Knowledge that Transforms

Financial Decision-Making: Are Women Really More Risk-Averse? by Renate Schubert, Martin Brown, Matthias Gysler and Hans Wolfgang Brachinger. Published in volume 89, issue 2, pages 381-385 of American Economic Review, May 1999

After 30 years of egalitarian rhetoric and collectivist practice, the introduction of market reforms to rural China entailed obvious risks for policymakers. Increases in average income might not compensate for the inequality generated by market-based income determination. Concern for this possibility may help explain the slow relaxation of administrative control over the allocation of resources like land. In order to evaluate the effect of market reforms, we could begin by comparing the current Gini coefficient to that which prevailed during the collective era (see Louis Putterman [1993] for early evidence). Yet, this might tell us little about the specific impact of market organization on income determination. Government policies, such as collective land ownership, mobility restrictions, and fertility limits cloud the picture. Furthermore, industrialization, though itself a product of the reforms, has changed the basis upon which individuals earn income. Isolating a pure effect of ‘‘market organization’’ is a difficult but important task since many current Chinese policies reflect an ambivalent attitude toward decentralized, market-based resource allocation. We offer a few suggestions on issues that need to be considered as this evaluation proceeds, by exploring current inequality in rural northeast China from the vantage point of the 1930’s. We begin with the observation that the level of inequality is similar in 1995 and 1935, and moreover, that most contemporary inequality exists within villages, as was the case in the 1930’s. We then focus on two institu-

Economists and psychologists argue that individuals skew personal beliefs to accord with their own interests. To test for the presence of self-serving beliefs, we surveyed 1,200 members of the Mormon Church about tithing. A tithe is a voluntary contribution equal to 10 percent of income. Since respondents must decide privately what income items to tithe, we observe how the income definition depends on an individual's religious and financial incentives. We find surprisingly little evidence that an individual's financial situation influences beliefs about what counts as income for the tithe. However, ambiguity increases the role for self-serving biases. (JEL A12, D63)

Oligopoly models where prior actions by firms affect subsequent marginal costs have been useful in illuminating policy debates in areas such as antitrust regulation, environmental protection, and international competition. We discuss properties of such models when a Cournot equilibrium occurs at the second stage. Aggregate production costs strictly decline with no change in gross revenue or gross consumer surplus if the prior actions strictly increase the variance of marginal costs without changing the marginal-cost sum. Therefore, unless the cost of inducing second-stage asymmetry more than offsets this reduction in production costs, the private and social optima are asymmetric. (JEL D43, L13, L40)

Recent developments in computer networks have driven the cost of distributing information virtually to zero, creating extraordinary opportunities for sharing product evaluations. We present pricing and subsidy mechanisms that operate through a computerized market and induce the efficient provision of evaluations. The mechanisms overcome three major challenges: first, evaluations, which are public goods, are likely to be underprovided; second, an inefficient ordering of evaluators may arise; third, the optimal quantity of evaluations depends on what is learned from the initial evaluations. (JEL D70, D83, H41, L15)

Recent articles have shown that contracts can support the efficient outcome for bilateral trade, even in the face of specific investments and incomplete contracting. These studies typically considered “selfish” investments that benefit the investor (e.g., the seller's investment reduces her production costs). We find very different results for “cooperative” investments that directly benefit the investor's partner (e.g., the seller's investment improves the buyer's value of the good). Most importantly, if committing not to renegotiate the contract is impossible, then contracting has no value, i.e., the parties cannot do better than to abandon contracting altogether in favor of ex post negotiation. (JEL C70, J41, K12, L22)

We analyze an economy that lacks a strong legal-political institutional infrastructure and is populated by multiple powerful groups. Powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock. In equilibrium, this leads to slow economic growth and a “voracity effect,” by which a shock, such as a terms of trade windfall, perversely generates a more-than-proportionate increase in fiscal redistribution and reduces growth. We also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks. (JEL F43, O10, O23, O40)

This paper considers conceptual and practical issues that arise in measuring labor's share of national income. Most importantly: How are workers defined? How is compensation defined? The current definition of labor compensation used the Bureau of Economic Analysis (BEA) includes the salary of business owners and payments to retired workers in labor compensation. An alternative series to the BEA's standard series is presented. In addition, a simple method for decomposing labor compensation into a component due to raw labor' and a component due to human capital is presented. Raw labor's share of national income is estimated using Census and CPS data. The share of national income attributable to raw labor increased from 9.6 percent to 13 percent between 1939 and 1959, remained at 12-13 percent between 1959 and 1979, and fell to 5 percent by 1996.

The Myth of the East Asian Miracle: The Macroeconomic Implications of Soft Budgets by Chong-En Bai and Yijiang Wang. Published in volume 89, issue 2, pages 432-437 of American Economic Review, May 1999