Knowledge that Transforms

Normative analysis asks how we (as a society) should make trade-offs between individuals. Behavioral welfare economics extends the scope of this analysis to a single individual, asking how the individual should trade off potential motives. We argue that any faith in economists’ (behavioral or otherwise) abilities to resolve such problems in moral philosophy cannot be based on past accomplishments of welfare economics, and that the best way to understand welfare economics is to view it as a part of positive economics with no normative content. We distinguish three types of welfare analysis. We refer to them as welfare I, II, and III. Welfare I identifies Pareto efficient outcomes within a particular model and relates those to equilibrium outcomes. Welfare I includes results such as the first theorem of welfare economics or the Myerson and Satterthwaite theorem on two-sided bargaining—results that show when an efficient outcome must, or cannot, be attained in equilibrium. Such results are used to explain the persistence of certain economic institutions (such as competitive markets) or derive limitations on what can be achieved within any institutional framework (such as bargaining or auctions). Welfare II posits an objective function for a policymaker and evaluates different policies or institutions according to that objective function. In other words, welfare II analyzes the implications of a policymaker’s preferences. Policymakers often pursue sophisticated objectives that cannot be captured by the standard functional forms used to describe simple, selfinterested economic agents. Moreover, evidence regarding policymakers’ preferences is typically limited. Hence, discussions of policymaker

Inward Foreign Direct Investment and Racial Employment Patterns in US Manufacturing by Abera Gelan, Kaye Husbands Fealing and James Peoples. Published in volume 97, issue 2, pages 378-382 of American Economic Review, May 2007

Most previous studies on intertemporal labor supply found very small or insignificant substitution effects. It is possible that these results are due to constraints on workers' labor supply choices. We conducted a field experiment in a setting in which workers were free to choose hours worked and effort per hour. We document a large positive elasticity of overall labor supply and an even larger elasticity of hours, which implies that the elasticity of effort per hour is negative. We examine two candidate models to explain these findings: a modified neoclassical model with preference spillovers across periods, and a model with reference dependent, loss-averse preferences. With the help of a further experiment, we can show that only loss-averse individuals exhibit a negative effort response to the wage increase. (JEL J22, J31)

Many countries have recently enacted or proposed reforms aimed at increasing citizens’ information on the quality of some public sector services. Disclosure of schools’and teachers’ quality is the case that has generated the biggest public debate. In the US, the No Child Left Behind Act (NCLB) requires learning progress to be measured for every child and results from students’tests be made available in annual report cards, so that parents can evaluate schools’ performances. Similar reforms have also been proposed for many other public services. In the UK, legislation introduced in the year 2000 now requires that the performance of each Local Government is reviewed and made public with regards to provision of services such as …re, police, housing, social services and education, but also like the condition of roads, the average time taken to remove ‡y-tips and the amount of household waste recycled. 1 By and large, most of these reforms have been opposed by the public sector employees a¤ected. In the US, the largest teachers union- the National Education Association- spent more than $8 million in an e¤ort to derail NCLB. In the UK, public service unions greeted reforms with increased scepticism and ultimately hostility. More generally, it is di ¢ cult to …nd groups of public sector workers or trade unions lobbying the government to disclose more information about quality. Moreover, in contrast with the private sector, it is much less common to see even the highest quality providers (hospitals, schools,....) trying to

People who are members of a group and identify with it behave differently from people who perceive themselves as isolated individuals. This paper shows that group membership affects preferences over outcomes, and saliency of the group affects the perception of the environment. We manipulate the saliency of group membership by letting a player's own group watch as a passive audience as decisions are made, and/or by making part of the payoff common for members of the group. In contrast to the minimal-group paradigm, minimal groups alone do not affect behavior in our strategic environments. However, salient group membership significantly increases the aggressive stance of the hosts (people who have their group members in the audience), and tends to reduce that of the guests. (JEL D71, Z13)

The Effect of Globalization on the Performance of Small- and Medium-Sized Enterprises in the United States: Does Owners' Race/Ethnicity Matter? by Elizabeth Asiedu and James A. Freeman. Published in volume 97, issue 2, pages 368-372 of American Economic Review, May 2007

ABSTRACT We examine whether corporate governance mechanisms, especially the market for corporate control, affect the profitability of firm acquisitions. We find that acquirers with more antitakeover provisions experience significantly lower announcement‐period abnormal stock returns. This supports the hypothesis that managers at firms protected by more antitakeover provisions are less subject to the disciplinary power of the market for corporate control and thus are more likely to indulge in empire‐building acquisitions that destroy shareholder value. We also find that acquirers operating in more competitive industries or separating the positions of CEO and chairman of the board experience higher abnormal announcement returns.

ABSTRACT Many financial markets are characterized by strong relationships and networks, rather than arm's‐length, spot market transactions. We examine the performance consequences of this organizational structure in the context of relationships established when VCs syndicate portfolio company investments. We find that better‐networked VC firms experience significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or a sale to another company. Similarly, the portfolio companies of better‐networked VCs are significantly more likely to survive to subsequent financing and eventual exit. We also provide initial evidence on the evolution of VC networks.

ABSTRACT We analyze the consequences of the board's dual role as advisor as well as monitor of management. Given this dual role, the CEO faces a trade‐off in disclosing information to the board: If he reveals his information, he receives better advice; however, an informed board will also monitor him more intensively. Since an independent board is a tougher monitor, the CEO may be reluctant to share information with it. Thus, management‐friendly boards can be optimal. Using the insights from the model, we analyze the differences between sole and dual board systems. We highlight several policy implications of our analysis.

ABSTRACT I quantitatively measure the interactions between the media and the stock market using daily content from a popular Wall Street Journal column. I find that high media pessimism predicts downward pressure on market prices followed by a reversion to fundamentals, and unusually high or low pessimism predicts high market trading volume. These and similar results are consistent with theoretical models of noise and liquidity traders, and are inconsistent with theories of media content as a proxy for new information about fundamental asset values, as a proxy for market volatility, or as a sideshow with no relationship to asset markets.