Knowledge that Transforms

Most of the British electricity supply industry has been privatized. Two dominant generators supply bulk electricity to an unregulated "pool." They submit a supply schedule of prices for generation and receive the market-clearing price, which varies with demand. Despite claims that this should be highly competitive, we show that the Nash equilibrium in supply schedules implies a high markup on marginal cost and substantial deadweight losses. Further simulations, to show the effect of entry by 1994, produce somewhat lower prices, at the cost of excessive entry; subdividing the generators into five firms would produce better results.

An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.

Proper evaluation of cost-quality trade-offs inherent in regulatory policy requires identifying the structure of production from the behavioral response of quality to the policy change. However, estimating the structure of production with endogenous quality is difficult because of both measurement problems and data availability. We develop a simple method for identifying and estimating cost functions in the presence of endogenous and unobserved quality. Using this method, we estimate that a quality-adjusted cost function for nursing homes treating quality as exogenous yields seriously misleading estimates of marginal cost and economies of scale. We then used the parameter estimates to evaluate the cost-quality trade-off in nursing home regulatory policy.

A key economic issue is whether poor countries or regions tend to grow faster than rich ones: are there automatic forces that lead to convergence over time in the levels of per capita income and product? We use the neoclassical growth model as a framework to study convergence across the 48 contiguous U.S. states. We exploit data on personal income since 1840 and on gross state product since 1963. The U.S. states provide clear evidence of convergence, but the findings can be reconciled quantitatively with the neoclassical model only if diminishing returns to capital set in very slowly. The results for per capita gross domestic product from a broad sample of countries are similar if we hold constant a set of variables that proxy for differences in steady-state characteristics.

We analyze a differential game in which all interest groups have access to a common capital stock. We show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons. We use this model to analyze capital flight: in many poor countries, property rights are not well defined; since "safe" bank accounts in rich countries (the inferior technology) are available to citizens of these countries, they engage in capital flight. We show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare.

The silver purchase program, initiated by President Franklin Roosevelt in late 1933 in response to the economically small but politically potent silver bloc, gave a large short-run subsidy to silver producers at the cost of destroying any long-run monetary role for silver. More important, it imposed severe deflation on China, the only major country still on a silver standard, and forced it off the silver standard and on to a fiat standard, which brought forward in time and increased in severity the subsequent wartime inflation and postwar hyperinflation. The silver purchase program thereby contributed, though perhaps only modestly, to the ultimate triumph of the Communists.

We argue that many goods and decisions are not allocated or made through markets. We interpret an agent's status as a ranking device that determines how well he or she fares in the nonmarket sector. The existence of a nonmarket sector can endogenously generate a concern for relative position in, for example, the income distribution so that higher income implies higher status. Moreover, it can naturally yield multiple equilibria. It is thus possible to explain differences in growth rates across countries without recourse to differences in underlying preferences, technologies, or endowments. Different social organizations lead to different reduced-form preferences, which lead to different growth rates.

This paper develops a two-sector neoclassical model of international trade with endogenous capital accumulation and intertemporal optimization. In contrast to the traditional "2 × 2 × 2" model, there is a Ricardian implication that countries specialize according to comparative advantage. Consequently, the theory predicts that government expenditure policies are unlikely to affect the established pattern of specialization and trade, but that changes in tax policies can result in a dramatic reorganization of world production. Further, the dynamic 2 × 2 × 2 model can explain many of the salient features of international trade that are problematic for the standard Heckscher-Ohlin-Samuelson model.

This paper examines the EPA's decision to cancel or continue the registrations of cancer-causing pesticides that went through the special review process between 1975 and 1989. Despite claims to the contrary, our analysis indicates that the EPA indeed balanced risks against benefits in regulating pesticides: Risks to human health or the environment increased the likelihood that a particular pesticide use was canceled by the EPA; at the same time, the larger the benefits associated with a particular use, the lower was the likelihood of cancellation. Intervention by special-interest groups was also important in the regulatory process. Comments by grower organizations significantly reduced the probability of cancellation, whereas comments by environmental advocacy groups increased the probability of cancellation. Our analysis suggests that the EPA is fully capable of weighing benefits and costs when regulating environmental hazards; however, the implicit value placed on health risks--$35 million per applicator cancer case avoided--may be considered high by some persons.