Knowledge that Transforms

Between 1971 and 1996 opponents of local funding for public schools successfully challenged the constitutionality of school-finance systems in sixteen states. Using the variation across states in the timing of these cases the authors investigate the impact of reform on the distribution of school resources. Their results suggest that court-ordered finance reform reduced within-state inequality in spending by 19 to 34 percent. Successful litigation reduced inequality by raising spending in the poorest districts while leaving spending in the richest districts unchanged, thereby increasing aggregate spending on education. Reform led states to fund additional spending through higher state taxes.

The transition to a market economy has produced a substantial and rapid change in the wage structure in Russia. Household surveys taken before and after the transition indicate that overall wage inequality nearly doubled from 1991 to 1994 and has reached a level higher than that in the United States. Returns to both measured skills (education, occupation) and unmeasured skills within groups have increased considerably. Skill premiums across experience groups, however, have become more compressed and relative wages of older workers have declined. In addition, female wages have declined relative to male wages across all percentiles of the wage distribution.

Conventional wisdom holds that the social rate of return to R&D significantly exceeds the private rate of return and, therefore, R&D should be subsidized. In the U.S., the government has directly funded a large fraction of total R&D spending. This paper shows that there is a serious problem with such government efforts to increase inventive activity. The majority of R&D spending is actually just salary payments for R&D workers. Their labor supply, however, is quite inelastic so when the government funds R&D, a significant fraction of the increased spending goes directly into higher wages. Using CPS data on wages of scientific personnel, this paper shows that government R&D spending raises wages significantly, particularly for scientists related to defense such as physicists and aeronautical engineers. Because of the higher wages, conventional estimates of the effectiveness of R&D policy may be 30 to 50% too high. The results also imply that by altering the wages of scientists and engineers even for firms not receiving federal support, government funding directly crowds out private inventive activity.

If people are so self-interested, why do they give their money away to charities? One possibility is that people care about the level of the public good their donations provide. But this is not a good explanation: free-riding typically dominates donating even for people who care a great deal about the good in question, and even in groups that are substantially smaller than those in which people contribute. An alternative explanation for giving is that the benefit comes from the donation itself, not from the good it buys. This idea is ancient. In the Old Testament, God promises those giving to the temple that he will

October 1997, (Forthcoming, American Economic Review) The government's incentives to bail out inefficient projects are determined by the tradeoff between political benefits and economic costs, the latter depending on the decentralization of government. Two effects of federalism are derived: First, fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and thus serves as a commitment device (the "competition effect"). Second, monetary centralization, together with fiscal decentralization, induces a conflict of interests and thus may harden budget constraints and reduce inflation (the "checks and balance effect"). Our analysis is used to interpret China's recent experience of transition to a market economy. (JEL E62, E63, H7, L30, P3) Key Words: Soft Budget Constraints, Federalism, Decentralization, Competition, China

One of the most important remaining issues in China's transition to a market economy is the reform of state-owned enterprises (SOE's). When reforms started in late 1978, SOE's dominated China's industrial sectors in every aspect. After 18 years of gradual transition, the SOE share in China's total industrial output has declined from 77.6 percent in 1978 to 28.8 percent in 1996. However, in 1996 SOE's still employed 57.4 percent of urban workers and possessed 52.2 percent of total investment in industrial fixed assets. Improving SOE performance is crucial for social stability and sustained growth in China. However, over 40 percent of SOE's are losing money. In this paper, we will argue that the root of the SOE problem is the separation of ownership and control and that the oftencriticized soft-budget constraints arise from various state-imposed policy burdens, which make the state accountable for the poor perfornance of SOE's. The key for a successful SOE reform is to remove the policy burdens and to create a level playing field so that market competition can provide sufficient information for the managerial performance of the SOE's and make the managers' incentives compatible with those of the state)' Io Competition and the Performance of Large Corporation in a Market Economy

This paper presents a simple R&D-driven endogenous growth model to shed light on some puzzling economic trends. The model can account for why patent statistics have been roughly constant even though R&D employment has risen sharply over the last 30 years. The model also illuminates why steadily increasing R&D effort has not lead to any upward trend in economic growth rates, as is predicted by earlier R&D-driven endogenous growth models with the “scale effect ” property.

A theoretical and computational model with tax-financed, tuition-free public schools and competitive, tuition-financed private schools is developed. Students differ by ability and income. Achievement depends on own ability and on peers' abilities. Equilibrium has a strict hierarchy of school qualities and two-dimensional student sorting with stratification by ability and income. In private schools, high-ability, low-income students receive tuition discounts, while low-ability, high-income students pay tuition premia. Tuition vouchers increase the relative size of the private sector and the extent of student sorting, and benefit high-ability students relative to low-ability students.