An understanding of the correct model of intertemporal consumption choice is crucial to evaluating the effects of fiscal policies. The debates over whether deficit policy matters (Martin Feldstein, 1974; Robert Barro, 1974) and, if so, how to measure such policy (Robert Eisner and Paul Pieper, 1985; Kotlikoff, 1986) are fundamentally debates about the correct model of consumption. Unfortunately, distinguishing empirically between different consumption theories is a subtle business that has produced no strong conclusions. One problem confronting many tests of alternative consumption theories is that they require joint and quite specific assumptions about preferences, economic resources, and the consumer's information set that may not be justified. In such cases, what is described as a rejection of a particular model may simply be a rejection of restrictive assumptions placed on the model. A second problem that is also routinely swept under the rug involves the implicit assumption that consumers optimize perfectly given their preferences and resources, and that they correctly value their resources. In order to explore these more fundamental questions we, have conducted an experiment to determine whether individuals, when placed in a controlled life cycle setting, make consistent and coherent consumption choices, and whether they correctly value their future resources. The experiment provides negative answers to both of these questions; in the experiment subjects made significant and systematic errors in their consumption choice, reflecting, in part, an overdiscounting of future income. This paper reviews several of the findings from our 1987 working paper, and then discusses their implications for fiscal policy. We give a brief description in Section I of the experiment. Section II describes inconsistencies and errors in consumption choice and traces them to the overdiscounting of future labor income. Section III presents some regression results also pointing to an undervaluation of future resources. Section IV discusses the implications of these results for viewing fiscal policy and suggests the need for additional experiments as well as consumption models that acknowledge, rather than avoid computation problems.

No region of the United States fared worse over the postwar period than the Rust Belt. This paper analyzes how much of its decline can be accounted for by the persistent labor market conflict that characterized Rust Belt union-management relations. We develop a multisector, multiregion, dynamic general equilibrium model in which labor market conflict leads to strikes, wage premia, lower investment, and lower productivity growth. These lead to shrinking Rust Belt industries and to workers moving out of the Rust Belt. Labor conflict accounts for half of the decline in the region’s share of manufacturing employment. Foreign competition plays a smaller role, and its effects are concentrated after most of the region’s decline had already occurred.

Older wealth holders spend down assets much more slowly than predicted by classic life-cycle models. This paper introduces health-dependent utility into a model with incomplete markets in which preferences for bequests, expenditures when in need of long-term care, and ordinary consumption combine with health and longevity uncertainty to explain saving behavior. To sharply identify motives, it develops strategic survey questions (SSQs) that elicit stated preferences. The model is estimated using these SSQs and wealth data from the Vanguard Research Initiative. The desire to self-insure against long-term-care risk explains a substantial fraction of the wealth holding of many older Americans.

Relying on diversity measures computed at the apartment block level under conditions of exogenous allocation of public housing in France, this paper identifies the effects of ethnic diversity on social relationships and housing quality. Housing Survey data reveal that diversity induces social anomie. Through the channel of anomie, diversity accounts for the inability of residents to sanction others for vandalism and to act collectively to demand proper building maintenance. However, anomie also lowers opportunities for violent confrontations, which are not related to diversity.

Bergstrom has shown that becker's “Rotten Kid theorem” holds in a world of two commodities if their utilities are transferable. The present paper identifies a further circumstance in which the theorem is valid. We show that it also holds in the absence of transferable utility if the externalities are assumed to take the form of a single pure public good.

We study from both a theoretical and an empirical perspective how a network of military alliances and enmities affects the intensity of a conflict. The model combines elements from network theory and from the politico-economic theory of conflict. We obtain a closed-form characterization of the Nash equilibrium. Using the equilibrium conditions, we perform an empirical analysis using data on the Second Congo War, a conflict that involves many groups in a complex network of informal alliances and rivalries. The estimates of the fighting externalities are then used to infer the extent to which the conflict intensity can be reduced through (i) dismantling specific fighting groups involved in the conflict; (ii) weapon embargoes; (iii) interventions aimed at pacifying animosity among groups. Finally, with the aid of a random utility model, we study how policy shocks can induce a reshaping of the network structure.

We investigate the effect of cross-border regulatory cooperation in the enforcement of securities laws on global-mutual-fund portfolio allocations. Our research design exploits a shock to the Securities and Exchange Commission’s oversight of foreign firms cross-listed on a US stock exchange around the signing of the Multilateral Memorandum of Understanding (MMoU), a non-binding, information-sharing arrangement between global securities regulators. In signatory countries, foreign investment in US-cross-listed firms increases by $110 billion relative to non-cross-listed firms. The strongest effects are for investors facing greater information asymmetries, those from countries closely linked to the US, and non-US foreign investors, suggesting significant spillover effects from international regulatory cooperation.