Knowledge that Transforms

The television game show The Price Is Right is used as a laboratory to conduct a preference-free test of rational decision theory in an environment with substantial economic incentives. It is found that contestants' strategies are transparently suboptimal. In response to this evidence, simple rules of thumb are developed that are shown to explain observed bidding patterns better than rational decision theory. Further, learning during the show reduces the frequency of strategic errors. This is interpreted as evidence of bounded rationality. Finally, there is no evidence that a concern for fairness significantly alters bidding behavior. Copyright 1996 by American Economic Association.

Private wage returns to schooling in South Africa in 1993 are twice as high for nonwhites as for whites and substantially higher at advanced levels of schooling for both races. To explore how these returns might be expected to change as the proportion of Africans with secondary and higher education increases quantile regressions for the wage function are estimated for African males and white males. If the residuals based on a standard wage function specification are interpreted as omitted ability and it is assumed that ability increases (decreases) returns to schooling then we expect quantile returns to increase (decrease) at higher quantiles. This is not observed for Africans at the higher and secondary school level but is evident among whites at higher educational levels. The opposite pattern of differential returns favoring the least able (i.e. lowest deciles) is reported for the lower tail of the educational distribution that is for Africans at the level of primary school and for whites at secondary school. (authors)

This paper provides general conditions for aggregating commodities without separable utility. These conditions impose weaker and more empirically plausible restrictions on price movements than the currently existing alternative to separability, the Hicks-Leontief composite commodity theorem. The idea is to allow departures from Hicks-Leontief that take the form of well-behaved error terms. Utility functions that permit generalized composite commodity aggregation include the AIDS model, the translog, all homothetic utility functions, and any utility function when demands are aggregated to two groups of goods. Implications of empirical nonstationarity of relative prices for aggregation and demand estimation are considered. Copyright 1996 by American Economic Association.

This paper describes an organizational setting in which professional employees are required to work inefficiently long hours. The focus of the authors' investigation is large law firms. The income sharing that characterizes legal partnerships creates incentives to promote associates who have a propensity to work very hard. Law firms use indicators of this propensity--especially an associate's record of billable hours--in promotion decisions. Reliance upon work hours as an indicator leads to a rat-race equilibrium in which associates work too many hours. The authors find evidence in support of this conclusion with data they collected from two large law firms. Copyright 1996 by American Economic Association.

We study the movements in output, consumption and hours that are forecastable from a VAR and analyze how they differ from those predicted by standard real-business-cycle models. We show that actual forecastable movements in output have a variance about one hundred times larger than those predicted by the model. We also find that forecastable changes in the three series are strongly positively correlated with each other. On the other hand, for parameters whose implications are plausible in other respects, the model implies that output, consumption, and hours should not all be expected to move in the same direction

This paper develops a model of capacity-price competition in which the equilibrium outcome ranges from the Bertrand to the Cournot outcome as capacity constraints become more important. This model is employed to reexamine aspects of strategic-trade-policy theory and, in particular, the theory's well-known sensitivity to the mode of oligopolistic competition. Among other things, the analysis identifies a simple single-rate policy, namely, capacity subsidies, which can increase the home country's income regardless of the mode of competition. This suggests that the presence of critical informational constraints need not diminish governments' incentives to distort the international competition. Copyright 1996 by American Economic Association.