Journal of the European Economic Association

Published by Wiley
Online ISSN: 1542-4774
Print ISSN: 1542-4766
The public Indian health care system is plagued by high staff absence, low effort by providers, and limited use by potential beneficiaries who prefer private alternatives. This artice reports the results of an experiment carried out with a district administration and a nongovernmental organization (NGO). The presence of government nurses in government public health facilities (subcenters and aid-posts) was recorded by the NGO, and the government took steps to punish the worst delinquents. Initially, the monitoring system was extremely effective. This shows that nurses are responsive to financial incentives. But after a few months, the local health administration appears to have undermined the scheme from the inside by letting the nurses claim an increasing number of "exempt days." Eighteen months after its inception, the program had become completely ineffective.
We study the allocation of time across decision problems. If a decision-maker (1) has noisy estimates of value, (2) improves those estimates the longer he or she analyzes a choice problem, and (3) allocates time optimally, then the decision-maker should spend less time choosing when the difference in value between two options is relatively large. To test this prediction we ask subjects to make 27 binary incentive-compatible intertemporal choices, and measure response time for each decision. Our time allocation model explains 54% of the variance in average decision time. These results support the view that decision-making is a cognitively costly activity that uses time as an input allocated according to cost-benefit principles.
Recent research on the economics of human development deepens understanding of the origins of inequality and excellence. It draws on and contributes to personality psychology and the psychology of human development. Inequalities in family environments and investments in children are substantial. They causally affect the development of capabilities. Both cognitive and noncognitive capabilities determine success in life but to varying degrees for different outcomes. An empirically determined technology of capability formation reveals that capabilities are self-productive and cross-fertilizing and can be enhanced by investment. Investments in capabilities are relatively more productive at some stages of a child's life cycle than others. Optimal child investment strategies differ depending on target outcomes of interest and on the nature of adversity in a child's early years. For some configurations of early disadvantage and for some desired outcomes, it is efficient to invest relatively more in the later years of childhood than in the early years.
This paper analyzes an informal financial institution that brings heterogeneous agents together in groups. We analyze decentralized matching into these groups, and the equilibrium composition of participants that consequently arises. We find that participants sort remarkably well across the competing groups, and that they re-sort immediately following an unexpected exogenous regulatory change. These findings suggest that the competitive matching model might have applicability and bite in other settings where matching is an important equilibrium phenomenon. (JEL: O12, O17, G20, D40).
The financial crisis that swept across northern Europe in 1763 bears a strong resemblance to more recent episodes of financial distress. The combination of the specific contractual arrange-ments at the time, interlocking credit relationships, and the high leverage of market participants triggered distress sales of assets, leading to a severe liquidity crisis. Hence, the crisis is an early instance of contagion on the asset side of the balance sheet. We highlight the salient features of the 1763 crisis and propose a stylized model of the events. While the financial institutions have changed fundamentally in the intervening 200 or so years, the underlying problems appear to be universal. (JEL: 6621, E44, N23) Copyright (c) 2004 by the European Economic Association.
In the 1970s, large increases in the price of oil were associated with sharp decreases in output and large increases in inflation. In the 2000s, and at least until the end of 2007, even larger increases in the price of oil were associated with much milder movements in output and inflation. Using a structural VAR approach Blanchard and Gali (2007a) argued that this has reflected in large part a change in the causal relation from the price of oil to output and inflation. In order to shed light on the possible factors behind the decrease in the macroeconomic effects of oil price shocks, we develop a new-Keynesian model, with imported oil used both in production and consumption, and we use a minimum distance estimator that minimizes, over the set of structural parameters and for each of the two samples (pre and post 1984), the distance between the empirical SVAR-based impulse response functions and those implied by the model. Our results point to two relevant changes in the structure of the economy, which have modified the transmission mechanism of the oil shock: vanishing wage indexation and an improvement in the credibility of monetary policy. The relative importance of these two structural changes depends however on how we formalize the process of expectations formation by economic agents.
In this paper, I study the production of academic research by economics departments and economists. Worldwide rankings are provided based on both citations and publications. These rankings reveal a dominant position of the United States in the production of economics literature. Over time, however, the extent of this dominance is decreasing. (JEL: A10, A14) Copyright (c) 2003 The European Economic Association.
We examine the impact of housing capital gains on savings behaviour during the 1990s British housing market cycle using microdata from the British Household Panel Survey and county-level house price data. We condition the models on household real financial capital gains using Family Resources Survey data. We find a marginal propensity to consume out of housing wealth of between 0.01 and 0.03, depending on specification. Among our novel findings are asymmetric behaviour between periods of house price rises and falls, with stronger consumption response during periods of house price increases, and a disproportionate impact on saving if the household has negative housing equity.
Part 1 of this report outlines the steps in launching the new Journal of the European Economic Association; Part 2 gives details of conferences, committees and other relatively routine matters; and Part 3 deals with administration and governance issues; Part 4 includes final notes.
Figure D1 Comparison of Control Totals as % Personal Income in National Accounts
A method is developed for using income-tax data to investigate the evolution of the highest incomes over virtually the entire 20th century. The income shares of the top 10, 5, 1, 0.5, 0.1, and 0.05 percent are analysed for the UK and the Netherlands. For considering the top shares among themselves the "Pareto-Lorenz coefficient" is proposed. Between the two countries, the top shares appear to undergo a strikingly similar and strong decline up to the mid-1970s. Since then British top shares have increased significantly while Dutch shares remained basically unchanged. This outcome parallels similar results for the US and France obtained by Piketty and Saez and poses interesting questions for research. (JEL: N34, D31, O15) Copyright (c) 2005 by the European Economic Association.
In recent research, we have proposed a new framework for examining the determinants of income inequality, which emphasizes firm and worker heterogeneity and selection into export markets. In this paper, we use our framework to examine how wage inequality and unemployment vary across workers with different abilities. Both in the closed and open economy, the unemployment rate is decreasing in worker ability, whereas both the average wage and wage inequality are increasing in worker ability. Upon opening the economy to trade, however, intermediate-ability workers experience reductions in average wages and increases in unemployment rates relative to both lower and higher ability workers. (JEL: F12, F16, E24) (c) 2010 by the European Economic Association.
We model differences among agents in their ability to recognize temporal patterns of prices. Using the concept of DeBruijn sequences in two dynamic models of markets, we demonstrate the existence of equilibria in which prices fluctuate in a pattern that is independent of the fundamentals and that can be recognized only by the more competent agents. (JEL: C7, D4, S477) Copyright (c) 2003 The European Economic Association.
Twenty-five percent of teachers were absent from school, and only about half were teaching, during unannounced visits to a nationally representative sample of government primary schools in India. Absence rates varied from 15% in Maharashtra to 42% in Jharkhand, with higher rates concentrated in the poorer states. We do not find that higher pay is associated with lower absence. Older teachers, more educated teachers, and head teachers are all paid more but are also more frequently absent; contract teachers are paid much less than regular teachers but have similar absence rates; and although relative teacher salaries are higher in poorer states, absence rates are also higher. Teacher absence is more correlated with daily incentives to attend work: teachers are less likely to be absent at schools that have been inspected recently, that have better infrastructure, and that are closer to a paved road. We find little evidence that attempting to strengthen local community ties will reduce absence. Teachers from the local area have similar absence rates as teachers from outside the community. Locally controlled nonformal schools have slightly higher absence rates than schools run by the state government. The existence of a PTA is not correlated with lower absence. Private-school teachers are only slightly less likely to be absent than public-school teachers in general, but are 8 percentage points less likely to be absent than public-school teachers in the same village. (JEL: O15, I21, H41, H52) Copyright (c) 2005 The European Economic Association.
We utilize a large-scale randomized social experiment to identify how coworkers affect each other’s effort as measured by work absence. The experiment altered the work absence incentives for half of all employees living in Göteborg, Sweden. Using administrative data we are able to recover the treatment status of all workers in more than 3,000 workplaces. We first document that employees in workplaces with a high proportion treated co-workers increase their own absence levels significantly. We then examine the heterogeneity of the treatment effect in order to explore what mechanisms are underlying the peer effect. While a strong effect of having a high proportion of treated coworkers is found for the nontreated workers, no significant effects are found for the treated workers. These results suggest that pure altruistic social preferences can be ruled out as the main motivator for the behaviour of a nonnegligible proportion of the employees in our sample.
Employment protection systems are widely believed to generate distortions in firms' hiring and firing decisions. However, much less is known about the impact of these regulations on workers' behavior. In this paper we provide evidence on the latter question using data from a large Italian bank. Our analysis is based on weekly observations for 545 men and 313 females hired as white-collar workers between January 1993 and February 1995. These workers begin to be protected against firing only after the 12th week of tenure, and we observe them for one year. We show that-particularly for men-the number of days of absence per week increases significantly once employment protection is granted at the end of probation. This suggests that the provision of employment protection causes the increase in absenteeism. Alternative explanations based on career concerns or on learning about social norms would predict a smooth relationship between absenteeism and tenure instead of the observed discrete jump. This consequence of employment protection seems to have been neglected in European policy debates so far. (JEL: J2, D2, D8, M5) Copyright (c) 2005 by the European Economic Association.
Economic theory is often abused in practical policy-making. There is frequently excessive focus on sophisticated theory at the expense of elementary theory; too much economic knowledge can sometimes be a dangerous thing. Too little attention is paid to the wider economic context, and to the dangers posed by political pressures. Superficially trivial distinctions between policy proposals may be economically significant, while economically irrelevant distinctions may be politically important. I illustrate with some disastrous government auctions, but also show the value of economic theory. (JEL: A11, B4, D44, L96) Copyright (c) 2003 The European Economic Association.
We develop and implement a collocation method to solve for an equilibrium in the dynamic legislative bargaining game of Duggan and Kalandrakis (2008). We formulate the collocation equations in a quasi-discrete version of the model, and we show that the collocation equations are locally Lipchitz continuous and directionally differentiable. In numerical experiments, we successfully implement a globally convergent variant of Broyden's method on a preconditioned version of the collocation equations, and the method economizes on computation cost by more than 50% compared to the value iteration method. We rely on a continuity property of the equilibrium set to obtain increasingly precise approximations of solutions to the continuum model. We showcase these techniques with an illustration of the dynamic core convergence theorem of Duggan and Kalandrakis (2008) in a nine-player, two-dimensional model with negative quadratic preferences.
This paper analyzes the demand and cost structure of the French market of academic journals. After merging several databases, we estimate an aggregated nested logit demand system combined simultaneously with a pricing equation, taking into account theevolution of impact factors of journals. We identify the structural parameters of this market and find that price elasticities of demand are relatively high, indicating that this industry experiences competitive constraints. We conjecture that the two-sidedness feature of academic journals could be a rationale for our results. (JEL: L11, L13, L82, C35) (c) 2007 by the European Economic Association.
We examine the trade-offs implicit in academic admissions standards when students are charged cost-based tuition and offered loans that remove liquidity constraints. Lowering entry requirements while holding graduation requirements fixed increases aggregate output and promotes a more equal distribution of wages, but reduces relative income mobility and diminishes the scope for affirmative action. Lowering admissions standards while raising graduation requirements, so that the number of graduates remains constant, has little direct effect on output, distribution, or mobility, but again reduces the scope for affirmative action. Income-based affirmative action offers a better trade-off between output and relative mobility than income-neutral admissions. (JEL: D31, H42, I23, I28, J24) Copyright (c) 2005 by the European Economic Association.
In this paper, we describe the properties of the optimal allocation of consumption in a world with moral hazard and hidden borrowing and lending. We discuss how and under what conditions the efficient allocation can be distinguished from that of the permanent income (self-insurance) model. We also compare our allocation with the complete markets (full information) case, and with the standard moral hazard model with monitorable and fully contractible asset holdings. (JEL: D82, E21) Copyright (c) 2005 The European Economic Association.
Changes in the legislation in the mid-1980s in Portugal provide remarkably good conditions for analysis of the employment effects of mandatory minimum wages, as the minimum wage increased sharply for a very specific group of workers. Relying on a matched employer-employee panel data set, we model gross worker flows-accessions and separations-in continuing firms, as well as in new firms and those going out of business, using a count regression model applied to proportions.Employment trends for teenagers, the affected group, are contrasted to those of older workers before and after the raise in the youth minimum wage. The major effect on teenagers of a rising minimum wage has been the reduction of separations from the employer, which, during the period under analysis, has compensated for the reduction of accessions to new and continuing firms.In this sense, our results can reconcile some of the previous evidence in the empirical literature when analyzing the aggregate impact of the minimum wage on youth employment without decomposing it by type of worker flow. (JEL: D21, J23, J38) (c) 2006 by the European Economic Association.
One of the few stylized facts in international relations is that democracies, unlike autocracies, very rarely fight each other. We examine the sustainability of international peace between democracies and autocracies, where the crucial difference between these two political regimes is whether or not policymakers are subject to periodic elections. We show that the fear of losing office can deter democratic leaders from engaging in military conflicts. Crucially, this discipline effect can only be at work if incumbent leaders can be re-elected, implying that democracies in which the executives are subject to term limits should be more conflict prone. To assess the validity of our predictions, we construct a large dataset on countries with executive term limits. Our analysis of inter-state conflicts for the 1816-2001 period suggests that electoral incentives are indeed behind the democratic peace phenomenon: while democratic dyads are in general less likely to be involved in conflicts than any other dyads, this result does not hold for democracies in which the executive faces binding term limits; moreover, the dispute patterns of democracies with term limits depend on whether the executive is in the last or penultimate mandate.
The use of school accountability in the United States to improve student performance began in the separate states during the 1980s and was elevated through the federal No Child Left Behind Act of 2001. Evaluating the impact of accountability is difficult because it applies to entire states and can be confused with other changes in the states. We consider how the differential introduction of accountability across states affects growth in student performance on the National Assessment of Educational Progress (NAEP). Our preliminary analysis finds that: 1) accountability improves scores of all students; 2) there is no significant difference between simply reporting scores and attaching consequences; and, 3) while accountability tends to narrow the Hispanic-White gap, it tends to widen the Black-White gap in scores. The last finding suggests that a single policy instrument cannot be expected to satisfy multiple simultaneous goals. (JEL: I2, H7, J4) Copyright (c) 2004 The European Economic Association.
This paper examines the declining volatility of U.S. output growth from a production perspective. At the aggregate level, increased output stability reflects decreased volatility in both labor productivity growth and hours growth, as well as a significant decline in the covariance. The decline in output volatility can also be traced to less volatile labor input and total factor productivity growth and the smaller covariance between them. At the industry level, the decline in volatility appears widespread, with about 80% of component industries showing smaller contributions to aggregate output volatility after 1984, although most of the aggregate decline reflects smaller covariances between industries. There is also strong evidence of a decline in the correlation between hours and labor productivity growth across industries. The paper concludes with a discussion of potential explanations. (JEL: E0, E3) (c) 2009 by the European Economic Association.
In 1998, Sweden introduced a second tier of mandatory individual accounts in the public pension system. This paper examinesinvestment choice in the Swedish individual account scheme focusing on two aspects of the investment decision: Do workers with high risk in their human capital diversify their overall portfolio by investing their pension funds in low-risk funds? And to what extent do participants exhibit "home bias" and invest in Swedish assets? Two pieces of evidence support rational investment decisions. First, we establish a positive relationship between income and the level of risk. Second, married participants appear to pool their risks. On the other hand, the results show that participants at the bottom of the income distribution take on as much risk as those at the top, indicating that they are not diversifying their overall portfolio. Finally, participants employed in sectors that are affected by foreign competition are less likely to diversify their portfolios and invest in foreign assets compared to the public sector. Instead, these workers exhibit "home bias" in their investments. (JEL: G11, H55) (c) 2007 by the European Economic Association.
This paper studies human capital investment in a spatial setting with interpersonal complementarities. A mixture of local and global social interactions affects the cost of acquiring education, and the return to human capital is determined endogenously in the market. We study how spatially segregated investment equilibria are affected by an increase in the relative importance of global vis-à-vis local interactions. Per capita income level, equality, and welfare are shown to improve if the skilled constitute a majority to begin with, and if not, these implications are reversed. We also examine the effects of wider local neighborhoods, and lower mobility costs, and study a related two-group model based on social distance. (JEL: D31, O15, D85) (c) 2010 by the European Economic Association.
Choice and competition in education have recently found growing support from both policymakers and academics. Yet evidence on the actual benefits of market-orientated reforms is at best mixed. Moreover, although the economic rationale for choice and competition is clear, in existing work there is rarely an attempt to distinguish between the two concepts. In this paper, we study whether pupils in Primary schools in England with a wider range of school choices achieve better academic outcomes than those whose choice is more limited; and whether Primary schools facing more competition perform better than those in a more monopolistic situation. In simple least squares regression models we find little evidence of a link between choice and achievement, but uncover a small positive association between competition and school performance. Yet this could be related to endogenous school location or pupil sorting. In fact, an instrumental variable strategy based on discontinuities generated by admissions district boundaries suggests that the performance gains from greater school competition are limited. Only when we restrict our attention to Voluntary Aided schools, which have more freedom in managing their governance and admission practices, do we find some evidence of a positive causal link between competition and pupil achievement. (JEL: I20, H70, R5) (c) 2008 by the European Economic Association.
In a randomized field experiment where first year university students could earn financial rewards for passing all first year requirements within one year we find small and non-significant average effects of financial incentives on the pass rate and the numbers of collected credit points. There is however evidence that high ability students collect significantly more credit points when assigned to (larger) reward groups. Low ability students collect less credit points when assigned to larger reward groups. After three years these effects have increased, suggesting dynamic spillovers. The small average effect in the population is therefore the sum of a positive effect for high ability students and a (partly) off-setting negative effect for low ability students. A negative effect of financial incentives for less able individuals is in line with research from psychology and recent economic laboratory experiments which shows that external rewards may be detrimental for intrinsic motivation.
This paper investigates the development of basic cognitive, motor, and noncognitive abilities from infancy to adolescence. We analyse the predictive power of these abilities, initial risk conditions, and home resources for children's achievement. Our data are taken from the Mannheim Study of Children at Risk (MARS), an epidemiological cohort study, which follows the long-term outcome of early risk factors. Results indicate that differences in abilities increase during childhood, although there is a remarkable stability in the distribution of the economic and socio-emotional home resources during childhood. Initial risk conditions trigger a cumulative effect. Cognitive, motor, and noncognitive abilities acquired during preschool age contribute to the prediction of children's achievement at school age. (JEL: D87, I12, I21,\break J13) (c) 2009 by the European Economic Association.
This paper makes use of the regional variation in schooling legislation within the German secondary education system to estimate the causal effect of central exit examinations on student performance. We propose a difference-in-differences framework that exploits the quasi-experimental nature of the German TIMSS middle school sample and discuss its identifying assumptions. The estimates show that students in federal states with central exit examinations clearly outperform students in federal states without such examinations. However, only part of this difference can be attributed to the existence of the central exit examinations themselves. Our results suggest that central examinations increase student achievement by the equivalent of about one-third of a school year. (JEL: D02, H42, I28) Copyright (c) 2005 by the European Economic Association.
The transition from economic stagnation to sustained growth is often modeled thanks to "population-induced" productivity improvements, which are assumed rather than derived from primary assumptions. In this paper the effect of population on productivity is derived from optimal behavior. More precisely, both the number and location of education facilities are chosen optimally by municipalities. Individuals determine their education investment depending on the distance to the nearest school, and also on technical progress and longevity. In this setting, higher population density enables the set-up costs of additional schools to be covered, opening the possibility to reach higher educational levels. Using counterfactual experiments we find that one-third of the rise in literacy can be directly attributed to the effect of density, and one-sixth is linked to higher longevity. Moreover, the effect of population density in the model is consistent with the available evidence for England, where it is shown that schools were established at a high rate over the period 1540-1620. (JEL: O41, I21, R12, J11) (c) 2007 by the European Economic Association.
We consider an auction environment with interdependent values. Each bidder can learn her payoff type through costly information acquisition. We contrast the socially optimal decision to acquire information with the equilibrium solution in which each agent has to privately bear the cost of information acquisition. In the context of the generalized Vickrey-Clarke-Groves mechanism, we establish that the equilibrium level exceeds the socially optimal level of information with positive interdependence. The individual decisions to acquire information are strategic substitutes. The difference between the equilibrium and the efficient level of information acquisition is increasing in the interdependence of the bidders' valuations and decreasing in the number of informed bidders.
Comparing the distribution of top incomes across countries raises many methodological problems, including differences in tax legislation and in tax avoidance, the definition of the income unit, and the definition of a control total for income. The paper considers the significance of these problems in three applications: comparing top income shares at a point in time, analysing the extent of convergence or divergence over time, and setting national changes in the context of the world distribution of income. (JEL: D31) Copyright (c) 2005 The European Economic Association.
We use household and village survey data from South India to examine who participates in village meetings called by elected local governments, and what effect these meetings have on beneficiary selection for welfare programs. Our main finding is that it is the more disadvantaged social groups who attend village meetings and that holding such meeting simproves the targeting of resources towards the neediest groups. (JEL: H40, H42, O20) Copyright (c) 2005 The European Economic Association.
We study political activism by several interest groups with private signals. When their ideological distance to the policymaker is small, a "low-trust" regime prevails: agents frequently lobby even when it is unwarranted, taking advantage of the confirmation provided by others' activism; conversely, the policymaker responds only to generalized pressure. When ideological distance is large, a "high-trust" regime prevails: lobbying behavior is disciplined by the potential contradiction from abstainers, and the policymaker's response threshold is correspondingly lower. Within some intermediate range, both equilibria coexist. We then study the optimal organization of influence activities, contrasting welfare levels when interest groups act independently and when they coordinate. (JEL: D72, D78, D82) Copyright (c) 2003 The European Economic Association.
We show that, when private sector expectations are determined in line with adaptive learning, optimal policy responds persistently to cost-push shocks. The optimal response is stronger and more persistent, the higher is the initial level of perceived inflation persistence by the private sector. Such a sophisticated policy reduces inflation persistence and inflation volatility at little cost in terms of output gap volatility. Persistent responses to cost-push shocks and stability of inflation expectations resemble optimal policy under commitment and rational expectations. Nevertheless, it is clear that the mechanism at play is very different. In the case of commitment it relies on expectations of future policy actions affecting inflation expectations; in the case of sophisticated central banking it relies on the reduction in the estimated inflation persistence parameter based on inflation data generated by shocks and policy responses. (JEL: E52) (c) 2006 by the European Economic Association.
This paper documents the existence and main patterns of inter-industry wage differentials across a large number of industries for eight EU countries at two points in time (in general 1995 and 2002) and explores possible explanations for these patterns. The analysis uses the European Structure of Earnings Survey, an internationally harmonised matched employer-employee data set, to estimate industry wage differentials conditional on a rich set of employee, employer, and job characteristics. After investigating the possibility that unobservable employee characteristics lie behind conditional wage differentials, a hypothesis which cannot be accepted, the paper investigates the role of institutional, industry structure, and industry performance characteristics in explaining industry wage differentials. The results suggest that inter-industry wage differentials could reflect efficiency wages or rent-sharing mechanisms and that rent-sharing is more likely in industries with firm-level collective agreements and with higher-collective agreement coverage. (JEL: J31, J41, J51) (c) 2010 by the European Economic Association.
This paper reviews some puzzling economic aspects of globalization and argues that they cannot be satisfactorily addressed in perfectly or monopolistically competitive models. Drawing on recent work, a model of oligopoly in general equilibrium is sketched. The model ensures theoretical consistency by assuming that firms are large in their own markets but small in the economy as a whole, and ensures tractability by assuming quadratic preferences defined over a continuum of goods. Applications considered include the effects of trade liberalization on industrial structure, on cross-border merger waves, and on the distribution of income between skilled and unskilled workers. (JEL: D50, L13, F12) Copyright (c) 2003 The European Economic Association.
The economics of public policy has suffered from "collective amnesia": we have forgotten or ignored much of the tradition of public policy in imperfect economies whose foundations were laid by James Meade and Paul Samuelson. This has been associated with a period of around two decades from the early 1980s to the early 2000s where the economics of public policy has "bent to political winds" and has fed arguments for government to get out of the way and leave everything to the markets, to self-interest and to self-regulation. This has manifested itself via the choice of models (those which imply, often directly from assumptions, passive government), patterns of teaching (the marginalisation of public economies in imperfect economics) and "compartmentalisation." Examples in climate change where this amnesia has misled include approaches to discounting and the failure to make non-marginal change central to analysis. On the other hand, creative application of modern public economics gives interesting results such as the possibility of making both current and future generations better off and of informed discussion complementing economic instruments. There are strong formal analogies between policy on climate change and on behavioural economics. Indeed, there seems to be great potential in the combination of these two fields. (JEL: A10, A12, D61, D62, D63) (c) 2010 by the European Economic Association.
This lecture address the following two key criticisms of the empirical application of revealed preference theory: When the RP conditions do not reject, they do not provide precise predictions; and when they do reject, they do not help characterize the nature of irrationality or the degree/direction of changing tastes. Recent developments in the application of RP theory are shown to have rendered these criticisms unfounded. A powerful test of rationality is available that also provides a natural characterization of changing tastes. Tight bounds on demand responses and on the welfare costs of relative price and tax changes are also available and are shown to work well in practice. (JEL: D11, D12, C14) Copyright (c) 2005 The European Economic Association.
The paper presents empirical findings regarding the economic policy consequences of constitutional arrangements, in three different dimensions. First, the data are consistent with several theoretical predictions about the consequences of electoral rules and forms of government for fiscal policy and rent extraction, even when non-random constitution selection is taken into account. Second, empirical tests of the predictions from a new comprehensive model of parliamentary democracy show that proportional elections raise government spending through their indirect consequences for party structures and types of government, rather than through their direct effects on policymaking incentives. Third, new empirical results suggest that constitutional arrangements may have important consequences for structural policies that promote long-run economic performance, hinting at a missing link in the causal chain from history to current economic performance. All these empirical findings appear statistically robust, and the estimated effects are large enough to be of genuine economic interest. (JEL: D72, E60, H00, O11) Copyright (c) 2004 The European Economic Association.
Top-cited authors
Jean-Charles Rochet
  • University of Zurich
Guido Tabellini
  • Università commerciale Luigi Bocconi
James J Heckman
  • University of Chicago
Armin Falk
  • briq - Institute on Behavior & Inequality
David Benjamin Huffman
  • University of Pittsburgh