn from the Luxembourg Income Study data bases.

This paper develops a new concept of separability with overlapping groups—latent separability. This is shown to provide a useful empirical and theoretical framework for investigating the grouping of goods and prices. It is a generalization of weak separability in which goods are allowed to enter more than one group and where the composition of groups is identified by the choice of group specific exclusive goods. Latent separability is shown to be equivalent to weak separability in latent rather than purchased goods and provides a relationship between separability and household production theory. For the popular class of linear, almost ideal and translog demand models and their generalizations, we provide a method for choosing the number of homothetic separable groups. A detailed method for exploring the composition of the separable groups is also presented. These methods are applied to a long time series of British individual household data on the consumption of twenty two nondurable and service goods.

Data snooping occurs when a given set of data is used more than once for purposes of inference or model selection. When such data reuse occurs, there is always the possibility that any satisfactory results obtained may simply be due to chance rather than to any merit inherent in the method yielding the results. This problem is practically unavoidable in the analysis of time-series data, as typically only a single history measuring a given phenomenon of interest is available for analysis. It is widely acknowledged by empirical researchers that data snooping is a dangerous practice to be avoided, but in fact it is endemic. The main problem has been a lack of sufficiently simple practical methods capable of assessing the potential dangers of data snooping in a given situation. Our purpose here is to provide such methods by specifying a straightforward procedure for testing the null hypothesis that the best model encountered in a specification search has no predictive superiority over a given benchmark model. This permits data snooping to be undertaken with some degree of confidence that one will not mistake results that could have been generated by chance for genuinely good results.

We propose a simple adaptive procedure for playing a game. In this procedure, players depart from their current play with probabilities that are proportional to measures of regret for not having used other strategies (these measures are updated every period). It is shown that our adaptive procedure guaranties that with probability one, the sample distributions of play converge to the set of correlated equilibria of the game. To compute these regret measures, a player needs to know his payoff function and the history of play. We also offer a variation where every player knows only his own realized payoff history (but not his payoff function).

This paper studies the monotonicity of individual and market demand with the aid of the indirect utility function. We identify sufficient (and in a sense, necessary) conditions on an agent's indirect utility which will guarantee that he has a monotonic demand function. Our conditions also point to a natural way of extending the result of Hildenbrand (1983). Hildenbrand showed that market demand is monontonic if the income distribution has a downward sloping density, even though individual agents' demand function might violate monotonicity. Using the indirect utility function, we introduce a measure of violations of individual monotonicity that allows us to identify a larger class of density functions that will generate a monotonic market demand.

Losing Sleep at the Market: The Daylight Saving Anomaly by Mark J. Kamstra, Lisa A. Kramer and Maurice D. Levi. Published in volume 90, issue 4, pages 1005-1011 of American Economic Review, September 2000

Child benefit systems exist in many countries. While they show a lot of differences in terms of eligibility rules, amounts involved, and implementation (tax deduction, tax credit, or direct benefit), the common motivation for their existence is to increase children's welfare. In the Dutch child benefit system-the case I focus on in this paperone of the parents, usually the mother, is entitled to an untaxed child benefit amount which only depends on the child's age and the number of children in the household. Thus, child support does not depend on household income, marital status, or labor-market status. As a result, child benefit is exogenous to the household given the presence of children. This is in contrast with the situation in many other countries, including Germany, France, the United Kingdom, and the United States, where government-provided child support is (partly) means-tested; see Jonathan Bradshaw et al. (1993). In The Netherlands, child benefit is generally a nonnegligible addition to the household income; the median share of child benefit in the total net income of households with children is 8 percent. On the national level, expenditures on child benefits amount to 1.2 percent of GNP. The use of the child benefit is completely at the discretion of the parent. There are no legal requirements that a certain amount be spent on particular goods or services, nor does the government provide any guidelines regarding expenditure on children. A policy question that arises is to what extent children benefit from child benefits. Standard microeconomic demand theory allows no role for effects of the composition of income. Given the fungibility of income sources, it is only the sum of income components that is relevant in explaining expenditure patterns. Thus, within that framework, the answer would be that the marginal propensity to consume child goods from one guilder of child benefits is no different than from one guilder of any other income source. In the more general class of gametheoretic models of household behavior, however, the composition of household income will generally affect expenditure patterns; see, e.g., Shelly J. Lundberg and Robert A. Pollak (1993) and Martin Browning et al. (1994). If fathers and mothers have different preferences, and mothers have control over child benefits, the effect of child benefits on expenditures will differ from the effect of other income sources. Lundberg et al. (1997) provide empirical evidence showing that a transfer of control over child benefits from fathers to mothers in the United Kingdom due to a change in legislation resulted in a significant increase in expenditures on child clothing. Daniela Del Boca and Christopher J. Flinn (1994) have analyzed the effect of income composition on expenditure decisions of divorced mothers. They find that the coefficients associated with child support and alimony income differ from those for other income in Engel curves for expenditures on childspecific goods. Their results can be explained in terms of a noncooperative Nash model in which the child support transfer decisions of the noncustodial father and the expenditure decisions of the mother are determined simultaneously. In contrast to Del Boca and Flinn's analysis, in which child support is a decision variable, the present paper focuses on the possible differential effect of government-provided child support which is truly exogenous. In this paper I analyze the effects of child benefits on expenditures by running regressions in which child benefit enters as a separate explanatory variable. The enipirical analysis is based on a time series of 17 cross-section consumer expenditure surveys in The Netherlands, covering the period 1978 through 1994. It is important to note that in a single cross-section it * Department of Economics, University of Groningen, P.O.B. 800, 9700 AV Groningen, The Netherlands (e-mail: [email protected]). I am indebted to two anonymous referees for constructive comments. Helpful comments were also provided by Rob Alessie, Maarten Allers, Chris Bojke, Werner de Bondt, Bert Schoonbeek, and Tom Wansbeek. I thank Vincent Linderhof for organizing the data. Financial support was provided by the Dutch Organization for Scientific Research, NWO (HOMES-project grant).

Generational Accounts for the United States: An Update by Jagadeesh Gokhale, Benjamin Page, Joan Potter and John Sturrock. Published in volume 90, issue 2, pages 293-296 of American Economic Review, May 2000

We study how diversity evolves at a firm with entry-level and upper-level employees who vary in ability and “type” (gender or ethnicity). The ability of entry-level employees is increased by mentoring. An employee receives more mentoring when more upper-level employees have the same type. Optimal promotions are biased by type, and this bias may favor either the minority or the majority. We characterize possible steady states, including a “glass ceiling,” where the upper level remains less diverse than the entry level. A firm may have multiple steady states, whereby temporary affirmative-action policies have a long-run impact.