ADAM SMITH'S CONCEPT OF SELF-COMMAND AS A SOLUTION TO DYNAMIC INCONSISTENCY AND THE COMMITMENT PROBLEM

How is rationality related to morality and the emotions? In response to Hume, Smith argues that sympathy is about the attenuation, rather than the escalation, of original emotions because sympathy involves judgment. Sympathy means that the spectator understands an emotion felt by the principal by placing him or herself in the principal’s shoes. Such understanding would not take place unless the principal’s emotion is proper in that the principal has attenuated the pitch of the emotion via self‐command, that is, via rational choice. Smith’s notion of sympathy solves the commitment problem: agents command their emotions, which include the temptation to cheat their future selves and others, in order to receive approval. (JEL B12, D01, D64)     

RATIONAL EXPECTATIONS IN THE AGGREGATE

This paper investigates the relationship between the way rational expectations is employed in practice and the argument initially put forth to justify its use. In practice rational expectations has meant that the expectations of each agent taken separately is consistent with the predictions of the theory. This is different than the argument frequently used by proponents of rational expectations that on an aggregate level expectations should be consistent with the theory. The primary findings are that standard and aggregate rational expectations typically yield systematically different equilibria and that the size of the difference depends positively on the degree of synergism.     

REDUNDANT TARIFFS AS RATIONAL ENDOGENOUS PROTECTION

Redundant protection, tariffs that exceed the domestic import-price differential, is an important feature of nineteenth century U.S. tariff history and remains a common practice in many developing countries. This paper develops political-economy models of the tariff setting process when the world price of the importable product is stochastic. The optimal endogenous tariff may involve redundant protection even if agents are risk neutral. These political-economy models also permit us to assess the comparative static effects of changes in the mean-preserving spread of the world price under differing assumptions about the political process.     

THE ECONOMIC CHOICE IN DIVORCE:

Abstract

Using the NELS data set, this study assessed whether parental involvement in children's education can eliminate the effects of parental divorce and remarriage on the academic achievement of adolescents. The results indicate that consistent effects for divorce emerged using the No-SES Model, both with and without the inclusion of the parental involvement variables. Similarly, consistent effects for remarriage emerged using the SES Model, both with and without the inclusion of the parental involvement variables. The significance of these results is discussed.     

SIMILARITY JUDGMENTS AND ANOMALIES IN INTERTEMPORAL CHOICE

This article demonstrates that choices based on similarity judgments will exhibit not only common ratio and reflection effects under uncertainty but also common difference and reflection effects in intertemporal contexts.     

MULTIPLE OUTPUTS AND COMMUNITY CHOICE IN PUBLIC EDUCATION

Numerous studies suggest that family or community effects dominate the production process in public education, and that marginal products of public school inputs are virtually zero. This paper argues that such findings result from ignoring the variety of school outputs, and the possibility for community choice among them. Systematic differences in school output preferences, by socioeconomic status and race, are used to explain differences in school outputs, usually taken to indicate differences in production possibilities. Estimates of multiple output production and cost functions allowing for choice do show reductions in background effects on production possibilities, though some effects remain.     

CATASTROPHE AND RATIONAL POLICY: CASE OF NATIONAL SECURITY

Predicting catastrophes involves heavy‐tailed distributions with no mean, eluding proactive policy as expected cost‐benefit analysis fails. We study US government counterterrorism policy, given heightened risk of terrorism. But terrorism also involves human behavior. We synthesize the behavioral and statistical aspects in an adversary‐defender game. Calibration to extensive data shows that where a Weibull distribution is the best predictor, US counterterrorism policy is rational (and optimal). Here, we estimate the adversary's unobserved variables, e.g., difficulty of an attack. We also find cases where the best predictor is a Generalized‐Pareto with no finite mean and rational policy fails. Here, we offer “work‐arounds”. (JEL H56, D81, C46)     

PORTFOLIO CHOICE AND RISK ATTITUDES: AN EXPERIMENT

Using financial incentives, we study how portfolio choice (how much to invest in a risky asset) depends on three well-known behavioral phenomena: ambiguity aversion, the illusion of control, and myopic loss aversion. We find evidence that these phenomena are present and test how the level of investment is affected by these motivations; at the same time, we investigate whether participants are willing to explicitly pay a small sum of money to indulge preferences for less ambiguity, more control, or more frequent feedback/opportunities to choose the investment level. First, the observed preference for "control" did not affect investment behavior and in fact disappeared when participants were asked to actually pay to gain more control. Second, while people were indeed willing to pay for less ambiguity, the level of ambiguity did not influence investment levels. Finally, participants were willing to pay to have more frequent feedback opportunities to change their portfolio, even though prior research has shown that people invest less in risky assets (and earn less) in this case . ( JEL B49, C91, D81, G11, G19)     

GORDON TULLOCK'S CONTRIBUTIONS TO THE THEORY OF PUBLIC CHOICE

This paper offers a commentary on Gordon Tullock's various contributions to economics and social science. Tullock's methodology and style, and various critical appraisals of Tullock's work are discussed. The importance of Tullock's work and its significance for the future of economics are also assessed.     

AN ECONOMIC ANALYSIS OF IDENTITY AND CAREER CHOICE*

Standard economic models tend to be more specific about pecuniary payoffs than nonpecuniary payoffs to education. Based on the ideas of Akerlof and Kranton, we consider a model of career choice and identity where individuals derive nonpecuniary identity payoffs. Using factor analysis on a range of attitude questions, we find two factors related to identity (career orientation and social orientation), which are important for planned educational choices and for observed gender differences. The implication is that policy makers and institutions of higher education need to focus on identity‐related issues rather than just improved financial incentives if they aim at attracting high‐ability youths to certain careers. (JEL I21, J24)     

FINANCIAL FRICTIONS AND THE CHOICE OF EXCHANGE RATE REGIMES

This article provides a quantitative assessment of the role of financial frictions in the choice of exchange rate regimes. I use a two‐country model with sticky prices to compare different exchange rate arrangements. I simulate the model without and with borrowing constraints on investment, under monetary policy and technology shocks. I find that the stabilization properties of floating exchange rate regimes in face of foreign shocks are enhanced relative to fixed exchange rate in presence of credit frictions. In presence of symmetric and correlated shock, fixed exchange rates regimes can perform better than floating. This analysis can have important policy implications for accession countries joining the European Exchange Rate Mechanism II system and with high degrees of credit frictions. (JEL E3, E42, E44, E52, F41)     

ON THE CHOICE BETWEEN PROPERTY RULES AND LIABILITY RULES

When parties can bargain with each other in an externality situation, it is frequently argued that liability rules are preferable to property rules. The case for liability rules is thought to be strongest when the parties behave strategically, when the collective authority responsible for maximizing social welfare has perfect information, and when lump-sum transfers are not available. It is shown here that liability rules are not generally preferable to property rules in these circumstances because of their limited ability to redistribute income between the parties.     

THE METRICS OF STYLE: ADAM SMITH TEACHES EFFICIENT RHETORIC

Does style matter for economic writing? Several stylistic characteristics of ninety-seven AEA presidential addresses, including word length, sentence length and percent of sentences in the passive voice, were computed and used to explain citations to these economists' work. Avoidance of the passive is an old stylistic norm given by Adam Smith. Word length and sentence length serve as modern stylistic norms. Only the percent passive matters to explain citations. Perhaps not coincidentally, while writing clarity in our data set has declined over time when measured by the new norm, it has improved when measured by the old norm.     

HEALTH CARE, INSURANCE, AND THE CONTRACT CHOICE EFFECT

This article explores the interdependence between the individual consumer's demand for medical care and choice of health insurance coverage, with emphasis on its implications for demand behavior and empirical analysis. We show that an increase in the price of medical care has two effects on demand, the usual response of reduced quantity demanded and a health insurance contract choice effect resulting from the consumer's incentive to change insurance plan. The contract choice effect, widely neglected in studies of medical care demand, alters both the quantitative and qualitative predictive properties of the consumer's demand for medical services. (JEL D11, D81, I11 )