Knowledge that Transforms

Sellers sometimes practice a form of false advertising known as bait and switch. A low-priced good is advertised but replaced by a different good at the showroom. the practice is surprising since advertising the wrong good discourages the appropriate buyers from shopping, attracting customers who will be disappointed when they see the good. Firms bait and switch to draw a greater number of shoppers. The cost is that some who would have bought the good that is for sale may not bother to look. Under a variety of conditions, bait and switch is a profitable strategy resulting in a fully rational equilibrium with false advertising.

This paper describes aspects of the French Revolution from the perspective of theories about money and government budget constraints. We describe how unpleasant fiscal arithmetic gripped the Old Regime, how the Estates General responded to reorganize France's fiscal affairs, and how fiscal exigencies impelled the Revolution into a procession of monetary experiments ending in hyper-inflation.

Currently available health insurance contracts often fail to insure long-term illnesses: sick people can suffer large increases in premiums or denial of coverage. I describe insurance contracts that solve this problem. Their key feature is a severance payment. A person who is diagnosed with a long-term illness and whose premiums are increased receives a lump sum equal to the increased present value of premiums. This lump sum allows him or her to pay the higher premiums required by any insurer. People are not tied to a particular insurer or a group, and the improvement is free: insurance companies can operate at zero economic profits, and consumers can pay exactly the same premium they do with standard contracts.

In standard durable-goods monopoly models, both the set of buyers and the set of prices are assumed to be continua. If the set of buyers is finite, the perfectly discriminating monopoly outcome is a unique subgame perfect equilibrium when the seller is sufficiently patient. Introducing instead a smallest unit of account yields the Coasian outcome as a generically unique subgame perfect equilibrium for patient enough buyers. A folk theorem is obtained if both sets are finite. These results reflect a strategic disadvantage of having to make moves with a large impact on other players' payoffs. The analysis is extended to durable-goods oligopoly.

The goal of this paper is to extend existing search-theoretic models of fiat money, which until now have assumed that the price level is exogenous, by explicitly incorporating bilateral bargaining. This allows us to determine the price level endogenously and leads to additional insights concerning the role of money. For example, we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner's problem, although the difference can become small as the discount rate or search friction vanishes. We also find that there exist nonstationary inflationary equilibria.

This paper uses a Treasury Department panel of more than 4,000 taxpayers to estimate the sensitivity of taxable income to changes in tax rates on the basis of a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform. The analysis emphasizes that the response of taxable income involves much more than a change in the traditional measures of labor supply. The evidence shows an elasticity of taxable income with respect to the marginal net-of-tax rate that is at least one and could be substantially higher. The implications for recent tax rate changes are discussed.

Many services provide outputs that depend partially on the customers as inputs; the presence of other customers often contributes to the output experienced by each purchaser. Higher education is the premier example; others are legion. We provide a simple model that addresses the questions of competitive pricing and allocative efficiency for these types of services. Prices that charge customers for what they get on net (output minus input) from the firm both are competitive and support efficient allocations; these prices internalize the apparent external effects of customers on each other. Few examples of such prices exist in the real world.

This paper develops a general equilibrium model of the allocation of resources among appropriative and productive activities. The model emphasizes the distinction between offensive weapons, which are the instruments of predation, and fortifications, which provide defense against predation. The analysis of this model shows how the equilibrium security of claims to property is determined. The analysis focuses on the possibility of a nonaggressive equilibrium, in which no resources are allocated to offensive weapons and claims to property are fully secure. We also analyze the complex relation between economic welfare and the security of claims to property. We find, for example, that a relatively poor agent could be better off in an equilibrium with less secure claims to property.

Polygyny is still practiced throughout much of sub-Saharan Africa, with important social consequences. This paper makes the first attempt to link African polygyny directly to the productivity of women in agriculture using micro data. I develop a structural model of the demand for wives that disentangles wealth and substitution effects. Using a large household survey from Côte d'Ivoire, I find that marked geographic diversity in cropping patterns leads to regional variation in female labor productivity. I also find that, conditional on wealth, men do have more wives when women are more productive, that is, cheaper. This substitution effect may explain why polygyny declined in rural areas of Côte d'Ivoire during agricultural development