Knowledge that Transforms

In a wide variety of settings, spiteful preferences would constitute an obstacle to cooperation, trade, and thus economic development. This paper shows that spiteful preferences - the desire to reduce another's material payoff for the mere purpose of increasing one's relative payoff - are surprisingly widespread in experiments conducted in one of the least developed regions in India (Uttar Pradesh). In a one-shot trust game, the authors find that a large majority of subjects punish cooperative behavior although such punishment clearly increases inequality and decreases the payoffs of both subjects. In experiments to study coordination and to measure social preferences, the findings reveal empirical patterns suggesting that the willingness to reduce another's material payoff - either for the sake of achieving more equality or for the sake of being ahead - is stronger among individuals belonging to high castes than among those belonging to low castes. Because extreme social hierarchies are typically accompanied by a culture that stresses status-seeking, it is plausible that the observed social preference patterns are at least partly shaped by this culture. Thus, an exciting question for future research is the extent to which different institutions and cultures produce preferences that are conducive or detrimental to economic development.

Since Schelling, it has often been assumed that players make use of salient decision labels to achieve coordination. Consistent with previous work, we find that given equal payoffs, salient labels yield frequent coordination. However, given even minutely asymmetric payoffs, labels lose much of their effectiveness and miscoordination abounds. This raises questions about the extent to which the effectiveness of focal points based on label salience persists beyond the special case of symmetric games. The patterns of miscoordination we observe vary with the magnitude of payoff differences in intricate ways that suggest nonequilibrium accounts based on “level-k” thinking and “team reasoning.”

Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies. This fact can help explain why sticky price business cycle models have been unable to match the persistence of the real exchange rate. I show that, in response to a number of different real shocks, a two-country sticky price business cycle model yields hump-shaped dynamics for the real exchange rate. The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate.

This paper analyzes how US presidential candidates should allocate resources across states to maximize the probability of winning the election, by developing and estimating a probabilistic-voting model of political competition under the Electoral College system. Actual campaigns act in close agreement with the model. There is a 0.9 correlation between equilibrium and actual presidential campaign visits across states, both in 2000 and 2004. The paper shows how presidential candidate attention is affected by the states' number of electoral votes, forecasted state-election outcomes, and forecast uncertainty. It also analyzes the effects of a direct national popular vote for president.

How Big Are Total Individual Income Tax Expenditures, and Who Benefits from Them? by Leonard E. Burman, Christopher Geissler and Eric J. Toder. Published in volume 98, issue 2, pages 79-83 of American Economic Review, May 2008

Historically in the United States, a child's gender has affected the level of education he or she is likely to receive, the occupation he or she will choose, and the wages he or she will be paid (e.g., Francine D. Blau 1998). A growing body of research examines how child gender may be associated with differential treatment by parents from birth, which could contribute to differences by gender in these adult market outcomes.1 One strand of this literature has found associations between child gender and parents' marriage formation and dissolution, with implications for the living arrangements of children. Fathers are more likely to be present in the home if a child is male; the presence of sons decreases the probability of divorce; and a nonmarital birth is more likely followed by marriage if the child

This paper studies the life-cycle labor supply of three cohorts of American women, born in the 1930s, 1940s, and 1950s. We focus on the increase in labor supply of mothers between the 1940s and 1950s cohorts. We construct a life-cycle model of female participation and savings, and calibrate the model to match the behavior of the middle cohort. We investigate which changes in the determinants of labor supply account for the increases in participation early in the life-cycle observed for the youngest cohort. A combination of a reduction in the cost of children alongside a reduction in the wage-gender gap is needed.

We study the asset pricing implications of Tversky and Kahneman's (1992) cumulative prospect theory, with a particular focus on its probability weighting component. Our main result, derived from a novel equilibrium with nonunique global optima, is that, in contrast to the prediction of a standard expected utility model, a security's own skewness can be priced: a positively skewed security can be “overpriced” and can earn a negative average excess return. We argue that our analysis offers a unifying way of thinking about a number of seemingly unrelated financial phenomena.

Many older US households have done little or no planning for retirement, and there is a substantial population that seems to undersave for retirement. Of particular concern is the relative position of older women, who are more vulnerable to old-age poverty due to their longer longevity. This paper uses data from a special module we devised on planning and financial literacy in the 2004 Health and Retirement Study. It shows that women display much lower levels of financial literacy than the older population as a whole. In addition, women who are less financially literate are also less likely to plan for retirement and be successful planners. These findings have important implications for policy and for programs aimed at fostering financial security at older ages.