Knowledge that Transforms

What Explains Differences in Smoking, Drinking, and Other Health-Related Behaviors? by David M. Cutler and Edward Glaeser. Published in volume 95, issue 2, pages 238-242 of American Economic Review, May 2005

by the Harvard Olin Center for Law, Economics, and Business. 1 The value of a statistical life (VSL) plays the central role in regulatory decisions affecting risks to life and health. Economists continue to try to improve the accuracy and concomitant usefulness of benefit assessments by examining whether the typically calculated VSL understates the average benefits of life-saving government regulations and whether the heterogeneity in individual VSLs should influence policy. Here we examine empirically the importance of two possible omitted variables that could affect the estimates of VSL based on the typical wage equation, relative position in the wage distribution and relative age within the life-cycle pattern of consumption. We find that ignoring the worker’s relative position in the wage distribution does not affect VSL as conventionally computed, but that ignoring workers ’ planned consumption undervalues VSL by perhaps 20 percent. Our results have implications for the economic understanding of the compensating wage differential process as well as for policy. The modest effect of adding measures of relative economic position to the canonical hedonic wage regression suggests that workers taking risky jobs make their decisions based on their personal wage-risk tradeoff rather than their status or relative economic position. In contrast, the worker’s relative position within the personal life cycle pattern of consumption is a driving force that affects the temporal trajectory of VSLs over the life cycle and is a promising way to consider distributional consequences of policy simply. Appropriate VSL assessments should not downweight the risks to older citizens compared to the young because the effect of age on the level of planned consumption may outweigh or dampen the effect of age in shortening people’s remaining future lifetimes. 2

I examine here an aspect of law enforcement that has recently been the subject of debate. This is the choice of a profiling policy wherein decisions to search for evidence of crime may vary with observable covariates of the persons at risk of being searched. Policies that make search rates vary with personal attributes are variously defended as essential to effective law enforcement and denounced as unfair to classes of persons subjected to relatively high search rates. Variation of search rates by race has been particularly controversial; see, for example, Knowles, Persico, and Todd (2001), Persico (2002), and Dominitz (2003). Whereas recent research on profiling has sought to define and detect racial discrimination, my concern is to understand how a social planner might choose a profiling policy. This paper studies optimal profiling in a simple, illustrative setting. In related work (Manski, 2004), I consider how a planner might reasonably behave when he does not possess all of the information needed to determine an optimal policy. Section I poses a utilitarian planning problem whose objective is to minimize the social cost of crime and search. Search is costly per se, and search that reveals a crime entails costs for punishment of offenders. Search is beneficial to the extent that it deters or prevents crime.

We conduct experiments to explore the possibility that subject misconceptions, as opposed to a particular theory of preferences referred to as the “endowment effect,” account for reported gaps between willingness to pay (“WTP”) and willingness to accept (“WTA”). The literature reveals two important facts. First, there is no consensus regarding the nature or robustness of WTP-WTA gaps. Second, while experimenters are careful to control for subject misconceptions, there is no consensus about the fundamental properties of misconceptions or how to avoid them. Instead, by implementing different types of experimental controls, experimenters have revealed notions of how misconceptions arise. Experimenters have applied these controls separately or in different combinations. Such controls include ensuring subject anonymity, using incentive-compatible elicitation mechanisms, and providing subjects with practice and training on the elicitation mechanism before employing it to measure valuations. The pattern of results reported in the literature suggests that the widely differing reports of WTP-WTA gaps could be due to an incomplete science regarding subject misconceptions. We implement a “revealed theory” methodology to compensate for the lack of a theory of misconceptions. Theories implicit in experimental procedures found in the literature are at the heart of our experimental design. Thus, our approach to addressing subject misconceptions reflects an attempt to control simultaneously for all dimensions of concern over possible subject misconceptions found in the literature. To this end, our procedures modify the Becker-DeGroot-Marschak mechanism used in previous studies to elicit values. In addition, our procedures supplement commonly used procedures by providing extensive training on the elicitation mechanism before subjects provide WTP and WTA responses. Experiments were conducted using both lotteries and mugs, goods frequently used in endowment effect experiments. Using the modified procedures, we observe no gap between WTA and WTP. Therefore, our results call into question the interpretation of observed gaps as evidence of loss aversion or prospect theory. Further evidence is required before convincing interpretations of observed gaps can be advanced.

The Collapse of a Medical Labor Clearinghouse (and Why Such Failures Are Rare) by C. Nicholas McKinney, Muriel Niederle and Alvin E. Roth. Published in volume 95, issue 3, pages 878-889 of American Economic Review, June 2005

In 2003 there were 8,665 transplants of deceased donor kidneys for the approximately 60,000 patients waiting for such transplants in the United States. While waiting, 3,436 patients died. There were also 6,464 kidney transplants from living donors (Scientific Registry of Transplant Recipients web site). Live donation is an option for kidneys, since healthy people have two and can remain healthy with one. While it is illegal to buy or sell organs, there have started to be kidney exchanges involving two donor–patient pairs such that each (living) donor cannot give a kidney to the intended recipient because of blood type or immunological incompatibility, but each patient can receive a kidney from the other donor. So far these have been rare: as of December 2004, only five exchanges had been performed in the 14 transplant centers in New England. One reason there have been so few kidney exchanges is that there have not been databases of incompatible patient–donor pairs. Incompatible donors were simply sent home. (Databases are now being assembled not only in New England, but also in Ohio and Baltimore.) Lainie Friedman Ross et al. (1997) discussed the possibility of exchange between incompatible patient–donor pairs. Not only have a few such two-way exchanges been performed, but two three-way exchanges (in which the donor kidney from one pair is transplanted into the patient in a second pair, whose donor kidney goes to a third pair, whose donor kidney goes to the first pair) have been performed at Johns Hopkins. There have also been a number of “list exchanges” in which an incompatible patient– donor pair makes a donation to someone on the waiting list for a cadaver kidney, in return for the patient in the pair receiving high priority for a cadaver kidney when one becomes available.

Several influential commentators have suggested recently that democratization in developing countries produces political instability, ethnic conflict, and poor economic outcomes. For instance, Robert D. Kaplan (2000) states that “If a society is not in reasonable health, democracy can be not only risky but disastrous” (p. 62). Fareed Zakaria (2003) points out that “although democracy has in many ways opened up African politics and brought people liberty, it has also produced a degree of chaos and instability that has actually made corruption and lawlessness worse in many countries.” Amy Chua (2003) argues that: “... in the numerous countries around the world with a market-dominant minority, ... [a]dding democracy to markets has been a recipe for insability, upheaval, and ethnic conflagration.” (p. 124).

This paper uses the consumption Euler equation to derive a decomposition of consumption growth into four sources. These four sources are new information, and three sources of predictable consumption growth: intertemporal substitution, changes in the preferences for consumption, and incomplete markets for consumption insurance. Using household-level data, we implement this decomposition for the average growth rate of consumption expenditures on nondurable goods in the United States from 1982 to 1997. The economic importance of precautionary saving rivals that of the real interest rate, but the relative importance of each source of movement in the volatility of consumption is not precisely measured.

This paper studies the role of consequences in a person’s decision to lie. Based on findings from an experiment with a deception game, as well as from questionnaires, I propose a simple formulation of preferences to describe deception behavior. The decision maker uses the “truth telling ” outcome as a reference level when evaluating the benefits of lying. The monetary consequences of the lie are compared to this reference level. In the formulation used in this paper the decision maker’s utility depends on her own intentions. She is selfish in the sense of maximizing her own payoffs, but sensitive to the cost her lie imposes on the other side. Sensitivity diminishes with the size of payoffs. Moreover, since perception of the counterpart’s cost is subjective. When there are differences in wealth as in employee-employer relations or a consumer-insurer interactions, the decision maker is more likely to lie the wealthier the counterpart.

We study good-by-good deviations from the Law-of-One-Price (LOP) for over 1,800 retail goods and services between all European Union (EU) countries for the years 1975, 1980, 1985, and 1990. We find that for each of these years, after we control for differences in income and value-added tax (VAT) rates, there are roughly as many overpriced goods as there are underpriced goods between any two EU countries. We also find that good-by-good measures of cross-sectional price dispersion are negatively related to the tradeability of the good, and positively related to the share of non-traded inputs required to produce the good. We argue that these observations are consistent with a model in which retail goods are produced by combining a traded input with a non-traded input.