Knowledge that Transforms

Do competitive markets remove the effect of social norms on market outcomes? Or are norms capable of exerting a persistent influence? In this article we report the results of a series of competitive market and bilateral bargaining experiments. They indicate that the norm of reciprocity gives rise to wages that are persistently above the competitive level. Moreover, wages under bilateral bargaining conditions coincide with wages in competitive markets, indicating that competition has a limited effect when the norm of reciprocity is operative. In addition, the results show that workers' reciprocal behavior increases effort and, hence, the efficiency of trades.

To study the problem of widespread youth crime, the author analyzes a time-allocation model in which consumers face parametric wages and diminishing marginal returns to crime. The theory motivates an econometric model that he estimates using data from the National Longitudinal Survey of Youth. The author's estimates suggest that youth behavior is responsive to price incentives and that falling real wages may have been an important determinant of rising youth crime during the 1970s and 1980s. Moreover, wage differentials explain a substantial component of both the racial differential in criminal participation and the age distribution of crime.

The authors propose models with an ascriptive characteristic generating earnings differentials and causing sectoral sorting, allowing them to distinguish among sources producing such differentials. They use longitudinal data on a large sample of graduates from one law school and measure beauty by rating matriculation photographs. Better-looking attorneys who graduated in the 1970s earned more than others after five years of practice, an effect that grew with experience. Attorneys in the private sector are better-looking than those in the public sector, differences that rise with age. These results support theories of dynamic sorting and customer behavior.

In the United States and Britain, there is a "family gap" between the wages of mothers and other women. Differential returns to marital and parental status explain 40%–50% of the gender gap. Another 30%–40% is explained by women's lower levels of work experience and lower returns to experience. Taking advantage of "quasi experiments" in job‐protected maternity leave in the United States and Britain, this article finds that women who had leave coverage and returned to work after childbirth received a wage premium that offset the negative wage effects of children.

This article uses various micro data sets to study entrepreneurship. Consistent with the existence of capital constraints on potential entrepreneurs, the estimates imply that the probability of self-employment depends positively upon whether the individual ever received an inheritance or gift. When directly questioned in interview surveys, potential entrepreneurs say that raising capital is their principal problem. Consistent with our theoretical model's predictions, the self-employed report higher levels of job and life satisfaction than employees. Childhood psychological test scores, however, are not strongly correlated with later self-employment.

The fall of Communism, the reassessment of Nordic social democracy, belt-tightening in other advanced welfare states, and the worldwide privatization wave have led many to conclude that egalitarianism is a merely utopian ideal, the possibility of whose realization is laid to rest by the failure of a series of twentieth-century social experiments. We survey the evidence, both empirical and theoretical, and conclude that obituaries are premature. Key theoretical errors in the design of egalitarian experiments, and in some critiques of pro-egalitarian policies, concern the role of information asymmetries, and we argue that their proper understanding re-opens possibilities for increasing equality without unacceptable sacrifices in efficiency.

Evolutionary game theory provides an answer to two of the central questions in economic modeling: when is it reasonable to assume that people are rational? And, when is it reasonable to assume that behavior is part of a Nash equilibrium (and if it is reasonable, which equilibrium)? The traditional answers are not compelling, and much of evolutionary modeling is motivated by the need for a better answer. Evolutionary game theory suggests that, in a range of settings, agents do (eventually) play a Nash equilibrium. Moreover, evolutionary modeling has shed light on the relative plausibility of different Nash equilibria.