The Quarterly Journal of Economics

doi: 10.1162/003355399555909pmid: N/A

Lindbeck, Assar; Nyberg, Sten; Weibull, Jörgen W.

doi: 10.1162/003355399555936pmid: N/A

This paper analyzes the interplay between social norms and economic incentives in the context of work decisions in the modem welfare state. We assume that to live off one's own work is a social norm, and that the larger the population share adhering to this norm, the more intensely it is felt by the individual. Individuals face two choices: one economic, whether to work or live off public transfers; and one political, how large the transfer should be. The size of the transfer and the intensity of the social norm are determined endogenously in equilibrium.

Rabin, Matthew; Schrag, Joel L.

doi: 10.1162/003355399555945pmid: N/A

Psychological research indicates that people have a cognitive bias that leads them to misinterpret new information as supporting previously held hypotheses. We show in a simple model that such confirmatory bias induces overconfidence: given any probabilistic assessment by an agent that one of two hypotheses is true, the appropriate beliefs would deem it less likely to be true. Indeed, the hypothesis that the agent believes in may be more likely to be wrong than right. We also show that the agent may come to believe with near certainty in a false hypothesis despite receiving an infinite amount of information.

Hall, Robert E.; Jones, Charles I.

doi: 10.1162/003355399555954pmid: N/A

Output per worker varies enormously across countries. Why? On an accounting basis our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker—we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language.

Hunt, Jennifer

doi: 10.1162/003355399555963pmid: N/A

Starting in 1985, (West) German unions began to reduce standard hours on an industry-by-industry basis, in an attempt to raise employment. Whether this “work-sharing” works is theoretically ambiguous. I exploit the cross-industry variation in standard hours reductions to examine their impact on actual hours worked, wages, and employment. Analysis of industry-level data suggests that “work-sharing” may have reduced employment in the period 1984–1994. Using individual data from the German Socio-Economic Panel, I substantiate the union claim of “full wage compensation:” the hourly wage rose enough to offset the decline in actual hours worked.

Isham, Jonathan; Kaufmann, Daniel

doi: 10.1162/003355399555972pmid: N/A

Using economic rates of return from World Bank-funded investments, we investigate how country characteristics and policies that influence aggregate performance affect investment productivity. Controlling for other characteristics, countries with undistorted (distorted) macroeconomic, exchange rate, trade, and pricing policies have highly productive (unproductive) investments. No type of project—in tradable or nontradable sectors—can be “insulated” from poor policies, where returns on investments are about ten percentage points lower Productivity increases when policies improve within a country. Projects are also affected, nonlinearly, by the size of the public investment program where policies are undistorted. The results offer new evidence on benefits from policy reform and challenge conventional cost-benefit analysis.

Guiso, Luigi; Parigi, Giuseppe

doi: 10.1162/003355399555981pmid: N/A

This paper investigates the effects of uncertainty on the investment decisions of a sample of Italian manufacturing firms, using information on the subjective probability distribution of future demand for firms' products according to the entrepreneurs. The results support the view that uncertainty weakens the response of investment to demand thus slowing down capital accumulation. Consistent with the predictions of the theory, there is considerable heterogeneity in the effect of uncertainty on investment: it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power. We show that the negative effect of uncertainty on investment cannot be explained by uncertainty proxying for liquidity constraints.

Goldfajn, Ilan; Valdés, Rodrigo O.

doi: 10.1162/003355399555990pmid: N/A

This paper empirically analyzes a broad range of real exchange rate appreciation episodes. The objective is twofold. First, the paper studies the dynamics of appreciations, using a sample that is not limited to cases that end in crisis (or devaluation). Second, the paper analyzes the mechanism by which overvaluations are corrected. In particular, for various degrees of misalignment we calculate the proportion of the reversions that occur through nominal devaluations rather than through cumulative inflation differentials. The overall conclusion is that in most cases large and medium appreciations are reversed with nominal devaluations.

Gruber, Jonathan; Levine, Phillip; Staiger, Douglas

doi: 10.1162/003355399556007pmid: N/A

We examine the impact of increased abortion availability on the average living standards of children through a selection effect. Would the marginal child who was not born have grown up in different circumstances than the average child? We use variation in the timing of abortion legalization across states to answer this question. Cohorts born after legalized abortion experienced a significant reduction in a number of adverse outcomes. We find that the marginal child would have been 40–60 percent more likely to live in a single-parent family, to live in poverty, to receive welfare, and to die as an infant.

Laster, David; Bennett, Paul; Geoum, In Sun

doi: 10.1162/003355399555918pmid: N/A

Do professional forecasters provide their true unbiased estimates, or do they behave strategically? In our model, forecasters have common information, confer actively, and thus know the true pdf of future outcomes. Intensive users of economic forecasts monitor forecasters' performance closely; occasional users are drawn to the forecaster who fared best in the previous period. In the resulting Nash equilibrium, even though economists have identical expectations, they make a range of projections that mimics the true probability distribution of the forecast variable. Those whose wages depend most on publicity produce forecasts that differ most from the consensus. Empirical evidence supports the model.