Knowledge that Transforms

Charity Care, Risk Pooling, and the Decline in Private Health Insurance by Michael Chernew, David Cutler and Patricia Seliger Keenan. Published in volume 95, issue 2, pages 209-213 of American Economic Review, May 2005

A unifying theme in the literature on organizations such as public bureaucracies and private nonprofits is the importance of mission, as opposed to profit, as an organizational goal. Such mission-oriented organizations are frequently staffed by motivated agents who subscribe to the mission. This paper studies incentives in such contexts and emphasizes the role of matching the mission preferences of principals and agents in increasing organizational efficiency. Matching economizes on the need for high-powered incentives. It can also, however, entrench bureaucratic conservatism and resistance to innovations. The framework developed in this paper is applied to school competition, incentives in the public sector and in private nonprofits, and the interdependence of incentives and productivity between the private for-profit sector and the mission-oriented sector through occupational choice.

Studies of innovation have focused on the effects of patent laws on the number of innovations, but have ignored effects on the direction of technological change. This paper introduces a new dataset of close to fifteen thousand innovations at the Crystal Palace World's Fair in 1851 and at the Centennial Exhibition in 1876 to examine the effects of patent laws on the direction of innovation. The paper tests the following argument: if innovative activity is motivated by expected profits, and if the effectiveness of patent protection varies across industries, then innovation in countries without patent laws should focus on industries where alternative mechanisms to protect intellectual property are effective. Analyses of exhibition data for 12 countries in 1851 and 10 countries in 1876 indicate that inventors in countries without patent laws focused on a small set of industries where patents were less important, while innovation in countries with patent laws appears to be much more diversified. These findings suggest that patents help to determine the direction of technical change and that the adoption of patent laws in countries without such laws may alter existing patterns of comparative advantage across countries.

We develop a model of matching with contracts which incorporates, as special cases, the college admissions problem, the Kelso-Crawford labor market matching model, and ascending package auctions. We introduce a new “law of aggregate demand” for the case of discrete heterogeneous workers and show that, when workers are substitutes, this law is satisfied by profit-maximizing firms. When workers are substitutes and the law is satisfied, truthful reporting is a dominant strategy for workers in a worker-offering auction/matching algorithm. We also parameterize a large class of preferences satisfying the two conditions.

We compare individuals with two-person teams in signaling game experiments. Teams consistently play more strategically than individuals and generate positive synergies in more difficult games, beating a demanding “truth-wins” norm. The superior performance of teams is most striking following changes in payoffs that change the equilibrium outcome. Individuals play less strategically following the change in payoffs than inexperienced subjects playing the same game. In contrast, the teams exhibit positive learning transfer, playing more strategically following the change than inexperienced subjects. Dialogues between teammates are used to identify factors promoting strategic play.

The Neuroeconomics of Distrust: Sex Differences in Behavior and Physiology by Paul J. Zak, Karla Borja, William T. Matzner and Robert Kurzban. Published in volume 95, issue 2, pages 360-363 of American Economic Review, May 2005

GDP per capita is usually used to proxy for the quality of life of individuals living in different countries. Welfare is also affected by quantity of life, however, as represented by longevity. This paper incorporates longevity into an overall assessment of the evolution of cross-country inequality and shows that it is quantitatively important. The absence of reduction in cross-country inequality up to the 1990s documented in previous work is in stark contrast to the reduction in inequality after incorporating gains in longevity. Throughout the post–World War II period, health contributed to reduce significantly welfare inequality across countries. This paper derives valuation formulas for infra-marginal changes in longevity and computes a "full" growth rate that incorporates the gains in health experienced by 96 countries for the period between 1960 and 2000. Incorporating longevity gains changes traditional results; countries starting with lower income tended to grow faster than countries starting with higher income. We estimate an average yearly growth in "full income" of 4.1 percent for the poorest 50 percent of countries in 1960, of which 1.7 percentage points are due to health, as opposed to a growth of 2.6 percent for the richest 50 percent of countries, of which only 0.4 percentage points are due to health. Additionally, we decompose changes in life expectancy into changes attributable to 13 broad groups of causes of death and three age groups. We show that mortality from infectious, respiratory, and digestive diseases, congenital, perinatal, and “ill-defined” conditions, mostly concentrated before age 20 and between ages 20 and 50, is responsible for most of the reduction in life expectancy inequality. At the same time, the recent effect of AIDS, together with reductions in mortality after age 50--due to nervous system, senses organs, heart and circulatory diseases--contributed to increase health inequality across countries.

What Does the Taxable Income Elasticity Say About Dynamic Responses to Tax Changes? by Robert Carroll and Warren Hrung. Published in volume 95, issue 2, pages 426-431 of American Economic Review, May 2005

The increasing incidence of ethnic conflicts, and the much-publicized consequences of these conflicts, have attracted the interest of many researchers in the social sciences. Many studies have addressed directly the issue of ethnic diversity and its effects on social conflicts and civil wars. Political scientists have stressed the importance of institutions in the attenuation or intensification of social conflict in ethnically divided societies. Recently economists have connected ethnic diversity with important economic phenomena like investment, growth, or the quality of government (William Easterly and Ross Levine, 1997; Alberto Alesina et al., 2003; Rafael La Porta et al., 1999). The number of papers dealing with the effects of ethnic diversity on issues of economic interest is growing rapidly. In this respect, it is common in recent work to include as a regressor in empirical growth estimations an index of ethnic fractionalization. There are several reasons to include such an indicator. First, some authors have argued that ethnically diverse societies have a higher probability of ethnic conflicts, which may lead to civil war. The political instability caused by potential ethnic conflicts has a negative impact on investment and, indirectly, on growth. Second, ethnic diversity may generate a high level of corruption which, in turn, could deter investment. Finally it has been argued that in heterogeneous societies the diffusion of technological innovations is more difficult, especially when there is ethnic conflict among groups in a country. Business as usual is not possible in a society with a high level of potential ethnic conflict, since this situation affects all levels of economic activity. Trade may be restricted to individuals of the same ethnic group; public infrastructure may have an ethnic bias; government expenditure may favor some ethnic groups, etc. The common element in all these mechanisms is the existence of an ethnic conflict which, through social and political channels, spreads to the economy. However, many empirical studies find no relationship between ethnic fractionalization, ethnic conflict, and civil wars. There are at least three alternative explanations for this. First, it could be the case that the classification of ethnic groups in the Atlas Nadorov Mira (henceforth ANM), source of the traditional index of ethnolinguistic fractionalization (ELF), is not properly constructed. Some authors have used other sources to construct datasets of ethnic groups for a large sample of countries. In general, the correlation between the index of fractionalization obtained using these alternative data sources is very high (over 0.8). Second, James D. Fearon (2003) has argued that it is important to measure the “ethnic distance” across groups in order to obtain indicators of cultural diversity. He measures these distances in terms of the proximity in a tree diagram of the families of languages of different countries. As in the case of alternative data sources, the correlation of the index of ethnic fractionalization, using these distances, with the original ELF index is very high, 0.82. * Montalvo: Department of Economics, Universitat Pompeu Fabra, C/Ramon Trias Fargas 25-27, Barcelona 08005 Spain, and Instituto Valenciano de Investigaciones Economicas (e-mail: [email protected]); Reynal-Querol: the World Bank, 1818 H Street, NW, Washington, DC 20433 (e-mail: [email protected]). We are grateful for comments by Antonio Villar, Joan Esteban, Paul Collier, Tim Besley, and two anonymous referees. We thank the participants of seminars at the World Bank, Institut de la Mediterranea, Toulouse, Brown University, the European Economic Association Meetings, and the Winter Meetings of the Econometric Society. We would like to thank Sergio Kurlat, William Easterly, and Anke Hoeffler for sharing their data. Financial support from the BBVA Foundation and the Spanish Secretary of Science and Technology (SEC2003-04429) is kindly acknowledged. Jose G. Montalvo thanks the Public Services Group of the Research Department (DECRG) of the World Bank, where most of the revision of this paper was done, for their hospitality. The conclusions of this paper are not intended to represent the views of the World Bank, its executive directors, or the countries they represent. 1 Measured by the ELF index using the data of the Atlas Nadorov Mira. 2 Montalvo and Reynal-Querol (2000), Alesina et al. (2003), or Fearon (2003). 3 See also Francesco Caselli and W. John Coleman (2002).