New: A Theory of Intergenerational Mobility
Date Posted:
Sep 01,
2015
We develop a model of intergenerational resource transmission that emphasizes the link between cross-sectional inequality and intergenerational mobility. By drawing on first principles of human capital theory, we derive several novel results. In particular, we show that, even in a world with perfect capital markets and without differences in innate ability, wealthy parents invest, on average, more in their offspring than poorer ones. As a result, persistence of economic status is higher at the top of the income distribution than in the middle. Successive generations of the same family may even cease to regress towards the mean. Moreover, we demonstrate that government interventions intended to ameliorate inequality may in fact lower intergenerational mobility — even when they do not directly favor the rich. Lastly, we consider how mobility is affected by changes in the marketplace.
New: The Manipulation of Children's Preferences, Old Age Support, and Investment in Children's Human Capital
Date Posted:
Oct 17,
2014
We consider the link between parents' influence over the preferences of children, parental investments in children's human capital, and children's support of elderly parents. It may pay for parents to spend resources to "manipulate" children's preferences in order to induce them to support their parents in old age. Since parents invest more in children when they expect greater support, manipulation of child preferences may end up helping children and parents. A new result, that we call the "Rotten Parent Theorem," demonstrates that if children are altruistic, then even selfish parents will make the optimal investment in kids' human capital.
New: Activating Actavis with a More Complete Model
Date Posted:
Jan 31,
2014
In FTC v. Actavis, Inc. the Supreme Court asked whether a patent settlement agreement involving a so-called “reverse payment” from a patent holder to an alleged infringer of a pharmaceutical patent “can sometimes unreasonably diminish competition in violation of the antitrust laws.” Edlin, Hemphill, Hovenkamp, and Shapiro (2013) propose a method of evaluating the competitive effects of reverse payment settlement agreements that compares the magnitude of the reverse payment to the sum of the patent holder’s prospective litigation costs and the value of services provided by the alleged infringer to the patent holder. This paper shows that the method proposed by Edlin et al. holds only under limited conditions. This paper also identifies conditions where a reverse payment in excess of litigation costs may lead to earlier generic entry and would be procompetitive. In addition to avoided litigation costs, relevant factors in evaluating patent settlements involving a reverse payment ...
New: Vertical Integration as a Self-Enforcing Contractual Arrangement
Date Posted:
Jul 10,
2011
A recent wave of large vertical mergers presents a challenge to established theories of vertical integration. The large mergers that have occurred in the pharmaceutical industry between drug manufacturers and companies that manage drug insurance benefits (such as Merck's acquisition of Medco) and in the entertainment industry between program suppliers and network distributors (such as Disney's acquisition of Capital Cities/ABC) do not seem to fit traditional economic theories of vertical ...
New: The Economics of Copyright 'Fair Use' in a Networked World
Date Posted:
Jul 09,
2011
The recent success of file-sharing technologies such as Napster has highlighted the economic question of whether copying increases or decreases the market value of copyrighted works. Contrary to Michele Boldrin and David K. Levine (2002), we show that Napster-type services are likely to reduce copyright value. This economic question of the effect of copying on copyright value largely coincides with the legal question of whether copying is “fair use.” The primary legal determinant of “fair use” ...
New: Competition in Two-Sided Markets: The Antitrust Economics of Payment Card Interchange Fees
Date Posted:
Jul 09,
2011
Standard economics provides a well-understood framework of the competitive determinants of market prices that is now widely accepted for antitrust analysis. In “two-sidedmarkets,” where firms supply products demanded by two interrelated groups of consumers, these competitive forces operate in a somewhat more complex way and understanding the antitrust implications requires extending the standard framework. For example, a newspaper publisher faces demand from both readers and advertisers. The ...
New: Exclusive Dealing Intensifies Competition for Distribution
Date Posted:
Jul 09,
2011
Manufacturer competition for retail distribution is shown to often include partially exclusive contracts when competitive retailers have the ability to shift sales by loyal customers to a chosen manufacturer. Since each manufacturer knows its sales will increase substantially at the expense of rival brands if selected for partial exclusivity by the retailer, manufacturers will reduce their wholesale prices in the attempt to be selected. Inter-retailer competition will then largely pass the ...
New: Explaining the Worldwide Boom in Higher Education of Women
Date Posted:
Sep 23,
2010
The last forty years have witnessed a remarkable boom in higher education around the world. Importantly, the boom in higher education has been concentrated among women, such that today in most higher-income countries, and many lower-income countries, more women than men attend and complete tertiary education. We present a model that explains the increase in higher education, particularly among women, in terms of a market for college graduates in which the supply of college graduates is ...
New: Terminal Care and the Value of Life Near its End
Date Posted:
Feb 01,
2010
Medical care at the end of life, estimated to contribute up to a quarter of US health care spending, often encounters skepticism from payers and policy makers who question its high cost and often minimal health benefits. It seems generally agreed upon that medical resources are being wasted on excessive care for end-of-life treatments that often only prolong minimally an already frail life. However, though many observers have claimed that such spending is often irrational and wasteful, little ...
Social Status, Education, and Growth
Date Posted:
Mar 19,
2009
This paper investigates the implications of social rewards on the allocation of talent in society and consequently on the process of economic growth. We consider two sources of heterogeneity among workers: nonwage income and innate ability. A greater emphasis on status may induce the "wrong" individuals, that is, those with low ability and high wealth, to acquire schooling, causing workers with high ability and low wealth to leave the growth-enhancing industries. This crowding-out effect, ...
The False Promise of Social Security Privatization
Date Posted:
Mar 19,
2009
Social Security is the single largest transfer program in the world. In 1999, Social Security paid $334.4 billion in benefits to retired workers and their families and collected $396.4 billion in taxes. More than 151 million persons worked in jobs covered by Social Security and paid Social Security taxes, while more than 37.9 million received benefits. In 1998 more than 90 percent of elderly households received social security payments, and such payments provided more than half of total income ...
Persuasion in Politics
Date Posted:
Mar 19,
2009
We present a model of the creation of social networks, such as political parties, trade unions, religious coalitions, or political action committees, through discussion and mutual persuasion among their members. The key idea is that people are influenced by those inside their network, but not by those outside. Once created, networks can be rented out to politicians who seek votes and support for their initiatives and ideas, which may have little to do with network members' core beliefs. ...
Entry, Pricing, and Product Design in an Initially Monopolized Market
Date Posted:
Mar 19,
2009
We analyze entry, pricing, and product design in a model with differentiated products. Market equilibrium can be "separating," with multiple sellers and a sorting of heterogeneous consumers across goods, or "exclusionary," with one seller serving all customer types. Entry into an initially monopolized market can occur because of cost reductions or product improvements, but entry need not lower the incumbent's price, improve efficiency, or raise consumer welfare. Postentry design incentives ...
Cattle Cycles
Date Posted:
May 22,
2008
U.S. beef cattle stocks are among the most periodic time-series in economics. A theory of cattle cycles is constructed, based upon rational breeding stock inventory decisions in the presence of gestation and maturation delays between production and consumption. The low fertility rates of cows and substantial lags between fertility and consumption decisions cause the demographic structure of the herd to respond cyclically to exogenous shocks in demand for beef and in production costs. Known ...
New: Why Does Human Capital Need a Journal?
Date Posted:
May 12,
2008
No abstract is available for this item.
An Empirical Analysis of Cigarette Addiction
Date Posted:
Apr 03,
2008
We use a framework suggested by a model of rational addiction to analyze empirically the demand for cigarettes. The data consist of per capita cigarettes sales (in packs) annually by state for the period 1955 through 1985. The empirical results provide support for the implications of a rational addiction model that cross price effects are negative (consumption in different periods are complements), that long-run price responses exceed short-run responses, and that permanent price effects ...
New: The Value of Life Near its End and Terminal Care
Date Posted:
Dec 04,
2007
Medical care at the end of life, which is often is estimated to contribute up to a quarter of US health care spending, often encounters skepticism from payers and policy makers who question its high cost and often minimal health benefits. It seems generally agreed upon that medical resources are being wasted on excessive care for end-of-life treatments that often only prolong minimally an already frail life. However, though many observers have claimed that such spending is often irrational ...
New: Inequality in Labor Market Outcomes: Contrasting the 1980's and Earlier Decades
Date Posted:
Nov 15,
2007
The increase in wage inequality during the 1980s was exceptional, but underlying demand and supply conditions showed relatively little contrast compared to previous decades. One possible explanation is that the increased demand for skills during the 1980s was unusually concentrated among the most skilled workers rather than being spread throughout the skill distribution.
New: Increasing Returns, Durables and Economic Fluctuations
Date Posted:
Oct 03,
2007
No abstract is available for this paper.
REVISION: The Market for Illegal Goods: The Case of Drugs
Date Posted:
Sep 15,
2007
This paper considers the costs of reducing consumption of goods by making their production illegal and punishing illegal producers. We use illegal drugs as a prominent example. We show that the more inelastic either demand for or supply of goods is, the greater the increase in social cost from further reducing its production by greater enforcement efforts. So, optimal public expenditures on the apprehension and conviction of illegal suppliers depend not only on the difference between the ...
New: Income Distribution, Market Size, and Industrialization
Date Posted:
Jun 11,
2007
No abstract is available for this paper.
Quality and Trade
Date Posted:
Jun 10,
2007
New: Building Blocks of Market Clearing Business Cycle Models
Date Posted:
Dec 29,
2006
We compare "real business cycle" and increasing returns models of economic fluctuations. In these models, business cycles are driven by productivity changes resulting either from technology shocks or from crucial building blocks that give both types of models hope of fitting the data. These building blocks include durability of goods, specialized labor, imperfect credit and elastic labor supply. We also present new evidence on comovernent of both outputs sand labor inputs across sectors and on ...
New: The Value of Health and Longevity
Date Posted:
Oct 31,
2006
We develop a framework for valuing improvements in health and apply it to past and prospective reductions in mortality in the United States. We calculate social values of (i) increased longevity over the twentieth century, (ii) progress against various diseases after 1970, and (iii) potential future progress against major diseases. Cumulative gains in life expectancy after 1900 were worth over $1.2 million to the representative American in 2000, whereas post‐ 1970 gains added about $3 ...
New: War in Iraq versus Containment
Date Posted:
May 13,
2006
We consider three questions related to the choice between war in Iraq and a continuation of the pre-war containment policy. First, in terms of military resources, casualties and expenditures for humanitarian assistance and reconstruction, is war more or less costly for the United States than containment? Second, compared to war and forcible regime change, would a continuation of the containment policy have saved Iraqi lives? Third, is war likely to bring about an improvement or deterioration ...
The Value of Health and Longevity
Date Posted:
Jul 06,
2005
We develop an economic framework for valuing improvements to health and life expectancy, based on individuals' willingness to pay. We then apply the framework to past and prospective reductions in mortality risks, both overall and for specific life-threatening diseases. We calculate (i) the social values of increased longevity for men and women over the 20th century; (ii) the social value of progress against various diseases after 1970; and (iii) the social value of potential future progress ...
Measuring the Impact of Crack Cocaine
Date Posted:
Jun 10,
2005
A wide range of social indicators turned sharply negative for Blacks in the late 1980s and began to rebound roughly a decade later. We explore whether the rise and fall of crack cocaine can explain these patterns. Absent a direct measure of crack cocaine's prevalence, we construct an index based on a range of indirect proxies (cocaine arrests, cocaine-related emergency room visits, cocaine-induced drug deaths, crack mentions in newspapers, and DEA drug busts). The crack index we construct ...
The Equilibrium Distribution of Income and the Market for Status
Date Posted:
Mar 29,
2005
This paper explores the implications for risk-taking behavior and the equilibrium distribution of income of assuming that the desire for status positions is a powerful motive and that it raises the marginal utility of consumption. In contrast to previous analyses, we consider the case in which status positions are sold in a hedonic market. We show that such a complete hedonic market in status positions can be perfectly replicated by a simpler arrangement with a "status good" and a social norm ...
The Economic Theory of Illegal Goods: The Case of Drugs
Date Posted:
Dec 20,
2004
This paper concentrates on both the positive and normative effects of punishments that enforce laws to make production and consumption of particular goods illegal, with illegal drugs as the main example. Optimal public expenditures on apprehension and conviction of illegal suppliers obviously depend on the extent of the difference between the social and private value of consumption of illegal goods, but they also depend crucially on the elasticity of demand for these goods. In particular, when ...
The Allocation of Talent: Implications for Growth
Date Posted:
Jul 05,
2004
A country's most talented people typically organize production by others, so they can spread their ability advantage over a larger scale. When they start firms, they innovate and foster growth, but when they become rent seekers, they only redistribute wealth and reduce growth. Occupational choice depends on returns to ability and to scale in each sector, on market size, and on compensation contracts. In most countries, rent seeking rewards talent more than entrepreneurship does, leading to ...
Industrialization and the Big Push
Date Posted:
May 28,
2004
No abstract is available for this paper.
Human Capital, Fertility, and Economic Growth
Date Posted:
May 26,
2004
No abstract is available for this paper.
Persuasion in Politics
Date Posted:
Feb 03,
2004
We present a model of the creation of social networks, such as political parties, trade unions, religious coalitions, or political action committees, through discussion and mutual persuasion among their members. The key idea is that people are influenced by those inside their network, but not by those outside. Once created, networks can be 'rented out' to politicians who seek votes and support for their initiatives and ideas, which may have little to do with network members' core beliefs. In ...
Why Has the Natural Rate of Unemployment Increased over Time?
Date Posted:
Jan 03,
2002
In 1970, when Robert Hall asked, "Why Is the Unemployment Rate So High at Full Employment?" the unemployment rate for adult men stood at 3.5 percent. That rate, which had been substantially below that level throughout the late 1960s, would climb to 4.4 percent in the recession of 1971. More recently, after the longest economic expansion of the post-war period, the unemployment rate of prime-aged men in the late 1980s settled at just below 5 percent of the labor force. What changes in the ...
Entry, Pricing and Product Design in an Initially Monopolized Market
Date Posted:
Oct 18,
2001
We analyze entry, pricing and product design in a model with differentiated products. Under plausible conditions, entry into an initially monopolized market leads to higher prices for some, possibly all, consumers. Entry can induce a misallocation of goods to consumers, segment the market in a way that transfers surplus to producers and undermine aggressive pricing by the incumbent. Post entry, firms have strong incentives to modify product designs so as to raise price by strengthening market ...
Economic Perspectives on Software Design: PC Operating Systems and Platforms
Date Posted:
Sep 25,
2001
Improvements in the software that provides hardware management, user interface and platform functions have played a central role in the growth and transformation of the personal computer (PC) industry. Several forces shape the design of these 'operating system' products and propel their evolution over time, including: A. The need to efficiently manage the interacting components of PC systems so as to keep pace with rapid advances in computer technologies the development of applications software.
Changes in Relative Wages, 1963-1987: Supply and Demand Factors
Date Posted:
Dec 21,
2000
A simple supply and demand framework is used to analyze changes
in the U.S. wage structure from 1963 to 1987. Rapid secular
growth in the demand for more-educated workers, "more-skilled"
workers, and females appears to be the driving force behind
observed changes in the wage structure. Measured changes in the
allocation of labor between industries and occupations strongly
favored college graduates and females throughout the period.
Movements in the college wage premium over this ...
Wage Inequality and Family Labor Supply
Date Posted:
May 16,
2000
Using data from the March CPS and the 1960 Census, this paper describes earnings and employment changes for married couples in different types of households stratified by the husband's hourly wage. While the declines in male employment and earnings have been greatest for low wage men, employment and earnings gains have been largest for wives of middle and high wage men. These findings cast doubt on the notion that married women have increased their labor supply in the recent decades to ...
Wages, Skills, and Technology in the United States and Canada
Date Posted:
May 07,
2000
Wages for more- and less-educated workers have followed strikingly different paths in the U.S. and Canada. During the 1980's and 1990's, the ratio of earnings of university graduates to high school graduates increased sharply in the U.S. but fell slightly in Canada. Katz and Murphy (1992) found that for the U.S. a simple supply-demand model fit the pattern of variation in the premium over time. We find that the same model and parameter estimates explain the variation between the U.S. and ...