Knowledge that Transforms

The problems associated with accurately measuring the value of a public good in an applied setting are considered. The values obtained from hypothetical elicitation procedures are compared and contrasted with those obtained in a marketplace. When hypothetical measurements are elicited in the field, buying-selling discrepancies similar to those predicted by psychological models of behavior are observed. However, when the market-like elicitation process is repeated, values are more consistent with diminishing marginal utility. The authors cannot reject the hypothesis that these individuals exhibit loss- aversion behavior. The marketplace, however, is a strong disciplinarian of limiting this type of behavior.

Stiglitz and Weiss reply regarding credit rationing in markets with imperfect information.

The author examines third-degree price discrimination by an upstream monopolist in an intermediate good market. Discrimination is motivated by the fact that downstream firms differ in their abilities to integrate backward into supply of the input. The author shows that under reasonable specifications of equilibrium, price discrimination leads to all buyers facing higher input prices. In other cases, discrimination raises some prices and lowers others. The author derives conditions under which discrimination lowers welfare by reducing total output and shows that in some markets discrimination will raise welfare by preventing socially inefficient backward integration.

This paper examines the impact of social security on national saving and individual welfare in the presence of realistic capital-market imperfections: market failure in the private provision of annuities and restrictions on borrowing against anticipated future wages. The introduction of social security increases lifetime welfare and reduces national saving if borrowing restrictions are absent. However, the increase in individual welfare is reduced, and in some cases eliminated, when borrowing constraints are taken into consideration. The substantial difference suggests the importance of reexamining the proportional payroll tax finance of social security.

Microeconomic theory typically concerns exchange between individuals or firms in a market setting. To make predictions precise, individuals are usually assumed to use the laws of probability in structuring and revising beliefs about uncertainties. Recent evidence, mostly gathered by psychologists, suggests probability theories might be inadequate descriptive models of individual choice. (See the books edited by Daniel Kahneman et al., 1982a, and by Hal Arkes and Kenneth Hammond, 1986.)

The authors study the rivalry between two firms to develop an innovation in a dynamic setting that allows for post-development dissemination of the innovation, such as licensing or imitation. This dissemination may cause the noninnovating firm to benefit from the discovery. When this occurs, conventional results in the economics of R&D no longer need apply They find that industry leaders will tend to develop minor innovations, but will develop major innovations only if imitation is difficult.

This paper proposes a positive theory of tariff formation based on the idea that the optimal trade policy may be time inconsistent. A benevolent government, with redistributive goals, may have an incentive to provide unexpected protection, since the redistributive effects of trade policy are larger if the policy is unanticipated. The suboptimal, but time consistent, policy involves an excessive amount of protection. Furthermore, in a time-consistent equilibrium, tariffs may dominate production subsidies. Thus, the requirement of time consistency can lead to a reversal of the traditional normative ordering of tariffs and subsidies as instruments of trade policy.

Cross-section data often show that the wealth of the elderly increases with age even at advanced ages. These and other results suggest that the life-cycle hypothesis of consumption should be augmented to include a bequest motive for saving. In this paper, the author proposes a model of bequests, and a test for a bequ est motive. Using panel data, he finds that over a ten-year period the elderly in the data set dissaved, in contradiction to most cross- section results. The test offers no support for a bequest motive.