WILLPOWER AND THE OPTIMAL CONTROL OF VISCERAL URGES

Common intuition and experimental psychology suggest that the ability to self‐regulate (willpower) is a depletable resource. We investigate the behavior of an agent with limited willpower who optimally consumes over time an endowment of a tempting and storable consumption good or cake. We assume that restraining consumption below the most tempting feasible rate requires willpower. Any willpower not used to regulate consumption may be valuable in controlling other urges. Willpower thus links otherwise unrelated behaviors requiring self‐control. An agent with limited willpower will display apparent domain‐specific time preference. Such an agent will almost never perfectly smooth his consumption, even when it is feasible to do so. Whether the agent relaxes control of his consumption over time as experimental psychologists predict or tightens it as most behavioral theories predict depends in our model on the net effect of two analytically distinct but opposing forces.     

THE RELATIONSHIP BETWEEN CHILD HEALTH,DEVELOPMENTAL GAPS,AND PARENTAL EDUCATION: EVIDENCE FROM ADMINISTRATIVE DATA

We use administrative German data to examine the role of physical and mental health conditions in explaining developmental gaps between children whose parents have different educational levels. Specifically, we employ sibling fixed effect models to estimate the effect of a comprehensive list of childhood health conditions—diagnosed by government physicians—on the cognitive and verbal ability of pre‐school children. We also apply decomposition methods to examine the extent to which gaps in child development can be attributed to child health conditions. While most physical health conditions have small and insignificant effects, mental health conditions, in particular hyperactivity, have a large and significant effect on development. Mental health conditions account for 14%–36% of the gap in cognitive ability and for 23%–24% of that in verbal ability. Thus, policies aimed at reducing disparities in child development and socioeconomic inequalities later in life should focus more on the early diagnosis and effective treatment of mental health conditions.     

Skill Acquisition in the Informal Economy and Schooling Decisions: Evidence from Emerging Economies

Informal jobs offer skill acquisition opportunities that may facilitate a future switch to formal employment for young workers. In this sense, informal training on the job may be a viable alternative to formal schooling in an economy with a large and diverse informal sector. In this paper, I investigate if these considerations are relevant for the schooling decisions of young individuals using panel data for 17 Latin American countries and micro‐level data for Turkey. Specifically, I ask if the prevalence of informal jobs distorts schooling attainment. I concentrate on three measures of schooling outcomes: (1) secondary education enrollment rate; (2) out‐of‐school rate for lower secondary school; and (3) tertiary education graduation rate. I find that the secondary education enrollment rate is negatively correlated with the size of the informal economy, whereas the out‐of‐school rate is positively correlated. Moreover, the tertiary education graduation rates tend to fall as the informal employment opportunities increase. This means that informal training on the job may be crowding out school education in developing countries. Policies that can potentially affect the size of the informal sector should take into consideration these second‐round effects on aggregate schooling outcomes.     

ROUTES OF INFECTION: EXPORTS AND HIV INCIDENCE IN SUB‐SAHARAN AFRICA

This paper estimates whether exports affect the incidence of HIV in Africa. This relationship has implications for HIV prevention policy as well as for the consequences of trade increases in Africa. I estimate this impact using two sources of data on HIV incidence, one generated based on UNAIDS estimates and the other based on observed HIV mortality. These data are combined with data on export value and volume. I find a fairly consistent positive relationship between exports and new HIV infections: doubling exports leads to a 10%–70% increase in new HIV infections. Consistent with theory, this relationship is larger in areas with higher baseline HIV prevalence. I interpret the result as suggesting that increased exports increase the movement of people (trucking), which increases sexual contacts. Consistent with this interpretation, the effect is larger for export growth than for income growth per se and is larger in areas with more extensive road networks.     

LIVE AID REVISITED: LONG‐TERM IMPACTS OF THE 1984 ETHIOPIAN FAMINE ON CHILDREN

In 1984, the world was shocked at the scale of a famine in Ethiopia that caused over half a million deaths, making it one of the worst in recent history. The mortality impacts are clearly significant. But what of the survivors? This paper provides the first estimates of the long‐term impact of the famine 20 years later, on the height of young adults aged 19–22 years who experienced this severe shock as infants during the crisis. An innovative feature of the analysis is that famine intensity is measured at the household level, while impacts are assessed using a difference‐in‐differences comparison across siblings, and compared with an IV cross‐section, using rainfall as an instrument for the shock. We find that by adulthood, affected children who were aged of 12‐36 months at the peak of the crisis are significantly shorter than the older cohort, and their unaffected peers, by at least 5 cm. There are no significant effects on those in utero during the crisis, although we cannot rule out that for this cohort, the selection effect dominates scarring. Indicative calculations show that for the affected group such height loss may lead to income losses of around 5% per year over their lifetime. The evidence also suggests that the relief operations at the time made little difference to those who survived.     

MATERNAL EDUCATION,HOME ENVIRONMENTS,AND THE DEVELOPMENT OF CHILDREN AND ADOLESCENTS

We study the intergenerational effects of maternal education on children’s cognitive achievement, behavioral problems, grade repetition, and obesity, using matched data from the female participants of the National Longitudinal Survey of Youth 1979 (NLSY79) and their children. We address the endogeneity of maternal schooling by instrumenting it with variation in schooling costs during the mother’s adolescence. Our results show substantial intergenerational returns to education. Our data set allows us to study a large array of channels which may transmit the effect of maternal education to the child, including family environment and parental investments at different ages of the child. We discuss policy implications and relate our findings to the literature on intergenerational mobility.     

UNDERSTANDING THE EVOLUTION OF THE US WAGE DISTRIBUTION: A THEORETICAL ANALYSIS

In this paper, we propose an analytically tractable overlapping‐generations model of human capital accumulation and study its implications for the evolution of the US wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill‐biased technical change (SBTC) theoretically. We show that in response to SBTC, the model generates behavior consistent with some prominent trends observed in the US data including (i) a rise in overall wage inequality both in the short run and long run, (ii) an initial fall in the education premium followed by a strong recovery, leading to a higher premium in the long run, (iii) the fact that most of this fall and rise takes place among younger workers, (iv) a rise in within‐group inequality, (v) stagnation in median wage growth (and a slowdown in aggregate labor productivity), and (vi) a rise in consumption inequality that is much smaller than the rise in wage inequality. These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC and interpreting the transformation of the US labor markets since the 1970s.     

SCHOOL ATTENDANCE AND CHILD LABOR—A MODEL OF COLLECTIVE BEHAVIOR

This paper investigates how community attitudes affect school attendance and child labor and how aggregate behavior of the community feeds back on the formation of schooling attitudes. The theory takes aggregate and idiosyncratic poverty into account as an important driver of absence from school and provides an explanation for why equally poor villages or regions can display very different attitudes towards schooling. Distinguishing between three modes of child time allocation, school attendance, work, and leisure, the paper shows how child labor productivity and the time costs of schooling contribute to the existence of a locally stable antischooling norm and how policy can exploit social dynamics and help a community to escape permanently from low attendance at school and child labor.     

JEEA‐FBBVA Lecture 2012: USE AND ABUSE OF AUTHORITY: A BEHAVIORAL FOUNDATION OF THE EMPLOYMENT RELATION

Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951, Econometrica, 19, 293–302), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one‐shot interactions, inducing the latter to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long‐run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration—the abuse of authority—and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz's (1972, American Economic Review, 62, 777–795) critique of the Coasian approach.     

INFORMATION AND THE EQUITY PREMIUM

We determine how better information affects the average equity premium in a standard representative‐agent exchange economy. Perfect information obviously eliminates the equity premium, and a particular kind of information about the level of future consumption always lowers the average equity premium. Surprisingly, information sometimes raises the average equity premium, no matter what the preferences of the representative agent. Information purely about the volatility either of consumption or the marginal utility of consumption raises the equity premium for a wide class of preferences. Moreover, information can raise the average equity premium by an arbitrarily large percentage (while still matching important magnitudes, such as average growth and the risk‐free rate). We consider two different economies: a two‐period economy with arbitrary preferences for the representative agent; and an infinite horizon economy, in which we restrict both preferences and the endowment distribution.     

EXPONENTIAL‐GROWTH BIAS AND LIFECYCLE CONSUMPTION

Exponential‐growth bias (EGB) is the tendency for individuals to partially neglect compounding of exponential growth. We develop a model wherein biased agents misperceive the intertemporal budget constraint, and derive conditions for overconsumption and dynamic inconsistency. We construct an incentivized measure of EGB in a US‐representative population and find substantial bias, with approximately one third of subjects estimated as the fully biased type. The magnitude of the bias is negatively associated with asset accumulation, and does not respond to a simple graphical intervention.     

SEARCH INTENSITY,DIRECTED SEARCH,AND THE WAGE DISTRIBUTION

We propose a search equilibrium model in which homogeneous firms post wages along with a vacancy to attract job seekers while homogeneous unemployed workers invest in costly job seeking. The key innovation relies on the organization of the search market and the search behavior of the job seekers. The search market is continuously segmented by wage level, individuals can spread their search investment over the different submarkets, and search intensity has marginal decreasing returns in each submarket. We demonstrate the existence of a nondegenerate equilibrium wage distribution. The density of this wage distribution is increasing at low wages and decreasing at high wages. The distribution can be right‐tailed, and, under additional restrictions, is hump‐shaped. Our results are illustrated by an example generating a Beta wage distribution.     

CRITICAL PERIODS DURING CHILDHOOD AND ADOLESCENCE

We identify the ages that constitute sensitive (or critical) periods in children's development towards their adult health status, skills, and human capital. For this, we use data on families migrating into Sweden from countries that are poorer, with less healthy conditions. Late‐life health is proxied by adult height and other adult outcomes. The relation between siblings’ ages at migration and their adult outcomes allows us to estimate the causal effect of conditions at specific childhood ages. We effectively exploit that, for siblings, the migration occurs simultaneously in calendar time but at different developmental stages (ages). We find evidence that the period just before the puberty growth spurt constitutes a critical period for adult height and we find related critical periods for adult cognition, mental health, and education.     

FORGETTING WE FORGET: OVERCONFIDENCE AND MEMORY

Do individuals have unbiased beliefs, or are they over‐ or underconfident? Overconfident individuals may fail to prepare optimally for the future, and economists who infer preferences from behavior under the assumption of unbiased beliefs will make mistaken inferences. This paper documents overconfidence in a new domain, prospective memory, using an experimental design that is more robust to potential confounds than previous research. Subjects chose between smaller automatic payments and larger payments they had to remember to claim at a six‐month delay. In a large sample of college and MBA students at two different universities, subjects make choices that imply a forecast of a 76% claim rate, but only 53% of subjects actually claimed the payment.     

Informal Referrals,Employment, and Wages: Seeking Causal Relationships

Employers and job seekers rely extensively on informal referrals to fill vacancies or to find a job. The widespread use of job contacts has been largely associated with labor outcomes, such as finding a job or even affecting wages. This paper explores whether the use of informal referrals on the job search process affects labor market outcomes of Colombian urban workers. Results indicate that informal referrals are slightly more successful than other job search strategies in term of job seeker's placement. However, referred workers earn in average less than their non‐referred counterparts. Yet, this is only true in formal‐sector positions.     

THE QUANTITATIVE ROLE OF CHILD CARE FOR FEMALE LABOR FORCE PARTICIPATION AND FERTILITY

I document that the labor force participation rate of West German mothers with children aged zero to two exceeds the corresponding child‐care enrollment rate, while the opposite is true for mothers whose children are older than two but below the mandatory schooling age. These facts also hold for a cross‐section of E.U. countries. I develop a life‐cycle model that explicitly accounts for this age‐dependent relationship by including various types of nonpaid and paid child care. I calibrate this model to data for West Germany and use the calibrated model for policy analysis. Increasing the supply of subsidized child care for children aged zero to two generates an increase in the maternal labor force participation rate consistent with empirical evidence from other settings; however, this increase is too small to conclude that the lack of subsidized child care accounts for the low labor force participation rate of mothers with children aged zero to two. The response along the intensive margin suggests that a large fraction of part‐time working mothers would work full‐time if they had greater access to subsidized child care. Finally, making subsidized child care available to more women does not achieve one of the commonly stated goals of such reforms, namely to increase the fertility rate.     

POLITICIANS AT WORK: THE PRIVATE RETURNS AND SOCIAL COSTS OF POLITICAL CONNECTIONS

We quantify the private returns and social costs of political connections exploiting a unique longitudinal dataset that combines matched employer–employee data for a representative sample of Italian firms with administrative archives on the universe of individuals appointed in local governments over the period 1985–1997. According to our results, the revenue premium granted by political connections amounts to 5.7% on average, it is obtained through changes in domestic sales but not in exports, and it is not related to improvements in firm productivity. The connection premium is positive for upstream producers for the public administration only, and larger (up to 22%) in areas characterized by high public expenditure and high levels of corruption. These findings suggest that the gains in market power derive from public demand shifts towards politically connected firms. We estimate that such shifts reduce the provision of public goods by approximately 20%.     

COMPETITION AND RELATIONAL CONTRACTS: THE ROLE OF UNEMPLOYMENT AS A DISCIPLINARY DEVICE

Abstract When workers are faced with the threat of unemployment, their relationship with a particular firm becomes valuable. As a result, a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party. But can relational contracts motivate high effort when workers can easily find alternative jobs? We examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market. We show that effective relational contracts do emerge in a market with excess demand for labor. Long‐term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment. However, stronger competition for labor does not impair labor market efficiency: higher wages induced by competition lead to higher effort out of concerns for reciprocity.     

THE EFFECT OF JOINT CUSTODY ON FAMILY OUTCOMES

Since the 1970s almost all US states have introduced a form of joint custody after divorce. I analyze the causal effect of these custody law reforms on different family outcomes. My identification strategy exploits the different timing of reforms across the US states. Estimations based on state panel data suggest that the introduction of joint custody led to an increase in marriage rates, an increase in overall fertility (including a shift from nonmarital to marital fertility), and an increase in divorce rates for older couples. Accordingly, female labor market participation decreased. Further, male suicide rates and domestic violence fell in treated states. The empirical evidence is consistent with the hypothesis that joint custody increased the relative bargaining power of men within marriage.     

POLITICAL SELECTION IN CHINA: THE COMPLEMENTARY ROLES OF CONNECTIONS AND PERFORMANCE

Who becomes a top politician in China? We focus on provincial leaders—a pool of candidates for top political office—and examine how their chances of promotion depend on their performance in office and connections with top politicians. Our empirical analysis, based on the curriculum vitae of Chinese politicians, shows that connections and performance are complements in the Chinese political selection process. This complementarity is stronger the younger provincial leaders are relative to their connected top leaders. To provide one plausible interpretation of these empirical findings, we propose a simple theory in which the complementarity arises because connections foster loyalty of junior officials to senior ones, thereby allowing incumbent top politicians to select competent provincial leaders without risking being ousted. Our findings shed some light on why a political system known for patronage can still select competent leaders.