efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

computer use and earnings in britain this paper estimates various models of the effect of computer use on earnings using recent ncds data the cross section estimates are large and significant while the standard fixed effects estimates are small or insignificant the panel estimates change considerably once we allow the coefficients to differ across individuals conditional on assumptions about when individuals use computers conventional panel estimates may not identify the crucial parameters and alternative methods are needed we conclude that there was a substantial premium associated with computer use for some individuals in the uk

wage employment contracts this paper studies the efficient agreements about the dependence of workers earnings on employment when the employment level is controlled by firms the firms superior information about profitability conditions is responsible for this form of contract governance under plausible assumptions such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk it is shown that if leisure is a normal good and firms are risk neutral employment is always above the efficient level such a one period implicit contracting model cannot therefore be used to explain unemployment as a rational byproduct of risk sharing between workers and a risk neutral firm under conditions of asymmetric information

wage profiles and imperfect capital markets a positive analysis this paper examines the structure of long term employment contracts when labor is mobile and risk averse employers are unable to monitor workers outside job offers workers cannot borrow against future income and workers productivity is increasing in the length of service with the long term employer workers are then liquidity constrained and the contract trades off consumption smoothing against efficiency in turnover in contrast to previous papers which have examined this problem this paper provides a continuous time formulation that permits a detailed characterization of the properties of the wage profile

the incentive implications of incomplete insurance the multiplicative case abstract when states of nature are not completely verifiable and payments in a pareto efficient insurance scheme contribute multiplicatively to wealth the insured may be better off in the insured against event depending upon the behavior of relative risk aversion

class size education and wages we use micro data for england and wales to examine the effects of class size on the decision to stay on in full time schooling at 16 and on wages later in life we find that class size has a sizeable and significant effect on the decision to stay on this finding is very robust wage equations show the effect of staying on is significantly positive for wages combining this with the effect of class size on the staying on decision reveals that class size significantly affects future wages reduced form models lead to much less accurate and insignificant estimates

using maimonides rule to estimate the effect of class size on scholastic achievement the twelfth century rabbinic scholar maimonides proposed a maximum class size of 40 this same maximum induces a nonlinear and nonmonotonic relationship between grade enrollment and class size in israeli public schools today maimonides rule of 40 is used here to construct instrumental variables estimates of effects of class size on test scores the resulting identiecation strategy can be viewed as an application of donald campbell s regression discontinuity design to the class size question the estimates show that reducing class size induces a signiecant and substantial increase in test scores for fourth and efth graders although not for third graders when asked about their views on class size in surveys parents and teachers generally report that they prefer smaller classes this may be because those involved with teaching believe that smaller classes promote student learning or simply because smaller classes offer a more pleasant environment for the pupils and teachers who are in them mueller chase and walden 1988 social scientists and school administrators also have a longstanding interest in the class size question class size is often thought to be easier to manipulate than other school inputs and it is a variable at the heart of policy debates on school quality and the allocation of school resources in many countries see e g robinson 1990 for the united states ofsted 1995 for the united kingdom and moshel ravid 1995 for israel this broad interest in the consequences of changing class size

the effect of additional funds for low ability pupils a non parametric bounds analysis this article investigates the effect of a policy measure that gives secondary schools additional resources for low ability pupils schools are free in deciding how to spend the additional money i use a non parametric bounds analysis to estimate upper and lower bounds on the effect of additional funds on examination results of pupils first i investigate what can be concluded without imposing assumptions next i layer weak non parametric assumptions to tighten the bounds the tightest bounds show that the additional school funds significantly increase the probability that a pupil passes the examination at the end of secondary education

on the initialization of adaptive learning in macroeconomic models abstract we review and evaluate methods previously adopted in the applied literature of adaptive learning in order to initialize agents beliefs previous methods are classified into three broad classes equilibrium related training sample based and estimation based we conduct several simulations comparing the accuracy of the initial estimates provided by these methods and how they affect the accuracy of other estimated model parameters we find evidence against their joint estimation with standard moment conditions as the accuracy of estimated initials tends to deteriorate with the sample size spillover effects also deteriorate the accuracy of the estimates of the model s structural parameters we show how this problem can be attenuated by penalizing the variance of estimation errors even so the joint estimation of learning initials with other model parameters is still subject to severe distortions in small samples we find that equilibrium related and training sample based initials are less prone to these issues we also demonstrate the empirical relevance of our results by estimating a new keynesian phillips curve with learning where we find that our estimation approach provides robustness to the initialization of learning that allows us to conclude that under adaptive learning the degree of price stickiness is lower compared to inferences under rational expectations

the progress of school education in india this paper provides an overview of school education in india first it places india s educational achievements in international perspective particularly against countries with which it is now increasingly compared especially china second the paper examines schooling access in terms of enrolment and school attendance rates and schooling quality in terms of literacy rates learning achievement levels school resources and teacher inputs third the paper investigates the role of private schooling in india examining the extent of growth of private schooling and surveying evidence on the relative effectiveness and unit costs of private and public schools last the paper discusses some major public education initiatives the concluding section suggests a future research agenda and appeals for rigorous evaluation of the impacts and costs of the numerous existing educational interventions in order to learn about their relative cost effectiveness for evidence based policy making

unemployment with observable aggregate shocks a general equilibrium model of optimal employment contracts is developed where firms have better information about labor s marginal product than workers it is optimal for the wage to be tied to the level of employment to prevent the firm from falsely stating that the marginal product is low and cutting the wage it is shown that an observed aggregate shock that leads to an interindustry shift in labor demand and that would have no effect on total employment under symmetric information leads to a reduction in employment when firms and workers have asymmetric information

empirical calibration of adaptive learning abstract adaptive learning introduces persistence in the evolution of agents beliefs over time helping explain why economies present sluggish adjustments towards equilibrium the pace of this learning process is directly determined by the gain parameter we document and evaluate gain calibrations for a broad range of model specifications with macroeconomic data also developing alternative approaches to the endogenous determination of time varying gains in real time our key findings are that learning gains are higher for inflation than for output growth and interest rates and that calibrations to match survey forecasts are lower than those derived according to forecasting performance suggesting some degree of bounded rationality in the speed with which agents update their beliefs

the quality and distribution of teachers under the no child left behind act the heart of accountability under the no child left behind nclb act is an attempt to change the existing incentives in schools with the ultimate objective that all students meet a proficiency standard existing research indicates that nothing is more important to high achieve ment as having effective teachers implying that the impact of new incentives on teachers will be central to any consideration of the accountability statutes tracing the impacts of nclb on the stock and distribution of teachers is none theless a difficult and uncertain task the belief that the quality of teachers matters a great deal to the quality of education received by students has actually proven hard to substantiate and the reasons for this difficulty are key to assessing the impacts of no child left behind a substantial body of research going back to the coleman et al 1966 report has attempted to link commonly used measures of teacher quality such as experience degree level and state teacher certification to student outcomes surprisingly except for perhaps the first few years of classroom experience no robust connection has appeared for example hanushek and rivkin 2006 review various studies attempting to identify characteristics of effective teachers one

interest rate smoothing and price level trend stationarity abstract this paper discusses the definition and mechanics of central bank interest rate smoothing under rational expectations a tension arising between interest rate smoothing and macroeconomic stabilization objectives induces non trend stationary price level and money stock behavior the paper thereby helps explain why such nominal non stationarities are widely observed further implications are drawn for base drift distribution of real returns on long term fixed rate nominal debt and operating characteristics of interest rate pegs and policy instruments

involuntary employment in contracts with risky job search involuntary employment in contracts with risky job search the implications of partially insurable job search risk for incentive compatibility in a standard contracting framework are explored when unemployment spells provoke job search workers face risk in spell duration and reemployment wages when search effort is not variable contracts including unemployment insurance will yield involuntary employment when search effort is diminished by ui benefits firms shift some compensation back to wages increasing the relative attractiveness of employment the analysis begins with a theorem on incomplete insurance by imai geanakoplos and ito 1981 for which a simple proof and economic intuition are provided i introduction in seminal models of contingent labor contracts azariadis 1975 and baily 1974 sought to explain the behavior of wages and employment over the business cycle much of the subsequent literature for example grossman and hart 1983 and hart 1983 has been devoted to exploring the impact of asymmetric information on such properties of contracting equilibria as over or underemployment wage flexibility and whether or not utility falls when a worker is fired this paper looks at the effects on contingent labor contracts of the asymmetry in risk faced on the one hand by workers who being laid off when the contract is implemented experience job search risk which is partially uninsured due to asymmetric information and on the other hand by workers who retaining their jobs return to a known status quo for the rest of the period in most contingent contracting models all relevant information about the prevailing state of nature is revealed at once and wage and employment levels are then determined once the contract is implemented there is no residual uncertainty this sequence of events agreement upon a contingent contract resolution of uncertainty determination of wages and employment is a reasonable approximation to the experience of workers who retain their jobs since they know their wages and their working conditions workers who are laid off however often face considerable risk over the effectiveness of job search and the terms of future employment this creates an asymmetry in the riskiness of the ex post outcomes of the contract job retention means no more uncertainty within the period while layoff entails further within period risk associated with job search and reemployment while severance pay or unemployment benefits can reduce some of the uncertainty associated with job loss they will not generally provide complete insurance this is because the intensity of job search and the arrival of job offers are private information since the firm cannot verify for example the intensity of job search it will insist that the worker bear some of the risk associated with the search s outcome this is a standard principal agent problem see for example shavell 1979 equilibrium labor contracts will therefore offer workers a gamble between job retention with no residual risk and layoff with some uninsured job search risk 1 this asymmetry in residual risk affects the contingent contracts workers enter into for example if workers feel more comfortable facing a given risk when their incomes are higher the residual risk associated with layoff may lead them to accept lower contingent wages in the employed state in exchange for greater severance pay when laid off a problem with this kind of modification of the standard contract i e one with no residual risk is that if enough compensation is shifted into the unemployed state expected utility may actually be higher for laid off workers than for those who are retained this is a situation with voluntary layoffs and involuntary employment at prevailing wages retained workers would rather be laid off if workers can increase their chances of being fired by behaving unproductively involuntary employment contracts may be unenforceable

expectation shocks and learning as drivers of the business cycle psychological factors market sentiments and less than fully rational shifts in beliefs are widely believed to play a role in the economy yet they are rarely considered in macroeconomic models this paper evaluates the empirical role of expectational shocks on business cycle fluctuations the paper relaxes the rational expectations assumption to exploit survey data on expectations in the estimation of a new keynesian model which allows for learning by economic agents expectation shocks affect the formation of expectations and capture waves of optimism and pessimism that lead agents to form forecasts that deviate from those implied by their learning model the empirical results uncover a crucial role for these novel expectations shocks as a major driving force of the u s business cycle expectation shocks regarding future real activity are the main source of economic fluctuations accounting for roughly half of business cycle fluctuations

the excess sensitivity of layoffs and quits to demand excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements the specific nature of worker firm relations creates a situat

the great inflation and the greenbook abstract can the story of evolving federal reserve beliefs in the conquest of american inflation simultaneously explain the great inflation and the forecasts published in the greenbook during that time if sargent is correct then evolving beliefs should be reflected not only in policy outcomes but also in greenbook forecasts in this paper they are by conditioning on the greenbook it is show that both inflation outcomes and greenbook forecasts can be rationalised by evolving beliefs the results improve on recent empirical evidence that has been criticised for relying on unrealistic beliefs that produce forecasts inconsistent with the greenbook

shifts in us federal reserve goals and tactics for monetary policy a role for penitence during the fi rst period starting in the mid 1920s the federal reserve offi cial during the fi rst period starting in the mid 1920s the federal reserve offi cial policy was to support high quality bank lending but not speculative lending this policy was to support high quality bank lending but not speculative lending this goal was set aside once in 1927 in an episode that many observers then blamed for goal was set aside once in 1927 in an episode that many observers then blamed for the economic collapse that followed the fi nancial crash of 1929 the fed was then the economic collapse that followed the fi nancial crash of 1929 the fed was then reluctant to increase the funds available to banks through the early 1930s even as reluctant to increase the funds available to banks through the early 1930s even as the great depression ravaged the economy the fed s concern with the volume and the great depression ravaged the economy the fed s concern with the volume and quality of lending in the setting of monetary policy did eventually wither however quality of lending in the setting of monetary policy did eventually wither however this only seems to have happened after the publication of friedman and schwartz this only seems to have happened after the publication of friedman and schwartz 1963 a revisionist history of the great depression that blamed its depth on the 1963 a revisionist history of the great depression that blamed its depth on the fed s inappropriate focus on productive lending fed s inappropriate focus on productive lending in the second period after the experience of post world war ii infl ation the in the second period after the experience of post world war ii infl ation the federal reserve in the 1950s was highly concerned with infl ation and was willing to federal reserve in the 1950s was highly concerned with infl ation and was willing to raise interest rates and bring on recessions to nip even modest infl ation rates in the raise interest rates and bring on recessions to nip even modest infl ation rates in the bud this brought withering criticism for the federal reserve on the grounds that bud this brought withering criticism for the federal reserve on the grounds that the recessions of 1957 and 1960 had been unnecessary by the mid 1960s some fed the recessions of 1957 and 1960 had been unnecessary by the mid 1960s some fed offi cials seem to have developed an aversion to creating recessions as a method of offi cials seem to have developed an aversion to creating recessions as a method of

partial fiscal decentralization reforms and educational outcomes a difference in differences analysis for spain abstract several arguments derived from fiscal federalism theory suggest that decentralization may improve the provision of public goods and services however theory remains inconclusive regarding these effects under partial decentralization the aim of this study is to examine this hypothesis by evaluating the effects on educational outcomes of the partial fiscal decentralization reform that took place in spain during the 1980s since education competences were devolved to the regions at different points in time we can consistently estimate the effects of this reform by applying the differences in differences method and by using the non decentralized regions as the comparison group we find that the reform had a sizeable impact on the percentage of students dropping out early from school the effects are much stronger for regions with a high level of revenues we also find that the effects are concentrated in the high school program and that the reform was not able to improve educational outcomes in the vocational program we interpret these results as evidence that decentralization improved the match between education policy and population preferences

are ols estimates of the return to schooling biased downward another look the authors examine evidence on bias in ols estimates of the economic return to schooling to study omitted ability bias they use test scores available in the national longitudinal survey of youth as proxies for ability allowing for measurement error in these test scores the authors also explore biases from the endogeneity of schooling or experience or measurement error in these variables in their data ols estimation including test scores appears to be appropriate and indicates an upward bias of roughly 40 percent in the ols estimate ignoring ability this contrasts with evidence from other recent research using different statistical experiments to purge schooling of its correlation with the wage equation error copyright 1995 by mit press

the effects of school spending on educational and economic outcomes evidence from school finance reforms since the coleman report many have questioned whether public school spending affects student outcomes the school finance reforms that began in the early 1970s and accelerated in the 1980s caused dramatic changes to the structure of k 12 education spending in the united states to study the effect of these school finance reform induced changes in public school spending on long run adult outcomes we link school spending and school finance reform data to detailed nationally representative data on children born between 1955 and 1985 and followed through 2011 we use the timing of the passage of court mandated reforms and their associated type of funding formula change as exogenous shifters of school spending and we compare the adult outcomes of cohorts that were differentially exposed to school finance reforms depending on place and year of birth event study and instrumental variable models reveal that a 10 increase in per pupil spending each year for all 12 years of public school leads to 0 31 more completed years of education about 7 higher wages and a 3 2 percentage point reduction in the annual incidence of adult poverty effects are much more pronounced for children from low income families exogenous spending increases were associated with notable improvements in measured school inputs including reductions in student to teacher ratios increases in teacher salaries and longer school years jel codes j10 i20 h7

incomplete insurance and absolute risk aversion abstract suppose that a subset of states of nature are not verifiable individually given an optimal feasible insurance scheme the expected utility across a group of unverifiable states is greater less than that of a verifiable state if the degree of absolute risk aversion is decreasing increasing

the religious factor in private education abstract we quantify the religious factor in private education in the united states by calibrating a political economy model of school choice among public private nonsectarian and subsidized religious schools in which parents differ in their incomes and in their preferences for religious education this shows strong latent demand for religious schooling conditioned on current subsidized tuition levels in parochial schools which is suppressed by the need to pay twice for private education applying the results of the calibration to gauge the effect of means tested school voucher programs on religious and nonsectarian private enrollment we find that when the amount of the voucher is relatively small including subsidized religious schools in such programs is necessary for providing low income families effective access to private education

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

monetary policy inflation expectations and the price puzzle this article re examines the var evidence on the price puzzle and proposes a new theoretical interpretation using actual data and two identification strategies based on zero restrictions and model consistent sign restrictions we find that the positive response of prices to a monetary policy shock is historically limited to the sub samples that are typically associated with a weak interest rate response to inflation using pseudo data generated by a sticky price model of the us economy we then show that the structural vars are capable of reproducing the price puzzle only when monetary policy is passive the omission in the vars of a variable capturing expected inflation is found to account for the price puzzle observed in simulated and actual data structural vector autoregressions svars are widely used for measuring and understanding the effects of monetary policy innovations on the aggregate economy while most results in the var literature are consistent with economic intuition and macroeconomic theory the typically found positive and significant reaction of the price level on impact to a monetary policy shock is a fact that most monetary models

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

human capital pricing equations with an application to estimating the effect of schooling quality on earnings this paper formulates and estimates alternative models for the pricing of labor services we present economic models that rationalize empirical specifications in the literature and we offer evidence on the validity of those specifications widely used efficiency units models of labor services are inconsistent with evidence from the u s labor market a model of heterogeneous skills provides a more accurate description of earnings data we present evidence that the pursuit of comparative advantage and selective migration are important features of the u s labor market when these features are included in the model the only support for an effect of schooling quality on earnings is through the return to college education three interactions are empirically important in explaining log wage equations a between schooling quality and education b between regional labor market shocks and education and c between region of residence and regionof birth because of this third interaction which can arise from comparative advantage in the labor market no unique quality effect on returns to education can be defined independently of the market in which it is used

indeterminacy and learning an analysis of monetary policy in the great inflation abstract the great inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices the federal reserve inadvertently pursued policies that were not anti inflationary enough because it did not fully understand the economic environment it was operating in specifically it had imperfect knowledge about the structure of the economy and was subject to data misperceptions the combination of learning about the economy and the use of mis measured data resulted in policies which the federal reserve believed to be optimal but when implemented led to equilibrium indeterminacy

nonrevelation in employment contracts the author considers an employment contracting model in which firms have private information that is directly payoff relevant to workers and workers are always free to quit in contrast to existing models firms will sometimes fail to reveal adverse information to workers in equilibrium because of the effect this will have on quits risk averse workers can prefer such pooling contracts to separating ones because inducing truth telling requires firms to cut wages in states that are already bad for the worker applications to firms incentives to reveal unsafe working conditions and impending layoffs or plant closures are discussed copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the economics of schooling production and efficiency in public schools n recent years public and professional interest in schools has been heightened by a spate of reports many of them critical of current school policy these policy documents have added to persistent and long standing concerns about the cost effectiveness and fairness of the current school structure and have made schooling once again a serious public issue as in the past however any renewed interest in education is likely to be short lived doomed to dissipate as frustration over the inability of policy to improve school practice sets in this frustration about school policy relates directly to knowledge about the educational production process and in turn to underlying research on schools although the educational process has been extensively researched clear policy prescriptions flowing from this research have been difficult to derive 2 there exists however a consistency to the research findings that does have an immediate application to school policy schools differ dramatically in quality

escaping nash inflation an ordinary differential equation ode gives the mean dynamics that govern the convergence to self confirming equilibria of self referential systems under discounted least squares learning another ode governs escape dynamics that recurrently propel away from a self confirming equilibrium in a model with a unique self confirming equilibrium the escape dynamics make the government discover too strong a version of the natural rate hypothesis the escape route dynamics cause recurrent outcomes close to the ramsey commitment inflation rate in a model with an adaptive government

understanding the twentieth century growth in u s school spending persistent increases in spending on elementary and secondary schools have gone virtually undocumented real expenditure per student increased 3 percent per year over the period 1890 1990 decomposition of the spending growth shows that it resulted from a combination of falling pupil staff ratios increasing real wages to teachers and rising expenditure outside of the classroom although the expansion of education for the handicapped has had a disproportionate effect on spending most of the growth in expenditure during the 1980s came from other sources significant teacher salary increases particularly for females have failed to keep up with wages in other occupations

quasi experimental estimates of the effect of class size on achievement in norway using a comprehensive norwegian administrative database we exploit independent quasi experimental methods to estimate the effect of class size on student achievement at the end of lower secondary school identification based on maximum class size rules and population variation and variations on these methods give very similar estimates we cannot reject that the class size effect is equal to zero and can rule out effects as small as 1 5 percent of a standard deviation for a one student change in class size during three consecutive years

is the test score decline responsible for the productivity growth decline the test score decline between 1967 and 1980 was large about 1 25 grade level equivalents and historically unprecedented new estimates of the trends in academic achievement of the effect of academic achievement on productivity and of trends in the quality of the work force are developed the test score decline did not cause the post 1965 productivity growth slowdown but it did contribute to its perpetuation if test scores had continued to grow after 1967 at the rate prevailing in the previous quarter century labor force quality would have been 2 9 percent 86 billion greater in 1987 5 5 percent greater in 2000 and 6 7 percent greater in 2010 copyright 1989 by american economic association

government bias in education schooling attainment and long run growth a surprising cross country stylized fact is that higher public spending on education tends to lower the long run growth rate of per capita gdp and the returns to schooling this is contrary to the conventional wisdom that education is a major driver of growth in this article we revisit this issue and try to understand these puzzling facts in terms of an endogenous growth model our cross country calibration of the growth model predicts that countries with a greater government involvement in education experience lower schooling efforts and lower growth

the failure of input based schooling policies in an effort to improve the quality of schools governments around the world have dramatically increased the resources devoted to them by concentrating on inputs and ignoring the incentives within schools the resources have yielded little in the way of general improvement in student achievement this paper provides a review of the us and international evidence on the effectiveness of such input policies it then contrasts the impact of resources with that of variations in teacher quality that are not systematically related to school resources finally alternative performance incentive policies are described

private school vouchers and student achievement an evaluation of the milwaukee parental choice program in 1990 wisconsin began providing vouchers to a small number of low income students to attend nonsectarian private schools controlling for individual fixed effects i compare the test scores of students selected to attend a participating private school with those of unsuccessful applicants and other students from the milwaukee public schools i find that students in the milwaukee parental choice program had faster math score gains than but similar reading score gains to the comparison groups the results appear robust to data imputations and sample attrition although these deficiencies of the data should be kept in mind when interpreting the results

earnings schooling ability and cognitive skills conventional estimates now available for a large number of countries generally indicate that the social returns to education are positive large and competitive with returns to investment in physical capital that such estimates are good guides for public resource allocation has however been questioned the heart of the problem lies in the interpretation of the positive relationship between the education and the earnings of workers whether as the conventional estimates assume the coefficient of the education variable in the earnings function measures the effect on the productivity of workers of human capital acquired in school it has been hypothesized that education in part or instead represents screening for native ability and motivation or credentialism and that as a consequence conventional measures of the social benefit of education are substantially upward biased 2 in this paper we attempt to distinguish the influence on earnings of cognitive achievement native ability and years of education as a means of adjudicating the human capital screening and credentialist hypotheses our econometric analysis is based on two rigorously comparable micro data sets from kenya and tanzania generated by surveys of the urban wage labor force specifically for this study these data sets contain the usual variables found in earnings function estimates of the benefits of schooling individual earnings years of education and years of employment experience in addition they contain two variables measures of the worker s cognitive skills and of his or her reasoning ability not previously found in studies of developing countries and only rarely found in studies of the education earnings relationship in developed countries 3 with these variables we can estimate the direct effects on earnings of cognitive skills ability and years of schooling by using them to estimate educational production functions and educational attainment functions and linking these functions with the earnings function in a recursive framework we can also assess the various indirect effects on earnings of ability and years of schooling having data sets from two countries very similar with respect to size resource endowments structure of production and employment and level of development means that not only can we subject our results to the usual statistical tests but we can also assess their replicability both kenya and tanzania have nearly achieved the objective of universal primary education while university enrollments remain at less than 1 percent of the relevant age group the important policy issues re boissiere development research department the world bank 1818 h street washington d c 20433 knight institute of economics and statistics oxford university sabot williams college williamstown ma 01267 we are grateful to the educational testing service of princeton for the design of tests used in this study and to j armitage j behrman j hausman d hendry d jamison and an anonymous referee for their insights and advice helpful comments were also received from participants in seminars at oxford and yale universities the views presented here are our own they should not be interpreted as reflecting those of the world bank george psacharopoulos 1973 1981 contains a listing of 44 countries in which rate of return studies had been conducted and of the estimates obtained 2for instance kenneth arrow 1973 mark blaug 1976 samuel bowles and herbert gintis 1976 john riley 1979 michael spence 1976 and lester thurow 1975 3for attempts to control for ability and or for cognitive achievement in studies for the united states see jere behrman et al 1980 gary chamberlain and zvi griliches 1977 griliches and william mason 1972 michael olneck 1977 paul taubman and terence wales 1974 taubman 1975 and david wise 1975 see also the survey articles by griliches 1977 1979 in most instances the data refer to special subgroups in the population and clear distinction cannot be made between natural ability and cognitive skills acquired in school

experimental estimates of education production functions this paper analyzes data on 11 600 students and their teachers who were randomly assigned to different size classes from kindergarten through third grade statistical methods are used to adjust for nonrandom attrition and transitions between classes the main conclusions are 1 on average performance on standardized tests increases by four percentile points the first year students attend small classes 2 the test score advantage of students in small classes expands by about one percentile point per year in subsequent years 3 teacher aides and measured teacher characteristics have little effect 4 class size has a larger effect for minority students and those on free lunch 5 hawthorne effects were unlikely

employment with asymmetric information in an economy without informational and other distortions entrepreneurs and workers can write labor contracts that support a pareto optimal allocation of resources this paper is an attempt to characterize contracts when enterpreneurs are better informed about the state of nature than are their workers asymmetric information generally results in a suboptimal allocation of both risk and worker effort in particular if consumption and leisure are perfect substitutes employment will be less than fully pareto optimal in all but the most favorable states of nature

school inputs and educational outcomes in south africa we examine the relationship between educational inputs primarily pupilteacher ratios and school outcomes in south africa immediately before the end of apartheid government black households were severely limited in their residential choice under apartheid and attended schools for which funding decisions were made centrally by white controlled entities over which they had no control the allocations resulted in marked disparities in average class sizes controlling for household background variables we find strong and significant effects of pupilteacher ratios on enrollment on educational achievement and on test scores for numeracy

property value capitalization and municipal open space referenda this paper first develops a theory of demand for land conservation in the presence of price effects due to both amenity creation and housing supply restriction three hypotheses designed to distinguish demand for amenities from homeowner rent seeking are based upon 1 renters 2 the quality of another locally provided good schools and 3 spatial autocorrelation of funding across municipalities econometric results suggest an observable degree of demand for open space measures is nonenvironmental in motivation efficiency and policy implications are discussed along with a recommendation for benefit cost analysis capable of separating nonrival amenities from other interests to certify open space measures jel h41 q24

does school quality matter returns to education and the characteristics of public schools in the united states this paper estimates the effects of school quality measured by the pupil teacher ratio average term length and relative teacher pay on the rate of return to education for men born between 1920 and 1949 using earnings data from the 1980 census we find that men who were educated in states with higher quality schools have a higher return to additional years of schooling rates of return are also higher for individuals from states with better educated teachers and with a higher fraction of female teachers holding constant school quality measures however we find no evidence that parental income or education affects average state level rates of return

why has europe become environmentally cleaner decomposing the roles of fiscal trade and environmental policies this paper examines the role of fiscal policy trade and energy taxes on environmental quality in europe using disaggregated data at the monitoring station level for the 12 richest european countries spanning the period from 1995 to 2008 our estimations show that fiscal policies and energy taxes are important determinants of pollution through various mechanisms we find that increasing the share of fiscal spending in gdp and shifting the emphasis towards spending in public goods and against non social subsidies significantly lower the concentrations of sulfur dioxide and ozone but not nitrogen dioxide at the same time energy taxes reduce nitrogen dioxide concentrations but have no effect on ozone and sulfur dioxide finally trade openness has a direct effect on sulfur dioxide but no effect on nitrogen dioxide or ozone our estimates account for time varying unobserved heterogeneity

social interactions in high school lessons from an earthquake after an earthquake hit southern italy in 1980 young men from certain towns were exempted from compulsory military service we show that the exemption raised high school graduation rates of boys by more than 2 percentage points we do this by comparing high school graduation rates of young exempt men and older nonexempt men from the least damaged areas and men of the same age groups from nearby towns that were not hit by the quake similar comparisons show that graduation rates of young women in the affected areas also increased since in italy women are not subject to the draft the findings suggest the presence of spillover effects jel i21 j13

does the time consistency problem explain the behavior of inflation in the united states abstract this paper derives the restrictions imposed by barro and gordon s theory of time consistent monetary policy on a bivariate time series model for inflation and unemployment and tests those restrictions using quarterly us data from 1960 through 1997 the results show that the data are consistent with the implications of the theory for the long run behavior of the two variables indicating that the theory can explain the initial rise and subsequent fall of inflation over the past four decades the results also suggest that the theory must be extended to account more fully for the short run dynamics that appear in the data

learning adaptive expectations and technology shocks this study explores the macroeconomic implications of adaptive expectations in a standard growth model we show that the self confirming equilibrium under adaptive expectations is the same as the steady state rational expectations equilibrium for all admissible parameter values but that dynamics around the steady state are substantially different between the two equilibria the differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect not by escapes emphasised by williams 2003 consequently adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labour market dynamics

labor contracts with voluntary quits this paper considers labor contracts between the risk neutral firm and risk averse workers with heterogeneous outside opportunities alternative wages which become known to the worker after a costly on the job search in the case of a deterministic alternative wage self selection over a menu of contract wages would achieve the first best contract if the alternative wages are stochastic the second best contract emerges as a trade off between productive efficiency and risk sharing workers who voluntarily search are fewer and workers who search are less likely to quit if the search effort is not monitored even fewer workers search

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

the impacts of teacher working conditions and human capital on student achievement evidence from brazilian longitudinal data abstractwe use a new longitudinal matched student teacher data from brazil to examine the impacts of teacher human capital and working conditions on student learning controlling for student teache

pension portability and labor market efficiency a survey of the literature this paper reviews the theoretical and empirical literature evaluating the labor market effects of policies to enhance pension portability one perspective is that reducing the cost of job change w

monetary regime switches and central bank preferences monetary policy objectives and targets are not necessarily constant over time the regime switching literature has typically analyzed and interpreted changes in policymakers behavior through simple interest rate rules this paper analyzes policy regime switches by explicitly modeling policymakers behavior and objectives we show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers preferences in fact capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results

using survey data of inflation expectations in the estimation of learning and rational expectations models do survey data on inflation expectations contain useful information for estimating macroeconomic models i address this question by using survey data in the new keynesian model by smets and wouters 2007 to estimate and compare its performance when solved under the assumptions of rational expectations and learning this information serves as an additional moment restriction and helps to determine the forecasting model for inflation that agents use under learning my results reveal that the predictive power of this model is improved when using both survey data and an admissible learning rule for the formation of inflation expectations

poverty and worklessness in britain relative poverty in the uk has risen massively since 1979 mainly because of increasing worklessness rising earnings dispersion and benefits indexed to prices not wages the economic force underlying this is the significant shift in demand against the unskilled this has substantially weakened the low skill labour market which has increased both pay dispersion and worklessness particularly among low skilled men practical policies discussed include improving education and overall well being for children in the lower part of the ability range raising wage floors new deal policies tax credits and benefits for the workless

decentralization and the productive efficiency of government evidence from swiss cantons advocates of fiscal decentralization argue that among other benefits it can increase the efficiency of delivery of government services this paper is one of the first to evaluate this claim empirically by looking at the association between expenditure decentralization and the productive efficiency of government using a data set of swiss cantons we first provide careful evidence that expenditure decentralization is a powerful proxy for legal local autonomy further panel regressions of swiss cantons provide robust evidence that more decentralization is associated with higher educational attainment we also show that these gains lead to no adverse effects across education types but that male students benefited more from educational decentralization closing for the swiss case the gender education gap

the dynamics of teacher quality abstract an extensive literature finds that while teachers vary considerably in initial quality there are limited teacher quality dynamics except for the first few years of teaching teacher quality does not improve over the course of a teacher s career this study evaluates the importance of various modeling restrictions to the key findings of this literature using data covering all 5th grade public school teachers from the state of north carolina i replicate the findings of the previous literature using their restrictive experience assumptions however using an unrestricted experience model i find that for mathematics achievement there are high returns to later career teaching experience about twice as much dispersion in initial teacher quality as previously estimated and a pattern of negative selection where high quality teachers are more likely to exit

trend inflation indexation and inflation persistence in the new keynesian phillips curve purely forward looking versions of the new keynesian phillips curve nkpc generate too little inflation persistence some authors add ad hoc backward looking terms to address this shortcoming we hypothesize that inflation per sistence results mainly from variation in the long run trend component of inflation which we attribute to shifts in monetary policy we derive a version of the nkpc that incorporates a time varying inflation trend and examine whether it explains the dynamics of inflation when drift in trend inflation is taken into account a purely forward looking version of the model fits the data well and there is no need for backward looking components jel e12 e31 e52 in this paper we consider the extent to which guillermo calvo s 1983 model of nominal price rigidities can explain inflation dynamics without relying on arbitrary backward looking terms in its baseline formulation the calvo model leads to a purely forward looking new keynesian

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

the effect of child health insurance access on schooling evidence from public insurance expansions although a sizable literature analyzes the effects of public health insurance programs on short run health outcomes little prior work has examined their long term effects we examine the effects of public insurance expansions among children in the 1980s and 1990s on their future educational attainment we find that expanding health insurance coverage for low income children increases the rate of high school and college completion these estimates are robust to only using federal medicaid expansions and mostly are due to expansions that occur when the children are not newborns our results indicate that the long run benefits of public health insurance are substantial

changes in college skills and the rise in the college wage premium the college wage premium for new labor market entrants rose sharply during the 1980s we ask how much of this change arose from changes in the skill level of the typical college graduate we find that skills attained prior to college as measured by standardized test scores and high school grades had no effect on the change in the college wage premium for men in contrast the returns to math ability rose considerably for women failing to account for math skills thus substantially overstates the growth in the female college wage premium skills acquired in college as reflected in the distribution of students across majors had important effects on the relative wages of men the trend away from low skill subjects such as education and toward high skill subjects such as engineering accounts for one fourth of the rise in the male college wage premium

a note on overemployment underemployment in labor contracts under asymmetric information abstract models of labor contracts under asymmetric information may predict either overemployment or underemployment this paper shows that this result depends crucially on whether or not leisure is a normal good if firms are risk neutral

the role of human capital in earnings differences between black and white men d uring the past 50 years the earnings of black men have increased substantially both in absolute terms and relative to those of white men as shown in figure 1 in 1940 the black white weekly earnings ratio among men ages 25 34 was 49 percent by 1980 it had increased to 79 percent during the 1980s however the overall black white earnings gap did not narrow and at younger ages the gap actually widened although the 1980s is not the first decade since 1940 in which black men made little or no gains in relative earnings the 1950s was another the lack of progress in the 1980s is nevertheless puzzling and a source of concern this article examines the factors underlying the differential in earnings between black men and white men with a focus on the role of human capital since 1940 successive generations of black men entering the labor force have been increasingly more educated relative to white men both in terms of years of school completed and in the quality of schooling obtained as the education and income levels of black parents increased racial differences in the transmission of human capital in the home were also likely to have narrowed this convergence in educational differences combined with the migration of blacks out of the south contributed to the narrowing in the racial gap in earnings over the 1940 80 period particularly in the first half of the period but human capital factors education and migration were not the only source of convergence in black white differences in earnings the patterns of change in the earnings gap support the contention that declining labor market discrimination against blacks has also contributed to the rise in the black white earnings ratio moreover the acquisition of human capital itself has been strongly affected by societal and governmental discrimination since blacks were long provided with greatly inferior schooling resources

the decline of schooling productivity in oecd countries based on baumol s cost disease model we develop two alternative measures of the change in the productivity of schooling both productivity measures are based on changes in the relative price of schooling we find that in most oecd countries the price of schooling has increased faster in 1970 94 than would be compatible with constant schooling productivity in addition we show that the average performance of pupils has remained constant at best in most oecd countries our results imply a larger decline in the productivity of schooling in many oecd countries than in the united states

why inflation rose and fell policy makers beliefs and u s postwar stabilization policy this paper provides an explanation for the run up of u s inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s which standard macroeconomic models have difficulties in addressing i present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally conditional on their current beliefs the steady state associated with the self confirming equilibrium of the model is characterized by low inflation however prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the phillips curve i estimate the model using likelihood methods the estimation results show that the model accounts remarkably well for the evolution of policymakers beliefs stabilization policy and the postwar behavior of inflation and unemployment in the united states

does additional spending help urban schools an evaluation using boundary discontinuities this study exploits spatial anomalies in school funding policy in england to provide new evidence on the impact of resources on student achievement in urban areas anomalies arise because the funding allocated to local education authorities lea depends through a funding formula on the additional educational needs of its population and prices in the district however the money each school receives from its lea is not necessarily related to the school s own specific local conditions and constraints this implies that neighbouring schools with similar intakes operating in the same labour market facing similar prices but in different leas can receive very different incomes we find that these funding disparities give rise to sizeable differences in pupil attainment in national tests at the end of primary school showing that school resources have an important role to play in improving educational attainment especially for lower socio economic groups the design is geographical boundary discontinuity design which compares neighbouring schools matched on a proxy for additional educational needs of its students free school meal entitlement fsm in adjacent districts the key identification requirement is one of conditional ignorability of the level of lea grant where conditioning is on geographical location of schools and their proportion of fsm children

equilibrium long term labor contracts the paper presents a labor market equilibrium analysis of implicit contract theory a two period single good model is used to propose consistent notions of labor market equilibrium for long term employment contracts both when labor is specialized and cannot move in the second period and when there is free mobility without costs the result that long term contracts emerge in equilibrium even without mobility costs is novel and contrary to common beliefs the main features of equilibrium are that risk neutral firms will insure risk averse workers against downside risk yielding downward rigid wages wages are not fully rigid as in earlier work on contract theory because workers may quit and wages have to be bid up to retain them the firm gets its return of the insurance deal by paying less than marginal product in the first period the resulting equilibrium is second best and lies between productive efficiency and full insurance workers gain from long term contracts in comparison to spot markets whereas owners may not in the model with specialized skills there exist transfer payments such that both parties are better off within an equilibrium with long term contracts

young workers and quit behaviour a model is set up to explain the quit behaviour of new entrants to the labour market it uses an incentive opportunity approach to integrate existing relevant arguments from search and information theory and human capital analysis it also provides for impetuous quits the model is tested by an examination of a disaggregated data set concerning a single cohort of 16 year old school leavers in the first year after gaining full time work the theory received strong support for example in the main model seven out of the ten coefficients were highly significant interestingly even in a time of deepening recession the existence of the job shopper seemed to be apparent

the effects of class size on student achievement new evidence from population variation abstract i identify the effects of class size on student achievement using longitudinal variation in the population associated with each grade in 649 elementary schools i use variation in class size driven by idiosyncratic variation in the population i also use discrete jumps in class size that occur when a small change in enrollment triggers a maximum or minimum class size rule the estimates indicate that class size does not have a statistically significant effect on student achievement i rule out even modest effects 2 to 4 percent of a standard deviation in scores for a 10 percent reduction in class size

school quality and black white relative earnings a direct assessment the wage differential between black and white men fell from 40 percent in 1960 to 25 percent in 1980 it has been argued that this convergence reflects improvements in the relative quality of black schools to test this hypothesis we assembled data on pupil teacher ratios annual teacher pay and term length for black and white schools in the eighteen segregated states from 1915 to 1966 these data are linked to estimated returns to education for southern born men from different cohorts and states in 1960 1970 and 1980 improvements in the relative quality of black schools explain 20 percent of the narrowing of the black white earnings gap between 1960 and 1980

the trade off between child quantity and quality an empirical investigation of trade offs between number of children and their scholastic performance confirms that family size directly affects children s achievement though parents show no favori

omitted ability bias and the increase in the return to schooling over the 1980s there were sharp increases in the return to schooling estimated with conventional wage regressions we explore whether the relationship between ability and schooling changed over this period in ways that would have increased the schooling coefficient in these regressions our empirical results reject the hypothesis that an increase in the bias of the schooling coefficient due to a change in the relationship between ability and schooling has contributed to observed increases in the return to schooling we also find that the increase in the schooling return has occurred for workers with relatively high levels of academic ability

optimal severance pay with incomplete information this paper contrasts optimal employment contracts in a world of full information and in a world in which the worker s alternative employment possibilities cannot be observed by the firm the difference between income and severance pay that is the opportunity cost of separating will be higher in more productive states of nature with complete wage insurance no longer possible we therefore have an explanation of higher ability individuals receiving high wages in the short run in long term contracts the explanation does not rely as past explanations have done on the imperfections in bonding arrangements or in loan markets

the effect of increased funding on student achievement evidence from texas s small district adjustment abstract we leverage an obscure set of rules in texas s school funding formula granting some districts additional revenue as a function of size and sparsity we use variation from kinks and discontinuities in this formula to ask how districts spend additional discretionary funds and whether these improve student outcomes a 1000 annual increase in foundation funding or 10 increase in expenditures yields a 0 1 s d increase in reading scores and a near 0 08 increase in math in addition dropout rates decline graduation rates marginally increase as does college enrollment and to a smaller degree graduation these gains accrue in later grades and largely among poorer districts an analysis of budget allocations reveals that additional funding only marginally affects budget shares

shocks and government beliefs the rise and fall of american inflation working paper 2004 22 september 2004 abstract the authors use a bayesian markov chain monte carlo algorithm to estimate a model that allows temporary gaps between a true expectational phillips curve and the monetary authority s approximating nonexpectational phillips curve a dynamic programming problem implies that the monetary authority s inflation target evolves as its estimated phillips curve moves the authors estimates attribute the rise and fall of post world war ii inflation in the united states to an intricate interaction between the monetary authority s beliefs and economic shocks shocks in the 1970s altered the monetary authority s estimates and made it misperceive the tradeoff between inflation and unemployment that misperception caused sharp rise in inflation in the 1970s the authors estimates indicate that policy makers updated their beliefs continuously by the 1980s policy makers beliefs about the phillips curve had changed enough to account for fed chairman paul volcker s conquest of u s inflation in the early 1980s jel classification e3 e5 key words updating beliefs policy evaluation self confirming equilibrium nash inflation ramsey outcomes i introduction today many statesmen and macroeconomists believe that inflation can largely be determined by a government monetary authority then why did the federal reserve board preside over high us inflation during the late 1960s and the 1970s and why under paul volcker did it rapidly bring inflation down during the early 1980s this paper answers these questions by estimating a model that features a particular process that makes a procession of economic shocks induce the monetary authority to alter its model of inflation unemployment dynamics the phillips curve at each date t the monetary authority updates its beliefs about the phillips curve and then recomputes a first period action recommended by a phelps problem a discounted dynamic programming problem that minimizes the expected value of a discounted quadratic loss function of inflation and unemployment 1 the monetary authority pursues the same objectives at each date using the same structural model with only its estimates of that model changing over time 2 this model of the systematic part of inflation puts the monetary authority s beliefs about the phillips curve front and center 3 we assume that the monetary authority s model of the phillips curve deviates in two subtle but important ways from what it would be in a rational expectations model e g kydland and prescott 1977 the first deviation is that while the true phillips curve is like kydland and prescott s we assume that the monetary authority omits the public s expected rate of inflation from its phillips curve by itself this omission need not prevent the outcomes of our model from coinciding with those of kydland and prescott s nor need it imply that the government s model is wrong in a way that could be detected from even an infinite sample whether the monetary authority s model is wrong in a statistically detectable way depends on how we allow the monetary authority to reestimate the parameters of its model in particular if the monetary authority were to believe that the coefficients of its phillips curve are constant over time then its estimates would converge to ones that support a self confirming equilibrium sce after convergence its estimated phillips curve would correctly describe occurrences along the sce path for inflation and unemployment such an after convergence version of our model has little hope of explaining the rise and fall of us inflation that model would have inflation fluctuating randomly around a constant sce level that coincides with kydland and prescott s time consistent suboptimal i e excessive level 4 this outcome motivates our second subtle deviation from a rational expectations equilibrium

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