Knowledge that Transforms

By social (norm for short) I shall mean a rule that is neither promulgated by an official source, such as a court or a legislature, nor enforced by the threat of legal sanctions, yet is regularly complied with (otherwise it wouldn't be a rule).' The rules of etiquette, including norms of proper dress and table manners; the rules of grammar; and customary law in prepolitical societies and private associations are all examples of norms in my sense. A full understanding of law requires consideration of norms. Law is older than political society, which means that it originates as a set of norms-as it remains in the case of public international law because there is no world government. Even in societies that have strong governments, norms are both a source of law and often a cheap and effective substitute for law -and sometimes they are an antagonist to law. The incentives for obeying law are clear enough, but what about the incentives for obeying norms? The answer to this question will help toward an understanding of the relation between law and norms. There are four incentives for obeying norms: (i) Some norms are self-enforcing (the incentive to obey comes from the fact that obedience confers private benefits) because they are constitutive of advantageous transactions. If you don't speak the language, you can't make yourself understood. If you don't play chess by the rules, you're not playing it at all, so if you enjoy playing chess, you will not cheat unless the net expected gain is great.2 This point bears on the norms governing judicial behavior of judges-not those norms backed by law, such as the rule against taking bribes, but those subtler norms that adjure the judge to lay aside personal or partisan sympathies, disregard public blame or praise, follow precedent rather than his own values-in short, adhere to the traditional virtues. Compliance with these norms is far from uniform, because there are incentives to deviate, and the costs of deviation are small. But why is there any compliance? The answer is that the private costs of compliance are low because the law-backed rules of judicial behavior' make it difficult for the judge to profit from partiality, while the private benefits are substantial because the rule-of-law norms are the constitutive rules of the practice of judging; if you don't obey them, you're not playing the judicial game. Law school and the judiciary teach the game to new lawyers, while judicial selection procedures select for persons who want to play the judicial game rather than some other game, such as partisan politics. Even when judicial appointments are elective rather than appointive or when appointments are based on patronage or ideology rather than merit, self-selection is present, in the decision to seek or accept appointment. (ii) Some norms are enforced by the emotions, a point vital to understanding the emergence of law. The honor code of the Old South (see Jack K. Williams, 1980) will illustrate. The code, which required a man to challenge to a duel any man who infringed his dignity, was a survival of a revenge-based system of law (more precisely, pre-law). Before there were governments, what is now called law was * U.S. Court of Appeals for the Seventh Circuit, and University of Chicago Law School, 1111 E. 60th St., Chicago, IL 60637. I thank Gary Becker, Dan Kahan, Lawrence Lessig, Martha Nussbaum, Eric Posner, Eric Rasmusen, Cass Sunstein, and Yuval Tal for many helpful comments on a previous draft. ' I do not require, however, that it be internalized as a preference, as in the definition of norm in Gary Becker (1996 p. 225). 2 These are examples of compensated norm-imposed constraints (Becker, 1996 p. 228). 'Not only must the judge not take bribes, but he must not sit in cases in which he or his relatives might derive a pecuniary benefit from his decision.

This paper presents a general equilibrium model of renewable resource and population dynamics related to the Lotka-Volterra predator-prey model, with man as the predator and the resource base as the prey. The authors apply the model to the rise and fall of Easter Island, showing that plausible parameter values generate a 'feast and famine' pattern of cyclical adjustment in population and resource stocks. Near-monotonic adjustment arises for higher values of a resource regeneration parameter, as might apply elsewhere in Polynesia. The authors also describe other civilizations that might have declined because of population overshooting and endogenous resource degradation.

The authors report the results of voluntary contributions experiments where subjects are randomly assigned different rates of return from their private consumption. These random assignments are changed round to round, enabling the measurement of individual player contribution rates as a function of that player's investment cost. The authors directly test these response functions for the presence of warm-glow and/or altruism effects. They find significant evidence for heterogeneous warm-glow effects that are, on average, low in magnitude. The authors statistically reject the presence of an altruism effect.

When a series of individuals with private information announce public predictions, initial conformity can create an "information cascade" in which later predictions match the early announcements. This paper reports an experiment in which private signals are draws from an unobserved urn. Subjects make predictions in sequence and are paid if they correctly guess which of two urns was used for the draws. If initial decisions coincide, then it is rational for subsequent decision makers to follow the established pattern, regardless of their private information. Rational cascades formed in most periods in which such an imbalance occurred. In many economic situations, agents observe private signals of some underlying state and make public decisions. Subsequent decision makers face a dilemma if their own private signal is indicative of a state that is unlikely given the previously observed decisions. An "information cascade" occurs when initial decisions coincide in a way that it is optimal for each of the subsequent individuals to ignore their private signals and follow the established pattern. For example, suppose that a worker is not hired by several potential employers because of poor interview performances. Knowing this, an employer approached subsequently may not hire the worker even if the employer's own assessment is favorable, since this information may be dominated by the unfavorable signals inferred from previous rejections.

The fight against poverty has been adopted by the multilateral development banks as their principal objective. Almost three decades after Robert McNamara announced that the World Bank's fundamental work was to improve the lives of the poor, its new president, James Wolfensohn, has reiterated that poverty reduction is the World Bank's principal purpose. Similarly, in 1994 the Inter-American Development Bank set social progress and social equity as its central objective. The emphasis in the international institutions contrasts with disappointing results in the real world. Although life expectancy, school enrollmuent, and other indicators of social wellbeing have improved dramatically across the developing world, and although the proportion of the poor has declined in the last few decades, the absolute number of poor people in the world has actually increased. Today about 1.3 billion people in less developed countries still subsist on less than $1 per day (World Bank, 1980, 1990, 1996). The case of Latin America is dramatic. While in the 1970's the number of poor fell, it nearly doubled in the 1980's, increasing from about 80 to almost 150 million; and in the last few years, the number of poor, now 33 percent of the total population, has failed to fall despite economic recovery (Birdsall and Londofio, 1997). The contrast between the multilateral banks' goals and these disappointing results suggests the need for a critical reassessment of their approach to poverty reduction. In this paper we describe the approach reflected in the work of World Bank economists and, based on new empirical work, assess its relevance for Latin America.'

In their comment, Subhash C. Ray and Evangelia Desli (1997) (hereafter RD) point out that the specification of the decomposition of the Malmquist productivity index used by Fare et al. (1994) (hereafter FGNZ) is not unique, and propose and compute an alternative specification of that decomposition. We will discuss additional decompositions at the end of this note, but proceed here by comparing the RD decomposition with FGNZ based on both conceptual and computational grounds. RD provide a discussion of the overall Malmquist productivity index, including the important issue of when this index is equivalent to the traditional notion of total factor productivity (TFP) -namely under the condition that the technology be consistent with constant returns to scale (CRS). As they point out, this will yield a measure of TFP even if the true underlying technology is not CRS, for example. Both RD and FGNZ use the CRS technology to compute overall Malmquist productivity. One of the key issues raised is the role of the underlying scale properties of the benchmark technologies used to define and compute both productivity and its components. In particular, two reference technologies are employed in both RD and FGNZ: what we refer to as CRS and variable returns to scale (VRS) technologies.' By construction, these technologies are nested: the CRS technology contains the VRS technology, as in Figure 1 in RD. This nestedness provides the logical basis for our decomposition. At a very intuitive level, we would argue that these two benchmarks can be used to provide bounds on the underlying true-but unknown-technology.2 Intuitively we see the VRS technology providing a type of convex inner approximation, whereas the CRS technology provides a type of convex outer approximation. Thus these two technologies provide alternative benchmarks; they do not require that the data satisfy either CRS or VRS. Another possible intuitive interpretation is that the CRS captures a (perhaps hypothetical) long run and the VRS approximates the short run. As a technology, the CRS technology has some very useful features; for example, it captures the notion of maximal

Economic agents rarely write optimally complete contracts in the Arrow-Debreu sense. Few regard this as puzzling, since contractual completeness of this kind is often technically infeasible. Our concern here is with the question of why contracts so often leave the contracting parties' obligations incompletely specified; that is, of why they contain "gaps".