Knowledge that Transforms

In this paper we model contract incompleteness “from the ground up,” as arising endogenously from the costs of describing the environment and the parties' behavior. Optimal contracts may exhibit two forms of incompleteness: discretion, meaning that the contract does not specify the parties' behavior with sufficient detail; and rigidity, meaning that the parties' obligations are not sufficiently contingent on the external state. The model sheds light on the determinants of rigidity and discretion in contracts, and yields rich predictions regarding the impact of changes in the exogenous parameters on the degree and form of contract incompleteness.

Terror as a Bargaining Instrument: A Case Study of Dowry Violence in Rural India by Francis Bloch and Vijayendra Rao. Published in volume 92, issue 4, pages 1029-1043 of American Economic Review, September 2002

There has been substantial recent interest in determining why there is cooperation in public goods experiments even in environments that provide all subjects with the incentive to free ride (see e.g., John O. Ledyard, 1995). Theories used to explain such cooperation generally posit either that subjects are “confused” in the sense that they make errors or do not understand the game’s incentives, or that subjects contribute due to social factors such as altruism and reciprocity. Although several authors have pointed out the importance of distinguishing between these alternatives, the roles that confusion and social motives play in determining public contributions remain poorly understood. This paper provides new evidence on the way that confusion and social motives determine contributions in public goods games by reporting data from experiments that use a new design with the Voluntary Contribution Mechanism (VCM). Two important and often replicated findings in the experimental public goods literature are (1) that subjects’ public contributions are much greater than predicted by standard economic theories of free-riding and (2) that these contributions decay over the course of multiple-round games (see e.g., Douglas D. Davis and Charles A. Holt, 1993). Models that employ social factors to explain cooperation and its decay usually assume that subjects are motivated by altruism, reciprocity, or fairness (see e.g., Andreoni, 1990; Rachel T. A. Croson, 1998; Anna Gunthorsdottir et al., 2001). It has been argued, for instance, that subjects make contributions in order to elicit like contributions from reciprocators in subsequent rounds and that decay in public contributions might result from “frustrated attempts at kindness” (Andreoni, 1995 p. 892). Specifically, because there is generally heterogeneity in the willingness to contribute to the public good, initially cooperative players will likely reduce their public contributions after being grouped with relatively low contributors. In contrast, confusion theories postulate that players make public contributions either in error or because they do not understand how to pursue their self-interest. These theories argue that high initial contributions decay primarily because subjects gradually come to understand the game’s incentives. Recently, Andreoni (1995) conducted an interesting series of experiments in the first and, to our knowledge, only effort to discriminate between these competing theories of cooperative play. He provides two reasons that doing this is important. The first is that knowing the relative importance of confusion and social motives in generating cooperative decay can provide a useful guide to future research. While Andreoni argues that such knowledge could be used to inform research on learning models, note also that to the extent confusion is found to be important, shedding light on the way different sorts of instructions affect confusion could help to improve pedagogics. A second compelling reason Andreoni gives is that the outcomes of experiments designed to test theories of social giving are difficult to interpret if confusion is a primary source of cooperation. * Houser: Department of Economics and Economic Science Laboratory, University of Arizona, Tucson, AZ 85721; Kurzban: Economic Science Laboratory, University of Arizona, Tucson, AZ 85721. We thank Mark Isaac, Kevin McCabe, David Porter, Vernon Smith, Bart Wilson, seminar participants at the University of Arizona, and two anonymous referees for valuable comments on this research. The authors gratefully acknowledge the research support of fellowships from the International Foundation for Research in Experimental Economics. This research was supported by Russell Sage Foundation Grant No. 98-00-01. The authors are responsible for any errors. 1 See, for example, James Andreoni (1995), Martin Sefton and Richard Steinberg (1996), and Thomas R. Palfrey and Jeffrey E. Prisbrey (1997). 2 This paper focuses on only standard linear games in which to contribute zero to the public good is the dominant strategy.

Accounting for Innovation and Measuring Innovativeness: An Illustrative Framework and an Application by Jacques Mairesse and Pierre Mohnen. Published in volume 92, issue 2, pages 226-230 of American Economic Review, May 2002

The role of bequests in propagating wealth inequality has long interested economists, policymakers, and social commentators. Josiah Wedgwood’s (1929) study of wealthy Britons indicated that most had received large inheritances and suggested that one-third owed their position in the wealth distribution entirely to inheritance. These findings and those of J. E. Meade (1966), C. D. Harbury and D. M. W. N. Hitchens (1979), and Paul L. Menchik (1979) support the public’s general view that restricting inheritances by taxing estates or inheritances or by forcing annuitization would lead to a more equal wealth distribution. Would wealth inequality actually be reduced if inheritances and, for that matter, all private inter vivos transfers were eliminated? The answer is not obvious. Private wealth holdings would, in this case, be traced to precautionary and retirement saving, with the distribution of wealth determined by the distributions of aftertax labor earnings, rates of return, demographics, and saving preferences. Household labor income is distributed very unequally because of differences in genetic endowments, educational opportunities, parental care, health, labor– leisure preferences, assortative mating, and a host of other factors. Rates of return earned on saving also vary widely across households for systematic and nonsystematic reasons. Also, as recently documented by Steven F. Venti and David A. Wise (2000), there is a great deal of heterogeneity with respect to saving behavior. Thus, a high degree of wealth inequality would exist in the absence of bequests and inter vivos gifts. Adding them back into the mix could actually reduce overall wealth inequality if they were made to children with relatively low earnings, low rates of return, or poor saving discipline or were made primarily to children whose parents died young. Clearly, understanding the precise role that bequests and gifts play in wealth inequality requires building a fairly elaborate model that can control for different factors and their interactions. The model we co-developed in Gokhale et al. (2001) to study U.S. wealth inequality, which we extend here, represents a step in this direction. The model features 88 overlapping generations. It incorporates marriage, fertility patterns, random death, heterogeneous skill endowments and rates of return, assortative mating based on skills, skill inheritability, progressive income taxation, and wealth annuitization via Social Security. Given the strong evidence against intergenerational altruism reported in Kotlikoff (2002) and the dictates of tractability, we modeled bequests as arising solely from imperfect annuitization. The model generates a realistic ratio of aggregate wealth to aggregate labor income, a realistic flow of bequests relative to the stock of wealth, and a realistic distribution of wealth at retirement, including the share of wealth held by those in the top tail of the distribution. Bequests play a limited role in influencing wealth inequality, the major determinant of which is skill (earnings) differences. Interestingly, bequests serve to equalize the distribution of wealth because, when children inherit, wealth is determined by the random date of parent’s death. In contrast, Social Security plays a disequalizing role. As stressed by Martin S. Feldstein (1976), Social Security annuitizes a much larger share of the assets of the poor than of the rich, leaving them with relatively little fungible wealth.

We analyze politically motivated privatization in a bipartisan environment. When median-class voters a priori favor redistributive policies, a strategic privatization program allocating them enough shares can induce a voting shift away from left-wing parties whose policy would reduce the value of shareholdings. To induce median-class voters to buy enough shares to shift political preferences, strategic rationing and underpricing is often necessary. In the extreme, this may lead to free share distribution and voucher privatization. Shifting voting preferences becomes impossible when strong ex ante political constraints require large upfront transfers to insiders or when social inequality is extreme.

Competitive Pressure and Labor Productivity: World Iron-Ore Markets in the 1980's by José E. Galdón-Sánchez and James A. Schmitz Jr.. Published in volume 92, issue 4, pages 1222-1235 of American Economic Review, September 2002

There is a welter of advice about what topics to include, which audiovisual/computing wizardry to employ, and how to use modem learning theory in Microeconomics Principles classes (William Becker and Michael Watts, 1999). What appears lacking (except for Kenneth Elzinga, 2001) is plain advice aimed particularly at newer instructors on how to present material and treat students-generally how to avoid having the course burden students and instructor. The spur is my upset when people say economics was the most boring course in college and one they never understood. My only bona fides for providing this advice is experience, over 30 sections of Micro Principles with over 12,000 students. The advice is aimed toward instructors of sections of at least 100 students, but most applies in smaller sections as well. The crucial assumptions here are that students: (i) do not intend to take more economics; (ii) know very little about what economics is really about; and (iii) are very concerned about maintaining/raising their grade point averages. These assumptions regrettably characterize the majority of students in Micro Principles classes and should condition how we teach. They imply that the burden of teaching, including the sheer physical energy and attention required to demonstrate the relevance of economics and maintain students' interest, is greater than in other courses. They necessitate introducing only those techniques that will be used in class in analyzing real-world issues: Teach ideas, not techniques.' The purpose is to enable students to see economic principles in action in real life, not to prepare budding economics majors. I. In-Class Issues

This paper provides a model of individual decisionmaking in the presence of neighborhood effects. By neighborhood effects, we refer to interdependencies between individual decisions and the decisions and characteristics of others within a common neighborhood. As such, neighborhood effects are forms of social interactions; in fact the terms would seem to be interchangeable in many contexts. Within economics, there has developed an increasing recognition that neighborhood effects play a possibly major role in explaining a range of individual behaviors; rich empirical and theoretical literatures have developed. A failing of much of this work is the absence of strong connections between theory and empirics. This paper addresses this limitation by providing a model of multinomial choice with neighborhood effects. The model represents a generalization of the binary choice model of William Brock and Steven Durlauf (2001a,b). The model is econometrically implementable and so has the potential of allowing for structural estimation of neighborhood effects. Section I outlines a basic choice model with neighborhood effects. Section II specializes the structure using a multinomial logit framework. Section III considers econometric implementation. Section IV discusses some limitations of the framework and proposes some research directions. Proofs of all theorems may be found in Brock and Durlauf (2001c).