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

globalization labor markets and policy backlash in the past the late nineteenth and twentieth centuries have many things in common both periods recorded fast growth convergence and labor market integration between oecd members both periods witnessed intense debate about who gained and who lost from globalization furthermore the earlier period saw a retreat from global liberalism long before the interwar deglobalization disaster did globalization of that time plant seeds of its own destruction are there lessons for the present

the cliometrics of international migration a survey abstract this is a survey of some of the key studies in the literature on international migration in history that may be described as cliometric this literature uses the concepts and approaches of applied economics to investigate a range of historical issues and there are strong parallels with the questions that have been addressed in the literature on contemporary migrations here i focus on the period 1850 1940 and chiefly on migration from europe to the new world the survey is organized around six themes that include the forces driving migration over time and across space the assimilation of migrants and their effects on wages and income distribution in source and destination countries and the evolution of immigration policy although this literature has drawn heavily on the tool kit of applied economists it also provides a wider perspective on many of the issues that concern migration today

price flexibility credit availability and economic fluctuations evidence from the united states 1894 1909 the importance of disturbances in financial markets for real economic activity and the positive association between price level and output movements typically are explained by appeal to a combination of nominal aggregate demand shocks particularly money supply shocks and rigid prices we argue that this view is inconsistent with evidence for short run responsiveness of prices and gold flows to nominal disturbances during the pre world war i gold standard era we offer an alternative explanation that connects financial markets and real activity through disturbances to the availability of credit this approach links comovements in prices and output through real effects in credit markets associated with price level shocks empirical analysis using monthly data for the pre world war i period supports the assumption of rapid price adjustment and the credit supply interpretation of the transmission of financial shocks disturbances to credit availability including price shocks contribute substantially to our empirical explanation of output fluctuations during this period

factor price convergence in the late nineteenth century the authors examine a dramatic historical episode of factor price convergence in the late nineteenth century their focus is convergence between old world and new and the analysis centers on land and labor wage rental ratios boomed in the old world and collapsed in the new moving the resource rich labor scarce new world closer to the resource scarce labor abundant old world the authors use econometrics and simulations to identify proconvergence forces which include commodity price convergence factor accumulation and factor saving biases the results confirm that open economy characteristics and international market integration are important sources of convergence copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

is financial globalization beneficial this lecture examines whether financial globalization is beneficial to developing countries by first examining the evidence on financial development and economic growth and concludes that financial development is indeed a key element in promoting economic growth it then asks why if financial development is so beneficial it often does not occur it then goes on to examine whether globalization particularly of the financial kind can help encourage financial and economic development and argues that it can however financial globalization does not always work to encourage economic development because it often leads to devastating financial crises the issue is thus not whether financial globalization is inherently good or bad but whether it can be done right

order in product customization decisions evidence from field experiments differentiated product models are predicated on the belief that a product s utility can be derived from the summation of utilities for its individual attributes in one framed field experiment and two natural field experiments we test this assumption by experimentally manipulating the order of attribute presentation in the product customization process of custom made suits and automobiles we find that order affects the design of a suit that people configure and the design and price of a car that people purchase by influencing the likelihood that they will accept the default option suggested by the firm

the impact of liberalization and foreign investment in colombia s financial sector abstract this study analyzes financial liberalization measures undertaken in 1990 of which an opening to foreign investment was a major component after a brief description of the major changes in legislation on foreign investment we compare performance of foreign owned vs domestic banks first using a descriptive approach then in a more systematic manner using econometric analysis panel data estimations reveal that financial liberalization in general had a beneficial impact on bank behavior in colombia by increasing competition lowering intermediation costs and improving loan quality although the positive contribution of foreign entry may be overstated in recent studies by not controlling for other liberalization factors foreign and domestic entry beginning in 1990 did improve bank behavior by enhancing operative efficiency and competition however the greater competition may have resulted in increased risk and a subsequent deterioration in loan quality particularly among domestic banks

global financial instability framework events issues two of the key questions facing policymakers today are how to reduce the risk of global financial instability and how to cope with it when it occurs this paper starts by defining financial instability and then showing how it harms economic activity it then uses this framework to describe what happened during the recent financial crises in mexico and east asia the paper ends by raising several key policy issues not coincidentally these issues are addressed in the remaining papers in the symposium

the anticipated and concurring effects of the emu exchange rate volatility institutions and growth abstract reduced exchange rate volatility and higher and less heterogeneous quality of institutional rules and macroeconomic policies are two of the main anticipated and concurring effects expected from a currency union in this paper we measure the magnitude of these two effects for the eurozone countries looking at real effective exchange rates reer and at different indicators of quality of institutional rules and macroeconomic policies qirmp we find that the first effect is much stronger than the second when we compare relative changes for eurozone countries and the rest of the world in the relevant period we further evaluate the impact of both effects on economic growth on a larger sample of countries our findings show that both have significant impact on levels more robust and on rates of growth weaker of per capita gdp

industry equilibrium uncertainty and futures markets abstract this paper studies competitive long run industry equilibrium with uncertainty and futures trading we also provide a long run analysis of futures trading instead of the conventional short run analysis it is shown without using a general equilibrium model that given uncertain demand and risk aversion a bias backwardation or contango arises in long run industry equilibrium given risk neutrality such a bias however disappears we find that the occurrence of the bias depends not only on the existence of a risk premium but also on the length of the period considered each risk averse firm operates at a less efficient scale and moreover an expected spot price never accords with marginal cost when the expected spot price is less than marginal cost the risk averse firm can secure profit by selling futures contracts more than the amount of its output in the presence of production supply uncertainty a risk neutral firm operates with excess capacity under additive risk while the firm operates with proper capacity under multiplicative risk the key lies in whether its average cost curve is shifted by production risk

choosing what i want versus rejecting what i do not want an application of decision framing to product option choice decisions abstract the authors examine the effects of using a subtractive versus an additive option framing method on consumers option choice decisions in three studies the former option framing method presents consumers with a fully loaded product and asks them to delete options they do not want the latter presents them with a base model and asks them to add the options they do want combined the studies support the managerial attractiveness of the subtractive versus the additive option framing method consumers tend to choose more options with a higher total option price when they use subtractive versus additive option framing this effect holds across different option price levels study 1 and product categories of varying price study 2 moreover this effect is magnified when subjects are asked to anticipate regret from their option choice decisions study 2 however option framing has a different effect on the purchase likelihood of the product category itself depending on the subject s initial inter

markets for risk and openness to trade how are they related if protectionist trade policies aim to insure domestic industries against swings in world market prices the development of financial markets could lead to trade liberalization likewise trade lib

the effects of product price uncertainty on the owner managed firm theory and evidence in this paper we extend the theory of the owner managed firm to incorporate product price uncertainty and we present an empirical test of the model s predictions under product price uncertainty the trade off between leisure and profit faced by an owner manager is combined with the trade off between surety and risk bearing faced by an entrepreneur the firm s owner bears the uninsurable and undiversifiable risk about profit caused by product price uncertainty and as manager supplies the firm a unique labor factor the model predicts that the substitution effect of an increase in risk on the quantity supplied by the firm is negative the income effect of risk reinforces the substitution effect if the entrepreneur s labor supply has a positive wage elasticity but runs counter to and could dominate the substitution effect if the wage elasticity of labor supply for the entrepreneur is sufficiently negative unlike previous research on price uncertainty and the firm this paper presents an empirical test of the model s predictions using data on physicians in solo practice our empirical analysis indicates that although wage elasticities of labor supply for the physician entrepreneurs are negative greater risk leads to a reduction in output these results suggest that the substitution effect is dominant in determining the response to product price uncertainty for the owner managed firms in our sample frank knight 12 gave prominence to the risk bearing role of the entrepreneur who as residual claimant bears the risk associated with a firm s revenue tibor scitovsky 21 later emphasized a different aspect of entrepreneurial activity the trade off confronted by an ownermanager between consumption of leisure and pursuit of profit both models of the entrepreneur are relevant to predicting the behavior of an owner managed firm operating in a risky environment the entrepreneur in such a firm must choose between consuming leisure and supplying labor which provides an uncertain return the random residual of revenue net of payments to other factors

a restaurant field experiment in charitable contributions abstract the issue of how to best elicit charitable contributions has long been an important one for charitable organizations some recent studies have examined different schemes for eliciting contributions for public radio and maximizing revenue for commercial purposes our study is a pure field experiment that was conducted in a restaurant we varied the level of suggested contribution on the jar at the cashier to see if this had an effect on the revenue received in one condition did not make any suggestion we do find differences in revenue depending on the suggested amount showing that there is scope for strategy in choosing how to appeal to the potential donors the amount requested does affect revenue but it is not a monotonic relationship we also find that not naming a suggested amount fares poorly in terms of generating revenue

distinguished lecture on economics in government reflections on managing global integration the language of public policy is increasingly the language of economics and sophisticated policy formulation depends to an ever greater extent on an understanding of economic concepts over the last six years i have spent at the u s department of the treasury i have had the chance to be present when concepts ranging from superlative price indices to multiple equilibrium to the liquidity trap to dynamic hedging to shadow pricing were discussed with the president of the united states where it was once the case that the president s council of economic advisers waged a lonely battle for good economics in the federal government today first rate economists staff departments ranging from treasury to labor to commerce to justice to the environmental protection agency and they hold line as well as advisory positions while academic interlopers serving as political appointees like myself may get a majority of the attention a majority of the greater economic literacy of government policy in areas ranging from tax policy to telecommunications policy from monetary policy to manpower policy from financial policy to forestry policy is the result of the steady perseverance of career government economists as remarkable as the penetration of economics and economists into the american government has been their penetration into even higher levels of governments around the world is even more notable a decade ago mexican president zedillo was a practicing monetary economist in the bank of mexico two recent italian prime ministers romano prodi and lamberto dini have distinguished records as economic thinkers lest anyone think all those trained in economics think alike russian prime minister primakov holds a doctorate in political economy there are too many examples to catalogue of economists at the level of finance minister and central bank governor consider the influence of

forging ahead and falling behind the rise and relative decline of the first industrial nation this paper considers britain s failure to maintain its lead in economic growth in the face of overtaking by the united states recent cliometric research is reviewed and it is argued that early nineteenth century britain had a low growth potential by twentieth century standards and that the american growth of the early twentieth century was of a quite different kind neither traditional nor new growth theories can encompass this experience and it is suggested that natural resource endowments location specific learning processes and the international migration of factors of production were central aspects of american overtaking of britain

the political economy of growth a critical survey of the recent literature this article reviews the recent literature on the political economy of growth focusing on the research that has developed at the intersection of the endogenous growth literature and the new political economy it explores the relationship among four key variables economic growth and capital accumulation political instability political freedom and democratic institutions and income inequality

on output price uncertainty and the comparative statics of industry equilibrium the analysis of firm response to output price variability has until recently been incomplete due to a failure to consider explicitly the effect of firm response on the attainment of competitive equilibrium at the industry level a recent paper by appelbaum and katz 1 has addressed the issue of industry equilibrium under output price uncertainty they show how the optimal number of firms might change through the process of exit and entry and they characterize the collective influence of firms decisions on expected market price however their analysis focuses on firms with a single stage production process which allows no production flexibility in the form of adjustment of output levels after output price is revealed an earlier paper by hartman 3 has shown that at the firm level the optimal response to output price uncertainty will depend on whether production flexibility exists specifically if firms employ a two stage production process which is characterized by the presence of a quasi fixed factor then firm level output may increase or decrease in response to changes in output price variability even if firms are risk neutral the assumption that production flexibility exists changes those results initially developed by sandmo 7 and applied more recently by appelbaum and katz 1 which are based on a single stage production process this paper provides an extension of the appelbaum and katz analysis to admit production flexibility equivalently it extends the analysis of hartman to consider explicitly the effect of firm response on the attainment of competitive equilibrium at the industry level appelbaum and katz show that for an industry of identical risk averse firms with a singlestage production technology the effect of a mean preserving increase in price uncertainty is to decrease industry output and to raise market price a more recent comment by ishii 5 shows that output per firm will also fall yet none of these authors shows unambiguously whether the number of firms increases or decreases although not explicitly stated the analysis in appelbaum and katz suggests there would be no firm or industry response to a mean preserving change in price spread if firms were risk neutral expected profit maximizers the model employed in this paper is analogous to that of appelbaum and katz with two principal exceptions i here an industry is composed of firms all of which are either risk neutral

when should the ask be a nudge the effect of default amounts on charitable donations abstracthow does setting a donation option as the default in a charitable appeal affect people s decisions in eight studies comprising 11 508 participants making 2 423 donation decisions in both experimental settings and a large scale natural field experiment the authors investigate the effect of choice option defaults on the donation rate average donation amount and the resulting revenue they find 1 a scale back effect in which low defaults reduce average donation amounts 2 a lower bar effect in which defaulting a low amount increases donation rate and 3 a default distraction effect in which introducing any defaults reduces the effect of other cues such as positive charity information contrary to the view that setting defaults will backfire defaults increased revenue in the field study however the findings suggest that defaults can sometimes be a self canceling intervention with countervailing effects of default option magnitude on decisions and resulting in no net effect

on the evolution of the world income distribution the post world war ii period has seen substantial changes in the distribution of gdp per worker around the world in the upper half of the distribution a number of countries have exhibited large increases in income relative to the richest countries in the bottom half several countries have seen incomes fall relative to the richest countries the net result of these changes is a movement in the shape of the world income distribution from something that looks like a normal distribution in 1960 to a bi modal twin peaks distribution in 1988 projecting these changes into the future suggests a number of interesting ndings first it seems likely that the united states will lose its position as the country with the highest level of gdp per worker second growth miracles have been more common in recent decades than growth disasters if these dynamics continue the future income distribution will involve far more rich countries and far fewer poor countries than currently observed

defaults and donations evidence from a field experiment we study the effects of defaults on charitable giving in a large scale field experiment on an online fundraising platform we exogenously vary default options along two choice dimensions the chari

a theory of trickle down growth and development this paper develops a model of growth and income inequalities in the presence of imperfect capital markets and it analyses the trickle down effect of capital accumulation moral hazard with limited wealth constraints on the part of the borrowers is the source of both capital market imperfections and the emergence of persistent income inequalities three main conclusions are obtained from this model first when the rate of capital accumulation is sufficiently high the economy converges to a unique invariant wealth distribution second even though the trickle down mechanism can lead to a unique steady state distribution under laissez faire there is room for government intervention in particular redistribution of wealth from rich lenders to poor and middle class borrowers improves the production efficiency of the economy both because it brings about greater equality of opportunity and also because it accelerates the trickle down process third the process of capital accumulation initially has the effect of widening inequalities but in later stages it reduces them in other words this model can generate a kuznets curve

coherent arbitrariness stable demand curves without stable preferences economic theories of valuation generally assume that prices of commodities and assets are derived from underlying fundamental values for example in finance theory asset prices are believed to reflect the market estimate of the discounted present value of the asset s payoff stream in labor theory the supply of labor is established by the tradeoff between the desire for consumption and the displeasure of work finally and most importantly for this chapter consumer microeconomics assumes that the demand curves for consumer products chocolates cds movies vacations drugs and so forth can be ultimately traced to the valuation of pleasures that consumers anticipate receiving from these products because it is difficult as a rule to measure fundamental values directly empirical tests of economic theory typically examine whether the effects of changes in circumstances on valuations are consistent with theoretical prediction for example whether labor supply responds appropriately to a change in the wage rate whether compensated demand curves for commodities are downward sloping or whether stock prices respond in the predicted way to share repurchases however such comparative static relationships are a necessary but not sufficient condition for fundamental valuation e g summers 1986 becker 1962 was perhaps the first to make this point explicitly when he observed that consumers choosing commodity bundles randomly from their budget set would nevertheless produce downward sloping demand curves

explaining international and intertemporal variations in income inequality this paper explores the propositions that income inequality is relatively stable within countries and that it varies significantly among countries a new and expanded data set provides broad support for both propositions drawing on a political economy and capital market imperfection arguments to explain the intertemporal and international variation in inequality the empirical analysis shows that the predicted variables associated with the first argument a measure of civil liberties and the initial level of secondary schooling and the second argument a measure of financial depth and the initial distribution of land are indeed important determinants of inequality this paper explores two propositions regarding income inequality they are first income inequality is relatively stable within countries and second it varies significantly across countries to illustrate note that the gini coefficient in india remained almost constant for forty years 1951 92 with mean 32 6 and standard deviation 2 0 2 in contrast the variation in gini coefficients across countries is large 61 9 in honduras in 1968 compared with 17 8 in bulgaria in 1976 if substantiated these propositions have potentially significant implications for poverty the significance of the first is obvious barring any fundamental socio political change poverty reduction will depend crucially on the rate of economic growth given this the significance of the second is that in inegalitarian economies the poor will enjoy a smaller share of any national increment in income than in more egalitarian ones drawing on a new and expanded data set on inequality deininger and squire 1996a the first of the paper s three sections conducts standard statistical tests of the two propositions the sample comprises 573 observations on the most common measure of inequality the gini coefficient for 49 developed and developing countries covering the period 1947 94 the results broadly confirm our two propositions specifically analysis of variance anova shows that about 90 of the total variance in the gini coefficients

economic integration and income convergence not such a strong link abstract we would expect that the process of globalization between 1870 and 1914 and subsequent disintegration of the world economy during the interwar period would have led first to income convergence and then to income divergence between the participating countries but in fact we find stronger evidence for income convergence during the interwar period than during the first globalization similarly the average level of import protection in the world cannot be shown to have either helped or hampered convergence the evidence for trade induced convergence is therefore weak

measuring the restrictiveness of trade policy this article provides an introduction to the trade restrictiveness index tri which equals the uniform tariff that is welfare equivalent to a given pattern of trade protection unlike standard measures of trade restrictiveness the tri has a solid theoretical basis can incorporate both tariffs and quantitative restrictions and can be adapted to construct the trade policy equivalent of domestic distortions the article compares a number of applications and describes procedures for operationalizing the tri on a personal computer the authors conclude that the tri has considerable potential in empirical work