Working Papers

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Working papers of the Vanderbilt Economics Department.

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Income Distribution and the Demand Constraint
(Vanderbilt University, 2000) Mani, Anandi
This paper argues that the interaction between inequality and the demand patterns for goods is a potential source of persistent inequality. Income distribution, in the presence of non-homothetic preferences, affect the demand for goods and, due to differences in their factor intensities across sectors, it alters the return to factors of production and the initial distribution of income. Low inequality leads to high demand medium skilled intensive goods providing a bridge over which low skill dynasties may transition to the high-skilled sector in the long run. Under high inequality however, the initial lack of demand for medium skilled labor breaches this from poverty to prosperity and inequality persists.
Knowledge Exchange Matching and Agglomeration
(Vanderbilt University, 2000) Berliant, Marcus; Reed III, Robert R.; Wang, Ping
Despite wide recognition of their significant role in explaining sustained growth and economic development, uncompensated knowledge spillovers have not yet been fully modeled with a microeconomic foundation. The main purpose of this paper is to illustrate the exchange of knowledge as well as its consequences on agglomerative activity in a general-equilibrium search-theoretic framework. Agents, possessing differentiated types of knowledge, search for partners to exchange ideas and create new knowledge in order to improve production efficacy. When individuals' types of knowledge are too diverse, a match is less likely to generate significant innovations. We demonstrate that the extent of agglomeration has significant implications for the patterns of information flows in economies. Further, by simultaneously determining the patterns of knowledge exchange and the spatial agglomeration of an economy we identify additional channels for interaction between agglomerative activity and knowledge exchange. Finally, contrary to previous work in spatial agglomeration, our model suggests that agglomerative environments may be either under-specialized and under-populated, or over-specialized and over-populated relative to the social optimum.
The Effects of Seed Money and Refunds on Charitable Giving: Experimental Evidence from a University Capital Campaign
(Vanderbilt University, 2000) List, John A.; Lucking-Reiley, David
We test two recent theories on the subject of charitable fundraising in capital campaigns. Andreoni (1998) predicts that publicly announced seed contributions can increase the total amount of charitable giving in a capital campaign. Bagnoli and Lipman (1989) predict that another technique for increasing contributions is a promise to refund donors' money in case the campaign threshold is not reached. Using a field experiment in a capital campaign for the Center for Environmental Policy Analysis at the University of Central Florida, we present evidence on both of these predictions. Data from direct mail solicitations sent to 3000 Central Floridian residents confirm the basic comparative-static predictions of both theories: total contributions increase with the amount of seed money, and with the use of a refund policy. A change in seed money from 10% to 67% of the campaign goal resulted in nearly a sixfold increase in contributions, while imposing a refund increased contributions by a more modest 20%. Seed money has a statistically significant effect on both the proportion of people choosing to donate and on the average gift size of those who donate, while refunds have a statistically significant effect only on the average gift size. These results have clear implications for practitioners in the design of fundraising campaigns.
Dynamics in a Transactions-Based Monetary Growth Model
(Vanderbilt University, 2000) Jha, Sailesh K.; Wang, Ping; Yip, Chong K.
This paper examines the dynamic properties of a monetary endogenous growth model in which money is introduced into the system via a transactions-cost technology. A monetary equilibrium that either satisfires the Friedman rule of the optimum quantity of money or accommodates the zero-inflation-rate policy is dynamically unstable. In a Cagan-like hyperinflationary environment, two possibilities arise: the monetary equilibrium may be unstable or exhibit dynamic indeterminacy in which a variety of equilibrium outcomes emerge in transition. The rate of monetary expansion, the relative magnitudes of the intertemporal elasticity of substitution and the production technological parameter are crucial for determining the stability property of the model. We characterize completely the transitional dynamics in the saddle-path case and generalize the basic model to allow for a convex production technology and an endogenous labor-leisure tradeoff to examine the robustness of the main findings.
Schumpeter's 'Vision' as Filter for his Evaluation of other Economists' Visions
(Vanderbilt University, 2000) Maneschi, Andrea
In his History of Economic Analysis, Schumpeter stated that although the subject of his book is a history of economic analysis, "analytic effort is of necessity preceded by a preanalytic cognitive act that supplies the raw material for the analytic effort. In this book, this preanalytic cognitive act will be called Vision" (p. 41). Scattered through it are various examples of Schumpeter's "vision", applied to either economists or areas investigated by schools of economic thought. These examples are revealing with regard to economists or schools described as having vision or, in a few cases, lacking it, and to the economists with whom this term is associated neither positively nor negatively. In this article, I analyze the economists and schools of thought that according to Schumpeter were marked by vision, and to assess the common denominator (if any) characterizing them. To place an economist's vision (or lack of it) in perspective, I first analyze Schumpeter's own vision of the economic process, and view it as a filter through which he appraised the visions of other economists. The fact that Schumpeter could couple the term vision with "all the errors that go with it" (p. 570) shows that he did not necessarily grant his approval to someone's vision. The economists and schools of thought whose vision Schumpeter analyzed include the early classical economist James Anderson, the national system economists List and Carey, the classical conception of economic development, the neoclassical economists' conception of the economic process, Marx, Jevons, Walras, his fellow Austrians Bâˆšâˆ‚hm-Bawerk and Wieser, and Keynes. Keynes's stagnationist vision is contrasted with Schumpeter's own very different view of the capitalist process, whose dynamics are entrusted to an innovative entrepreneurial class. In the concluding section I investigate the role of vision in the history of economic thought in light of Schumpeter's elaboration of this concept.
Financial Matchmakers in Credit Markets with Heterogeneous Borrowers
(Vanderbilt University, 2000) Becsi, Zsolt; Li, Victor; Wang, Ping
What happens when liquidity increases in credit markets and more funds are channeled from borrowers to lenders? We examine this question in a general equilibrium model where financial matchmakers help borrowers (firms) and lenders (households) search out and negotiate profitable matches and where the composition of heterogeneous borrowers adjusts to satisfy equilibrium entry conditions. We find that enhanced liquidity causes entry by all borrowers and tends to benefit low quality borrowers disproportionately. However, liquid credit markets may or may not be associated with higher output and welfare. The result is determined by whether the effect of higher market participation outweighs that of lower average quality. The net effect depends crucially on the source of the liquidity shock (financial matching efficacy, productivity, or entry barriers).
Social Choice with Analytic Preferences
(Vanderbilt University, 2000) Le Breton, Michel; Weymark, John A.
Arrow's axioms for social welfare functions are shown to be inconsistent when the set of alternatives is the nonnegative orthant in a multidimensional Euclidean space and preferences are assumed to be either the set of analytic classical economic preferences or the set of Euclidean spatial preferences. When either of these preference domains is combined with an agenda domain consisting of compact sets with nonempty interiors, strengthened versions of the Arrovian social choice correspondence axioms are shown to be consistent. To help establish the economic possibility theorem, an ordinal version of the Analytic Continuation Principle is developed.
Financing Education Using Optimal Redistributive Taxation
(Vanderbilt University, 2000) Brett, Craig; Weymark, John A.
In this article, the joint use of an income tax and public provision of education as instruments to achieve the government's distributional objectives are considered. Individuals differ in innate labour productivity and in aptitude to acquire skills through education. Actual labour productivity depends on both innate skill and the amount of education received. Using a generalized version of the Mirrlees tax problem that incorporates these features, qualitative properties of an optimal tax schedule are investigated.
Productivity in Manufacturing and the Length of the Working Day: Evidence from the 1880 Census of Manufactures
(Vanderbilt University, 2000) Atack, Jeremy; Bateman, Fred; Margo, Robert A.
We use data from the manuscript census of manufacturing to estimate the effects of the length of the working day on output and wages. We find that the elasticity of output with respect to daily hours was positive but less than one - that is, there were diminishing returns to increases in hours. Holding constant annual days of work, the average annual wage was positively related to daily hours but, again, the elasticity was less than one. At the modal value of daily hours - ten hours per day - it appears that, from the standpoint of employers, the marginal benefits of a shorter working day - a lower wage bill - were approximately offset by the marginal cost - lower output.
Dispersion in Real Exchange Rates
(Vanderbilt University, 2000) Crucini, Mario J.; Telmer, Chris I.; Zachariadis, Marios
Using cross-sectional data on local currency prices of over 1,800 retail goods and services across 13 European countries in the mid 1980's, we characterize the behavior of average relative prices --- `real exchange rates' --- as well as dispersion around these averages. We find that the averages are surprisingly close to what purchasing power parity would suggest. In other words, in the mid 1980's, averages of ratios of foreign to domestic prices (across goods for a particular pair of countries) provide surprisingly accurate predictions of most nominal cross-rates. Variation around the averages, however, is large but is found to be related to economically meaningful characteristics of goods such as measures of international tradeability, the importance of non-traded inputs into production and the geographical distance between product markets. Using data on product brands, we find that product heterogeneity is at least as important as geography in explaining relative price dispersion.
Welfare Analysis of the Number and Locations of Local Public Facilities
(Vanderbilt University, 2000) Berliant, Marcus; Peng, Shin-Kun; Wang, Ping
We develop a discrete or finite household model with congestable local public goods where the level of provision, the number of facilities and their locations are all endogenously determined in a purely normative context. We prove the existence of an equal-treatment identical-provision second best optimum, where all households are required to reach the same utility level, the provision of local public good is required to be the same at all facilities, and all facilities must serve the same number of consumers. Such an optimal public facility configuration need not be geographically centralized even if there is only a single public facility site. Moreover, the optimal public facility configuration could be either concentrated (single site) or dispersed (multiple sites), depending crucially on the degree of congestability and the household valuation of local public goods as well as the unit transportation cost.
Found Money? Split-Award Statutes and Settlement of Punitive Damages Cases
(Vanderbilt University, 2000) Daughety, Andrew F.; Reinganum, Jennifer F.
We examine the effect of "split-award" statutes (wherein the State takes a share of a punitive damages award) on equilibrium settlements and the incentives to go to trial. We find that split-award statutes simultaneously lower settlement amounts and the likelihood of trial, as both parties act to cut out the State. We develop an analysis of the revenue that split-award statutes could generate, conditioned on the allocation of punitive damages between the plaintiff, his lawyer and the State. We determine the revenue-maximizing share and find that it is robust to variations in economic parameters and to whether the State's share is gross or net of the plaintiff's attorney's fee. One surprising result is that these statutes need not deter filings and that their use can encourage plaintiffs' attorneys to pursue weaker cases than would otherwise be brought. We discuss possible objectives for the states currently employing split-award procedures.
Emerging Financial Markets and Early U.S. Growth
(Vanderbilt University, 2000) Rousseau, Peter L.; Sylla, Richard
Studies of early U.S. growth traditionally have emphasized real-sector explanations for an acceleration that by many accounts became detectable between 1815 and 1840. Interestingly, the establishment of the nation's basic financial structure predated by three decades the canals, railroads, and widespread use of water and steam-powered machinery that are thought to have triggered modernization. We argue that this innovative and expanding financial system, by providing debt and equity financing to businesses and governments as new technologies emerged, was central to the nation's early growth and modernization. The analysis includes a set of multivariate time series models that relate measures of banking and equity market activity to measures of investment, imports and business incorporations from 1790 to 1850. The findings offer support for our hypothesis of "finance-led" growth in the U.S. case. By implication, the interest today in improving financial systems as a means of fostering sustainable growth is not misplaced.
Technology and the Stock Market: 1885-1998
(Vanderbilt University, 2000) Jovanovic, Boyan; Rousseau, Peter L.
Using 114 years of U.S. stock market data we try to relate movements in stock prices to changes in technology. We find Measures of technological progress explain 37% of the 3.9% annual growth in the stock market over the 1885-1998 period, The "Jazz-Age" (1918-1934) entrants were not overvalued, in spite of the 1929 crash and the Great Depression, and The large shift to stocks and away from debt finance over the entire period does not explain the medium and short frequency movements in stock-market capitalization.
Educational Policy and Skill Heterogeneity with Credit Market Imperfections
(Vanderbilt University, 2000) Fender, John; Wang, Ping
An overlapping-generations model where agents choose whether to become educated when young is presented. Education enhances productivity, but needs to be financed by borrowing. Because of the possibility of default, lenders may ration credit. We characterize the steady-state equilibrium with and without credit constraints and show that credit rationing tends to be associated with lower education and a lower real interest rate. We then examine the role of public policy in remedying the inefficiency which occurs in the presence of credit rationing and derive results on optimal public education spending and on allocative and distributional issues.
Using Taylor Rules as Efficiency Benchmarks
(Vanderbilt University, 2000) Weymark, Diana N.
In this article, benchmark Taylor rules are obtained as the solution to a dynamic programming problem in which interest rates are chosen to minimize the discounted sum of observed inflation and output variations. The properties of these benchmark rules are used to derive efficiency conditions that are amenable to estimation. Estimated efficient ranges for the coefficients in the benchmark rule are used to characterize efficient classes of rules for Canada, France, Germany, Italy, the United Kingdom, and the United States, and to assess the efficiency of the interest rate policies actually employed in these countries from the early 1980s onwards.
Aids Home and Community-Based Waivers: Effects on Use of Services Expeditures and Survival
(Vanderbilt University, 2000) Anderson, Kathryn; Mitchell, Jean
State Medicaid home and community-based waiver programs for persons with AIDS (PWAs) were implemented with the expectation that PWAs would use home and community-based services in lieu of more expensive hospital-based care. If so, then Medicaid spending per PWA should decline and this in turn should generate program cost savings. While some published research indicates that waiver participants incur lower expenditures than non-participants, this evidence is based on data which pre-dates the development of highly effective but expensive antiretroviral combination therapies. In this study, we analyzed Florida Medicaid claims data for PWAs from December 1995 through December 1997 to determine how participation in the home and community-based waiver affects the use of inpatient services, the receipt of antiretroviral combination therapies, monthly expenditures and survival of PWAs. Importantly, antiretroviral combination therapies were available to Medicaid recipients with AIDS throughout this time period. Four important findings are obtained. 1) the waiver program offers a different form of care to PWAs; waiver participants are more likely to receive combination therapies, but are less likely to use hospital-based care relative to non-participants. 2)The waiver is not randomly selected by PWAs; white men and sicker patients are much more likely to join the waiver program than other eligible PWAs. 3) After controlling for the non-random selection of the waiver and other patient characteristics, monthly expenditures for waiver participants are 49% lower than non-participants. 4) Waiver participation does not significantly affect survival.
Bidding Behavior and Decision Costs in Field Experiments
(Vanderbilt University, 2000) List, John A.; Lucking-Reiley, David
Whether rationality of economic behavior increases with expected payoffs and decreases with the cognitive cost it takes to formulate an optimal strategy remains an open question. We explore these issues with field data, using individual bids from sealed-bid auctions in which we sold nearly $10,000 worth of sportscards. Our results indicate that stakes do indeed matter, as high-priced ($70) cards produced more of the theoretically predicted strategic behavior than did lower-priced ($3) cards. We find additional evidence consistent with the importance of cognitive costs, as subjects more experienced with sportscard auctions exhibited a greater tendency to behave strategically than did less experienced bidders.
Race and the Value of Owner-Occupied Housing 1940-1990
(Vanderbilt University, 2000) Collins, William J.; Margo, Robert A.
This paper begins by documenting racial convergence in the value of owner-occupied housing from 1940 to 1990. Most of this convergence occurred before 1970, as black and white home owners became more similar in terms of household and housing characteristics that were positively correlated with housing values. The post-1970 story is rather less encouraging. During the 1970s, convergence in housing values stalled, and in fact, the "unexplained" portion of the value gap increased. We explore the post-1970 experience from a variety of perspectives. We examine the changing connection between residential segregation and the racial value gap; we document trends in the correlation between income and central-city residence; and we explore the correlation between riots in the 1960s and the racial gap in housing values thereafter.
Determining the Optimal Sample Size for Contingent Valuation Surveys
(Vanderbilt University, 2000) Vaughan, William J.; Russell, Clifford S.; Darling, Arthur H.
Fundamentally, this paper is about the value of information. Whenever a cost-benefit analysis has to be undertaken using benefits that are estimated from household survey data the size of the survey sample must be specified. The most obvious case in the valuation of environmental amenity improvements through contingent valuation (CV) surveys of willingness to pay. One of the first questions that has to be answered in the survey design process is "How many subjects should be interviewed?" The answer can have significant implications for the cost of project preparation. Traditionally, the sample size question has been answered in an ad hoc way either be dividing an exogenously fixed survey budget by the cost per interview or employing some variant of a standard statistical tolerance interval formula. Neither of these approaches can balance the gains to additional sampling effort against the extra interviewing costs. A better answer if not to be found in the environmental economics literature, though it can be developed by adapting a Bayesian decision analysis approach from business statistics. The paper explains and illustrates, with a worked example, the rationale for and mechanics of a sequential Bayesian optimization technique, which is applicable when there is some monetary payoff to alternative courses of action that can be linked to the sample data. In this sense, unlike pure valuation studies that are unconnected to a policy decision, investigators who use contingent valuation results directly in cost-benefit analysis have a hidden advantage that can be exploited to optimize the sample size. The advantage lies in the link between willingness to pay and the decision variable, the net present value of the prospective investment. The core objective of the paper is practical. Readers without a statistical background can easily implement the method. An Appendix shows how, with just six key pieces of information, anyone can solve the optimal sample size problem in a spreadsheet. An automated spreadsheet algorithm is available from the authors on request. To run the program all the users has to do is enter the key data and then activate a macro that automatically computes the optimum number of additional observations needed to augment any initial "small" survey sample.

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