cooperative and noncooperative r d in duopoly with spillovers contrary to the usual assumption made in most oligopoly models relations among firms are seldom of a wholly cooperative or noncooperative type in many situations they compete in some fields while they cooperate in others an important example is the case of cooperative research efforts bringing fierce competitors together two types of agreement are observed first r d cooperation can take place at the so called precompetitive stage companies share basic information and efforts in the r d stage but remain rivals in the market place 1 a second type of agreement involves an extended collusion between partners creating common policies at the product level the usual justifications of this extension are the difficulties of protecting intellectual property the idea is then to allow partners who have achieved inventions together to also control together the processes and products which embody the results of their collaboration in order to recuperate jointly their r d investments 2 what could be expected from these types of agreement is a reduction in r d expenditures because of less wasteful duplication and a reduction of total production because of more reprinted from the american economic review 78 5 1133 1137 1988 center for operations research econometrics 1348 louvain la neuve belgium we are grateful to jean

persuasive advertising and product differentiation in a hotelling type differentiated products duopoly model we distinguish between three alternative ways that persuasive advertising may affect consumer perferences we illustrate the implications of our theory an contrast with results from models of informative advertising by analysing the relationship between the degree of product differentiation and equilibrium levels of advertising the analysis suggests that an positive relationship between equilibrium levels of advertising and inherent product substitutability is consistent only with advertising that increases perceived product differences

psychological contracts a nano level perspective on social contract theory social contract theory has been criticized as a theory in search of application we argue that incorporating the nano or individual level of analysis into social contract inquiry will yield more descriptive theory we draw upon the psychological contract perspective to address two critiques of social contract theory its rigid macro orientation and inattention to the process of contract formation we demonstrate how a psychological contract approach offers practical insight into the impact of social contracting on day to day human interaction we then articulate several potentially testable propositions that emerge from this nano level perspective

deductible contracts against fraudulent claims evidence from automobile insurance insurance fraud is now recognized as a significant resource allocation problem in many markets the object of this study is to verify how straight deductible contracts may affect the equilibrium level of falsification in automobile insurance this type of contract is observed in many markets even if it is not optimal under costly state falsification a higher deductible may create incentives to fraud or cheat particularly when the insured anticipates that the claim has a small probability of being audited to verify this proposition we estimate a loss equation for which one of the determinants is the amount of the deductible using a data set of claims filed for damages following an automobile accident with twenty insurance companies in quebec in 1992 because we have access only to reported losses a higher deductible also implies a lower probability of reporting small losses to isolate the fraud effect related to the presence of a deductible in the contract we jointly estimate a loss equation and a

seasonality and the effect of advertising on price does advertising make markets more or less competitive this paper lays out an econometric strategy for estimating the effect of advertising on prices that exploits seasonal demand and imperfect targeting of consumers we find mostly negligible effects of advertising on prices at monthly frequency among the 35 of 131 product categories with sufficient advertising seasonality to justify second stage estimation only nine have a significant effect and those are typically small this finding is essentially the result of the much greater seasonality in advertising than price

empirical contract theory the case of insurance data abstract while contract theory has reached a high degree of sophistication econometric applications remain scarse one often invoked reason is that adequate data is hard to find we argue that insurance data fit especially well the requirements of econometric testing then we propose some insights on how insurance data can be used to test the predictions of contract theory as an illustration we present some preliminary empirical results relative to the existence of adverse selection of the rothschild and stiglitz type in automobile insurance

research note additional learning and implications on the role of informative advertising observers argue that evidence for the persuasive role of advertising comes from competitive categories where increases in advertising lead to higher average prices conversely others claim that advertising serves a purely informational role here higher levels of advertising lead to better informed consumers and this should increase competition and stimulate lower prices the objective of this study is to neither confirm nor refute either of these perspectives it is rather to show that increases in informative advertisingalone can lead to both higher or lower prices i further show that the direction of this relationship depends on the level of differentiation between competing firms similar to grossman and shapiro 1984 i examine conditions where the differences between competing products are small but i also examine conditions where the differences are significant the role of advertising is to inform consumers about individual products and higher advertising for a product means that more of the potential market knows about it higher levels of advertising increase the relative importance of fully informed consumers compared to partially informed consumers this dynamic is the basis for explaining why informative advertising can push prices either up or down in a uniformly distributed spatial market

perceived ethicality of insurance claim fraud do higher deductibles lead to lower ethical standards insurance claim fraud costs insurance companies policymakers and taxpayers billions of dollars every year and has been described as the second largest white collar crime the most common insurance fraud activity and one that contributes a significant portion of dollar losses is the practice of padding claim amounts in the event of a loss one of the largest issues insurance companies face is that policyholders often do not perceive insurance claim padding as an unethical behavior however very little research has examined the factors that contribute to such perceptions considering how consumers often attempt to justify fraudulent behavior from a fairness perspective the present work examines how the amount of the deductible in an insurance claim situation can influence feelings of fairness and ethicality the results of an experimental study show that higher deductible amounts result in stronger perceptions that insurance claim padding is fair to the insurance company weaker perceptions that the behavior is unethical and higher proposed claim award amounts the study also shows however that the deductible amount effects are attenuated for consumers who display higher ethical standards as reflected by their scores on the consumer ethics scale implications are discussed with respect to the insurance industry deviant consumer behavior and general business ethics theory

the slave trade and the origins of mistrust in africa in a recent study nunn 2008 examines the long term impacts of africa s slave trade he finds that the slave trade which occurred over a period of more than 400 years had a significant negative effect on long term economic development although the article arguably identifies a negative causal relationship between the slave trade and income today the analysis is unable to establish the exact causal mechanisms underlying this reduced form relationship in this article we examine one of the channels through which the slave trade may affect economic development today combining contemporary individual level survey data with historical data on slave shipments by ethnic group we ask whether the slave trade caused a culture of mistrust to develop within africa initially slaves were captured primarily through state organized raids and warfare but as the trade progressed the environment of ubiquitous insecurity caused individuals to turn on others including friends and family members and to kidnap trick and sell each other into slavery sigismund wilhelm koelle 1854 p e h hair 1965 charles piot 1996 we hypothesize that in this environment a culture of mistrust may have evolved which may persist to this day we show that current differences in trust levels within africa can be traced back to the transatlantic and indian ocean slave trades combining contemporary individual level survey data with historical data on slave shipments by ethnic group we find that individuals whose ancestors were heavily raided during the slave trade are less trusting today evidence from a variety of identification strategies suggests that the relationship is causal examining causal mechanisms we show that most of the impact of the slave trade is through factors that are internal to the individual such as cultural norms beliefs and values jel j15 n57 z13

informative advertising and product match abstract this paper studies informative advertising in a variety of market structures for which some consumers are informed about two differentiated products while other consumers are uninformed we characterize a unique symmetric subgame perfect nash equilibrium in advertising and pricing and analyze the welfare properties of the equilibrium remarkably total surplus is non monotonic in advertising in a duopoly market the equilibrium level of advertising may be more or less than socially optimal we also study the effect of a trade association and compare these results with the first best solution and a multiproduct monopolist

informative advertising with differentiated products in this paper we study the role of promotional expenditures by sellers in a model of product differentiation advertising conveys full and accurate information about the characteristics of products heterogeneous consumers who have no source of information other than advertisements seek to purchase the products that best fit their needs despite the roles played by advertising in improving the matching of products and consumers and in increasing the elasticity of demand faced by each firm we find that the market determined levels of advertising are excessive given the extent of diversity in the market we derive a promotional equilibrium based on a specific information transmission technology paying explicit attention to the structure of consumer information and its impact on firms demand curves this allows us to study the effects of changes in the advertising technology including an increased ability to target messages to specific groups of consumers on the equilibrium in the product market we find that decreased advertising costs may reduce profits by increasing the severity of price competition

insurance fraud and optimal claims settlement strategies abstract we examine the optimal claims settlement strategy for a liability insurer when claimants can permanently misrepresent their losses by engaging in costly claims falsification in this environment claims auditing is not a possible deterrent to fraud and the settlement strategy consists of an indemnification profile that relates the insurance payment to the claimed amount of loss the optimal indemnification profile is shown to involve systematic underpayment of claims at the margin as a means to deter loss exaggeration with the extent of underpayment limited by expected litigation costs and potential bad faith claims the key testable implication of the theory is that the extent of underpayment should be greater for classes of claims for which loss exaggeration is easier empirical analysis of insurance settlements for bodily injury liability in automobile accidents confirms this prediction this suggests that liability insurers optimally choose claims payment strategies to lessen a claimant s i

price match announcements in a consumer search duopoly using a model of sequential search we show that announcements to price match raise prices by altering consumer search behavior first price matching diminishes firms incentives to lower prices to attract consumers who have no search costs second for consumers with positive search costs price matching lowers the marginal benefit of search inducing them to accept higher prices finally price matching can lead to asymmetric equilibria where one firm runs fewer sales and both firms tend to offer smaller discounts than in a symmetric equilibrium price increases grow in the proportion of consumers who invoke price matching guarantees and in the level of equilibrium asymmetry

empirical generalizations about the impact of advertising on price sensitivity and price consumers sensitivities to price changes are an important input to strategic and tactical decisions it has been argued that price sensitivities depend on factors such as advertising prior studies on the effect of advertising on consumer price sensitivity have found seemingly conflicting results we analyze the characteristics of previous studies in marketing and generate a set of three empirical generalizations these are 1 an increase in price advertising leads to higher price sensitivity among consumers 2 the use of price advertising leads to lower prices and 3 an increase in nonprice advertising leads to lower price sensitivity among consumers these generalizations have important implications for managers and researchers managers need to coordinate their advertising and pricing decisions to attain maximum profits for researchers our summary and discussion of empirical results provide directions for future

ethnic diversity and economic development abstract this paper analyzes the role that different indices and dimensions of ethnicity play in the process of economic development firstly we discuss the advantages and disadvantages of alternative data sources for the construction of indices of religious and ethnic heterogeneity secondly we compare the index of fractionalization and the index of polarization we argue that an index of the family of discrete polarization measures is the adequate indicator to measure potential conflict we find that ethnic religious polarization has a large and negative effect on economic development through the reduction of investment and the increase of government consumption and the probability of a civil conflict

occupational choice and the spirit of capitalism the british industrial revolution triggered a socioeconomic transformation whereby the landowning aristocracy was replaced by industrial capitalists rising from the middle classes as the economically dominant group we propose a theory of preference formation under financial market imperfections that can account for this pattern parents shape their children s preferences in response to economic incentives middle class families in occupations requiring effort skill and experience develop patience and a work ethic whereas upper class families relying on rental income cultivate a refined taste for leisure these class specific attitudes which are rooted in the nature of preindustrial professions become key determinants of success once industrialization transforms the economic landscape i introduction the industrial revolution was more than capital accumulation and growth it also set off a social and political transformation that redefined hierarchies in society and reshaped the distribution of income and wealth before the onset of industrialization in eighteenth century britain wealth and political power were associated with the possession of land over the course of the nineteenth century a new class of entrepreneurs and businessmen emerged as the economic elite for the most part the members of this class rose from humble beginnings and had their social origins in the urban middle classes the landed elite was left behind and eventually lost its political and economic predominance many observers of the time linked this reversal in economic fortunes to differences in values attitudes and ultimately preferences across social classes there are countless examples both in scholarly and in fictional writing of portrayals of members of the landowning class as averse to work unwilling to save ill disposed tocommercialactivity andunabletoconsidermoneyassomething

optimal auditing with scoring theory and application to insurance fraud this article makes a bridge between the theory of optimal auditing and the scoring methodology in an asymmetric information setting our application is meant for insurance claims fraud but it can be applied to many other activities that use the scoring approach fraud signals are classified based on the degree to which they reveal an increasing probability of fraud we show that the optimal auditing strategy takes the form of a red flags strategy which consists in referring claims to a special investigative unit siu when certain fraud indicators are observed the auditing policy acts as a deterrence device and we explain why it requires the commitment of the insurer and how it should affect the incentives of siu staffs the characterization of the optimal auditing strategy is robust to some degree of signal manipulation by defrauders as well as to the imperfect information of defrauders about the audit frequency the model is calibrated with data from a large european insurance company we show that it is possible to improve our results by separating different groups of insureds with different moral costs of fraud finally our results indicate how the deterrence effect of the audit scheme can be taken into account and how it affects the optimal auditing strategy

do you trust your insurer ambiguity about contract nonperformance and optimal insurance demand abstract we study optimal insurance demand for a risk and ambiguity averse consumer under ambiguity about contract nonperformance ambiguity aversion lowers optimal insurance demand and the consumer s degree of ambiguity aversion is negatively associated with the optimal level of coverage a more pessimistic belief and greater ambiguity may increase or decrease the optimal demand for insurance and we determine sufficient conditions for a negative effect we also discuss wealth effects and evaluate the robustness of our results by considering several alternative models of ambiguity aversion our findings show how ambiguity about contract nonperformance can undermine the functioning of insurance markets making it a concern for regulators caution is required though because demand reactions are only imperfectly informative about the welfare effects of ambiguity about contract nonperformance

bundling strategies when products are vertically differentiated and capacities are limited we consider a seller who owns two capacity constrained resources and markets two products components corresponding to these resources as well as a bundle comprising the two components in an environment where all customers agree that one of the two components is of higher quality than the other and that the bundle is of the highest quality we derive the seller s optimal bundling strategy we demonstrate that the optimal solution depends on the absolute and relative availabilities of the two resources as well as upon the extent of subadditivity of the quality of the products the possible strategies that can arise as equilibrium behavior include a pure components strategy a partial or full spectrum mixed bundling strategy and a pure bundling strategy where the latter strategy is optimal when capacities are unconstrained these conclusions are contrary to findings in the prior literature on bundling that demonstrated the unambiguous dominance of the full spectrum mixed bundling strategy thus our work expands the frontier of bundling to an environment with vertically differentiated components and limited resources we also explore how the bundling strategies change as we introduce an element of horizontal differentiation wherein different types of customers value the available components differently

covenants and collateral as incentives to monitor although monitoring borrowers is thought to be a major function of financial institutions the presence of other claimants reduces an institutional lender s incentives to do this thus loan contracts must be structured to enhance the lender s incentives to monitor covenants make a loan s effective maturity and the ability to collateralize makes a loan s effective priority contingent on monitoring by the lender thus both covenants and collateral can be motivated as contractual devices that increase a lender s incentive to monitor these results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending modern finance theory suggests that financial intermediaries such as commercial banks insurance companies and finance companies monitor and control their borrowers on behalf of other investors 1 this article investigates how the loans made by these institutions can be structured so as to best enhance the institutions role as delegated monitors covenants and collateral are common features of loans made by financial institutions but these features are somewhat difficult to justify consider loan covenants clauses in a loan contract that require the borrower to take or refrain from various actions berlin and mester 1992 magee and sridhar 1994 and park 1994 show that by giving institutions the right to renegotiate or call loans when covenants are violated covenants serve as tripwires that enhance the flexibility and efficiency of financial contracting also as documented in smith and warner 1979 control rights from covenants reduce borrower adverse selection or moral hazard nevertheless by allowing institutions to demand repayment based on any information contractible or not

understanding privacy online development of a social contract approach to privacy recent scholarship in philosophy law and information systems suggests that respecting privacy entails understanding the implicit privacy norms about what why and to whom information is shared within specific relationships these social contracts are important to understand if firms are to adequately manage the privacy expectations of stakeholders this paper explores a social contract approach to developing acknowledging and protecting privacy norms within specific contexts while privacy as a social contract a mutually beneficial agreement within a community about sharing and using information has been introduced theoretically and empirically the full impact on firms of an alternative framework to respecting the privacy expectations of stakeholders has not been examined the goal of this paper is to examine how privacy norms develop through social contract s narrative to redescribe privacy violations given the social contract approach and to critically examine the role of business as a contractor in developing privacy norms a social contract narrative dealing specifically with issues of privacy is an important next step in exploring a social contract approach to privacy here the narrative is used to explain to analyze the dynamic process of privacy norm generation within particular communities based on this narrative individuals within a given community discriminately share information with a particular set of obligations in mind as to who has access to the information and how it will be used rather than giving away privacy individuals discriminately share information within a particular community and with norms governing the use of their information similar to contractual business ethics impact on global commerce in explaining how and why norms vary across global contexts the social contract approach to privacy explains how and why norms vary across communities of actors focusing on agreements around privacy expectations shifts the responsibility of firms from adequate notification to the responsibility of firms as contractors to maintain a mutually beneficial and sustainable solution

consumer insurance fraud abuse as co creation and co responsibility a new paradigm insurance fraud and abuse international concerns are inherent in the proposition of insurance and prevalent in insurer insured interactions while the subject of considerable industry and regulatory attention this little researched area of consumer behavior and consumer ethics represents persistent social policy questions and problems at multiple levels this article addresses the issue by first defining insurance fraud and its origins in contract as well as consumer and insurer management the authors conclude by re envisioning the problem as one of co creation by the consumer insured and insurer personnel proposing a framework for its study and resolution

insurance for the poor microinsurance is the provision of insurance services to the poor usually in developing countries one of the key criteria of poverty is vulnerability even to minor events in such cases even micro coverage can make a major difference yet still be funded by an affordable contribution by the insured like any kind of insurance microinsurance can cover different risks to life health farming property among other things our paper sketches how one could address and develop microinsurance business ethics first we introduce microinsurance to the business ethics community and business ethics to the microinsurance community our draft of microinsurance ethics is then developed from two angles as a holistic understanding of ideals and possible ethical conflicts in key stakeholder relationships and by distinguishing eight challenges when targeting the poor and when marketing microinsurance as an open ending the article suggests a three stage action research design focusing on how microinsurance could and should internalize ethics respecting rather than neglecting national and local cultural conditions

the advertising mix for a search good we extend the persuasion game to bring it squarely into the economics of advertising we model advertising as exciting consumer interest into learning more about the product and determine a firm s equilibrium choice of advertising content over quality information price information and horizontal match information equilibrium is unique whenever advertising is necessary the outcome is a separating equilibrium with quality unravelling lower quality firms need to provide more information for a given quality level as a function of consumer visit costs first quality information is disclosed then price information and then horizontal product information are added to the advertising mix some suggestive evidence is provided from airline ads in newspapers this paper was accepted by j miguel villas boas marketing

a simple theory of advertising as a good or bad our analysis treats advertisements and the goods advertised as complements in stable metautility functions and generates new results for advertising by building on and extending the general analysis of complements by assimilating the theory of advertising into the theory of complements we avoid the special approaches to advertising found in many studies that place obstacles in the way of understanding the effects of advertising we also use this approach to evaluate advertising from a welfare perspective whether there is excessive or too little advertising depends on several variables the effects on consumer utility the degree of competition in the market for advertised goods the induced changes in prices and outputs of advertised goods and whether advertising is sold to consumers

a model of advertising competition using a dynamic model of advertising rivalry between competitors in a duopoly the author obtains analytical results for the case of pure market share rivalry in a mature market a more general mod

selection on observed and unobserved variables assessing the effectiveness of catholic schools in this paper we measure the effect of catholic high school attendance on educational attainment and test scores because we do not have a good instrumental variable for catholic school attendance we develop new estimation methods based on the idea that the amount of selection on the observed explanatory variables in a model provides a guide to the amount of selection on the unobservables we also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of catholic school attendance to selection bias we use our methods to estimate the effect of attending a catholic high school on a variety of outcomes our main conclusion is that catholic high schools substantially increase the probability of graduating from high school and more tentatively attending college we find little evidence of an effect on test scores

price competition between an expert and a non expert abstract this paper characterizes price competition between an expert and a non expert in contrast with the expert the non expert s repair technology is not always successful consumers visit the expert after experiencing an unsuccessful match at the non expert this re entry affects the behavior of both sellers for low enough probability of successful repair at the non expert all consumers first visit the non expert and a timid pricing equilibrium results if the non expert s repair technology performs well enough it pays for some consumers to disregard the non expert a visit they directly go to the expert s shop and an aggressive pricing equilibrium pops up for intermediate values of the non expert s successful repair a mixed pricing equilibrium emerges where the expert randomizes over the monopoly price and some lower price

social learning and dynamic pricing of durable goods we analyze the impacts of social learning sl on the dynamic pricing and consumer adoption of durable goods in a two period monopoly consumers can make either early uninformed purchases or late but potentially informed purchases as a result of social learning several results are derived first we identify the market conditions under which ex ante homogeneous consumers may choose to purchase at different times second equilibrium adoption may demonstrate inertia where all adopt late or frenzy where all adopt early in particular adoption inertia appears when sl intensity is reasonably high but may vanish when sl intensity exceeds a certain threshold third firm profits and social welfare first weakly decrease in sl intensity and may then jump up by a lump sum amount at the threshold sl intensity level mentioned above last we show that the firm potentially benefits from informative advertising or investing to cultivate more social learning

economic integration and political disintegration in a world of trade restrictions large countries enjoy economic benefits because political boundaries determine the size of the market under free trade and global markets even relatively small cultural linguistic or ethnic groups can benefit from forming small homogeneous political jurisdictions this paper provides a formal model of the relationship between openness and the equilibrium number and size of countries and successfully tests two implications of the model firstly the economic benefits of country size are mediated by the degree of openness to trade secondly the history of nation state creations and secessions is influenced by the trade regime

a theory of combative advertising in mature markets with competing firms a common role for advertising is to shift consumer preferences towards the advertiser in a tug of war with no effect on category demand in this paper we analyze the effect of such combative advertising on market power we show that depending on the nature of consumer response combative advertising can reduce price competition to benefit competing firms however it can also lead to a procompetitive outcome where individual firms advertise to increase their own profitability but collectively become worse off this is because combative advertising can intensify price competition such that an advertising war leads to a price war similar to price competition advertising competition can result in a prisoner s dilemma where all competing firms make less profit even when the effect of each firm s advertising is to enhance consumer preferences in its favor given such procompetitive effects we further show that cost of combative advertising could be a blessing in disguise higher unit cost of advertising resulting in lower equilibrium levels of advertising leading to higher prices and profits we conduct a laboratory experiment to investigate how combative advertising by competing brands influences consumer preferences our experimental analysis offers strong support for our conclusions

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

hardball and the soft touch the economics of optimal insurance contracts with costly state verification and endogenous monitoring costs abstract we examine an environment of costly state verification in which insureds possess private information about the magnitude of an insurable loss insurers can verify the actual loss suffered only by incurring a positive resource cost and insureds may verification and may lead to more generous settlements optimal insurance contracts are shown to mitigate the incentives to evade by a combination of incentives which include the overpayment of easily monitored losses and undercompensation for claims exhibiting higher verification costs

religion and economy religion has a two way interaction with political economy with religion viewed as a dependent variable a central question is how economic development and political institutions affect religious participation and beliefs with religion viewed as an independent variable a key issue is how religiosity affects individual characteristics such as work ethic honesty and thrift and thereby influences economic performance in this paper we sketch previous studies of this two way interaction but focus on our ongoing quantitative research with international data

cross market network effect with asymmetric customer loyalty implications for competitive advantage a cross market network effect exists in many industries e g newspaper publishing media software in which a seller sells both a primary and a secondary product e g a newspaper publisher sells newspapers to readers and advertising space to advertisers and the value of the secondary product depends on the size of the user base of the primary product this paper examines the competitive implications of asymmetric customer loyalty in such markets in traditional markets an advantage in customer loyalty generates a profit advantage we show here however that in the presence of a cross market network effect a midlevel of loyalty advantage in the primary product market can lead to an overall profit disadvantage this surprising result is derived from the interdependence of the two markets whereby a profit in one market may be gained at the cost of the other and by the positive relationship between a larger loyalty segment and a higher opportunity cost of price competition in the product of the primary market extending our model to a two period entry game also shows that under certain conditions the entrant with disadvantage in customer loyalty can outperform the incumbent in profit and market share this result suggests that asymmetry in customer loyalty can be a source of first mover advantage or disadvantage

evidence on adverse selection equilibrium signaling and cross subsidization in the insurance market the configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium deductible menu and the demand function as a standard hedonic system using contractual data from a representative insurer we estimate a reduced form hedonic premium equation and the inverse of the marginal bid equation for insurance coverage the data reveal an equilibrium with adverse selection and market signaling but lead us to reject the hypothesis that high risks receive contracts subsidized by low risks

the effect of group size and asymmetries on the incentive to reveal group specific information in this paper i examine how firms incentives to differentiate their products through the revelation of truthful information about product attributes varies with the distribution of consumer preferences for those attributes i show that information will tend to be provided for large groups even absent scale economies in producing that information in addition the relative sizes of the groups whose estimates of product quality change positively vs negatively i e the degree of asymmetry by the information is likewise an important determinant of its profitability

war and local collective action in sierra leone abstract we study the brutal 1991 2002 sierra leone civil war using nationally representative household data on conflict experiences postwar economic outcomes local politics and collective action individuals whose households directly experienced more intense war violence are robustly more likely to attend community meetings more likely to join local political and community groups and more likely to vote tests using prewar controls and alternative samples suggest that selection into victimization is unlikely to be driving the results more speculatively the findings could help partially explain the rapid postwar political and economic recoveries observed in sierra leone and after several other recent african civil wars

fraudulent claims and nitpicky insurers insurance fraud is a major source of inefficiency in insurance markets a self justification of fraudulent behavior is that insurers are bad payers who start nitpicking if an opportunity arises even in circum stances where the good faith of policyholders is not in dispute we relate this nitpicking activity to the inability of insurers to commit to their auditing strategy reducing the indemnity payments acts as an incentive device for the insurer since auditing is profitable even if the claim is not fraudulent we show that optimal indemnity cuts are bounded above and that nitpicking remains optimal even if it induces adverse effects on policyholders moral standards

moral hazard insurance claims and repeated insurance contracts the paper develops a simple model of repeated automobile insurance contracts providing a framework for analyzing changes in aggregate insurance data in periods of changes that affect driver incentives experience rating of premiums gives drivers an incentive to exert effort to avoid accidents ex ante moral hazard and an incentive to hide accidents ex post moral hazard the empirical analysis using data from the competitive insurance markets in ontario and alberta over a period of major legislative changes in ontario suggests that much of the recent decline in accidents in ontario was due to an increased incentive to hide accidents jel classification d 12 d82 hasard moral reclamations d assurance et contrats d assurance renouveles le texte developpe un modele simple de contrats d assurance automobile renouveles fournissant un cadre d analyse des donnees d assurance agregees dans des periodes de changement qui affectent les incitations des chauffeurs un regime de primes cotees selon l experience donne aux chauffeurs une incitation a faire des efforts pour eviter les accidents hasard moral ex ante et une incitation a cacher qu il y a eu accident hasard moral ex post l analyse empirique utilisant les donnees recueillies dans les marches d assurance con currentiels de l ontario et de l alberta pour une periode au cours de laquelle il y a eu des changements legislatifs majeurs en ontario suggere qu une bonne partie du declin des accidents enregistre en ontario a ete attribuable a une incitation accrue a cacher les accidents

costly risk verification without commitment in competitive insurance markets abstract this paper analyzes the equilibrium of an insurance market where applicants for insurance have a duty of good faith when they reveal private information about their risk type insurers can at some cost verify the type of insureds who file a claim and they are allowed to retroactively void the insurance contract if it is established that the policyholder has misrepresented his risk when the contract was taken out however insurers cannot precommit to their risk verification strategy the paper analyzes the relationship between second best pareto optimality and the insurance market equilibrium in a game theoretic framework it characterizes the contracts offered at equilibrium the individuals contract choice as well as the conditions under which an equilibrium exists

product diversion to a direct competitor a manufacturer will often limit competition among downstream partners by authorizing only a select group of retailers to carry its product however it is not uncommon for authorized retailers to create an additional competitor by diverting units to an unauthorized seller this paper presents an analytical model that demonstrates how diversion from authorized retailers to an unauthorized direct competitor can occur under circumstances not considered by the prior literature in fact diversion can represent a prisoner s dilemma whereby retailers diminish their own profit by selling to the unauthorized direct seller the authorized retailer s profit loss actually increases as the per unit diversion costs incurred by the authorized retailer decrease the model also shows that the unauthorized direct seller earns greater profit by strategically procuring a unilaterally constraining quantity even though this procurement strategy results in an equivalent increase in the quantity sold by the retailers combined the results identify a new reason for diversion and its consequences for retailers and the unauthorized direct seller

anticipated regret and product innovation when a firm introduces a product with new features some consumers may find it difficult to assess their valuations for these new attributes their purchase decisions made under such uncertainty may lead to postpurchase regret it has been experimentally shown that consumers may anticipate their potential postpurchase regret and make their current choices to mitigate or minimize it that is a consumer s anticipated regret can significantly impact his purchase decision given the trend that firms in various markets invoke regret to stimulate sales this paper analytically explores whether and how anticipated regret affects competing firms profits and product innovation our analyses reveal that the presence of anticipated regret can increase or decrease firms profits and foster or hinder product innovation depending on whether it makes the consumer segments more or less polarized in other words anticipated regret has a nonmonotonic effect on firms profits and the entrant s optimal quality therefore

advertising and aggregate consumption a bayesian dsge assessment aggregate data reveal that advertising in the u s absorbs approximately 2 of gdp and has a well defined pattern over the business cycle being strongly procyclical and highly volatile because the purpose of brand advertising is to foster sales we ask whether such spending has an appreciable effect on the pattern of aggregate consumption and through this avenue on economic activity this question is addressed by developing a dynamic general equilibrium model in which households preferences for differentiated goods depend on the intensity of brand advertising which is endogenously determined by profit maximizing firms once the model is estimated to match the u s economy it argues that the presence of advertising in the long run raises aggregate consumption and hours worked eventually fostering economic activity we also find that advertising has a relevant impact on fluctuations in consumption investment and markup over the business cycle all of the abovementioned effects are proven to epend crucially on the degree of competitiveness of advertising at the firm level

the impact of consumer attentiveness and search costs on firm quality disclosure a competitive analysis firms can invest to disclose quality information about their products to consumers but consumers are not always perfectly attentive to these disclosures indeed technologies such as digital video recorders have increased the ease with which disclosures can be avoided by consumers although such inattention may result in a consumer missing information from one or more competing firms consumers who have missed disclosures might decide to search for quality information to become fully informed before making a purchase decision in this paper we incorporate consumer attentiveness as well as the related endogenous search decision into a model of quality disclosure our results suggest that firms should disclose less quality information as the share of partially informed consumers informed about one firm but not the other increases or as consumer search costs increase we also provide insights into the potential impact of consumer trends toward lower attentiveness and lower search costs this paper was

competitive reactions to advertising and promotion attacks how do competitors react to each other s price promotion and advertising attacks what are the reasons for the observed reaction behavior we answer these questions by performing a large scale empirical study on the short run and long run reactions to promotion and advertising shocks in over 400 consumer product categories over a four year time span our results clearly show that the most predominant form of competitive response is passive in nature when a reaction does occur it is usually retaliatory in the same instrument i e promotion attacks are countered with promotions and advertising attacks are countered with advertising there are very few long run consequences of any type of reaction behavior by linking reaction behavior to both cross and own effectiveness we further demonstrate that passive behavior is often a sound strategy while firms that do opt to retaliate often use ineffective instruments resulting in spoiled arms accommodating behavior is observed in only a minority of cases and often results in a missed sales opportunity when promotional support is reduced the ultimate impact of most promotion and advertising campaigns depends primarily on the nature of consumer response not the vigilance of competitors

respect responsibility and development abstract we develop a theory that explains how two core values respect for others and responsibility affect productivity the accumulation of capital and output per worker using data from the world values survey we empirically test the model using a panel dataset that includes 82 countries over six distinct years we find that these two core values are important to production and that their impact is substantial we also show that respect and responsibility reduce the influence of trust and mitigate the negative macroeconomic effects associated with fractionalized societies our results are robust to various treatments for endogeneity and under alternative samples

consumer privacy and marketing avoidance a static model we introduce the concept of marketing avoidance consumer efforts to conceal themselves and to deflect marketing the setting is one in which sellers market some item through solicitations to potential consumers who differ in their benefit from the item and suffer harm from receiving solicitations concealment by one consumer induces sellers to shift solicitations to other consumers whereas deflection does not solicitations cause two externalities direct harm on consumers and the indirect cost of consumer concealment and deflection we find that in markets where the marginal cost of solicitation is sufficiently low efforts by low benefit consumers to conceal themselves will increase the cost effectiveness of solicitations and lead sellers to market more however concealment by high benefit consumers leads sellers to market less furthermore concealment by low benefit consumers increases direct privacy harm and consumer welfare is higher with deflection than concealment finally it is optimal to impose a charge on solicitations

asymmetric information and overinvestment in quality in a standard adverse selection world asymmetric information about product quality leads to quality deterioration in the market suppose that a higher investment level makes the realization of high quality more likely then if consumers observe the investment but not the realization of product quality before purchase they can infer the probability distribution of high and low quality that may be put on the market we uncover two effects that may lead the firm to overinvest in quality compared to a market with full information first an adverse selection effect according to which a sufficiently large investment can avoid adverse selection and second an efficiency effect according to which a larger investment reduces the probability of having in the market low quality products that are not socially valuable

performance regimes and marketing policy shifts even in mature markets managers are expected to improve their brands performance year after year when successful they can expect to continue executing on an established marketing strategy however when the results are disappointing a change or turnaround strategy may be called for to help performance get back on track in such cases performance diagnostics are needed to identify turnarounds and to quantify the role of marketing policy shifts in this process this paper proposes a framework for such a diagnosis and applies several methods to provide converging evidence for two main findings first contrary to prevailing beliefs the performance of brands in mature markets is not always stable instead brands systematically improve or deteriorate their performance outlook in clearly identifiable time windows that are relatively short compared to windows of stability second these shifts in performance regimes are associated with the brand s marketing actions and policy shifts as opposed to competitive marketing promotion oriented marketing policy shifts are particularly potent in improving a brand s performance outlook

detailing vs direct to consumer advertising in the prescription pharmaceutical industry the pharmaceutical industry has always used sales representatives to target physicians detailing who are a key link in sales and market share for prescription pharmaceuticals since august of 1997 when the food and drug administration eased the restrictions on direct to consumer advertising dtca there has been a dramatic increase in the use of dtca by pharmaceutical firms to target end customers patients dtca seems to have two different effects on pharmaceutical markets the first is to inform patients about the availability of drugs for some ailments thus expanding the market constructive the second is to persuade patients to talk about specific brands when they meet physicians with the objective of influencing market share combative we consider both effects of dtca in the presence of a detailing program in a competitive environment we incorporate the dynamics of physician patient interaction in a game theoretic model where firms decide on the form of dtca to adopt constructive or combative and then compete in the marketplace by choosing detailing and dtca levels we answer four questions what is the impact of adopting dtca on competitive intensity how do optimal detailing levels for a firm change with the adoption of dtca how should the dtca strategy for a firm vary depending on whether it is stronger or weaker in its degree of influence in the physician s office finally under what conditions would competing firms voluntarily decide to pursue constructive dtca

the seeds of negativity knowledge and money this paper studies the tendency to use negative ads for this purpose we focus on an interesting industry political campaigns and an intriguing empirical regularity the tendency to go negative is higher in close races we present a model of electoral competition in which ads inform voters either of the good traits of the candidate or of the bad traits of his opponent we find that in equilibrium the proportion of negative ads depends on both voters knowledge and the candidate s budget furthermore for an interesting subset of the parameter space negativity increases in both knowledge and budget using data on the elections for the u s house of representative in 2000 2002 and 2004 we examine the model and its implications using nonstructural estimation we find that negativity indeed increases in both voters knowledge and the candidate s budget furthermore we also find that knowledge and budget mediate the effect of closeness on negativity using structural estimation we reinforce these findings specifically we find that the model s parameters are within the subset of the parameter space discussed above thus the evidence implies that the model is not only helpful in identifying variables that were ignored by previous studies i e knowledge and budget but also in explaining an intriguing empirical regularity

optimal contracts under costly state falsification we examine an exchange economy with two agents one risk neutral with a certain endowment and a second risk averse with a random endowment the realization of the endowment is public but can be falsified by the second agent at a cost for a broad class of falsification cost functions the optimal no falsification contract is noncontingent on a left hand interval and strictly increasing with a slope strictly less than one on a right hand interval under a mild further restriction optimal no falsification contracts are in addition piece wise linear optimal contracts may in general require falsifying the state but for a set of the highest endowment realizations there is no falsification we find simple conditions under which the optimal contract is a no falsification contract the model has applications that include financial insurance and employment contracts and tax policy

reverse price discrimination with bayesian buyers this paper studies price discrimination under the situation in which buyers prior valuations are initially observable by a seller but buyers receive further information about a product or service which remains private thereafter the buyers interpret new information via bayes rule we show that in this environment prices are not monotone in buyers prior valuations interestingly this results in the possibility that a seller intentionally offers a higher price to a low valuation buyer rather than a high valuation buyer reverse price discrimination we derive this result in both monopoly and duopoly markets

conflicts of interest information provision and competition in the financial services industry abstract in some markets sellers have better information than buyers over which products best serve a buyer s needs depending on the market structure this may lead to conflicts of interest in the provision of information by sellers this paper studies this issue in the market for financial services the analysis presents a new model of competition between banks where price competition influences the ensuing incentives for truthful information revelation we also compare conflicts of interest in two different firm structures specialized banking and one stop banking

war and local collective action in sierra leone a comment on the use of coefficient stability approaches abstract in a study of the effect of civil war exposure on local collective action outcomes in sierra leone bellows and miguel 2009 employ a coefficient stability approach to assess the importance of omitted variable bias building on altonji et al 2005a here we clarify the econometric assumptions underlying bellows and miguel 2009 and extend their analysis using data on dependent variable reliability ratios and the method developed in oster 2015

wearout effects of different advertising themes a dynamic bayesian model of the advertising sales relationship models of advertising response implicitly assume that the entire advertising budget is spent on disseminating one message in practice managers use different themes of advertising for example price advertisements versus product advertisements and within each theme they employ different versions of an advertisement in this study we evaluate the dynamic effects of different themes of advertising that have been employed in a campaign we develop a model that jointly considers the effects of wearout as well as that of forgetting in the context of an advertising campaign that employs five different advertising themes we quantify the differential wearout effects across the different themes of advertising and examine the interaction effects between the different themes using a bayesian dynamic linear model dlm such a response model can help managers decide on the optimal allocation of resources across the portfolio of ads as well as better manage their scheduling we develop a model to show how our response model parameters can be used to improve the effectiveness of advertising budget allocation across different themes we find that a reallocation of resources across different themes according to our model results in a significant improvement in demand

optimal contracts when enforcement is a decision variable this paper analyzes choice theoretic costly enforcement in an intertemporal contracting model with a differentially informed investor and entrepreneur an intertemporal contract is modeled as a mechanism in which there is limited commitment to payment and enforcement decisions the goal of the analysis is to characterize the effect of choice theoretic costly enforcement on the structure of optimal contracts the paper shows that simple debt is the optimal contract when commitment is limited and costly enforcement is a decision variable theorem 1 in contrast stochastic contracts are optimal when agents can commit to the ex ante optimal decisions theorem 2 the paper also shows that the costly state verification model can be viewed as a reduced form of an enforcement model in which agents choose payments and strategies as part of a perfect bayesian nash equilibrium

workers compensation and moral hazard two types of moral hazard have been determined the first type is related to self prevention activities affecting probabilities of accidents the second type relates to the agent s activities whenever the accident occurs the authors objective consists of presenting an empirical measure of the significance of this second type of moral hazard in the workers compensation market the main challenge in isolating moral hazard consists of dividing into two parts the total variation in recovery time with respect to changes in insurance coverage 1 the variation of consumption corresponding to a given level of information and 2 the variation of consumption due to greater asymmetrical information the methodology used in this study separates these two variations copyright 1991 by mit press

the economics of privacy the concept of privacy has received a good deal of attention from lawyers political scientists sociologists philosophers and psychologists but until recently very little from economists this neglect is on the mend see for example my 1978 1979a articles and forthcoming book chs 9 11 george stigler and in this paper i will report on the economic research on privacy in which i and others have been engaged some definitional clarification is necessary at the outset privacy is used today in at least three senses first it is used to mean the concealment of information indeed this is its most common meaning today second it is used to mean peace and quiet as when someone complains that telephone solicitations are an invasion of his privacy third it is used as a synonym for freedom and autonomy it is in this sense that the supreme court has used the word in subsuming the right to have an abortion under the right of privacy see my 1979b article pp 190 200 the third meaning of privacy need detain us only briefly to affix the term privacy to human freedom and autonomy as in jack hirshleifer is simply to relabel an old subject not to identify a new area for economic research the second meaning of the word privacy set out above invites a slightly novel application of economics it suggests an economic reason why certain cerebral workers have private offices and other manual workers do not why aversion to noise is associated with rising education and why certain low level invasions of a person s private space for example shoving a person roughly but without hurting him are tortious see my forthcoming book ch 10 but the range of economic applications in this area seems limited the first meaning of privacy set out above privacy as concealment of informationseems the most interesting from an economic standpoint there is a rich and growing literature on the economics of information it would seem that the same economic factors that determine search behavior by workers and consumers might also determine investments in obtaining and in shielding private information this insight emphasized in my 1978 article provides the starting point for the economic analysis of privacy to relate the economics of privacy to the economics of information in as clear a fashion as possible consider the example of the employer searching across employees and the employee searching across employers the employer is looking for certain traits in an employee that may not be obvious things like honesty diligence loyalty and good physical and mental health to the extent that the employee is deficient in one or more of these characteristics he has an incentivestrictly analogous to the incentive of a seller of goods to conceal product defectsto conceal these deficiencies that is he has an incentive to invoke a right of privacy if the employer tries to pry into his private life the concealment of personal characteristics in the employment contest retards rather than promotes the efficient sorting of employees to employers by reducing the amount of information available to the buyer in the labor market the employer it reduces the efficiency of that market the analysis can easily be generalized moreover to other markets some of them noneconomic in which private information is concealed an example is the marriage market the efficient sorting of females to males in that market is impeded if either spouse conceals material personal information the extended courtship that remains typical of the marriage market may be due in part to the efforts of prospective spouses to conceal their deficiencies from each other university of chicago law school

auditing claims in the insurance market with fraud the credibility issue abstract this paper characterizes the equilibrium of an insurance market where opportunist policyholders may file fraudulent claims we assume that insurance policies are traded in a competitive market where insurers cannot distinguish honest policyholders from opportunists the insurer policyholder relationship is modelled as an incomplete information game in which the insurer decides to audit or not the market equilibrium depends on whether insurers can credibly commit or not to their audit strategies we show that a no commitment equilibrium results in a welfare loss for honest individuals which may even be so large that the insurance market completely shuts down we also show that transferring monitoring costs to a budget balanced common agency would mitigate the commitment problem

advertising s elusive economic rationale public policy and taxation advertising and its effects have been debated for well over a century in the last fewdecades a generally sceptical view of the benefits of advertising has been overturned by a series ofacademic advances in economics that detail a variety of ways in which advertising may affect theeconomy and society this academic work has however been paralleled by a growing popular andpolitical opposition to advertising and its social effects in this paper the positive economic case foradvertising is challenged by an assessment of the main channels of its influence and by a review ofthe associated empirical findings on its economic and wider impact a policy response of limitingthe tax deductibility of business advertising is explored

egalitarianism and international investment abstract this study identifies how country differences on a key cultural dimension egalitarianism influence international investment flows a society s cultural orientation toward egalitarianism is manifested by intolerance for abuses of market and political power and a desire for protecting less powerful actors we show egalitarianism to be based on exogenous factors including social fractionalization dominant religion circa 1900 and war experience from the 19th century we find a robust influence of egalitarianism distance on cross national flows of bond and equity issuances syndicated loans and mergers and acquisitions an informal cultural institution largely determined a century or more ago egalitarianism exercises its effect on international investment via an associated set of consistent contemporary policy choices but even after controlling for these associated policy choices egalitarianism continues to exercise a direct effect on cross border investment flows likely through its direct influence on managers daily business conduct

comparative advertising disclosing horizontal match information improved consumer information about horizontal aspects of products of similar quality leads to better consumer matching but also to higher prices so consumer surplus can go up or down while profits rise with enough quality asymmetry though the higher quality and hence larger firm s price falls with more information so both effects benefit consumers this occurs when comparative advertising is used against a large firm by a small one comparative advertising as it imparts more information therefore helps consumers although it also improves the profitability of the small firm overall welfare goes down because of the large loss to the attacked firm

information constrained insurance the revelation principle extended abstract private information induced incentive constraints can cause allocations to diverge from full information optimal allocations often in the direction of limited insurance but can bring unanticipated anomalies related plausible contract exclusion restrictions can be damaging in welfare terms more generally private information optimal allocations can be sensitive to the information structure suggesting that the latter be specified with an eye toward realism as well as tractability in an effort to make tractability less of a constraint the paper shows how two apparently difficult information structures a costly state verification environment and a multiperiod multilateral private information environment can be handled theoretically by revelation principle methods the paper also shows how solutions can be generated numerically

presidential address institutions and culture how and why does distant political and economic history shape the functioning of current institutions this paper argues that individual values and convictions about the scope of application of norms of good conduct provide the missing link evidence from a variety of sources points to two main findings first individual values consistent with generalized as opposed to limited morality are widespread in societies that were ruled by non despotic political institutions in the distant past second well functioning institutions are often observed in countries or regions where individual values are consistent with generalized morality and under different identifying assumptions this suggests a causal effect from values to institutional outcomes the paper ends with a discussion of the implications for future research jel a10 d7 e00

is honesty the best policy curtailing insurance fraud through optimal incentive contracts an incentive contracting approach is used to characterize optimal contracts when insured individuals possess private information about their losses and are able to misrepresent permanently their loss magnitudes by engaging in the falsification of claims we demonstrate that efficient agreements necessarily induce some falsification but that the extent of such claims inflation is mitigated partially by an indemnification schedule that overcompensates small losses while overpaying larger ones the differential costs of generating insurance claims through falsification provide an avenue by which the heterogencous insureds can credibly signal their underlying losses and are exploited in an optimal contract to implement loss contingent insurance payments

product differentiation with imperfect information the paper employs a model of monopolistic competition and product differentiation with consumers who are not well informed about the specification of the offered brands welfare analysis of the degree of product differentiation in such a market concludes that the socially desirable product variety is limited due to consumers imperfect information consequently when the number of consumers is sufficiently large or economies to scale in production are sufficiently weak the market would offer excessive variety the literature on product differentiation is motivated by the observation that only some of the potential brands of a differentiated product are produced and sold it studies issues such as the role of the market structure in the determination of product diversity and the welfare performance of alternative markets in making this product selection for example see lancaster 1979 and salop 1979 in the spatial models tradition spence 1976 and dixit and stiglitz 1977 in the diversifying representative consumer tradition these studies model product selection as an equilibrium outcome of monopolistic competition the welfare analysis focuses on the tradeoff between consumer benefits which naturally increase with variety and production efficiency which owing to economies to scale decreases with variety they find no natural relation between the socially optimal variety and the market outcome the latter can be smaller or larger than the former depending on the parameters of the model although it is natural to expect that in some markets for differentiated products consumers are imperfectly informed about the available brands all these studies assume that consumers possess perfect information the present paper assumes that consumers are imperfectly informed and indeed obtains qualitatively different results first regardless of how significant are the production economies of scale the optimal variety is below a predetermined level that depends on the parameters of consumer utility and information second when consumer population is sufficiently large or economies to scale in production are sufficiently weak the market would offer excessive variety the explanation is that consumers imperfect information limits the extent to which they can exploit the variety offered in the market it is therefore a social waste to increase variety to a level that consumers cannot benefit from

delegation as commitment the case of income tax audits in this article we study the value of delegating authority over income tax audit policy arising from the incompleteness of contracts consider a utilitarian government whose ability to commit is limited to aggregate dimensions of its audit policy as publicly verifiable information about detailed allocations of audit budgets is not available we show that the welfare level associated with the full commitment solution can be attained by delegating authority over audit policy to a manager the latter is offered a simple incentive scheme based only on the aggregate variables which are publicly observable in contrast if the government retains authority direct commitment to these same variables does not allow the full commitment welfare level to be achieved thus despite sharing a common informational basis delegation may perform better than centralized arrangements in the presence of incomplete contracts

returns to investment in education a global update the author updates compilations of rate of return estimates to investment in education published since 1985 and discusses methodological issues surrounding those estimates some key patterns among the three main levels of education primary education continues to exhibit the highest social profitability in all world regions private returns are considerably higher than social returns because of the public subsidization of education the degree of public subsidy increases with the level of education which is regressive social and private returns at all levels generally decline by the level of a country s per capita income overall the returns to female education are higher than those to male education but at individual levels of education the pattern is more mixed the returns to the academic secondary school track are higher than the vocational track since unit cost of vocational education is much higher and the returns for those who work in the private competitive sector of the economy are higher than in the public noncompetitive sector and the returns in the self employment unregulated sector of the economy are higher than in the dependent employment sector controversies in the literature are discussed in the light of the new evidence the undisputable and universal positive correlation between education and earnings can be interpreted in many ways the causation issue on whether education really affects earnings can be answered only with experimental data generated by randomly exposing different people to various amounts of education given the fact that moral and pragmatic considerations prevent the generation of such pure data researchers have to make do with indirect inferences or natural experiments some have been attempted the author looks at the research on overeducation or surplus schooling the conclusions reinforce earlier patterns they confirm that primary education continues to be the number one investment priority in developing countries they also show that educating females is marginally more profitable than educating males that the academic secondary school curriculum is a better investment than the technical vocational tract and that the returns to education obey the same rules as investment in conventional capital that is they decline as investment is expanded