occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

time inconsistent preferences and social security revisited in continuous time abstract imrohoroglu et al 2003 prove that it is impossible in a three period partial equilibrium model for social security to improve the welfare of a naive quasi hyperbolic agent if the program has a negative net present value this paper first generalizes their impossibility theorem to a continuous time setting and then proves analytically that no discount function exists that can rationalize a social security program with a negative net present value

the optimal level of social security benefits the optimal level of social security benefits depends on balancing the protection that these benefits offer to those who lack the foresight to provide for their own old age against the welfare costs of distorting economic behavior the primary such cost is the distortion in private saving the present paper derives the level of social security benefits that is optimal in three basic cases in the first section the paper derives the optimal level of benefits for an economy in which all individuals do not anticipate retirement at all and therefore do no saving the second and third sections then derive optimal benefits for two different definitions of incomplete myopia

an experiment on time preference and misprediction in unpleasant tasks we experimentally investigate the time inconsistent taste for immediate gratification and future preference misprediction across 7 weeks 100 participants choose the number of unpleasant transcription tasks given various wages to complete immediately and at different future dates participants preferred 10 12 fewer tasks in the present compared to any future date leading to an estimated of 0 83 comparing predictions with actual immediate work choices provides evidence against substantial sophistication with estimates implying that participants understand no more than 24 of their present bias finally we find evidence of projection bias participants wished to complete 4 12 fewer tasks when decisions were elicited right after completing tasks rather than before

the economic impact of genetically modified cotton on south african smallholders yield profit and health effects abstract results of a large scale survey of resource poor smallholder cotton farmers in south africa over three years conclusively show that adopters of bt cotton have benefited in terms of higher yields lower pesticide use less labour for pesticide application and substantially higher gross margins per hectare these benefits were clearly related to the technology and not to preferential adoption by farmers who were already highly efficient the smallest producers are shown to have benefited from adoption of the bt variety as much as if not more than larger producers moreover evidence from hospital records suggests a link between declining pesticide poisonings and adoption of the bt variety

borrowing constraints human capital accumulation and growth abstract borrowing constraints increase aggregate savings and therefore may increase growth this paper argues however that by reducing human capital accumulation borrowing constraints also have negative effects on growth these effects are discussed in an overlapping generations model with endogenous growth empirical evidence for oecd and developing countries lend support to the main predictions of the model

public versus private investment in human capital endogenous growth and income inequality in this paper we present an overlapping generations model with heterogeneous agents in which human capital investment through formal schooling is the engine of growth we use simple functional forms for preferences technologies and income distribution to highlight the distinction between economies with public education and those with private education we find that income inequality declines more quickly under public education on the other hand private education yields greater per capita incomes unless the initial income inequality is sufficiently high we also find that societies will choose public education if a majority of agents have incomes below average

working over time dynamic inconsistency in real effort tasks experimental tests of dynamically inconsistent time preferences have largely relied on choices over time dated monetary rewards several recent studies have failed to nd the standard patterns of present bias however such monetary studies contain oftendiscussed confounds in this paper we sidestep these confounds and investigate choices over consumption real eort in a longitudinal experiment we pair this eort study with a companion monetary discounting study we conrm very limited time inconsistency in monetary choices however subjects show considerably more present bias in eort furthermore present bias in the allocation of work has predictive power for demand of a meaningfully binding commitment device therefore our ndings validate a key implication of models of dynamic inconsistency with corresponding policy implications

myopia redistribution and pensions this paper reviews a number of recent contributions that study pension design with myopic individuals its objective is to explore how the presence of more or less myopic individuals affects pension design when individuals differ also in productivity this double heterogeneity gives rise to an interesting interplay between paternalistic and redistributive considerations which is at the heart of most of the results that are presented the main part of the paper is devoted to the issue of pension design when myopic individual do not save enough for their retirement because their myopic self with a high discount rate emerges when labor supply and savings decisions are made some extensions and variations are considered in the second part in particular we deal with situations where labor disutility or preferences for consumption are subject to habit formation and where sin goods have a detrimental effect on second period health myopic individuals tend to underestimate the effects of both habit formation and sinful consumption which complicates public policy

the hyperbolic consumption model calibration simulation and empirical evaluation ur preferences for the long run tend to conflict with our short run behavior when planning for the long run we intend to meet our deadlines exercise regularly and eat healthfully but in the short run we have little interest in revising manuscripts jogging on the stairmaster and skipping the chocolate souffleala mode delay of gratification is a nice long term goal but instant gratification is disconcertingly tempting this gap between long run intentions and short run actions is apparent across a wide range of behaviors including saving choices a 1997 survey found that 76 percent of respondents believe they should be saving more for retirement looking only at respondents who believed they were at an age where you should be seriously saving already the survey found that 55 percent reported being behind in their savings and only 6 percent reported being ahead farkas and johnson 1997 the report on the survey concluded t he gaps between people s atti tudes intentions and behavior are troubling and threaten increased insecurity and dissatisfaction for people when they retire americans are simply not doing what logic and their own reasoning suggests they should be doing a 1993 luntz webber merrill lynch survey found similar answers when baby boomers were asked what percentage of your annual household income do you think you should save for retirement and what percentage of your annual

time inconsistent preferences and social security in this paper we examine the role of social security in an economy populated by overlapping generations of individuals with time inconsistent preferences who face mortality risk individual income risk and borrowing constraints we find that unfunded social security lowers the capital stock output and consumption for consumers with time consistent or time inconsistent preferences however it may raise or lower welfare depending on the strength of time inconsistency

raising primary school enrolment in developing countries the relative importance of supply and demand abstract few policies are as universally accepted as raising primary school enrolment in developing countries but the policy levers for achieving this goal are not straightforward this paper merges household survey data with detailed school supply characteristics from official sources in order to estimate the relative impact of demand and supply side determinants of rural primary school enrolment in mozambique policy simulations based on a set of plausible interventions show that in rural mozambique building more schools or raising adult literacy will have a larger impact on primary school enrolment rates than interventions that raise household income when relative costs are considered adult literacy campaigns are nearly 10 times more cost effective than the income intervention and 1 5 to 2 5 times better than building more schools

job search and impatience workers who are more impatient search less intensively and set lower reservation wages the effect of impatience on exit rates from unemployment is therefore unclear if agents have exponential time preferences the reservation wage effect dominates for sufficiently patient individuals so increases in impatience lead to higher exit rates the opposite is true for agents with hyperbolic time preferences using two large longitudinal data sets we find that impatience measures are negatively correlated with search effort and the unemployment exit rate and are orthogonal to reservation wages impatience substantially affects outcomes in the direction predicted by the hyperbolic model

demand deposit contracts and bank runs with present biased preferences abstract this paper extends the diamond dybvig model of bank runs by incorporating hyperbolic discounting the main question is how consumers myopic decisions affect the possibility of a bank run and the bank s optimal contract under hyperbolic discounting consumers deposit preferences differ from their withdrawal preferences therefore the bank needs to consider two separate preferences when designing the optimal banking contract making it more difficult to design a run safe banking contract this difference in preferences could increase the possibility of a bank run in equilibrium although the bank can design a run proof contract the ex ante welfare through banking services will be lower under hyperbolic discounting due to its tighter incentive compatibility constraint

to each according to markets tournaments and the matching problem with borrowing constraints we compare the performance of markets and tournaments as allocative mechanisms in an economy with borrowing constraints the economy consists of a continuum of individuals who differ in their initial wealth and ability level these must be assigned to a continuum of investment opportunities or inputs of different productivity with perfect capital markets matching is efficient under both mechanisms markets however generate higher aggregate consumption because of the waste associated with the production of signals under tournaments when borrowing constraints are present tournaments dominate markets in terms of matching efficiency and for sufficiently powerful signalling technologies also in terms of aggregate consumption

rational addiction and the effect of price on consumption legalization of such substances as marijuana heroin and cocaine surely will reduce the prices of these harmful addictive drugs by the law of the downward sloping demand function their consumption will rise but by how much according to conventional wisdom the consumption of these illegal addictive substances is not responsive to price however conventional wisdom is contradicted by becker and murphy s 1988 theoretical model of rational addiction the becker murphy b m analysis implies that addictive substances are likely to be quite responsive to price in this paper we summarize b m s model of rational addiction and the empirical evidence in support of it we use the theory and evidence to draw highly tentative inferences concerning the effects of legalization of currently banned substances on consumption in the aggregate and for selected groups in the population addictive behavior is usually assumed to involve both reinforcement and tolerance reinforcement means that greater past consumption of addictive goods such as drugs or cigarettes increases the desire for present consumption but tolerance cautions that the utility from a given amount of consumption is lower when past consumption is greater these aspects of addictive behavior imply

social insurance with competitive insurance markets and risk misperception this paper considers an economy where individuals differ in productivity and in risk rochet 1991 has shown that when private insurance markets offer full coverage at fair rates social insurance is desirable if and only if risk and productivity are negatively correlated this condition is usually shown to be satisfied for many health risks but it appears to be violated for the old age dependency risk mainly because longevity in turn is positively correlated with productivity we examine the role of uniform and nonuniform social insurance to supplement a general income tax when neither public nor private insurers can observe individual risk and when it is positively correlated with wages consequently a rothschild and stiglitz 1971 equilibrium emerges in the private insurance market and low wage low risk individuals are not fully insured we show that even when social insurance provided to the poor has a negative incentive effect it also increases their otherwise insuficient insurance coverage social insurance to the rich produces exactly the opposite effects whichever of these effects dominates some social insurance is always desirable finally we introduce risk misperception which exacerbates the failure of private markets the insurance term now reflects the combined failure brought about by adverse selection and misperception now the low risk individuals are not only underinsured but also pay a higher than fair rate however and rather surprisingly it turns out that this does not necessarily strengthen the case for public insurance

studying optimal paternalism illustrated by a model of sin taxes the classical economic approach to policy analysis assumes that people always respond optimally to the costs and benefits of their available choices a great deal of evidence suggests however that in some contexts people make errors that lead them not to behave in their own best interests economic policy prescriptions might change once we recognize that humans are humanly rational rather than superhumanly rational and in particular it may be fruitful for economists to study the possible advantages of paternalistic policies that help people make better choices we propose an approach for studying optimal paternalism that follows naturally from standard assumptions and methods of economic theory write down assumptions about the distribution of rational and irrational types of agents about the available policy instruments and about the government s information about agents and then investigate which policies achieve the most efficient outcomes in other words economists ought to treat the analysis of optimal paternalism as a mechanism design problem when some agents might be boundedly rational this approach has many advantages first and foremost by explicitly addressing when and how people do and don t pursue their own best interests economists will be better able to contribute to policy debates to contribute to debates over regulating private financial decisions we must study whether financial decisions are based on fallacious statistical reasoning and whether self control problems lead people to borrow too heavily to contribute to debates over teenage smoking we must study whether teenagers become smokers against their long run best interest economists will and should be ignored if we continue to insist that it is axiomatic that constantly trading stocks or accumulating consumer debt or becoming a heroin addict must be optimal for the people doing these things merely because they have chosen to do it a second advantage of our approach is that it forces us to look for the best feasible policy our

measuring investment in education historic debates about the measurement of capital are even more complicated in the case of education and human capital as extensive research demonstrates education resources are not consistently related to student performance in existing elementary and secondary schools this inefficiency in public schools implies that spending and resource measures do not accurately capture variations in school quality this finding then has clear implications for both education policy and economic research because school inputs are poor policy instruments an alternative policy focus that appears much more productive is performance incentives related to student achievement

tax incidence when individuals are time inconsistent the case of cigarette excise taxes abstract one of the most cogent criticisms of excise taxes is their regressivity with lower income groups spending a much larger share of their income on goods such as cigarettes than do higher income groups we argue that traditional quantity based measures of incidence are only appropriate under a very restrictive time consistent model of consumption of sin goods a model that is much more consistent with existing evidence on smoking decisions is a time inconsistent formulation where excise taxes on cigarettes serve a self control function that is valued by smokers who would like to quit but cannot this self control function benefits lower income groups more since they have a significantly higher price sensitivity of smoking calibrations show that as a result cigarette taxes are much less regressive than previously assumed and are even progressive for a wide variety of parameter values

taxing sin goods and subsidizing health care we consider a two period model in the first period individuals consume two goods one is sinful and the other is not the sin good brings pleasure but has a detrimental effect on second period health and individuals tend to underestimate this effect in the second period individuals can devote part of their saving to improve their health status and thus compensate for the damage caused by their sinful consumption we consider two alternative specifications concerning this second period health care decision either individuals acknowledge that they have made a mistake in the first period out of myopia or ignorance or they persist in ignoring the detrimental effect of their sinful consumption we study the optimal linear taxes on sin good consumption saving and health care expenditures for a paternalistic social planner we compare those taxes in the two specifications we show under which circumstances the first best outcome can be decentralized and we study the second best taxes when saving is unobservable

consumption self control by rationing purchase quantities of virtue and vice consumers attempts to control their unwanted consumption impulses influence many everyday purchases with broad implications for marketers pricing policies addressing theoreticians and practitioners alike this paper uses multiple empirical methods to show that consumers voluntarily and strategically ration their purchase quantities of goods that are likely to be consumed on impulse and that therefore may pose self control problems for example many regular smokers buy their cigarettes by the pack although they could easily afford to buy 10 pack cartons these smokers knowingly forgo sizable per unit savings from quantity discounts which they could realize if they bought cartons by rationing their purchase quantities they also self impose additional transactions costs on marginal consumption which makes excessive smoking overly difficult and costly such strategic self imposition of constraints is intuitively appealing yet theoretically problematic the marketing literature lacks operationalizations and empirical tests of such consumption self control strategies and of their managerial implications this paper provides experimental evidence of the operation of consumer self control and empirically illustrates its direct implications for the pricing of consumer goods moreover the paper develops a conceptual framework for the design of empirical tests of such self imposed constraints on consumption in consumer goods markets within matched pairs of products we distinguish relative virtue and vice goods whose preference ordering changes with whet her consumers evaluate immediate or delayed consumption consequences for example ignoring long term health effects many smokers prefer regular relative vice to light relative virtue cigarettes because they prefer the taste of the former however ignoring these short term taste differences the same smokers prefer light to regular cigarettes when they consider the long term health effects of smoking these preference orders can lead to dynamically inconsistent consumption choices by consumers whose tradeoffs between the immediate and delayed consequences of consumption depend on the time lag between purchase and consumption this creates a potential self control problem because these consumers will be tempted to over consume the vices they have in stock at home purchase quantity rationing helps them solve the self control problem by limiting their stock and hence their consumption opportunities such rationing implies that per purchase occasion vice consumers will be less likely than virtue consumers to buy larger quantities in response to unit price reductions such as quantity discounts we first test this prediction in two laboratory experiments we then examine the external validity of the results at the retail level with a field survey of quantity discounts and with a scanner data analysis of chain wide store level demand across a variety of different pairs of matched vice regular and virtue reduced fat calorie or caffeine etc product categories the analyses of these experimental field and scanner data provide strong convergent evidence of a characteristic crossover in demand schedules for relative vices and virtues for categories as diverse as among others potato chips chocolate chip cookies cream cheese beer soft drinks ice cream and frozen yogurt chewing gum coffee and beef andturkey bologna vice consumers demand increases less in response to price reductions than virtue consumers demand although their preferences are not generally weaker for vices than for virtues constraints on vice purchases are self imposed and strategic rather than driven by simple preferences we suggest that rationing their vice inventories at the point of purchase allows consumers to limit subsequent consumption as a result of purchase quantity rationing however vice buyers forgo savings from price reductions through quantity discounts effectively paying price premiums for the opportunity to engage in self control thus purchase quantity rationing vice consumers are relatively price in sensitive from a managerial and public policy perspective our findings should offer marketing practitioners in many consumer goods industries new opportunities to increase profits through segmentation and price discrimination based on consumer self control they can charge premium prices for small sizes of vices relative to the corresponding quantity discounts for virtues virtue consumers on the other hand will buy larger amounts even when quantity discounts are relatively shallow a key conceptual contribution of this paper lies in showing how marketing researchers can investigate a whole class of strategic self constraining consumer behaviors empirically moreover this research is the first to extend previous theoretical work on impulse control by empirically demonstrating its broader implications for marketing decision making

unequal societies income distribution and the social contract this paper develops a theory of inequality and the social contract aiming to explain how countries with similar economic and political fundamentals can sustain such different systems of social insurance fiscal redistribution and education finance as those of the united states and western europe with imperfect credit and insurance markets some redistributive policies can improve ex ante welfare and this implies that their political support tends to decrease with inequality conversely with credit constraints lower redistribution translates into more persistent inequality hence the potential for multiple steady states with mutually reinforcing high inequality and low redistribution or vice versa

randomized evaluations of educational programs in developing countries some lessons this paper reviews recent randomized evaluations of educational programs in developing countries including programs to increase school participation to provide educational inputs and to reform education it then extracts some lessons for education policy and for the practice and political economy of randomized evaluations

who pays for obesity adult obesity is a growing problem from 1962 to 2006 obesity prevalence nearly tripled to 35 1 percent of adults the rising prevalence of obesity is not limited to a particular socioeconomic group and is not unique to the united states should this widespread obesity epidemic be a cause for alarm from a personal health perspective the answer is an emphatic yes but when it comes to justifications of public policy for reducing obesity the analysis becomes more complex a common starting point is the assertion that those who are obese impose higher health costs on the rest of the population a statement which is then taken to justify public policy interventions but the question of who pays for obesity is an empirical one and it involves analysis of how obese people fare in labor markets and health insurance markets we will argue that the existing literature on these topics suggests that obese people on average do bear the costs and benefits of their eating and exercise habits we begin by estimating the lifetime costs of obesity we then discuss the extent to which private health insurance pools together obese and thin whether health insurance causes obesity and whether being fat might actually cause positive externalities for those who are not obese if public policy to reduce obesity is not justified on the grounds of external costs imposed on others then the remaining potential justification would need to be on the basis of helping people to address problems of ignorance or self control that lead to obesity in the conclusion we offer a few thoughts about some complexities of such a justification

quasi hyperbolic discounting and retirement abstract some people have self control problems regularly this paper adds endogenous retirement to laibson s quasi hyperbolic discounting savings model quarterly journal of economics 112 1997 443 477 earlier selves think that the deciding self tends to retire too early and may save less to induce later retirement still earlier selves may think the pre retirement self does this too much saving more to induce early retirement the consumption pattern may be different from that with exponential discounting other observational non equivalence includes the impact of changing mandatory retirement rules or work incentives on savings and a possibly negative marginal propensity to consume out of increased future earnings naive agents are briefly considered

income distribution and macroeconomics this paper analyzes the role of wealth distribution in macroeconomics through investment in human capital it is shown that in the presence of credit markets imperfections and indivisibilities in investment in human capital the initial distribution of wealth affects aggregate output and investment both in the short and in the long run as there are multiple steady states this paper therefore provides an additional explanation for the persistent differences in per capita output across countries furthermore the paper shows that cross country differences in macroeconomic adjustment to aggregate shocks can be attributed among other factors to differences in wealth and income distribution across countries

impatience incentives and obesity this paper explores the relationship between time preferences economic incentives and body mass index bmi using data from the 2006 national longitudinal survey of youth we rst show that greater impatience increases bmi and the likelihood of obesity even after controlling for demographic human capital occupational and nancial characteristics as well as risk preference next we provide evidence of an interaction

das human kapital a theory of the demise of the class structure this paper suggests that the demise of the capitalists workers class structure was a socio economic transformation orchestrated by the capitalists in reaction to the increasing importance of human capital in sustaining their profit rates physical capital accumulation in the process of industrialization enhanced the importance of human capital in production and generated incentives for capitalists to support the provision of public education for the masses triggering the demise of the existing class structure the implications of the theory are consistent with the voting patterns on england s education reform of 1902

the isomorphism hypothesis the prisoner s dilemma as intertemporal allocation and vice versa abstract economists model the choice of the current self in intertemporal allocation as the outcome of identity the current and future selves belong to the same decision maker by the sheer fact they reside in the same biological skin defined by biological identity the economists should be consistent and likewise model the choice of each player in the prisoner s dilemma or generally the social dilemma as the outcome of identity the selves of the players belong to the same decision maker by the sheer fact they reside in the same social skin defined by social identity if the economists consider cooperation rather than defection to be the rational strategy of the current self in intertemporal allocations they should be consistent and consider cooperation rather than defection to be the rational strategy of each player in social dilemmas symmetrically if the economists judge defection rather than cooperation to be the rational strategy in social dilemmas it behooves them to also judge defection rather than cooperation to be the rational strategy in intertemporal allocations

human capital and growth abstract this paper describes a growth model with the property that human capital accumulation can account for all observed growth the model is shown to be consistent with evidence on individual productivities as measured by census earnings data the central hypothesis is that we learn more when we interact with more productive people

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

adolescent time preferences predict lifetime outcomes this study investigates the relationship between time preferences and lifetime social and economic outcomes we use a swedish longitudinal data set that links information from a large survey on children s time preferences at age 13 to administrative registers spanning over five decades our results indicate a substantial adverse relationship between high discount rates and school performance health labour supply and lifetime income males and high ability children gain significantly more from being future oriented these discrepancies are largest regarding outcomes later in life we also show that the relationship between time preferences and long run outcomes operates through early human capital investments

procrastination and obedience in this lecture i shall focus on situations involving repeated decisions with time inconsistent behavior although each choice may be close to maximizing and therefore result in only small losses the cumulative effect of a series of repeated errors may be quite large thus in my examples decision makers are quite close to the intelligent well informed individuals usually assumed in economic analysis but cumulatively they make seriously wrong decisions that do not occur in standard textbook economics this lecture discusses and illustrates several pathological modes of individual and group behavior procrastination in decision making undue obedience to authority membership of seemingly normal individuals in deviant cult groups and escalation of commitment to courses of action that are clearly unwise in each case individuals choose a series of current actions without fully appreciating how those actions will affect future perceptions and behavior the standard assumption of rational forwardlooking utility maximizing is violated the nonindependence of errors in decision making in the series of decisions can be explained with the concept from cognitive psychology of undue salience or vividness for example present benefits and costs may have undue salience relative to future costs

externalities and optimal taxation this paper reexamines the optimal tax design problem income and commodities in the presence of externalities the nature of the second best and the choice of the tax instruments are motivated by the informational structure in the economy the main results are i environmental levies linear or nonlinear differ in formula from pigouvian taxes by the expressions for the optimal tax on private goods ii externalities do not affect commodity tax formulas linear and nonlinear for private goods iii externalities do not affect the income tax structure if commodity taxes are nonlinear and affect it if commodity taxes are linear and iv a general income tax plus strictly pigouvian taxes are sufficient for efficient taxation if individuals of different types have identical marginal rates of substitution at any given consumption bundle

rising cigarette prices and rising obesity coincidence or unintended consequence economists have begun to debate if the rise in cigarette prices in the u s in recent decades has contributed to the nation s rise in obesity reaching conclusions that are surprisingly sensitive to specification i show that allowing for the effect to occur gradually over several years leads to the conclusion that a rise in cigarette prices is actually associated with a long run reduction in body mass index and obesity this result is robust to the different methodologies used in the literature i also provide evidence that indirect effects on exercise and food consumption may explain the counterintuitive result

direct versus indirect taxation the design of the tax structure revisited this article studies the optimal direct indirect tax mix problem when individuals differ in several unobservable characteristics productivity and endowments it presents general expressions for the optimal commodity tax rates and proves that contrary to atkinson and stiglitz s 1976 result differential commodity taxation remains a useful instrument of tax policy even if preferences are separable between labor and produced goods when cross substitution effects are zero the expressions resemble traditional many households ramsey rules in a cobb douglas illustration where endowments differ only in good 1 interpreted as wealth the tax on good 2 provides an indirect way to tax the unobservable wealth

optimal sin taxes abstract we investigate sin taxes on unhealthy items such as fatty foods that people may by their own reckoning consume too much of we employ a standard optimal taxation framework but replace the standard assumption that all consumers have 100 self control with an assumption that some consumers may have some degree of self control problems we show that imposing taxes on unhealthy items and returning the proceeds to consumers can generally improve total social surplus because such taxes counteract over consumption by consumers with self control problems while at the same time they naturally redistribute income to consumers with no self control problems who consume less such taxes can even create pareto improvements finally we demonstrate with some simple numerical examples that even if the population exhibits relatively few self control problems optimal taxes can still be large

something in the air pollution and the demand for health insurance we find that daily air pollution levels have a significant effect on the decision to purchase or cancel health insurance in a manner inconsistent with rational choice theory a one standard deviation increase in daily air pollution leads to a 7 2 increase in the number of insurance contracts sold that day conditional on purchase a one standard deviation decrease in air pollution during the cooling off i e cost free cancellation period relative to the order date level increases the return probability by 4 0 we explore a range of potential mechanism and find the most support for projection bias and salience

school subsidies for the poor evaluating the mexican progresa poverty program abstract this paper evaluates how the progresa program which provides poor mothers in rural mexico with education grants has affected enrollment poor children who reside in communities randomly selected to participate in the initial phase of the progresa are compared to those who reside in other control communities pre program comparisons check the randomized design and double difference estimators of the program s effect on the treated are calculated by grade and sex probit models are also estimated for the probability that a child is enrolled controlling for additional characteristics of the child their parents local schools and community and for sample attrition to evaluate the sensitivity of the program estimates these estimates of program short run effects on enrollment are extrapolated to the lifetime schooling and the earnings of adults to approximate the internal rate of return on the public schooling subsidies as they increase expected private wages

over savings and hyperbolic discounting abstract hyperbolic discounting models are widely seen as implying that consumers do not save enough in accordance with the observed low rates of savings of some households this paper qualifies this view by showing that hyperbolic consumers may oversave in the short run the result extends to uncertainty on future income and does not depend on whether preferences are present biased or future biased a generalized comparative statics analysis of self control is introduced and its relationship to the analysis of uncertainty on discount factors is emphasized

unequal opportunities and human capital formation abstract this paper develops a tractable heterogeneous agents general equilibrium model where individuals have different endowments of the factors that complement the schooling process the paper explores the relationship between inequality of opportunities inequality of outcomes and aggregate efficiency in human capital formation using numerical solutions we study how the endogenous variables of the model respond to two different interventions in the distribution of opportunities a mean preserving spread and a change in the support the results suggest that a higher degree of inequality of opportunities is associated with lower average level of human capital a lower fraction of individuals investing in human capital higher inequality in the distribution of human capital and higher wage inequality in particular the model does not predict a trade off between aggregate efficiency in human capital formation as measured by the average level of human capital in the economy and equality of opportunity

equity and efficiency in human capital investment the local connection a general model of community formation and human capital accumulation with social spillovers and decentralized school funding is used to analyse the causes of economic segregation and its consequences for equity and efficiency significant polarization arises from minor differences in endowments preferences or access to capital markets this makes income inequality more persistent across generations but the same need not be true for wealth equilibrium stratification tends to be excessive resulting in low aggregate surplus whether state equalization of school resources can remedy these problems hinges on how purchased social and family inputs interact in education and in mobility decisions

choice and procrastination author s o donoghue ted rabin matthew abstract recent models of procrastination due to self control problems assume that a procrastinator considers just one option and is unaware of her self control problems we develop a model where a person chooses from a menu of options and is partially aware of her self control problems this menu model replicates earlier results and generates new ones a person might forego completing an attractive option because she plans to complete a more attractive but never to be completed option hence providing a non procrastinator additional options can induce procrastination and a person may procrastinate worse pursuing important goals than unimportant ones

investment in education do economic volatility and credit constraints matter abstract recent research has focused on the effects of economic volatility on the investment in physical capital this paper shows that economic volatility and the lack of financial markets have a negative effect also on the accumulation of human capital our evidence drawn from cross country and panel regressions is that average secondary enrollment in the period 1970 1972 is negatively affected by the lack of financial markets income or employment volatility and income inequality our results are robust to different specifications of volatility the inclusion of public expenditure in education country specific effects and different sets of regressors

have efforts to reduce smoking really contributed to the obesity epidemic i introduction two of the most notable trends in public health over the past 30 yr are the reductions in smoking rates and the rapid increase in obesity rates based on data from the national health interview survey the smoking rate among adult americans was roughly 37 in the early 1970s and is 21 today a reduction of more than 40 in contrast the adult obesity rate increased 135 from 14 in the early 1970s to 32 2 in 2004 national health and nutrition examination survey nhanes 71 04 figure 1 because the medical literature has shown that smoking cessation is associated with weight gain these trends have given rise to a puzzling question have efforts to reduce smoking rates in the united states inadvertently caused increases in rates of obesity there is substantial evidence that at least in the short term smoking and obesity are not independent klesges and shumaker 1992 found that reductions in smoking and or quitting altogether is associated with increases in dietary intake as well as metabolic changes that promote weight gain as a result weight gain is often an unwanted side effect of quitting smoking the 1990 surgeon general s report the health benefits of smoking cessation concluded that the average weight gain after smoking cessation was about 5 pounds or 2 3 kg u s department of health and human services 1990 however there is additional evidence that this increase may be short lived mizoue et al 1998 found that given enough time the weight of former smokers inevitably returns to that of never smokers as a result the long term impact on weight of efforts to reduce smoking rates may be negligible figure 1 omitted to date three articles have attempted to quantify what proportion of the increase in obesity rates over the past several decades is caused by efforts to reduce smoking chou grossman and saffer 2004 used repeated cross sections from 1984 to 1999 behavioral risk factor surveillance system brfss data to estimate the impact of several state level measures on body mass index bmi and on the probability of being obese including increases in state level cigarette prices figure 1 the results of this study suggest that increases in cigarette prices may be responsible for as much as 20 of the increase in bmi and trends in obesity rates over this period this finding is used to argue that rising obesity rates are an unintended consequence of the success of the antismoking movement gruber and frakes 2006 extended the models presented in chou grossman and saffer 2004 using the same data set they examined the relationship between cigarette taxes and body weight and argue that cigarette taxes are a more appropriate measure than prices because price changes may be driven by market factors that affect the rates of smoking and eating their specification also includes several other differences including controls for state and year effects gruber and frakes found that cigarette taxes are negatively associated with body weight suggesting that increases in cigarette taxes result in reductions in bmi this result is in direct contrast with the findings of chou grossman and saffer however not even the authors find their result plausible p 196 flegal 2007 presents yet another analysis of the link between smoking and obesity using nhanes data the author models the contemporaneous relationship between smoking and weight and then reestimates the current prevalence of obesity under the assumption that past smoking levels had remained unchanged using this approach she concludes that decreases in the prevalence of cigarette smoking had only a small effect less than 1 percentage point on the overall prevalence of obesity in this article we revisit the analyses presented by chou grossman and saffer and gruber and frakes to explain the dichotomy of results and provide further evidence of the relationship between antismoking efforts and increases in bmi

can gm technologies help the poor the impact of bt cotton in makhathini flats kwazulu natal abstract the results of a two year survey of smallholders in makhathini flats kwazulu natal show that farmers who adopted bt cotton in 1999 2000 benefited according to all the measures used higher yields and lower chemical costs outweighed higher seed costs giving higher gross margins these measures showed negative benefits in 1998 99 which conflicts with continued adoption but stochastic efficiency frontier estimation which takes account of the labor saved showed that adopters averaged 88 efficiency as compared with 66 for the nonadopters in 1999 2000 when late rains lowered yields the gap widened to 74 for adopters and 48 for nonadopters

forced saving redistribution and nonlinear social security schemes this paper studies the design of nonlinear social security schemes when individuals differ in productivity and in their degree of myopia myopic individuals may not save enough for their retirement the welfare function is paternalistic the rate of time preference of the farsighted is used for both types we show that the solution does not necessarily imply forced savings for the myopics paternalistic considerations are mitigated by incentive effects numerical results suggest that as the proportion of myopic individuals increases there is less redistribution and more forced saving and the desirability of social security increases

public goods and optimal paternalism under present biased preferences this paper concerns the provision of a state variable public good in a two type model under presentbiased consumer preferences the preference for immediate grati cation facing the high ability type weakens the incentive to adjust public provision in response to the self selection constraint

anticipation and the valuation of delayed consumption this paper presents a model of intertemporal choice that incorporates savoring and dread i e utility from anticipat ion of delayed consumption the model explains why an individual with positive time preference may delay desirable outcomes or get unpleas ant outcomes over with quickly contrary to the prediction of convent ional formulations of intertemporal choice implications of savoring and dread for savings behavior empirical estimation of discount rate s and public policy efforts to combat myopic behavior are explored the model provides an explanation for common violations of the indepe ndence axiom as applied to intertemporal choice copyright 1987 by royal economic society

time preferences and food choices evidence from a choice experiment time preferences have been recognized by numerous studies as an important driver of a number of healthy and environmentally friendly behaviors in this study we first examined if healthy and environmentally friendly food labels e g usda organic carbon trust health claim and calories are relevant in driving food choices second using the consideration of future consequences cfc scale we analyzed if individuals with different time preferences have different choice behavior and valuations in relation to these labels results indicate that consumers value both healthy and environmentally friendly attributes displayed on labels results also suggest that time preferences can significantly influence consumers valuation for the usda organic label the presence of health claims and the calorie amount attribute

technological progress mobility and economic growth this paper analyzes the relationship between technological progress wage inequality intergenerational earnings mobility and economic growth in periods of major technological inventions a decline in the relative importance of initial conditions raises inequality enhances mobility and generates a larger concentration of high ability individuals in technologically advanced sectors stimulating future technological progress and growth however once technologies become more accessible mobility is diminished and inequality decreases but becomes more persistent the reduction in the concentration of ability in technologically advanced sectors diminishes the likelihood of technological breakthroughs and slows future growth user friendliness therefore becomes unfriendly to future economic growth copyright 1997 by american economic association

vouchers for private schooling in colombia evidence from a randomized natural experiment colombia used lotteries to distribute vouchers which partially covered the cost of private secondary school for students who maintained satisfactory academic progress three years after the lotteries winners were about 10 percentage points more likely to have finished 8th grade primarily because they were less likely to repeat grades and scored 0 2 standard deviations higher on achievement tests there is some evidence that winners worked less than losers and were less likely to marry or cohabit as teenagers benefits to participants likely exceeded the 24 per winner additional cost to the government of supplying vouchers instead of public school places

a note on optimal paternalism and health capital subsidies this paper concerns the policy implications of a potential self control problem underlying the consumption of unhealthy food our results show that subsidies on wealth and healthcapital can be used

optimal paternalistic health and human capital subsidy abstract we characterize the first best earnings subsidy when agents are heterogeneous with respect to present biased preferences and cognitive skills when agents health and human capital biased allocations affect not only welfare but also their labor earnings a single subsidy corrects for agents mistaken decisions we highlight two novel features of paternalistic interventions the effects of agents decisions on the economy s supply side through future productivity and the role of cognitive skills on individual s optimal trade off between human capital accumulation and leisure we compare this optimal subsidy to an alternative policy package

present bias lessons learned and to be learned while present bias is an old idea it only took hold in economics following david laibson s 1994 dissertation over the past 20 years research has led to a much better theoretical understanding of present bias when and how to apply it and which ancillary assumptions are appropriate in different contexts empirical analyses have demonstrated how present bias can improve our understanding of behavior in various economic field contexts nonetheless there is still much to learn in this paper we give our assessment of some lessons learned and to be learned

on the optimality of public pensions in an economy with life cyclers and myopes in this paper we develop a two period overlapping generations model with two types of individuals life cyclers and myopes we revisit feldstein s problem by deriving the optimal level of social security using a social welfare function a la samuelson rather than a la lerner in opposition to the lerner solution our optimal pension benefit exhibits several interesting properties dynamic efficiency egalitarism easy implementation then the opportunity to move to a partially funded system is examined it turns out that a partially funded system ensures the equality of utility within and across generations the effective use of funding opportunities is less a question of rate of return than a question of equal treatment of individuals

integrated pest management for resource poor african farmers is the emperor naked abstract the success of integrated pest management ipm with rice in asia has not been replicated with staple smallholder food crops in sub saharan africa this is variously blamed on inadequate extension underinvestment in agricultural research and unfavorable government policies this article argues that it reflects the slow progress of africa s green revolution which has reduced economic incentives for chemical forms of crop protection and thus the potential cost savings from the adoption of ipm strategies in this context ipm must re think its approach ipm is more likely to be adopted by resource poor african farmers if it focuses on host plant resistance and biological control high value commodities and helps meet farmers wider objectives of increasing household food security and earning cash income the argument is illustrated from secondary literature and recent project experience in southern malawi

optimal taxation in a habit formation economy abstract this paper studies habit formation in consumption preferences in a dynamic mirrlees economy we derive optimal labor and savings wedges based on a recursive approach we show that habit formation creates a motive for subsidizing labor supply and savings in particular habit formation invalidates the well known no distortion at the top result we demonstrate that the theoretical findings are quantitatively important in a parametrized life cycle model average labor and savings wedges fall by more than one third compared with the case of time separable preferences

hyperbolic discounting and uniform savings floors abstract previous research suggests that in partial equilibrium individuals whose decision making exhibits a present bias such as hyperbolic discounters who tend to over consume will be in favor of having a floor imposed on their savings in this paper i show it is quite difficult for the introduction of a savings floor to be pareto improving in general equilibrium indeed a necessary condition for the floor to be pareto improving is that it is high enough to be binding for all individuals even in that case because the equilibrium interest rate adjusts with the level of the savings floor some individuals may prefer to commit to a future time path of consumption by facing a high interest rate and no floor rather than a high floor an essential insight for understanding this result is to note that even those with little self control in an absolute sense will choose to save a lot when the interest rate is high enough

capital income taxation when inherited wealth is not observable this paper extends the atkinson stiglitz model of direct and indirect taxation to a dynamic setting with two unobservable characteristics productive ability and inherited wealth bequests are motivated by the joy of giving a child s inheritance is a random variable with a probability distribution that depends on his parent s investment in a bequest technology public borrowing is assumed and implies the modified golden rule we study the optimal tax policy when two instruments are available a non linear wage income tax and a proportional tax on capital income we show that the second instrument ought in general to be used but that the tax rate is not necessarily positive however a positive tax rate is more likely when there is a positive correlation between inherited wealth and innate ability

reference dependent consumption plans we develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption because changes in wealth are news about future consumption preferences over money are reference dependent if news resonates more when about imminent consump tion than when about future consumption a decision maker might to generate pleasant surprises overconsume early relative to the optimal committed plan increase immediate consumption following surprise wealth increases and delay decreasing consumption following surprise losses since higher wealth mitigates the effect of bad news people exhibit an unambiguous first order precautionary savings motive

economic growth and the quantity and distribution of education a survey the focus of this survey is to discuss different attempts at incorporating the distributional dimension of human capital into the theoretical and empirical growth framework we present a series of models which deviate from the direct link between the aggregate or average level of human capital and economic growth in that they introduce the distribution of education as a new element in explaining the relationship under investigation after surveying the theoretical literature we present recent empirical work on the relation between economic performance and the average level as well as the distribution of education respectively

understanding overeating and obesity abstract the combination of economic and biological factors is likely to result in overeating in the current environment of cheap and readily available food this propensity is shown using a dual decision approach where choices reflect the interaction of a deliberative system operating as in standard economic models and an affective system that responds rapidly to stimuli without considering long term consequences this framework is characterized by excess food consumption and body weight in that individuals prefer both ex ante and ex post to eat and weigh less than they actually do with weight loss attempts being common but often unsuccessful or only partially successful as in the standard model weight is related to prices however another potentially important reason for rising obesity is that food producers have incentives to engineer products to stimulate the affective system so as to encourage overeating data from several sources are used to investigate predictions of the dual decision model with the evidence providing broad support for at least some irrationality in food consumption most importantly there is little indication that the large secular increases in body mass index have been accompanied by corresponding growth in utility maximizing weight one result is that efforts to reduce weight have become more common as obesity has increased

voting over type and generosity of a pension system when some individuals are myopic this paper studies the determination through majority voting of a pension scheme when society consists of far sighted and myopic individuals all individuals have the same basic preferences but myopics tend to adopt a short term view instant gratification when dealing with retirement saving and labor supply consequently they will find themselves with low consumption after retirement and regret their insufficient savings decisions henceforth when voting they tend to commit themselves into forced saving we consider a pension scheme that is characterized by two parameters the payroll tax rate that determines the size or generosity of the system and the bismarckian factor that determines its redistributiveness individuals vote sequentially we examine how the introduction of myopic agents affects the generosity and the redistributiveness of the pension system our main result is that a flat pension system is always chosen when all individuals are of one kind all far sighted or all myopic while a less redistributive system may be chosen if society is composed of both myopic and far sighted agents furthermore while myopic individuals tend to prefer larger payroll taxes than their far sighted counterparts the generosity of the system does not always increase with the proportion of myopics