EC325 MT Readings

Question 1

Weitzmann (1974)

Answer 1

When we are not sure about the true cost of reducing a negative externality:
If social marginal benefit is decreasing sharply with quantity, then the quantity control instrument tends to result in lower deadweight loss, and is preferred. (nuclear leak)
Intuition:
Quantity control surely guarantees the intended level of reduction (abatement) – so is more suitable when we want to make sure we get the quantity abatement right, with less consideration for minimizing costs for firms. Hence, we would want to implement quantity control in situations that social marginal benefit is harmed significantly by increase in quantity (i.e. sharp SMB curve) (think about it as: you need to get the abatement amount exactly right in the case of nuclear leakage – hence quantity control(sharp SMB)!!!)
Price control guarantees the minimization of costs for firms – so is more suitable when the social flexibility for abatement is high (flat SMB curve)

Question 2

Samuelson (1954)

Answer 2

Samuelson Rule: optimal provision of a public good is when marginal social benefit equals marginal social cost.

Question 3

Gruber & Hungerman (2005)

Answer 3

Authors used powerful congressmen as instrument to study the effect of New Deal poverty relief policies on poverty relief expenditures of 6 large church denominations during the Great Depression

Found New Deal government poverty relief crowded out charitable church activity by 5.7 cents for every 1 dollar spent.

Question 4

Andreoni & Payne (2003, 2008)

Answer 4

Government crowds out private donations through 2 channels to charities

• Reduce people’s Willingness to donate
• Less fundraising activities by charities.

Employing panel data from arts and social service organizations, we find that 70% of loss in charity spending comes from less fundraising activities by charities, and showing signs that individuals are passive actors in donating

Question 5

Marwell & Ames (1981)

Answer 5

Lab experiment shown that people do invest tokens into group account, when it is less profitable to do so. neoclassical theory would predict them investing everything into their own account. Evidence of warm glow preferences or altruism in action.

Question 6

Arrow (1951)

Answer 6

Arrow’s impossibility theorem: The only choice rule that satisfies 1. The Pareto Criterion 2. Transitivity 3. Independence of irrelevant alternatives is dictatorship.

Question 7

Acemoglu (2003)

Answer 7

Developed a stylized model, citing North vs South Korea as an example, and argued that the Political Coase Theorem is not supported by the evidence.

(Political Coasian Theorem: Bargaining between the people and the state creates a social contract that eliminates inefficiencies, so difference in efficiency is only explained by circumstances, and perhaps also the belief of what is efficient.)

Poses a theoretical explanation based on the limits of Coasian bargaining

Question 8

Hart, Shleifer & Vishny (1997)

Answer 8

New Contract Theory: government privatization decision is analogous to ‘make or buy’ decision of firms.

Question 9

Krueger (1999)

Answer 9

Randomized experiment measuring the effects of class size on educational achievement. They did this by randomly assigning students and teachers to 1 of 3 groups:

1. Small classes students.
2. Regular classes students.
3. Regular classes students with a full-time teacher’s aide.

Found that smaller class had a significant positive effect on students’ achievements, and aide teacher did not have a significant effect on students’ achievements.

Problem: Attrition Bias: especially good students from large classes may have enrolled in private schools creating a selection bias problem.

Krueger addresses this concern by imputing test scores (from their earlier test scores) for all children who leave the sample and then re-estimates the model including students with imputed test scores

Question 10

Angrist and Krueger (1991)

Answer 10

used quarter of birth as an instrumental variable for schooling.
Angrist and Krueger conclude that compulsory school law has an effect on educational attainment and earnings. Individuals who are required to reach higher years of schooling by compulsory school attendance law have higher weekly wage as a result of higher level years of schooling.

Question 11

Meyer (1989)

Answer 11

Meyer (1989) considered UI reforms in the early 1980s in 5 states in the U.S., where the benefit cap was increased.
The higher cap implies higher benefits for high-earners in the reform-states(treatment), but not for high-earners in other ”similar” states (control 1) or for low-earners in the same states (control 2).
Using a dif-in-dif estimator, Meyer finds an elasticity of duration with respect to benefits around 0.8-1. Little effect on incidence of unemployment or job quality (measured as earnings at re-employment)
Parallel trends?
Meyer’s approach is based on a parallel trend assumption: Non-reform changes over time are the same for high earners in reform states (treatment) and high earners in non-reform states (control 1) or low earners in reform states (control 2).
This assumption may not be satisfied, e.g. because recession effects in the early 80s were heterogeneous across states and income levels. But the presence of variation in two dimensions (state and income level) allows us to control for this.

Question 12

Aguiar and Hurst (2005)

Answer 12

The paper employed a panel data-set, and performed a comprehensive analysis of individual food diaries of retirement-age household heads.

Finds

1. despite expenditure falls after retirement, retirees are not necessarily living worse off.
2. Time spent on home production post retirement increases by 60%.
3. Evidence that all measures of calorie & Vitamin intake, meat quality do not drop after retirement.

Question 13

Chetty et al. (2014)

Answer 13

Studies whether Danish mandating a certain amount of savings changes the overall savings of people. Using the sharp increases and decreases in employer pension contributions at the time of job change as the source of variation.

Findings:

1. very little crowding out effect when employer pension contribution increased.
2. 15% savers were active, while 85% of savers were passive.

Question 14

Thaler and Benzarti (2004)

Answer 14

Proposed the Save More Tomorrow Programme, which is a commit in advance for people to allocate a portion of their future salary increases toward retirement savings.

Thaler and Benzarti find that the plan is highly popular, with relatively few individuals opting out once they agree to participate, and substantial increases in savings rates.

[the power of default option!]

Question 15

Kahneman and Tversky (1981)

Answer 15

Asian disease experiment – framing!

Findings:

1. Losses loom larger than gains (Loss aversion)
2. Low-probability possibilities are over-weighted in decision making (can be extended to health insurance – over purchase)

Question 16

Kanheman and Tversky (1979)

Answer 16

Proposed prospect theory in a stylized fashion, and used it to model loss aversion of individuals.

Question 17

Spinnewijn (2014)

Answer 17

Paper argues that many individuals are over-optimistic about their odds of finding a job. Hence, they search too little for work and save too little for unemployment. This provides a argument for the implementation of unemployment benefits – counter-argument is moral hazard.