Knowledge that Transforms

Colombia used lotteries to distribute vouchers which partially covered the cost of private secondary school for students who maintained satisfactory academic progress. Three years after the lotteries, winners were about 10 percentage points more likely to have finished 8th grade, primarily because they were less likely to repeat grades, and scored 0.2 standard deviations higher on achievement tests. There is some evidence that winners worked less than losers and were less likely to marry or cohabit as teenagers. Benefits to participants likely exceeded the $24 per winner additional cost to the government of supplying vouchers instead of public-school places.

The Bell Curve (Richard Herrnstein and Murray, 1994) presented data on the independent effect of IQ on a wide variety of social and economic outcomes for members of the National Longitudinal Survey of Youth (NLSY). To control for socioeconomic background, we constructed an index using the standard three indicators: parental education, occupation, and income. Among the many threads in the response to The Bell Curve, the following question arose: How much would the independent effect of IQ have been attenuated if a broader set of family background variables had been used as controls? To test this, Sanders Korenman and Christopher Winship conducted a fixedeffects analysis of the large number of siblings within the NLSY, in effect controlling not just for socioeconomic status, but for everything in the shared environment of the family. The results were that [w]ith a few exceptions, the fixed-effects for AFQT [the cognitive test used in the NLSY] are remarkably similar to the standard OLS and logit estimates (Korenman and Winship, 2000 p. 146). The independent effect of IQ is robust across methods. I subsequently conducted my own analysis of the NLSY siblings for a publication on income inequality and IQ (Murray, 1998). In the course of that work, another aspect of sibling analysis struck me. The procedure, which is used in this paper as well, begins by identifying every sibling pair in which one sibling had scored in the normal range, defined as a tested IQ of 90-109, and the other member of the pair had scored somewhere outside that range. Those in the normal range were used as the reference group against which sibling outcomes were compared. I then limited the sample to full biological siblings, to take genetics out of the picture, and further limited the sample to sibling pairs in which the siblings had lived with both biological parents for at least seven years after birth, to minimize differential family backgrounds arising from divorce and remarriage. Both limits on the sample were essential to preserve the virtues of the sibling comparison. But notice what had been done in the process. In applying those conditions, the sibling sample represented a population in which all parents were wed when the child was born (zero illegitimacy) and all young children were brought up by both biological parents during their most formative years (zero early divorce). Such a population is one that has achieved much of what we ideally want to achieve through social policy. The thought occurred to me: why not complete the process? Having already created a sample without illegitimacy and early divorce, why not slay as well the great beast of social policy, poverty? To achieve that, I lopped off the sibling pairs whose parents were anywhere in the bottom 25 percent of the income distribution as of 1978-1979, when the NLSY began. This produced a sample of 733 sibling pairs who grew up in households which, by 1978-1979, had a median parental family income of $64,586 and a minimum income of $30,486 (expressed in 2000 dollars). For practical purposes, I had by this process nearly achieved the utopia of income distribution as defined by many, one in which the lowest income is half the median income. I hereby dub these 733 pairs the utopian sample. It is utopian not just because it has virtually no illegitimacy, divorce, and poverty. The way it has been selected has also necessarily effected drastic improvements in the neighborhoods, peers, and educational systems which the youths attended. The members of the utopian sample had a big edge in their potential access to college, both economically and because the sample is highly selected for the kind of parents who actively encourage their children to continue their educations. The same selection factors mean that I have created a sample in * American Enterprise Institute, 1150 17th Street, N.W., Washington, DC 20036.

Estimating Individual Discount Rates in Denmark: A Field Experiment by Glenn W. Harrison, Morten I. Lau and Melonie B. Williams. Published in volume 92, issue 5, pages 1606-1617 of American Economic Review, December 2002

Intergenerational Risk-Sharing via Social Security when Financial Markets Are Incomplete by Dirk Krueger and Felix Kubler. Published in volume 92, issue 2, pages 407-410 of American Economic Review, May 2002

Transboundary spillovers may degrade environmental quality if countries free ride. This paper examines the extent of such degradation in water quality in international rivers. Using data from river monitoring stations in the UN's Global Emissions Monitoring System (GEMS), it compares pollution levels in international and domestic rivers. The results suggest that free riding may substantially increase pollution in international rivers, but the estimates are sensitive to the inclusion of country effects.

Throughout history wives have been the property of their husbands. Only in the past two centuries has this institution broken down in the world’s most developed regions. In America and England, the doctrine of coverture restricted women’s choices in virtually every aspect of their lives until the beginning of the 20th century. A married woman (a feme covert) could not make contracts, buy and sell property, sue or be sued, or draft wills (Joel P. Bishop, 1875; John C. Wells, 1878; John F. Kelly, 1882). Her husband owned any wages she earned, and he controlled any property she brought to the marriage. A husband also could control his wife’s economic activities outside the home, such as limiting a particular shopkeeper from selling to his wife (Marylynn Salmon, 1986). Even in the rare case of divorce, the children of the marriage fell under the father’s custody. Today the doctrine of coverture is extinct in most developed countries. Women now control rights to themselves and the products of their labor. No formal restrictions remain on a woman’s ability to own or convey title to land or other forms of real property. Women are able to contract freely and enforce their contractual rights. No formal restrictions remain on a woman’s capacity to sue or be sued in tort. Rape is no longer a crime against a husband’s property interest in his wife, but a crime in which the woman is the sole victim. No formal restrictions limit a woman’s ability to alienate her labor and own the wages she earns. Whether married or single, women today have practically all the rights of their male counterparts. We use a property-rights analysis to explain the demise of coverture in the United States. We characterize the modern property-rights structure to human beings as a system in which all adults are self-owners. Men and women have essentially equal rights and are able to contract fully inside and outside of marriage, so marriage is a share contract (Douglas W. Allen, 1992). Coverture, in contrast to self-ownership, is characterized as a principal–agent system in which the man (husband) legally owned his wife and her flow of value. Under coverture a wife was an agent, severely constrained by the system of property rights, which denied her the right to freely choose human-capital investments and consumption as well as to capture the full returns from her actions. The husband’s economic ownership was imperfect, however, allowing the woman to deviate from the man’s directives. Human ownership regimes are important because they affect incentives to acquire and develop human capital (T. W. Schultz, 1968; Stanley Engerman, 1973). In particular, we argue that economic growth with attendant increases in wealth and specialized markets leads * Geddes: Department of Policy Analysis and Management, Cornell University, 107 MVR Hall, Ithaca, NY 14853, and Hoover Institution (e-mail: [email protected]); Lueck: Montana State University and University of Virginia School of Law (e-mail: [email protected]). Geddes was supported by the Earhart Foundation. Lueck was supported as John M. Olin Faculty Fellow at the Yale Law School. Cynthia Powell, Hui-Ping Chao, and Mary Godfrey provided research assistance. We have also benefited from comments from Doug Allen, Lee Alston, Ian Ayres, David Barker, Parantap Basu, Gary Becker, Mary Beth Combs, Lee Craig, Joe Ferrie, Andy Hanssen, Gillian Hamilton, Shawn Kantor, Dean Lillard, Robin Lumsdaine, Steve Margolis, Joel Mokyr, Bart Moore, Lee Redding, Glen Whitman, Paul Zak, two anonymous referees, and participants in numerous seminars and conferences. 1 While married women’s property belonged to their husbands, most single women were dependents of their male relatives. Although a single woman legally had the same property rights as a man, powerful norms and private restrictions severely limited the rights of divorcees, spinsters, and widows (Mary Beth Norton, 1980). 2 We recognize a potential divergence between economic and purely legal rights because enforcement costs limit the application of legal doctrine (Yoram Barzel, 1977). Here, however, we treat economic and legal rights as virtually synonymous since coverture codified customs and norms and because coverture’s restrictions extended beyond the family into markets and society.

Lab experiments have gone to extremes to isolate and repress other-regarding behavior in extensive-form bargaining games, with limited success. Consider, for example, Elizabeth Hoffman et al.’s (1996; hereafter HMS) Anonymous Dictator game. This game controls self-interested strategic behavior by giving a person complete control over the distribution of wealth, and complete anonymity from all others including the experimenter. While theory predicts people with complete control and complete anonymity will offer up nothing to others, in fact they still share the wealth in about 40 percent of the observed bargains. Such other-regarding choice is another example in which individual behavior differs from that predicted by subgame perfection, and supports the call for a new “behavioral game theory” (Colin F. Camerer, 1997). Herein we extend the work of HMS to reveal a setting in which 95 percent of dictators follow game-theoretic predictions. In contrast to previous studies, our design has people bargain over earned wealth rather than unearned wealth granted by the experimenter. We argue that just as rewards must be salient (Kyung Hwan Baik et al., 1999), the assets in a bargain must be legitimate to produce rational behavior. Our results support this conjecture. Dictators bargaining over earned wealth were more selfinterested than observed in previous studies; and when they had complete anonymity, selfless behavior is essentially eliminated.

This Paper develops a model of economic growth and activity locating endogenously on a 3-dimensional featureless global geography. The same economic forces influence simultaneously growth, convergence, and spatial agglomeration and clustering. Economic activity is not concentrated on discrete isolated points but instead a dynamically-fluctuating, smooth spatial distribution. Spatial inequality is a Cass-Koopmans saddlepath, and the global distribution of economic activity converges towards egalitarian growth. Equality is stable but spatial inequality is needed to attain it.

In Corbae, Temzelides, and Wright (2001) (hereafter, CTW) we proposed a new version of the framework that uses bilateral matching to model the exchange process, and in particular to model the use of money as a medium of exchange. Our version does not have agents meeting exogenously and at random, but rather has agents meeting endogenously. That is, agents are matched at each date subject to a stability condition that requires, roughly, that no agents prefer to be paired with each other or to be unmatched, rather than to be paired with the partners they get along the equilibrium path. While similar in spirit to the cooperative matching concept introduced by David Gale and Lloyd Shapley (1962), we had to generalize their framework to dynamic models because we are interested in monetary economics. Here we present a version of the solution concept in CTW, specialized in some ways but also generalized to include extrinsic uncertainty (sunspots). We then discuss some applications of endogenous matching models to issues that have previously been addressed using random matching, including the existence of sunspot equilibria and the efficiency of inside versus outside money. One of our main goals is to show how endogenous matching is a useful alternative to random matching. This may be interesting to those who think that bilateral trade is a reasonable friction upon which to build a theoretical foundation for monetary economics but perhaps think that random matching is an extreme and unrealistic simplification. Another goal is to provide examples where it makes a difference for substantive results how we model the matching process, and also examples where it does not. I. Endogenous Matching

A special exemption from the 1986 Age Discrimination Act allowed colleges and universities to enforce mandatory retirement of faculty at age 70 until 1994. We construct a survey that permits us to compare faculty turnover rates before and after the law changed at a large sample of institutions with defined contribution pension plans. After the elimination of compulsory retirement the retirement rates of 70- and 71-year-olds fell by two-thirds and were comparable to rates of 69-year-olds. These findings indicate that U.S. colleges and universities will experience a rise in the number of older faculty over the coming years.