time out of work and skill depreciation this paper investigates the role of skill depreciation in the relationship between work interruptions and subsequent wages using swedish data from two waves 1994 and 1998 of the international adult literacy survey which included results of tests gauging respondents ability to read and make practical use of printed information the authors are able to analyze changes in individuals skills as a function of time out of work they find statistically strong evidence of a negative relationship between work interruptions and skills the analysis suggests that depreciation of general skills was economically important a full year of non employment for example was associated with a 5 percentile move down the skill distribution

do better schools matter parental valuation of elementary education the evaluation of numerous school reforms requires an understanding of the value of better schools given the difficulty of calculating the relationship between school quality and student outcomes i turn to another method and use house prices to infer the value parents place on school quality i look within school districts at houses located on attendance district boundaries houses then differ only by the elementary school the child attends i thereby effectively remove the variation in neighborhoods taxes and school spending i find that parents are willing to pay 2 5 percent more for a 5 percent increase in test scores this finding is robust to a number of sensitivity checks

comments on plott and on kahneman knetsch and thaler both of these papers raise a number of interesting questions as to the factors that are important in determining market outcomes the kahneman knetsch and thaler in this issue paper explores whether the introduction of fairness can help explain behavior by firms that could not be easily explained by standard economic analyses charles plott s in this issue summary of experimental economic evidence suggests that market models based on rational choice principles do rather well for a certain class of problems but that there are a number of areas where the jury is still out let me first turn to the kahneman et al paper in my opinion the importance of this paper is that it lays out a set of testable propositions that are based on the deviations between a new transaction from a reference transaction on the basis of these propositions the authors offer testable hypotheses such as the following

adverse selection commitment and renegotiation extension to and evidence from insurance markets with asymmetric information full commitment to long term contracts may permit markets to approach first best allocations however commitment can be undermined by opportunistic behavior notably renegotiation we reexamine commitment in insurance markets we present an alternative model which extends laffont and tirole s procurement model to address uncertainty and competition which involves semipooling in the first period followed by separation this and competing models e g single period models and no commitment models have different predictions concerning temporal patterns of insurer profitability a test using california data suggests that some automobile insurers use commitment to attract selective portfolios comprising disproportionate numbers of low risks

school finance reform and private school enrollment evidence from california abstract abstract this paper uses the school finance reforms in california in the 1970s to examine whether the constraints such reforms impose on school districts lead to switching to private schools misspecifications of demand in previous work have led to understatement of reform effects an empirical model of schooling share equations is derived from a discrete choice framework large biases are shown to result from failure to account for heterogeneity of demanders and school district specific fixed effects simulations indicate that the changes in public provision potentially resulting from reform explain a sizeable portion of the growth in the private school share

a new international database on education quality 1965 2010 the aim of this paper is to propose a new database allowing a comparative evaluation of the relative performance of schooling systems around the world we measure this performance through pupils achievement in standardized tests we merge all existing regional and international student achievement tests by using a specific methodology compared to other existing databases our approach innovates on several ways especially by including regional student achievement tests and intertemporal comparable indicators we provide a dataset of indicators of quality of student achievement iqsa for 103 countries areas in primary education and 111 countries areas in secondary education between 1965 and 2010

competition between private and public schools vouchers and peer group effects a theoretical and computational model with tax financed tuition free public schools and competitive tuition financed private schools is developed students differ by ability and income achievement depends on own ability and on peers abilities equilibrium has a strict hierarchy of school qualities and two dimensional student sorting with stratification by ability and income in private schools high ability low income students receive tuition discounts while low ability high income students pay tuition premia tuition vouchers increase the relative size of the private sector and the extent of student sorting and benefit high ability students relative to low ability students

centralization fiscal federalism and private school attendance a cge model is used to analyze the impact of public school financing on private school attendance the common perception that public school finance centralization will necessarily lead to greater private school attendance is not correct in such a model even when that centralization involves an extreme equalization as in california furthermore if centralization is less dramatic as in most states declines in private school attendance are even more pronounced this weakens the speculation that low exit rates to private schools in centralizing states imply that general public school quality does not drop as a result of such centralization

taxation of human capital and wage inequality a cross country analysis wage inequality has been significantly higher in the united states than in continental european countries ceu since the 1970s moreover this inequality gap has further widened during this period as the us has experienced a large increase in wage inequality whereas the ceu has seen only modest changes this paper studies the role of labor income tax policies for understanding these facts we begin by documenting two new empirical facts that link these inequality differences to tax policies first we show that countries with more progressive labor income tax schedules have significantly lower before tax wage inequality at different points in time second progressivity is also negatively correlated with the rise in wage inequality during this period we then construct a life cycle model in which individuals decide each period whether to go to school work or be unemployed individuals can accumulate skills either in school or while working wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks progressive taxation compresses the after tax wage structure thereby distorting the incentives to accumulate human capital in turn reducing the cross sectional dispersion of before tax wages we find that these policies can account for half of the difference between the us and the ceu in overall wage inequality and 76 of the difference in inequality at the upper end log 90 50 differential when this economy experiences skill biased technological change progressivity also dampens the rise in wage dispersion over time the model explains 41 of the difference in the total rise in inequality and 58 of the difference at the upper end

returns to skills around the world evidence from piaac abstract existing estimates of the labor market returns to human capital give a distorted picture of the role of skills across different economies international comparisons of earnings analyses rely almost exclusively on school attainment measures of human capital and evidence incorporating direct measures of cognitive skills is mostly restricted to early career workers in the united states analysis of the new piaac survey of adult skills over the full lifecycle in 23 countries shows that the focus on early career earnings leads to underestimating the lifetime returns to skills by about one quarter on average a one standard deviation increase in numeracy skills is associated with an 18 percent wage increase among prime age workers but this masks considerable heterogeneity across countries eight countries including all nordic countries have returns between 12 and 15 percent while six are above 21 percent with the largest return being 28 percent in the united states estimates are remarkably robust to different earnings and skill measures additional controls and various subgroups instrumental variable models that use skill variation stemming from school attainment parental education or compulsory schooling laws provide even higher estimates intriguingly returns to skills are systematically lower in countries with higher union density stricter employment protection and larger public sector shares

regression toward mediocrity in economic stature this paper provides estimates of the correlation in lifetime earnings between fathers and sons intergenerational data from the national longitudinal survey are used earlier studies conducted for the united states report elasticities of children s earnings with respect to parent s earnings of 0 2 or less suggesting extensive integenerational mobility these estimates however are biased downward by error contaminated measures of lifetime economic status estimates presented in this paper correct for the problem of measurement error and find the intergenerational correlation in income to be on the order of 0 4 this suggests considerably less intergenerational mobility than previously believed jel j62

are risk aversion and impatience related to cognitive ability is the way that people make risky choices or tradeoffs over time related to cognitive ability this paper investigates whether there is a link between cognitive ability risk aversion and impatience using a representative sample of the population and incentive compatible measures we conduct choice experiments measuring risk aversion and impatience over an annual time horizon for a randomly drawn sample of roughly 1 000 german adults subjects also take part in two different tests of cognitive ability which correspond to sub modules of one of the most widely used iq tests interviews are conducted in subjects own homes we find that lower cognitive ability is associated with greater risk aversion and more pronounced impatience these relationships are significant and robust to controlling for personal characteristics educational attainment income and measures of credit constraints we perform a series of additional robustness checks which help rule out other possible confounds

intergenerational income mobility in the united states social scientists and policy analysts have long expressed concern about the extent of intergenerational income mobility in the united states but remarkably little empirical evidence is available the few existing estimates of the intergenerational correlation in income have been biased downward by measurement error unrepresentative samples or both new estimates based on intergenerational data from the panel study of income dynamics imply that the intergenerational correlation in long run income is at least 0 4 indicating dramatically less mobility than suggested by earlier research copyright 1992 by american economic association

mobility targeting and private school vouchers simulations are derived from a three district model of low middle and highincome school districts calibrated to new york data with housing stocks that vary within and across districts in this model it is demonstrated that school district targeted vouchers are similar in their impact to nontargeted vouchers but vastly different from vouchers targeted to low income households furthermore strong migration effects are shown to significantly improve the likely equity consequences of voucher programs jel 122 128 h73 persistent frustration with the perceived low quality of public education exacerbated by concerns over the inherently unequal levels of public school quality across school districts has caused policy makers courts and researchers to investigate modifications and alternatives to the current public school system one idea that has received increasing academic and public attention is that of private school vouchers with proponents arguing that the competitive pressures of voucher programs would cause improvements in the efficiency of the publicschool system while at the same time addressing equity concerns if vouchers can be targeted to low income households or low income school districts but aside from a few limited experiments in some u s cities our experience with vouchers in the united states remains virtually nonexistent this limits the amount of information researchers can derive from standard empirical analysis in that it forces them to rely on only current nonvoucher induced differences in competition despite important suggestive results such work may not anticipate all the impacts from a large scale policy such as the voucher policies currently under discussion at the same time theoretical models of school finance are also limited in that they often either focus on only one particular aspect of the general equilibrium school finance problem or they are too rich and complex to yield crisp predictions

the equality multiplier how wage compression and welfare empowerment interact we explore how more wage equality fuels the generosity of the welfare state via political competition in elections and how a more generous welfare state fuels wage equality via empowerment of weak groups in the labor market together the two mechanisms may generate a cumulative process that explains how equality multiplies and why countries with more equal distributions of market outcomes also have stronger welfare states the complementarity between wage setting and welfare spending can explain why almost equally rich countries differ so much in economic and social equality among their citizens jel h53 i31 j31

supply and demand allocation and wage inequality an international comparison an allocation model of workers differentiated by their field of study is developed to test whether international differences in the wage structure can be explained by differences in labour demand and supply in each country the model explicitly takes into account the effects of supply and demand shifts on the allocation structure to disentangle country specific differences in the recruitment for one occupation from real supply demand effects empirical results based on data for nine countries show that cross country differences in wage inequality explain at least two third of the differences in labour demand and supply

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

do cognitive test scores explain higher u s wage inequality using microdata from the 1994 1998 international adult literacy survey for nine countries we examine the role of cognitive skills in explaining higher wage inequality in the united states we find that while the greater dispersion of cognitive test scores in the united states plays a part in explaining higher u s wage inequality higher labor market prices i e higher returns to measured human capital and cognitive performance and greater residual inequality still play important roles and are on average quantitatively considerably more important than differences in the distribution of test scores in explaining higher u s wage inequality

capitalization and the voucher an analysis of precinct returns from california s proposition 174 abstract in 1993 californians voted on a school voucher initiative we hypothesize that homeowners in good school districts understood the voucher to be a threat to their property values and thus voted against it precinct returns from los angeles county confirm this hypothesis we also examine an alternative hypothesis explaining the relationship between school quality and precinct returns according to the alternative voters perceived the initiative to be a referendum on public school quality to distinguish between the two hypotheses we compare the voting patterns of homeowners and renters the comparison does not favor one hypothesis over the other

labor market institutions and wage inequality the authors investigate how labor market institutions such as unemployment insurance unions firing regulations and minimum wages have affected the evolution of wage inequality among male workers results of estimations using data on institutions in eleven oecd countries indicate that changes in labor market institutions can account for much of the change in wage inequality between 1973 and 1998 factors found to have been negatively associated with male wage inequality are union density the strictness of employment protection law unemployment benefit duration unemployment benefit generosity and the size of the minimum wage over the 26 year period institutional changes were associated with a 23 reduction in male wage inequality in france where minimum wages increased and employment protection became stricter but with an increase of up to 11 in the united states and united kingdom where unions became less powerful and in the united states minimum wages fell

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

repeated insurance contracts and moral hazard abstract an attempt is made to account for the frequently observed phenomenon of insurance companies offering discounts to clients who possess a favorable record of past claims we argue that such discounts provide a mechanism which enables both insurer and insured to counteract the inefficiency which arises from moral hazard

ambiguity and underwriter decision processes this paper provides empirical evidence that risk and ambiguity affect underwriters decisions on pricing insurance a field study of primary insurance underwriters in a random sample of commercial property and casualty insurance companies reveals that premiums are significantly higher for risks when there is either ambiguity regarding the probability of a particular event occurring and or uncertainty about the magnitude of the resulting loss the paper suggests economic and organizational rationales for this behaviour and offers several explanations as to why insurers in a competitive market can charge higher prices for ambiguous risks which promise to yield excess profits in the long run

tying life insurance and savings decisions a multiperiod expected utility approach abstract many whole life insurance contracts provide in addition to protection in case of death of the insured also a savings element the main purpose of this article is to provide an economic rationale for this practice two alternative models are offered in both models it is assumed that there is an asymmetry of information between the insurers and insureds where the know better their probability of death and hence adverse selection may cause a market failure it is shown that by offering several deliberately designed contracts tying savings and insurance the insurers can induce the insureds to self select that is insureds with higher probability of death will voluntarily choose different contracts than those with a lower probability of death and hence will reveal their probability of death to the insurers the problem of adverse selection is thus overcome in the first model contracts differ in the amount of insurance they specify and the amount of savings tied with insurance in the second model a multiperiod actually two period contract and a single period contract are offered the multiperiod contract specifies a savings element which will be received by the insured if he or she lives at the end of the second period it is shown that by the right choice of the return on the savings part insureds with lower probabilities of death will choose the multiperiod contract whereas insureds with higher probability of death will prefer two successive single period contracts again self selection is achieved these two models show that tie in arrangements of savings and insurance may help overcome the adverse selection problem and hence an economic rationale is provided for their existence the paper also examines the demand for life insurance and savings the sensitivity of the demand for these products to variations in key parameters is analyzed the differences between the sensitivity analyses results obtained when insurance and savings decisions are made separately and those obtained when these decisions are simultaneosly made are highlighted and explained

explaining international differences in male skill wage differentials by differences in demand and supply of skill this paper explores the hypothesis that wage differentials between skill groups across countries are consistent with a demand and supply framework using micro data from 15 countries we find that about one third of the variation in relative wages between skill groups across countries is explained by differences in net supply of skill groups the demand and supply framework does an even better job at explaining relative wages of low skilled workers

heterogeneity stratification and growth macroeconomic implications of community structure and school finance this paper examines how socioeconomic stratification and alternative systems of education finance affect inequality and growth agents interact through local public goods or externalities school funding neighborhood effects and economywide linkages complementary skills knowledge spillovers sorting families into homogeneous communities often minimizes the costs of existing heterogeneity but mixing reduces heterogeneity faster integration therefore tends to slow down growth in the short run yet raise it in the long run a move to state funding of education presents society with a similar intertemporal trade off local and global complementarities play major roles in determining the efficient social and educational structures copyright 1996 by american economic association

asymmetric information and learning evidence from the automobile insurance market this paper tests the predictions of adverse selection models using data from the automobile insurance market i find that in contrast to what recent research suggests the evidence is consistent w

consumer lock in with asymmetric information abstract a two period version of the rothschild and stiglitz 1976 model of competitive screening in an insurance market is presented its features include repeat purchase of insurance among consumers no commitment among insurers or consumers asymmetric information among insurers about a consumer s accident history and state contingent contracts an equilibrium may exist in this model with full pooling in period one and consumer lock in in period two in such an equilibrium high risk consumers are experience rated and firms earn negative profits in period one and positive profits in period two