Knowledge that Transforms

This paper considers racial profiling in traffic stops as a public policy problem. Efficiency and equity considerations are characterized. I argue that while there is a strong argument that racial profiling produces a violation of fairness, specifically in the treatment of innocent black motorists, the efficiency effects of profiling are not known. One cannot assign probabilities to the possible magnitudes of either deterrent effects or the harms of profiling to individuals. This makes the assessment of profiling an example of decisionmaking under ambiguity. I defend a notion of a “Fairness Presumption” that requires a policymaker to be able to make an affirmative case if a policy is to be implemented that induces unfairness. On this basis, I reject racial profiling as a policy. Steven N. Durlauf Department of Economics University of Wisconsin 1180 Observatory Drive Madison, WI 53706-1393 [email protected]

Parental Child Care in Single-Parent, Cohabiting, and Married-Couple Families: Time-Diary Evidence from the United Kingdom by Charlene M. Kalenkoski, David C. Ribar and Leslie S. Stratton. Published in volume 95, issue 2, pages 194-198 of American Economic Review, May 2005

What accounts for the worldwide advance of financial reforms in the last quarter century? Using a new index of financial liberalization, we find that influential events shook the policy status quo. Balance-of-payments crises spurred reforms, but banking crises set liberalization back. Falling global interest rates strengthened reformers, while new governments went both ways. The overall trend toward liberalization, however, reflected pressures and incentives generated by initial reforms that raised the likelihood of additional reforms, stimulated further by the need to catch up with regional reform leaders. In contrast, ideology and country structure had limited influence.

In a recent paper Osborne, Rosenthal and Turner (2000) investigate a model of meetings with costly participation. Their main result is that the equilibrium number of participants is small and their positions are extreme. In particular, when the policy space is one-dimensional and the policy outcome is the median of participants' positions, they conclude that the number of attendees is even. The proof is flawed. We construct an example with an odd number of attendees. Oddness of the number of participants has a dramatic consequence on how equilibria look like.

In recent years, economists have increasingly debated whether multilateral development banks, such as the World Bank, should switch from making subsidized loans to giving outright grants. It is no small question. The combined loans of the World Bank Group and brethren regional entities such as the Asian and Inter-American Development Banks, approach $300 billion. Their funds constitute a main channel through which rich country governments provide assistance to developing country governments. In Bulow and Rogoff (1990), we first developed the case for a shift to outright grants. We argued that under the status quo, a vastly disproportionate share of aid goes to middle income countries via disguised interest subsidies, rather than to the poorest countries. We also argued that a shift to grants would protect donor banks from sometimes having to play a “bad cop” role when trying to collect net repayments rather than fully rolling over loans. The “Meltzer Commission” (International Financial Institution Advisory Commission, 2000) report on government sponsored international lending institutions famously took a similar view. Supporters of the status quo often argue that development bank loans to middle income countries are in fact highly profitable, and are essential for allowing institutions like the World Bank to subsidize aid to poor countries. We shall argue that the Bank’s profitability is an accounting artifice that greatly underestimates the risks of the Bank’s portfolio. Another argument for loans is that multilateral development banks have a superior enforcement technology that helps international debt markets to function more efficiently. Thus loans allow financially strapped governments, including in middle-income countries, to borrow more than they could otherwise. We will argue that this benefit, too, is an illusion. In those cases when official lending does expand a developing country government’s borrowing capacity, it effectively enables the government to commit the country to repayment levels beyond that supported by domestic political consensus, creating moral hazard for shortsighted rulers. In theory, better credit access to finance, say, public infrastructure projects can be highly beneficial. In practice, however, the increased risk of debt crisis all too often outweighs any gain ordinary citizens might enjoy from the loans. Furthermore, moral hazard on the part of lenders, who may be able to induce rich countries into subsidizing the bailout of troubled middle-income borrowers, may mean that aggregate lending is excessive even if multilaterals merely displace equivalent private debt. We do not argue for eliminating assistance to middle-income countries. On the contrary, we would favor expanding aid in general, albeit in far greater proportion to the world’s poorest countries. Note that in principle, any country with market access could use grant flows to help defray interest rate costs on loans if it so chose, but development banks would never need to assume a “bad cop” role in enforcing debt.

This paper analyzes the effect of regulations governing land use and residential construction upon the course of housing prices in California. We explore the linkage between regulation and housing prices using measures of housing prices estimated from the Public Use Microdata Samples (PUMS) of the 1990 and 2000 Census of Population and Housing, together with a detailed cross-sectional land use regulation and growth controls in California cities. We explore mechanisms by which regulatory stringency may affect housing outcomes for consumers. First, we assess whether housing is more expensive in more regulated cities. Second, we assess whether growth in the city-level housing stock over the period of a decade depends on the degree of land-use regulation at the start of the decade. Finally, we estimate the price elasticity of housing supply for regulated and relatively unregulated cities. Our results suggest that current regulations have powerful effects on housing outcomes.

Advancing annuity demand theory, we present sufficient conditions for the optimality of full annuitization under market completeness which are substantially less restrictive than those used by Menahem E. Yaari (1965). We examine demand with market incompleteness, finding that positive annuitization remains optimal widely, but complete annuitization does not. How uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk. A new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization, suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases.

mechanism to match over 90,000 entering students to public high schools each year. This paper makes a very preliminary report on the design process and the first year of operation, in academic year 2003-04, for students entering high school in Fall 2004. In the first year, only about 3,000 students had to be assigned to a school for which they had not indicated a preference, which is only 10 % of the number of such assignments the previous year. New York City has the largest public school system in the country, with over a million students. In 1969 the system was decentralized into over thirty community school districts. In the 1990s, the city began to take more centralized control, and in 2002, a newly reorganized NYCDOE began to reform many aspects of the school system. In May 2003, Dr. Jeremy Lack, then the NYCDOE Director of Strategic Planning, contacted one of us for advice on designing a new high school matching process. The NYCDOE was aware of the matching process for American physicians, the National Resident Matching Program (Roth 1984; Roth and Peranson 1999). They wanted to know if it could be appropriately adapted to the city’s schools. The three authors of the present paper (and, at several crucial junctures, also Tayfun Sönmez) advised (and often convinced) Dr.

Should the manufacturer of a product be held legally responsible when a consumer, while using the product, harms someone else? We show that if consumers have deep pockets, then manufacturer liability is not desirable. If homogeneous consumers have limited assets, then the best rule is “residual-manufacturer liability” where the manufacturer pays the shortfall in damages not paid by the consumer. Residual-manufacturer liability distorts the market quantity when consumers' willingness to pay is correlated with their propensity to cause harm. It distorts product safety when consumers differ in their wealth levels. In both cases, consumer-only liability may be preferred.

This paper investigates the role of proposal power in the allocation of transportation projects across U.S. congressional districts in 1991 and 1998. The evidence supports the key qualitative prediction of legislative bargaining models: members with proposal power -- those sitting on the transportation authorization committee -- secure more project spending for their districts than do other representatives. Support for the quantitative restrictions on the value of proposal power is more mixed. I then empirically address several alternative models of legislative behavior, including partisan models, informational roles for committees, models with appropriations committees, and theories of committees as preference outliers.