Knowledge that Transforms

Managers often face a choice between authority and persuasion. In particular, since a firm’s formal and relational contracts and its culture and norms are quite rigid in the short term, a manager who needs to prevent an employee from undertaking the wrong action has the choice between either trying to persuade this employee or relying on interpersonal authority. 1 Simon (1947) noted, for example, that ‘when... disagreement is not resolved by discussion, persuasion, or other means of conviction, then it must be decided by the authority of one or the other participant ’ and that ‘in actual practice [...] authority is liberally admixed with suggestion and persuasion. ’ Obviously, in choosing between persuasion and authority the manager makes a cost-benefit trade-off. This paper studies that trade-off, focusing in particular on agency conflicts that originate in open disagreement, in the sense of differing priors. To that purpose, I will study a setting in which a principal and an agent are involved in a project. The project’s outcome depends on decisions by both the principal and the agent and also depends on complementary private effort by the agent. A key issue is that the principal and agent may openly disagree on which decisions are most likely to lead to a success, even though no player has private information, i.e. the players have differing

Risk Preferences in the PSID: Individual Imputations and Family Covariation by Miles S. Kimball, Claudia R. Sahm and Matthew D. Shapiro. Published in volume 99, issue 2, pages 363-68 of American Economic Review, May 2009

The twentieth century saw a dramatic increase in the number of women in the labor force, as well as a steady increase in the number of selfemployed women during the past three decades. This increase in labor force participation represents a striking change in the allocation of women’s time between work and home activities. Despite the growing literature examining self-employed women, little is known about how self-employed women divide their time between work and other life activities. The flexibility afforded by self-employment is often regarded as a way to better balance work and home activities. Indeed, the existing econometric studies indicate that women choose self-employment primarily because of family or lifestyle factors (Theresa Devine 1994; Richard K. Caputa and Arthur Dolinsky 1998; Richard J. Boden 1999; Greg Hundley 2000). Yet studies outside the economics literature seem to indicate that self-employed women do not necessarily experience more family satisfaction (Holly E. Buttner and Dorothy P. Moore 1997; Saroj Parasuraman and Claire A. Simmers 2001; Richard DeMartino, Robert Barbato, and Paul H. Jacques 2006). A source of the difference might be that the econometric studies use Human Capital aCquisition and EntrEprEnEursHip †

This paper explores how to optimally set taxes and transfers when taxation authorities are uninformed about individuals' value of time in both market and nonmarket activities; and can observe both market-income and time allocated to market employment. We show that optimal redistribution in this environment involves a cutoff wage whereby workers above the cutoff are taxed as they increase their income, while workers earning a wage below the cutoff receive an income supplement as they increase their income. Finally, we show that the optimal program transfers zero income to individuals who choose not to work.

International audience

In August 1982, after a year in a deep recession that had several months left to run, Congress passed the Tax Equity and Fiscal Responsibility Act (TEFRA), scaling back the large Reagan tax cuts that had been enacted just over one year earlier as part of the Economic Recovery Tax Act (ERTA). Legislation over the same period cut near-term federal spending, with reductions in nondefense spending swamping additions to defense spending (Congressional Budget Office 1983, Table 8). Together, the spending reductions and TEFRA were estimated to have increased the fiscal-year 1983 primary surplus by $50 billion, or about 1.5 percent of GDP. During the next U.S. recession, in October 1990, a budget summit meeting of President Bush and Congressional leaders produced legislation aimed at reducing the cumulative deficit by $500 billion over five fiscal years, including $33 billion in fiscal-year 1991. The summit also produced the Budget Enforcement Act (BEA), introducing new budget rules aimed at controlling budget deficits and discretionary spending. As in the previous recession, budget deficits captured the attention of policy makers and strongly influenced their fiscal policy actions. As 2008 drew to a close one year into the most serious U.S. recession at least since 1982, Congress and the incoming Obama administration were moving toward adopting legislation of a

Consistent with mental accounting, we document that investors sometimes choose the asset allocation for one account without considering the asset allocation of their other accounts. The setting is a firm that changed its 401(k) matching rules. Initially, 401(k) enrollees chose the allocation of their own contributions, but the firm chose the match allocation. These enrollees ignored the match allocation when choosing their own-contribution allocation. In the second regime, enrollees simultaneously selected both accounts' allocations, leading them to mentally integrate the two. Own-contribution allocations before the rule change equal the combined own- and match-contribution allocations afterwards, whereas combined allocations differ sharply across regimes.

This paper derives empirically tractable formulas for the welfare effects of fare adjustments in passenger peak and off-peak rail and bus transit, and for optimal pricing of those services. The formulas account for congestion, pollution, accident externalities, scale economies, and agency adjustment of transit service offerings. We apply them using parameter values for Washington (DC), Los Angeles, and London. The results support the efficiency of the large current fare subsidies; even starting with fares at 50 percent of operating costs, incremental fare reductions are welfare improving in almost all cases. These findings are robust to alternative assumptions and parameters.

This paper provides a simple and empirically plausible model of artworks as investment vehicles. It reconciles the observation that average financial returns for collectibles are low and volatile with the theory of consumption-based asset pricing. Art assets are appealing both for their ability to transfer consumption over time and for their use as signals of wealth, as in the literature on the demand for luxuries. Adding art value to utility, returns also reflect this “conspicuous consumption” dividend; as a result, average financial returns are low. Risk premia for artworks are predicted to be modest or even negative.

The article discusses and analyzes data from several economic experiments in a household survey with mothers of preschool children. The researchers measured competitiveness by giving the subjects the choice between competing in a tournament or receiving a piece rate for a real effort task. The subjects also participated in lottery choices, which enabled the researchers to assess their risk preferences. The relationship between social preferences and competitiveness in the sample of mothers of preschool children was analyzed. The hypothesis that egalitarian subjects aren't as likely to self-select into competitive environments, which can produce winners and losers, was tested. A negative relationship between egalitarian choices and self-selection into competition was found.