learning and wage dynamics we develop a dynamic model of learning about worker ability in a competitive labor market the model produces three testable implications regarding wage dynamics 1 although the role of schooling in the labor market s inference process declines as performance observations accumulate the estimated effect of schooling on the level of wages is independent of labor market experience 2 timeinvariant variables correlated with ability but unobserved by employers such as certain test scores are increasingly correlated with wages as experience increases and 3 wage residuals are a martingale we present evidence from the nlsy that is broadly consistent with the model s predictions

the poverty gap in school spending following the introduction of title i abstract title i of the 1965 elementary and secondary education act explicitly directed more federal aid for k 12 education to poorer areas for the first time in us history with a goal of promoting regional convergence in school spending using newly collected data we find some evidence that title i narrowed the gap in per pupil school spending between richer and poorer states in the short to medium run however the program was small relative to then existing poverty gaps in school spending even in the absence of crowd out by local or state governments the program could have reduced the gap by only 15 percent

human capital accumulation in a federation abstract more than half of the variation across u s school districts in real k 12 education expenditures per student is due to differences between rather than within states i study the welfare implications of redistribution of education expenditures by the federal government using an analytically tractable model of human capital accumulation with heterogeneous agents and endogenous state policies the net welfare effect of federal redistribution depends on a trade off between the positive effect of redistributing resources toward poorer states and the negative effect resulting from misallocation of population across states federal redistribution increases welfare in a calibrated version of the model

the speed of employer learning the employer learning literature finds support for statistical discrimination on the basis of schooling how economically relevant statistical discrimination is depends on how fast employers learn about workers productive types this article is the first to estimate the speed of employer learning employers learn quickly initial expectation errors decline by 50 within 3 years this estimate places an upper bound on the contribution of signaling this bound varies with the speed of employer learning and with discount rate for a wide range of parameter values the contribution of signaling to the gains from schooling is less than 25

the efficiency of equity in organizational decision processes it is now widely accepted that rent seeking anne krueger 1974 or directly unproductive profit seeking jagdish bhagwati 1982 may cause inefficiencies in the context of public sector decisions the possibility that government decisions for example about taxes quotas franchises or standards may create or redistribute rents induces private parties to spend valuable resources to influence that distribution even when such expenditures carry no social benefit moreover the social cost of rent seeking can exceed the value of the resources spent trying to gain and protect rents for example because the fear of losing wealth through redistribution reduces the incentives for wealth creation treating rent seeking activities as characteristic of public sector decision processes ignores the fact that similar phenomena are to be found in firms unions and other private sector organizations our recent work milgrom 1988 our 1988 1990 papers attempts to identify the advantages of decision processes private or public that permit rent seeking and to incorporate these into a cost benefit analysis of optimal decision processes our work begins with an analysis of why rents and quasi rents arise in organizations and of the forms that the rent seeking they engender may take some measures to insulate the decision process from rent seeking such as limits on the provision of information by interested parties or restrictions on the range of options considered may degrade the quality of decisions especially by blocking the flow of valuable information optimal decision processes balance the costs of rent seeking against the value of information obtained several aspects of the rules affect the opportunities that members have to spend resources trying to alter the distribution of rents to ascertain the possibilities for rent seeking the analyst must ask questions like can the parties propose new initiatives at any time can they give volumes of testimony in a form of their own choosing can they appeal adverse decisions are decision makers obliged to respond to the parties initiatives is the range of actions that they can take in response relatively broad rather than being tightly constrained by property rights or other formal rules more affirmative answers to these questions lead to more opportunities or greater incentives for costly rent seeking as a kind of shorthand we call decision processes that have more of these elements more open processes the very elements that make a process open to rent seeking may also add flexibility and responsiveness helping to ensure that important ideas and proposals are fully considered from this perspective the benefits of openness can in principle be measured by a value of information calculation in the usual manner of statistical decision theory weighing the costs and benefits it follows that a more open process is more desirable when the rents available for redistribution are low and the value of the information that might be acquired is high conversely when the potential for redistribution is high and the value of information is low the optimal decision process is less open this kind of reasoning helps to illuminate the variations in the decision processes that are found in many organizations we have discussed a number of examples in our earlier work including the characteristics of personnel departments the contrasting patterns of decision making employment and compensation in u s and japanese firms professor of economics stanford university and jonathan b lovelace professor of economics graduate school of business stanford university stanford ca 94305 respectively this work was supported by the national science foundation

fiscal shenanigans targeted federal health care funds and patient mortality we explore the effectiveness of matching grants when lower levels of government can expropriate some of the funds for other uses using data on the medicaid disproportionate share program we identify states that were most able to expropriate funds payments to public hospitals in these states were systematically diverted and had no significant impact on patient mortality payments that were not expropriated were associated with significant declines in patient mortality overall subsidies were an effective mechanism for improving outcomes for the poor but the impact was limited by the ability of state and local governments to divert the targeted funds

nonlinear income effects in random utility models random utility models rums are used in the literature to model consumer choices from among a discrete set of alternatives and they typically impose a constant marginal utility of income on individual preferences this assumption is driven partially by the difficulty of constructing welfare estimates in models with nonlinear income effects recently mcfadden 1995 developed an algorithm for computing these welfare impacts using a monte carlo markov chain simulator for generalized extreme value variates this paper investigates the empirical consequences of nonlinear rums in the case of sportfishing modal choice while refining and contrasting the available methods for welfare estimation

endogenous federal grants and crowd out of state government spending theory and evidence from the federal highway aid program contrary to simple theoretical predictions existing evidence suggests that federal grants do not crowd out state government spending a legislative bargaining model with endogenous grants documents a positive correlation between grant receipts and preferences for public goods this correlation has likely biased existing work against measuring crowd out to correct for such endogeneity the model motivates instruments based on the political power of state congressional delegations exploiting this exogenous variation in grants the instrumental variables estimator reports crowd out that is statistically and economically significant this endogeneity may explain the flypaper effect a nonequivalence between grant receipts and private income jel d70 h40 h77

biased signaling and yardstick comparisons in a sovereign debt market abstract this paper develops a sovereign debt model in which governments are privately informed about their likelihood of default but can themselves have a biased perception of this likelihood i show that in this setup government borrowing acts as a signal that is only partially informative about fundamental default probabilities and bond prices do not necessarily reflect true credit risk i also show that in a two country version of the model correlations between the two countries induces yardstick comparisons and the borrowing decision of one government affects the bond price received by the other whether the information spillover increases or decreases the distortion created by the bias depends on the extent to which borrowing signals reinforce each other

a repeated nested logit model of atlantic salmon fishing participation and site choice for atlantic salmon fishing are modeled in the context of a repeated three level nested logit model consumer s surplus measures are derived for different levels of species availability in the penobscot river the most important salmon river in new england for comparison six other travel cost models are estimated these include restrictive cases of the nested logit model a partial demand model and two single site demand models comparisons across these models indicate the importance of modeling the participation decision including income effects and of adopting a nested logit structure rather than a single level logit structure

active labour market policies and the efficiency of the european social fund in spanish regions abstractactive labour market policies and the efficiency of the european social fund in spanish regions regional studies this paper estimates the determinants of public expenditure on active labour market policies almps at the regional level using panel data from a sample of the 17 spanish regions 1989 2010 the estimations take into account endogeneity dynamics and spatial dependence among regions estimations outcome is interpreted with the help of a simple theoretical model of intergovernmental grants results reveal that the european social fund is not effective in its aim of promoting almp expenditure and show that rent seeking when regions compete to attract funds from a common pool provokes the opposite effect which is exacerbated in the presence of imitation

relying on the private sector the income distribution and public investments in the poor abstract what drives governments with similar revenues to provide very different amounts of goods with private sector substitutes education is a prime example i use exogenous shocks to brazilian municipalities revenue during 1995 2008 generated by non linearities in federal transfer laws to demonstrate two things first municipalities with higher income inequality or higher median income allocate less of a revenue shock to education and are less likely to expand public school enrollment they are more likely to invest in public infrastructure that is broadly enjoyed like parks and roads or to save the shock second i find no evidence that the quality of public education suffers as a result if anything unequal and high income areas are more likely to improve public school inputs and test scores following a revenue shock given their heavy use of private education i further provide evidence that an increase in public sector revenue lowers private school enrollment

the health returns of education policies from preschool to high school and beyond the accessibility of quality schools and educational resources for children are key engines of upward mobility in the united states holding the potential to break the cycle of poverty from one generation to the next inequalities in economic status tend to be correlated across generations in part because of intergenerational correlations in health and education rucker c johnson 2009 residential segregation by race and class that leads to unequal access to quality schools is often cited as a culprit in perpetuating inequality in attainment outcomes over the past four decades three major government interventions have had substantial impacts on the provision of school resources and have narrowed black white differences in access to dimensions of school quality i court mandated school desegregation ii state legislation and legal action aimed to change the distribution and level of school funding and iii the expansion of targeted preschool programs for disadvantaged children through head start court ordered school desegregation has been described as the most controversial and ambitious social experiment of the past 50 years human capital health outcomes and inequality

estimating the general equilibrium benefits of large changes in spatially delineated public goods the purpose of this article is to report a new approach for measuring the general equilibrium willingness to pay for large changes in spatially delineated public goods such as air quality we estimate the parameters of a locational equilibrium model and compute equilibria for alternative scenarios characterizing the availability of public goods within a system of communities welfare measures take into consideration the adjustments of households in equilibrium to nonmarginal changes in public goods the framework is used to analyze willingness to pay for reductions in ozone concentrations in southern california between 1990 and 1995

paying for progress conditional grants and the desegregation of southern schools this paper examines how a large conditional grants program influenced school desegregation in the american south exploiting newly collected archival data and quasi experimental variation in potential per pupil federal grants we show that school districts with more at risk in 1966 were more likely to desegregate just enough to receive their funds although the program did not raise the exposure of blacks to whites like later court orders districts with larger grants at risk in 1966 were less likely to be under court order through 1970 suggesting that tying federal funds to nondiscrimination reduced the burden of desegregation on federal courts i introduction because the u s constitution reserves powers not explicitly delegated to the federal government to the states conditional grants are key levers for federal policymakers seeking to affect a broad range of state and local policies states must implement federally approved speed limits and drinking ages to receive highway funding universities must provide gender parity in athletic offerings to receive research funding and states can lose funding if they do not comply with the clean air act more recently states and school districts have risked losing federal grants for failure to comply with the accountability requirements of the no child left behind act in this paper we examine whether the threat

the empirics of the municipal fiscal adjustment we summarize the literature that uses the vector error correction model approach to analyze the dynamics of the municipal fiscal adjustment the international comparison between samples collected from entire countries and specific regions reveals interesting similarities but also remarkable differences the main similarities are the fulfillment of the intertemporal budget constraint the volatility of the budgetary components and the importance of the intergovernmental transfers as an adjustment instrument the most remarkable difference is the preponderant role of the own revenues in the usa probably reflecting the larger fiscal autonomy of us municipalities in most cases the large municipalities seem to be more dependent on grants than their small counterparts although this pattern is broken in japan finally partial evidence supporting the existence of moral hazard problems and the flypaper effect is provided

the rise of the states u s fiscal decentralization in the postwar period article i nfo article history one of the most dramatic changes in the fiscal federalism landscape during the postwar period has been the rapid growth in state budgets which almost tripled as a share of gdp and doubled as a share of government spending between 1952 and 2006 we argue that the greater role of states cannot be easily explained by changes in tiebout forces of fiscal competition such as mobility and voting patterns and are not accounted for by demographic or income trends rather we demonstrate that much of the growth in state budgets has been driven by changes in intergovernmental interactions restricted federal grants to states have increased and federal policy and legal constraints have also mandated or heavily incentivized state own source spending particularly in the areas of education health and public welfare these outside pressures moderate the forces of fiscal competition and must be taken into account when assessing the implications of observed revenue and spending patterns

heterogeneous human capital occupational choice and male female earnings differences human capital models have mainly focused on the rate of return to investment in a homogeneous stock of capital yet individuals have different initial attributes that determine comparative advantage in producing different types of human capital we find that mathematical ability is an important determinant of field choice for college students and that differences in earnings across fields are largely explained as a return to the use of scarce quantitative abilities in the production of each type of human capital the model successfully accounts for the observed male female differences in earnings and occupational choices of recent college graduates

determinants of international university rankings scores this article analyses the relationship between a university s score in international university rankings its expenditure per student and other factors such as university mission size and productive inefficiency we develop an economic model of rankings and universities and estimate this model with data on universities classified in the top 200 by the times higher education supplement ranking of 2007 we find that the elasticity of a university s ranking score for the expenditure per student is between 4 and 9 and that there are no clear signs of inefficiency in production among the top 200 universities university mission and size are also significant predictors of ranking score these results are especially interesting given the relevance attributed to rankings by government officials university directors and students

the flypaper effect what happens to a state s spending when it receives an unconditional grant from the federal government the standard theoretical analysis predicts that the increase in spending will be the same as that generated by an equivalent increase in local incomes or roughly 5 10 percent for most states in contrast numerous empirical analyses have found that spending increases by much more with some estimates near 100 percent this result is known as the flypaper effect since the money appears to stick where it hits the authors review this evidence as well as other studies that find similar behavior in firms

unsticking the flypaper effect in an uncertain world abstract we provide a novel explanation for the flypaper effect based on insurance arguments in our model the flypaper effect arises due to the differential response of precautionary savings to private income or fiscal transfers shocks in an uncertain world with incomplete markets the model generates two testable implications i the flypaper effect is a decreasing function of the correlation between fiscal transfers and private income and ii such relationship is stronger the higher is the volatility of fiscal transfers and or private income an empirical analysis of argentinean provinces for the period 1963 2006 finds strong support for the model s implications

are workers paid their marginal products status is like coase s social costs a reciprocal phenomenon given that one person s gain in status can occur only at the expense of a loss in status for others and that workers are free to choose their coworkers it follows that the competitive wage structure within a firm must be one in which individual wage differences understate individual differences in marginal products the purpose of this paper is to examine a variety of empirical evidence that relates to this proposition about the firm s internal wage structure the paper is organized as follows section i briefly summarizes the theoretical considerations that govern competitive wage determination when status matters to people and firms are viewed as voluntary associations of workers section ii then confronts the predictions of section i by examining pay and productivity schedules for a group of sales occupations for which these schedules are relatively easily observed section ii also examines the relationship between wages and productivity for a sample of university professors an occupation in which individual productivity differences are for a variety of obvious reasons relatively more difficult to measure all of the evidence examined is consistent with the hypothesis that within firms wage rates vary substantially less than do individual productivity values section iii discusses additional observations and evidence that bear on this same hypothesis it suggests that the implicit market for status may strongly influence the ways in which firms are organized to carry out the tasks they perform section iv concludes by considering the claim that egalitarian internal wage structures arise because of equity considerations it argues that the concept of equity appears very closely linked to the concept of status and suggests a strategy for assigning monetaty value to the equity considerations that so often dominate public policy decisions

the welfare costs of union wage compression abstract this paper calculates the quantitative significance of the welfare costs of union wage compression this is done in a dynamic general equilibrium model with overlapping generations where agents choose both schooling human capital and assets physical capital the labor market in this model is characterized as a right to manage contract which allows unions to compress wage differentials between high and low skilled workers by implementing a binding minimum wage this paper shows that when labor markets are competitive even low levels of wage compression lead to large welfare losses since wage compression creates costly unemployment among low skilled workers the effect of wage compression on the supply of skilled labor however is rather small since the disincentive effect of a lower high skilled wage is to a large extent offset by a lower opportunity cost of schooling due to higher unemployment

finders keepers forfeiture laws policing and local budgets to encourage anti drug policing the federal government and many state governments have enacted laws that allow police agencies to keep a substantial fraction of the assets that they seize in drug arrests we use rich new data on police seizures and local spending to explore the reactions of both governments and police to the incentives created by these policies we find that local governments offset police seizures by reducing their other allocations to police partially undermining the incentives laid out in statute and diverting the earmarked funds to other purposes police in turn respond to the real net incentives for seizures once local offsets are taken into account by increasing the drug arrest rate heroin prices also increase suggesting that the increased emphasis on anti drug policing raises the supply costs of illicit drugs these findings highlight both the promise and pitfalls of using financial incentives to solve agency problems in a federal system both local agents and intervening governments have sophisticated responses to financial incentives and these responses must be taken into account in both designing effective policies and evaluating their consequences 2007 elsevier b v all rights reserved

using a discontinuous grant rule to identify the effect of grants on local taxes and spending when investigating the effects of federal grants on the behavior of lower level governments it is hard to defend the handling of grants as an exogenous factor federal governments often set grants based on characteristics and performance of decentralized governments in this paper we make use of a discontinuity in the swedish grant system in order to estimate the causal effects of general intergovernmental grants on local spending and local tax rates the formula for the distribution of funds is used as an exclusion restriction in an iv estimation we find evidence of crowding in where federal grants are shifted to more local spending but not to reduced local tax rates

the signaling role of promotions further theory and empirical evidence an extensive theoretical literature investigates the role of promotions as a signal of worker ability we extend the theory by focusing on how the signaling role of promotion varies with education and then investigate the resulting predictions using a longitudinal data set that contains detailed information concerning the internal labor market history of a medium sized firm in the financial services industry our results support signaling being important for understanding the differences between promotion practices concerning bachelor s and master s degree holders while the evidence concerning the importance of signaling for high school graduates and phds is mixed

a theory of wage and promotion dynamics inside firms we show that a framework that integrates job assignment human capital acquisition and learning captures several empirical findings concerning wage and promotion dynamics inside firms including the following first real wage decreases are not rare but demotions are second wage increases are serially correlated third promotions are associated with large wage increases fourth wage increases at promotion are small relative to the difference between average wages across levels of the job ladder fifth workers who receive large wage increases early in their stay at one level of the job ladder are promoted quickly to the next

interdependent preferences and the competitive wage structure this article shows by example that when workers care about relative income and are free to choose their coworkers the equilibrium distribution of wages within firms must be less dispersed than the corresponding distribution of marginal products an implicit market for within firm status is shown to produce welfare gains by sorting workers among firms in accordance with how much they are willing to pay for high rank the resulting equilibrium pareto dominates allocations in which each worker is paid his marginal product

estimating the labor market signaling value of the ged this paper tests the labor market signaling hypothesis for the general educational development ged equivalency credential using a unique data set containing ged test scores and social security administration ssa earnings data we exploit variation in ged status generated by differential state ged passing standards to identify the signaling value of the ged net of human capital effects our results indicate that the ged signal increases the earnings of young white dropouts by 10 to 19 percent we find no statistically significant effects for minority dropouts

a theory of wage dynamics a dynamic equilibrium model of long term implicit labour contracts under incomplete but symmetric information is developed workers are assumed to be risk averse and of unknown ability or productivity risk neutral firms learn as do workers about each worker s productivity by observing the worker s output over time it is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker s market value increases above his current wage in addition to characterizing the equilibrium wage contract we also derive some of its implications for the behaviour of aggregate wages across various groups of workers these implications explain some findings in the recent empirical literature on ageearnings profiles in particular our model can explain why earnings may be positively related to experience even after controlling for productivity as some empirical studies have indicated

do women shy away from competition do men compete too much we examine whether men and women of the same ability differ in their selection into a competitive environment participants in a laboratory experiment solve a real task first under a noncompetitive piece rate and then a competitive tournament incentive scheme although there are no gender differences in performance men select the tournament twice as much as women when choosing their compensation scheme for the next performance while 73 percent of the men select the tournament only 35 percent of the women make this choice this gender gap in tournament entry is not explained by performance and factors such as risk and feedback aversion only playa negligible role instead the tournament entry gap is driven by men being more overconfident and by gender differences in preferences for performing in a competition the result is that women shy away from competition and men embrace it

tax mix corners and other kinks abstractthis paper models the local tax mix determination process in the presence of statewide fiscal limitations the decentralized government finance archetype and shows how excess sensitivity of local public spending to grants the conventionally and somewhat misleadingly termed flypaper effect arises in the constrained tax mix irrespective of whether lower or upper limits bind and how it cannot in general be taken as a symptom of local government overspending an empirical application to italian province panel data provides consistent evidence of the role of corner solutions produced by two sided tax limits in explaining the sensitivity of local public expenditures to grants

government decision making and the incidence of federal mandates abstract this paper analyzes the effects of federally mandated program changes on state spending and revenues incorporating and evaluating the predictive value of several common theories of the state decision making process using several sources of exogenous increases in public medical spending i estimate that the entire state portion of the burden of mandated spending is borne by decreases in other public welfare spending while federal mandates may influence the composition of benefits at the state level it is much more difficult for them to change the total level of state transfers comparison of state reactions to different shocks suggests that these reductions are due in part to the substitutability of programs in the voter utility function but also in part to the stickiness of spending within budget categories states with greater racial differences between recipients and voters and states with less generous neighbors reduce other public welfare spending by even more alleviating the burden the medical expansions imposed on their taxpayers mandates may thus serve only to increase inequality across states

special interest groups and the allocation of public funds i propose a fully rational model of government contracting that explains differences in local government spending from grants and other income in this model violations of fungibility arise from dynamic interactions between politicians and interest groups with the ability to raise funds for the local government the predictions of the model are tested by exploiting unique features of windfalls received by states under a settlement with the tobacco industry although windfalls are legally unrestricted the median state increased spending on tobacco control programs from zero to 2 30 per capita upon receipt of funds the marginal propensity to spend on such programs is 0 20 from settlement revenue and zero from overall income states which were not involved in the settlement lawsuits spend less these results cannot be explained by existing models in the literature

does partisan affiliation impact the distribution of spending evidence from state governments expenditures on education abstract how and why does partisan affiliation impact policy using a regression discontinuity strategy and focusing on state education spending we find that democratic and republican governors allocate spending differently in particular school districts with higher shares of minority students receive larger state transfers than other districts under democratic governors a similar pattern occurs in state transfers to higher education institutions this is true regardless of whether the governor is eligible for reelection we find no evidence that democrat governors are simply sending money to areas with a larger share of democrats these results suggest that the observed policy divergence is driven by differences in preferences of elected candidates

the effect of rising income inequality on taxation and public expenditures evidence from u s municipalities and school districts 1970 2000 the income distribution in many developed countries widened dramatically from 1970 to 2000 some scholars argue that income inequality contributes to a host of social ills by undermining voters will ingness to support public expenditures in contrast we find that growing income inequality is associated with an expansion in government reven ues and expenditures on a wide range of services in u s municipalities and school districts results are robust to a number of model specifica tions including instrumental variables that address the endogeneity of the local income distribution our results are inconsistent with models pre dicting that heterogeneous societies provide lower levels of public goods public sector 3 two types of identification problems com plicate estimation of the empirical relationship between income inequality and public goods provision the cross country variation often used for this exercise suffers from omitted variable bias that is countries with high income inequality may also have other characteristics that could limit the size of the public sector cross state comparisons also suffer from endogenous household sorting if low or high income families migrate to states with high public expenditures the positive association observed in the litera ture between state public expenditures and income inequal ity may be spurious in this paper we examine the relationship between income inequality and government finances in municipali ties and school districts in the united states from 1970 to 2000 local government represents a large segment of the economy in fiscal year 2009 local governments disbursed more than 3 trillion for such important services as educa tion and public safety 4 our study has several advantages over existing empirical work first the large number of local governments in our data exhibit much greater variation in income inequality over time than do the small number of countries or states used in previous studies a large sample size allows us to separately control for changes in the top end or bottom end of the income distribution and for initial levels of inequal ity thus ruling out a mechanical association between tax revenues and rising income for the affluent second we develop an instrumental variable strategy to mitigate con cerns about potential reverse causality from the endogenous

hospital ownership and public medical spending the hospital market is served by firms that are private for profit private not for profit and government owned and operated i use a plausibly exogenous change in hospital financing that was intended to improve medical care for the poor to test three theories of organizational behavior i find that the critical difference between the three types of hospitals is caused by the soft budget constraint of government owned institutions the decision makers in private not for profit hospitals are just as responsive to financial incentives and are no more altruistic than their counterparts in profit maximizing facilities my final set of results suggests that the significant increase in public medical spending examined in this paper has not improved health outcomes for the indigent i introduction the hospital market is served by firms that are private for profit private not for profit and publicly owned and operated in this paper i examine how a hospital s type of ownership influences its response to profitable opportunities that are created by changes in government policy the policy change that i exploit was designed to improve the quality of medical care for lowincome individuals by significantly increasing hospitals financial incentives to treat them this program also substantially increased the revenues of those hospitals that had been serving a disproportionate share of the indigent i use this plausibly exogenous change in government policy to test three different theories of organizational behavior and then to assess the impact of hospital behavioral responses on health outcomes the response of organizations to changes in government policy will have an important impact on the consequences of these policies this is likely to be especially true in the medical sector in which the federal state and local governments contract directly

job assignments signalling and efficiency this article analyzes a model in which information about a worker s ability is only directly revealed to the firm employing the worker other firms however use the worker s job assignment as a signal of ability three results recur throughout the analysis first wage rates tend to be more closely associated with jobs than with ability levels second there is frequently an inefficient assignment of workers to jobs i e even when a firm has complete information about a worker s output third the severity of this inefficiency tends to be negatively correlated with the level of firm specific human capital in the economy

compensating variation and hicksian choice probabilities in random utility models that are nonlinear in income in this paper we discuss hicksian demand and compensating variation in the context of discrete choice we first derive hicksian choice probabilities and the distribution of the random expenditure function in the general case when the utilities are nonlinear in income we subsequently derive exact and simple formulae for the expenditure and choice probabilities under price policy changes conditional on the initial utility level this is of particular interest for welfare measurement because it enables the researcher to compute the distribution of compensating variation in a simple way we also derive formulae for the joint distribution of expenditure the choice before and after a policy change has been introduced

the value of school facility investments evidence from a dynamic regression discontinuity design author s cellini stephanie riegg ferreira fernando rothstein jesse abstract despite extensive public infrastructure spending surprisingly little is known about its economic return in this paper we estimate the value of school facility investments using housing markets standard models of local public goods imply that school districts should spend up to the point where marginal increases would have zero effect on local housing prices our research design isolates exogenous variation in investments by comparing school districts where referenda on bond issues targeted to fund capital expenditures passed and failed by narrow margins we extend this traditional regression discontinuity approach to identify the dynamic treatment effects of bond authorization on local housing prices student achievement and district composition our results indicate that california school districts underinvest in school facilities passing a referendum causes immediate sizable increases in home prices implying a willingness to pay on the part of marginal homebuyers of 1 50 or more for each 1 of capital spending these effects do not appear to be driven by changes in the income or racial composition of homeowners and the impact on test scores appears to explain only a small portion of the total housing price effect c 2010 by the president and fellows of harvard college and the massachusetts institute of technology

why do firms train theory and evidence this paper offers a theory of training whereby workers do not pay for the general training they receive the superior information of the current employer regarding its employees abilities relative to other firms creates ex post monopsony power and encourages this employer to provide and pay for training even if these skills are general the model can lead to multiple equlibria in one equilibrium quits are endogenously high and as a result employers have limited monopsony power and provide little training while in another equilibrium quits are low and training is high using microdata on german apprentices we show that the predictions of our model receive some support from the data

mental accounting of public funds the flypaper effect in the lab abstract we report evidence from a series of laboratory experiments that focus on mental accounting of public funds groups of three players decide upon how much to redistribute within the group we measure the preference to redistribute when transfers are made either out of individual accounts the players own money or out of a common account the group s money since the common account is dissolved after each round and paid out to individuals its size should not affect the decision to redistribute the experiment is designed to control for anchoring as a potential confounding effect we find that the size of the common account significantly affects redistribution behavior specifically the transfer increases in the size of the common account this effect is significantly more pronounced when the transfer is paid out of the common account instead of the individual account we interpret these findings as evidence for a flypaper effect due to mental accounting

pay equality and industrial politics personnel managers often argue that equitable pay treatment manifested as wage compression is useful because it reduces disharmony among workers but it is far from obvious that a compressed salary structure is morale improving since better workers may feel disenchanted by this scheme however when workers rewards are based on relative comparisons salary compression reduces uncooperative behavior that is detrimental to the firm relative comparisons imply that some reference group must be selected the major result is that within the relevant groups some wage compression is efficient

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

does school quality explain the recent black white wage trend around 1980 the trend toward racial wage convergence essentially stopped i ask whether this break in the convergence trend can be explained by school quality department of education surveys provide earnings data for the high school class of 1972 in 1979 and the class of 1980 in 1986 both linked to data from the respondents high schools by several measures differences between schools attended by blacks and whites were already rather small in the 1970s furthermore i find that measurable school inputs generally have little effect on wages thus school quality explains little of the recent black white wage trend

integration of choice probabilities in logit we find for logit with income effects a function that generates choice probabilities via roy s identity we show that it possesses all the properties to qualify as an indirect utility it has a closed form expression for the practically interesting translog specification of the systematic utilities it reduces in the case without income effects to the expectation of the maximum utility we discuss the use of the findings in welfare measurement and the extension to observed heterogeneity and mixed logit

nonlinear income effects in random utility models revisiting the accuracy of the representative consumer approximation this article investigates the implications of nonlinear income effects in random utility models rum for measuring general equilibrium welfare impacts a popular approach in applied welfare analysis is to approximate the expected compensating variation cv for an amenity change as the cv of a representative consumer whose indirect utility is given by the expected maximum utility however this approach can be misleading in the case of nonmarginal changes as it implies that changes in income do not affect the consumer s choice in this case the true expected cv can be obtained via simulation empirical applications to recreational demand find that the bias from the representative approach is small this article re evaluates the accuracy of the representative consumer approximation in the context of measuring the general equilibrium welfare impacts of large environmental changes our findings suggest that though the representative consumer approximation could lead to biased point estimates of the expecte

the representative consumer approximation bias in discrete choice welfare analysis discrete choice welfare analysis is essential in non market valuation to accompany studies using choice experiments and recreation choice models mcfadden in melvin moore riezman eds trade theory and econometrics essays in honor of john s chipman routledge london 1999 shows that discrete choice welfare measures derived by the common representative consumer approach can be biased under nonlinear income effects and the percentage bias increases monotonically with the size of quality improvement we present contrary results that percentage measurement errors in such welfare measures can go either direction and provide conditions under which the direction of bias can be identified we also show that price and non price variables play different roles in discrete choice welfare analysis

growing up in a recession does the historical macroeconomic environment affect preferences for redistribution we find that individuals who experienced a recession when young believe that success in life depends more on luck than effort support more government redistribution and tend to vote for left wing parties the effect of recessions on beliefs is long lasting we support our findings with evidence from three different datasets first we identify the effect of recessions on beliefs exploiting time and regional variation in macroeconomic conditions using data from the 1972 2010 general social survey our specifications control for nonlinear time period life cycle and cohort effects as well as a host of background variables second we rely on data from the national longitudinal survey of the high school class of 1972 to corroborate the age period cohort specification and look at heterogeneous effects of experiencing a recession during early adulthood third using data from the world value survey we confirm our findings with a sample of 37 countries whose citizens experienced macroeconomic disasters at different points in history

positive self image and incentives in organizations this paper investigates the implications of individuals mistaken beliefs of their abilities on incentives in organizations using the principal agent model of moral hazard the paper shows that if effort is observable then an agent s mistaken beliefs about own ability are always favorable to the principal however if effort is unobservable then an agent s mistaken beliefs about own ability can be either favorable or unfavorable to the principal the paper provides conditions under which an agent s over estimation about own ability is favorable to the principal when effort is unobservable finally the paper shows that workers mistaken beliefs about their coworkers abilities make interdependent incentive schemes more attractive to firms than individualistic incentive schemes

union wage practices and wage dispersion within establishments this study analyzes establishment level data primarily to examine the effect of unionism on the wage structure within establishments the major finding is that within establishment dispersion of wages is significantly narrower in unionized than in nonunionized establishments a pattern the author attributes in large part to unions wage practices such as single rate or automatic progression modes of wage payment as opposed to merit reviews and individual wage determination the data also show that dispersion in average wages is narrower among organized plants but by more modest amounts than the within establishment differential overall the evidence suggests a major role for explicit union wage policies in explaining the dispersion of wages within firms and in the economy as a whole

beyond incentives do schools use accountability rewards productively we use a regression discontinuity design to analyze an understudied aspect of school accountability systems how schools use financial rewards for two years california s accountability system financially rewarded schools based on a deterministic function of test scores qualifying schools received per pupil awards amounting to about 1 of statewide per pupil spending corroborating anecdotal evidence that awards were paid out as teacher bonuses we find no evidence that winning schools purchased more instructional material increased teacher hiring or changed the subject specific composition of their teaching staff most importantly we find no evidence that student achievement increased in winning schools supplemental materials for this article are available online

do federal grants boost school spending evidence from title i abstract one of the federal government s main elementary and secondary education programs is title i which allocates money for compensatory education to school districts based on child poverty i use sharp changes in per pupil grant amounts surrounding the release of decennial census data to identify effects of title i on state and local education revenue and how much the program ultimately increases spending by recipient school districts i find that state and local revenue efforts initially are unaffected by title i changes but that local governments substantially and significantly crowd out changes in title i within in a 3 year period

overconfidence insurance and paternalism it is well known that when agents are fully rational compulsory public insurance may make all agents better off in the rothschild and stiglitz 1976 model of insurance markets we find that when sufficiently many agents underestimate their personal risks compulsory insurance makes low risk agents worse off hence behavioral biases may weaken some of the well established rationales for government intervention based on asymmetric information

model selection and misspecification in discrete choice welfare analysis this study extends the work by herriges and kling 1997 to further evaluate the impact of discrete choice modelling techniques on welfare measures particularly we evaluate the performance of the increasingly popular mixed logit model and the computational strategy for deriving discrete choice welfare measures our simulation results show that model misspecification can have profound effects on welfare measures in general the flexible mixed logit model performs relatively well in the presence of misspecification however when the nesting structure can be appropriately identified via statistical tests and a priori knowledge experience the nested logit model provides more reliable welfare measures than the mixed logit model

desegregation and black dropout rates in 1954 the united states supreme court ruled that separate schools for black and white children were inherently unequal this paper studies whether the desegregation plans of the next 30 years benefited black and white students in desegregated school districts data from the 1970 and 1980 censuses suggest desegregation plans of the 1970 s reduced high school dropout rates of blacks by two to three percentage points during this decade no significant change is observed among whites the results are robust to controls for family income parental education and state and region specific trends as well as to tests for selective migration

finders keepers forfeiture laws policing incentives and local budgets to encourage anti drug policing the federal government and many state governments have enacted laws that allowpoliceagencies tokeepasubstantial fractionofthe assets thattheyseizeindrugarrests weuserich new data on police seizures and local spending to explore the reactions of both governments and police to the incentives created by these policies we find that local governments offset police seizures by reducing their other allocations to police partially undermining the incentives laid out in statute and diverting the earmarked funds to other purposes police in turn respond to the real net incentives for seizures once local offsets are takenintoaccount byincreasingthedrugarrestrate heroinpricesalsoincrease suggestingthattheincreased emphasis on anti drug policing raises the supply costs of illicit drugs these findings highlight both the promise and pitfalls of using financial incentives to solve agency problems in a federal system both local agents and intervening governments have sophisticated responses to financial incentives and these responses must be taken into account in both designing effective policies and evaluating their consequences 2007 elsevier b v all rights reserved

an evaluation of eu regional policy do structural actions crowd out public spending motivated by the lack of success of previous studies trying to estimate the impact of the european cohesion policy this paper brings an unexplored issue to light transfers that are intended to finance public investment in key areas for growth might be crowded out by subsidized governments to alternative uses in fact using annual data from fifteen member countries 1993 2005 we conclude that public investment in the member countries makes up around 60 of the increase in eu funds the limited role of the european commission in the allocation of the funds could partially explain this result

does head start improve children s life chances evidence from a regression discontinuity design this paper exploits a new source of variation in head start funding to identify the program s effects on health and schooling in 1965 the office of economic opportunity oeo provided technical assistance to the 300 poorest counties to develop head start proposals the result was a large and lasting discontinuity in head start funding rates at the oeo cutoff for grant writing assistance we find evidence of a large drop at the oeo cutoff in mortality rates for children from causes that could be affected by head start as well as suggestive evidence for a positive effect on educational attainment i introduction head start was established in 1965 as part of the war on poverty to provide preschool health and other social services to poor children age three to five and their families and currently serves over 900 000 children each year at a cost of around 7 billion hhs 2006 this paper provides new evidence on the effects of the head start program on schooling and health by drawing on a new source of variation in program funding spe

the effect of state education finance reform on total local resources abstract both the federal government and the states use intergovernmental grants to try to change the composition of local spending across different programs as well as the distribution of resources across localities many states are now under court order to use state education grants to reduce local disparities in education spending while a substantial body of literature suggests that these court orders increase the level and progressivity of state education spending there is little evidence on their broader effects on the total resources available not just for schools in low income districts but for other programs across all localities we find that states finance the required increase in education spending in part by reducing their aid to localities for other programs particularly for wealthier areas thus while court ordered school finance equalizations do increase total state aid to localities for education they do so at the expense of drawing state intergovernmental aid away from programs like public welfare health hospitals and general services these findings provide insight into the effectiveness of using earmarked funds to achieve redistribution

school district operational spending and student outcomes evidence from tax elections in seven states abstract we use close tax elections to estimate the impact of school district funding increases on operational spending and student outcomes across seven states districts with passing levies directed new revenue toward support services and instructor salaries but did not increase teacher staffing levels these districts eventually realized gains in student achievement and attainment our preferred estimates imply that increasing operational spending by 1000 per pupil increased test scores by approximately 0 15 of a standard deviation and graduation rates by approximately 9 percentage points there is some evidence of diminishing returns as these effects are driven by districts below the median in spending per pupil based on research linking academic outcomes to earnings we conclude that these spending increases were likely cost effective

a model of add on pricing this paper examines competitive price discrimination with horizontal and vertical taste differences consumers with higher valuations for quality are assumed to have stronger brand preferences two models are considered a standard competitive price discrimination model in which consumers observe all prices and an add on pricing game in which add on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add ons at high unadvertised prices in the standard game price discrimination is self reinforcing the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not the analysis of the add on pricing game focuses on the chicago school argument that profits earned on add ons will be competed away via lower prices for advertised goods a conclusion is that add on practices can raise equilibrium profits by creating an adverse selection problem that makes price cutting unappealing although profitable when jointly adopted using add on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising several models that could account for add on pricing are discussed

enriching a theory of wage and promotion dynamics inside firms in previous work we showed that a model that integrates job assignment human capital acquisition and learning can explain several empirical findings concerning wage and promotion dynamics inside firms in this article we extend that model in two ways first we incorporate schooling and derive further testable implications that we then compare with the available empirical evidence second and more important we show that introducing task specific human capital allows us to produce cohort effects we further argue that task specific human capital is a realistic concept and may have many important implications we also discuss limitations of our extended approach

more cops less crime abstract i exploit a natural experiment to estimate the causal effect of police on crime the american recovery and reinvestment act increased funding for the community oriented policing services cops hiring grant program from less than 20 million over 2005 2008 to 1 billion in 2009 hiring grants distributed in 2009 were allocated according to an application score cutoff rule and i leverage quasi random variation in grant receipt by comparing the change over time in police and crimes for cities above and below the threshold in a difference in differences framework relative to low scoring cities those above the cutoff experience increases in police of about 3 2 and declines in victimization cost weighted crime of about 3 5 following the distribution of hiring grants the effects are driven by large and statistically significant effects of police on robbery larceny and auto theft with suggestive evidence that police reduce murders as well crime reductions associated with additional police were more pronounced in areas most affected by the great recession the results highlight that fiscal support to local governments for crime prevention may offer large returns especially during bad macroeconomic times

education and the allocation of talent i study how education affects the allocation of talent into different sectors of the economy i focus on two forces first education adds to a worker s information capital and thus may change her self confidence second performance contracts give a worker incentives to choose a sector according to her abilities the baseline model predicts that workers with intermediate ability educate while the most able skip education in an extension i compare the u k and the u s bachelor s degrees and moreover discuss hybrid educational systems common in europe that offer both u k and u s types of bachelor s degrees

labor market signaling and self confidence wage compression and the gender pay gap i extend spence s signaling model by assuming that some workers are overconfident they underestimate their marginal cost of acquiring education and some are underconfident firms cannot observe workers productive abilities and beliefs but know the fractions of high ability overconfident and underconfident workers i find that biased beliefs lower the wage spread and compress the wages of unbiased workers i show that gender differences in self confidence can contribute to the gender pay gap if education raises productivity men are overconfident and women underconfident then women will on average earn less than men finally i show that biased beliefs can improve welfare

a discrete choice equilibrium approach to valuing large environmental changes abstract this study develops a discrete choice locational equilibrium model to evaluate the benefits of the air quality improvements that occurred in the los angeles area following the 1990 clean air act amendments caaa the discrete choice equilibrium approach accounts for the fact that air quality improvements brought about by the 1990 caaa will change housing choices and prices the study also provides new evidence for the distributional welfare impacts of the 1990 caaa in the los angeles area findings suggest that the air quality improvements that occurred in the los angeles area between 1990 and 2000 provided substantial general equilibrium benefits to households the analysis reveals noticeable differences between partial and general equilibrium welfare gains demonstrating that ignoring equilibrium effects will likely misrepresent the benefits of large environmental changes in addition we find that the equilibrium welfare impacts of the 1990 caaa in the los angeles area varied significantly across income groups