Knowledge that Transforms

Reports on the desirable goals and characteristics of economics programs, and reforms proposed to attain such programs (e.g., W. Lee Hansen, 1991; Hirschel Kasper et al., 1991), have ignored the issue of how economics is to be taught. That is surprising because several popular trade books have recently appeared condemning teaching practices at American colleges and universities. Some of these books were written by economists (e.g., Martin Anderson's [1992] Impostors in the Temple) and used economics courses as notable examples of these problems. Long before these reports and books appeared, the National Council on Economic Education (NCEE), together with the American Economic Association's (AEA) Committee on Economic Education, began sponsoring programs to improve the teaching of economics and to promote innovative teaching methods. In Becker and Watts (1995), we describe many of these improvements and explain how economists could use alternative teaching methods in different undergraduate courses. Until now, however, we could not provide data on how widely those approaches were used. We do that here, based on responses to a national survey.'

The critical economic policy issue for many OECD countries, developing countries, and transition economies currently is fiscal consolidation, and the maintenance of long-run fiscal balance. Two related components underlie this general goal. First, several countries face the issue of deficit reduction, particularly those countries with high debt/GDP ratios. Second, it is becoming increasingly apparent that major reforms of the welfare system and, specifically, of social-security systems are critical ingredients of a long-lasting fiscal consolidation (see Alesina and Perotti, 1995a). In the case of monetary policy, a constructive discussion has generated a widespread consensus about the benefits of different monetary institutions. Relatively few economists dispute the benefits of a certain amount of central-bank independence, even though different commentators and policymakers may disagree on the optimal degree of independence. Also a contracting approach has highlighted the benefit of inflation-targeting and of certain institutional relationships ( contracts) between the executive and the central bank. A similar theoretical and empirical discussion on the role of budget procedures and budget institutions is just beginning. In this paper we ask the following two questions: (i) Do budget procedures matter for the determination of the budget balance and its composition? (ii) Are there certain institutional reforms that one should feel comfortable in recommending? Based on the relatively scarce empirical evidence available, we tentatively answer yes to the first question: budget procedures matter. On the second question we suggest that the two critical areas of reform are: first, more transparency; second, a strengthening of the roles of the executive branch vis 'a vis the legislature, and of the treasury minister vis a vis the rest of the executive branch, in order to achieve a centralized and top-bottom approach to the budget process.

Some firms such as Kellogg, Nestle, Hewlett-Packard, and Boeing have consistently earned significantly higher returns than their immediate competitors. Why do intraindustry rents persist for these firms? Competition typically erodes these rents, as evidenced by the strong convergence of firm profitability to the industry mean, illustrated in Figure 1. I claim that the persistence of these firmspecific rents depends at least partly on industry economic structure (similar to Richard E. Caves and Michael E. Porter's [1977] mobility barriers), so the rents are more persistent in some industries than others. In this paper I test which of the theoretical industry factors are significant. To support my claim I also show that the persistence of abnormal returns differs widely and systematically across industries. For example, an industry with highly persistent profitability differences is the American automobile industry in the 1970's, as illustrated by Figure 2, which graphs differences in returns on assets (ROA's) over time. Throughout the 1970's, General Motors maintained a persistent, significant profitability advantage over Ford, while Ford held a persistent advantage over Chrysler. This situation did change later, but it is still true that, during the 1970's, there was no apparent convergence of profitability differences among the big-three auto makers. A comparison of Figures 1 and 2 suggests that the economy-wide result of Figure 1 is merely an average over very different industries with convergence rates ranging from almost zero (as in automobiles in the 1970's) to very rapid. My methods for estimating persistence of above-average returns improve on previous studies in several ways. First, I only consider the persistence of returns around the industry mean. The persistence of this intra-industry or rent rather than total rent has not been previously investigated. Yet the factors affecting firm-specific rents need not be the same as those affecting industry rents. Second, I estimate persistence in several ways. Finally, I use a wider range of explanatory variables than earlier studies. This study is structured as follows. Section I explains the concept of persistent firmspecific rents. Later sections specify the empirical model and estimate persistence by industry (Section II), theoretically relate industry factors to these varying persistence estimates (Section III), discuss cross-sectional regression estimates (Section IV), and provide conclusions (Section V).

This paper develops a methodology for consistently estimating the relative weights in senator utility functions, despite the fact that senator ideologies are unobserved. The empirical results suggest that voter preferences are assigned only one quarter of the weight in senator utility functions. The national 'party line' also has some influence but the senator's own ideology is the primary determinant of roll-call voting patterns. These results cast doubt on the empirical relevance of the median voter theorem. Estimation of the model requires only roll-call voting data, making it widely applicable. Copyright 1996 by American Economic Association.

In existing theory, wealth is no more valuable than its implied consumption rewards. In reality investors acquire wealth not just for its implied consumption, but for the resulting social status. Max M. Weber refers to this desire for wealth as the spirit of capitalism. We examine, both analytically and empirically, implications of Weber's hypothesis for consumption, savings, and stock prices. When investors care about relative social status, propensity to consume and risk-taking behavior will depend on social standards, and stock prices will be volatile. The spirit of capitalism seems to be a driving force behind stock-market volatility and economic growth.

We study the problem of a seller who wants to maximize her revenue in situations where the outcome of the sale affects the nature of the future interaction between agents. We model those situations by assuming that an agent that does not acquire the object for sale incurs an externality that may depend both on the identity of the sufferer and on the identity of the final purchaser. We describe an optimal auction that has a unique Nash equilibrium in strictly dominant strategies. We show that: 1) Outside options are endogenously determined in equilibrium. Participation constraints and the ''threats'' in case of non-participation play an important role. 2) An optimizing seller can extract surplus also from buyers that do not obtain the auctioned object. 3) The seller is better off by not selling at all (while obtaining some payments) if externalities are large when compared to the pure profits that buyers achieve if they acquire the object. 4) The revenue-maximizing equilibrium is coalition-proof if buyers cannot organize side payments among themselves. (orig.)

The authors develop a positive theory of how interest-group competition shapes the organization of Congress and use it to explain campaign contribution patterns in financial services. Since interest groups cannot enforce fee-for-service contracts with legislators, legislators have an incentive to create specialized, standing committees which foster repeated dealing between interests and committee members. The resulting reputational equilibrium supports high contributions and high legislative effort for the interests. Contribution patterns by competing interests in the congressional battle over whether banks can enter new businesses support the theory, which also has implications for term limits and campaign reform. Copyright 1998 by American Economic Association.

We study a dynamic model of labor migration in which moving costs decrease with the number of migrants already settled in the destination. This assumption is supported by sociological studies of migrant networks. With endogenous moving costs migration occurs gradually over time. Once it starts it develops momentum and migratory flows may increase even as wage differentials narrow. In addition migration tends to follow geographical channels and low-moving-cost individuals migrate first. These patterns are consistent with historical evidence from the Great Black Migration of 1915-1960 [in the United States] much of which cannot be reconciled with existing migration models. (EXCERPT)

The problem of extracting commonly owned renewable resources is examined within an evolutionary-game-theoretic framework. It is shown that cooperative behavior guided by norms of restraint and punishment may be stable in a well-defined sense against invasion by narrowly self-interested behavior. The resource-stock dynamics are integrated with the evolutionary-game dynamics. Effects of changes in prices, technology, and social cohesion on extraction behavior and the long-run stock are analyzed. When threshold values of the parameters are crossed, social norms can break down leading generally to the lowering of the long-run stock and possibly to its extinction. Copyright 1996 by American Economic Association.

Panel and time-series data describing the green-revolution period in India are used to assess the effects of exogenous technical change on the returns to schooling, the effects of schooling on the profitability of technical change, and the effects of technical change and school availability on household schooling investment. The results indicate that the returns to (primary) schooling increased during a period of rapid technical progress, particularly in areas with the highest growth rates. Such increases induced private investment in schooling, net of changes in wealth, wages, and the availability of schools, and school expansion importantly increased levels of schooling. Copyright 1996 by American Economic Association.