Showing papers in "Journal of Economic Perspectives in 2002"

Decentralization of Governance and Development

Abstract: All around the world in matters of governance, decentralization is the rage. Even apart from the widely debated issues of subsidiarity and devolution in the European Union and states’ rights in the United States, decentralization has been at the center stage of policy experiments in the last two decades in a large number of developing and transition economies in Latin America, Africa and Asia. The World Bank, for example, has embraced it as one of the major governance reforms on its agenda (for example, World Bank, 2000; Burki, Perry and Dillinger, 1999). Take also the examples of the two largest countries of the world, China and India. Decentralization has been regarded as the major institutional framework for the phenomenal industrial growth in the last two decades in China, taking place largely in the nonstate nonprivate sector. India ushered in a landmark constitutional reform in favor of decentralization around the same time it launched a major program of economic reform in the early 1990s. On account of its many failures, the centralized state everywhere has lost a great deal of legitimacy, and decentralization is widely believed to promise a range of benee ts. It is often suggested as a way of reducing the role of the state in general, by fragmenting central authority and introducing more intergovernmental competition and checks and balances. It is viewed as a way to make government more responsive and efe cient. Technological changes have also made it somewhat easier than before to provide public services (like electricity and water supply) relatively efe ciently in smaller market areas, and the lower levels of government have now a greater ability to handle certain tasks. In a world of rampant ethnic cone icts and separatist movements, decentralization is also regarded as a way of diffusing social and political tensions and ensuring local cultural and political autonomy. These potential benee ts of decentralization have attracted a very diverse range

Confronting the Environmental Kuznets Curve

Abstract: T he environmental Kuznets curve posits an inverted-U relationship between pollution and economic development. Kuznets's name was apparently attached to the curve by Grossman and Krueger (1993), who noted its resemblance to Kuznets's inverted-U relationship between income inequality and development. In the first stage of industrialization, pollution in the environmental Kuznets curve world grows rapidly because people are more interested in jobs and income than clean air and water, communities are too poor to pay for abatement, and environmental regulation is correspondingly weak. The balance shifts as income rises. Leading industrial sectors become cleaner, people value the environment more highly, and regulatory institutions become more effective. Along the curve, pollution levels off in the middle-income range and then falls toward pre-industrial levels in wealthy societies. The environmental Kuznets curve model has elicited conflicting reactions from researchers and policymakers. Applied econometricians have generally accepted the basic tenets of the model and focused on measuring its parameters. Their regressions, typically fitted to cross-sectional observations across countries or regions, suggest that air and water pollution increase with development until per capita income reaches a range of $5000 to $8000. When income rises beyond that level, pollution starts to decline, as shown in the "conventional EKC" line in Figure 1. In developing countries, some policymakers have interpreted such results as conveying a message about priorities: Grow first, then clean up. Numerous critics have challenged the conventional environmental Kuznets curve, both as a representation of what actually happens in the development process and as a policy prescription. Some pessimistic critics argue that crosssectional evidence for the environmental Kuznets curve is nothing more than a

Evolutionary theorizing in economics

Abstract: Modern economic analysis, oriented toward understanding the workings of economies that make extensive use of markets, came into existence with three guiding questions, all central in Adam Smith’s (1776 [1937]) The Wealth of Nations. One question concerned order. Without any central authority guiding and commanding action, how is economic activity coordinated? The second question was the challenge of explaining the prevailing constellation of prices, inputs and outputs. What explains the price of labor and the rent of land? The third question addressed the processes of economic progress, or development. Smith and other early economists clearly were impressed by the inventiveness, the energy and the growing productivity generated by the evolving market economy. How to understand its dynamics? The first two questions have defined continuing central concerns of the discipline of economics since they first were posed over two centuries ago. When not posed in the context of an economy that is understood as in the process of developing, they seem to pull the focus of theorizing toward equilibrium conditions. The third question, concerned with the processes driving economic progress, pulls the theorizing toward an evolutionary orientation. The question of economic development has waxed and waned in centrality to the discipline, as has the importance of evolutionary theorizing. During the first several decades of the twentieth century, evolutionary thinking and language was widespread in economics. But as one contrasts the economic

The Theory of the Firm as Governance Structure: From Choice to Contract

Abstract: The propositions that organization matters and that it is susceptible to analysis were long greeted by skepticism by economists. One reason why this message took a long time to register is that it is much easier to say that organization matters than it is to show how and why. The prevalence of the science of choice approach to economics has also been an obstacle. As developed herein, the lessons of organization theory for economics are both different and more consequential when examined through the lens of contract. This paper examines economic organization from a science of contract perspective, with special emphasis on the theory of the firm.

The Inheritance of Inequality

Abstract: How level is the intergenerational playing field? What are the causal mechanisms that underlie the intergenerational transmission of economic status? Are these mechanisms amenable to public policies in a way that would make the attainment of economic success more fair? These are the questions we will try to answer.

What Really Matters in Auction Design

Abstract: The most important issues in auction design are the traditional concerns of competition policy-preventing collusive, predatory, and entry-deterring behavior. Ascending and uniform-price auctions are particularly vulnerable to these problems. The Anglo-Dutch auction - a hybrid of the sealed-bid and ascending auctions - may perform better. Effective antitrust is also critical. Notable fiascoes in auctioning mobile-phone licenses, television franchises, companies, eletricty, etc., and especially the European "third-generation" (UMTS) spectrum auctions, show that everything depends on the details of the context. Auction design is not "one size fits all."

Cross-Country Differences in Intergenerational Earnings Mobility

Abstract: International studies of the extent to which economic status is passed from one generation to the next are important for at least two reasons. First, each study of a particular country characterizes an important feature of that country’ s income inequality. Second, comparisons of intergenerational mobility across countries may yield valuable clues about how income status is transmitted across generations and why the strength of that intergenerational transmission varies across countries. The e rst section of this paper explains a benchmark measure of intergenerational mobility commonly used in U.S. studies. The second section summarizes comparable empirical e ndings that have accumulated so far for countries other than the United States. The third section sketches a theoretical framework for interpreting cross-country differences in intergenerational mobility.

The Central Role of Entrepreneurs in Transition Economies

Abstract: “All sorts of small enterprises boomed in the countryside, as if a strange army appeared suddenly from nowhere,” remarked Deng Xiaoping, reflecting in 1987 on the first eight years of China’s economic reforms (Zhou 1996: 106). These startup firms drove China’s reform momentum; they were arguably the single main source of China’s growth. But their rapid emergence, Deng said, “was not something I had thought about. Nor had the other comrades. This surprised us.” The reformers had not foreseen the key to their own reforms.

The Economics of Patents: Lessons from Recent U.S. Patent Reform

Abstract: U.S. patent reform over the past two decades has strengthened the legal enforcement of patent rights and has extended protection to new subject matter, such as genetically engineered life ...

Economic Reforms in India Since 1991: Has Gradualism Worked?

Abstract: Opinions on the causes of India's growth deceleration vary. World economic growth was slower in the second half of the 1990s, and that would have had some dampening effect, but India's dependence on the world economy is not large enough for this to account for the slowdown. Critics of liberalization have blamed the slowdown on the effect of trade policy reforms on domestic industry. However, the opposite view is that the slowdown is due not to the effects of reforms, but rather to the failure to implement the reforms effectively. This in turn is often attributed to India's gradualist approach to reform, which has meant a frustratingly slow pace of implementation. However, even a gradualist pace should be able to achieve significant policy changes over ten years. This paper examines India's experience with gradualist reforms from this perspective.

Transition Economies: Performance and Challenges

Abstract: I present data and assess the first twelve years of the transition from plan to market. Transformations have taken place, but the income gap between the transition and advanced economies has widened. Transition countries further east have performed worse than those further west, but policies matter. All countries carried out quickly Type I reforms, such as macroeconomic stabilization, price liberalization, small-scale privatization, and breakup of state-owned enterprises. They differed in Type II reforms, such as large-scale privatization and development of banking and legal systems. Countries that developed a functioning legal framework and corporate governance have performed better than others.

The Trouble With Electricity Markets: Understanding California's Restructuring Disaster

Abstract: In June 2000, after two years of fairly smooth operation, California's deregulated wholesale electricity market began producing extremely high prices and threats of supply shortages. The upheaval demonstrated dramatically why most current electricity markets are extremely volatile: demand is difficult to forecast and exhibits virtually no price responsiveness, while supply faces strict production constraints and prohibitive storage costs. This structure leads to periods of surplus and of shortage, the latter exacerbated by sellers' ability to exercise market power. Electricity markets can function much more smoothly, however, if they are designed to support price-responsive demand and long-term wholesale contracts for electricity.

The Promise and Pitfalls of Using Imprecise School Accountability Measures

Abstract: In recent years, most states have constructed elaborate accountability systems using school-level test scores However, because the median elementary school contains only 69 children per grade level, such measures are quite imprecise We evaluate the implications for school accountability systems For instance, rewards or sanctions for schools with scores at either extreme primarily affect small schools and provide weak incentives to large ones Nevertheless, we conclude that accountability systems may be worthwhile Even in states with aggressive financial incentives, the marginal reward to schools for raising student performance is a small fraction of the potential labor market value for students

Intergenerational Inequality: A Sociological Perspective

Abstract: When economists are concerned with the inheritance of inequality, they typically focus on the intergenerational transmission of income or wealth. In contrast, sociologists are more likely to analyze intergenerational mobility between (and immobility in) different class positions.

Productivity Growth in World Agriculture: Sources and Constraints

Abstract: During the last half-century, advances in crop production came from expansion in areas irrigated from more intensive application of fertilizers and crop protection chemicals, and from crop varieties that were more responsive to technical inputs and management. Advances in animal production came from genetic improvements and advances in animal nutrition. Differences among developed and developing countries in output per hectare and per worker have widened. If these gaps are to be narrowed agricultural research capacity in developing countries will have to be substantially strengthened.

The Political Economy of Transition

Abstract: The overriding importance of political constraints in the transition process has led to developments of the theory of the political economy of reform. What are the main insights from that theory? How does it reflect the transition reality? What have we learned, and what do we still need to learn? The present article will attempt to answer those questions.

Evolution of Social Behavior: Individual and Group Selection

Abstract: How selfish does our evolutionary history suggest that humans will be? We explore models in which groups are formed and dissolved and where reproduction of individuals is determined by their payoffs in a game played within groups. If groups are formed ``randomly'' and reproductive success of group founders is determined by a multi-person prisoners' dilemma game, then selfish behavior will prevail over maximization of group payoffs. However, interesting models exist in which ``group selection'' sustains cooperative behavior. Forces that support cooperative behavior include assortative matching in groups, group longevity, and punishment-based group norms.

Is India's Economic Growth Leaving the Poor Behind?

Abstract: There has been much debate about how much India's poor have shared in the economic growth unleashed by economic reforms in the 1990s. The authors argue that India has probably maintained its 1980s rate of poverty reduction in the 1990s. However, there is considerable diversity in performance across states. This holds some important clues for understanding why economic growth has not done more for India's poor. India's economic growth in the 1990s has not been occurring in the states where it would have the most impact on poverty nationally. If not for the sectoral and geographic imbalance of growth, the national rate of growth would have generated a rate of poverty reduction that was double India's historical trend rate. States with relatively low levels of initial rural development and human capital development were not well-suited to reduce poverty in response to economic growth. The study's results are consistent with the view that achieving higher aggregate economic growth is only one element of an effective strategy for poverty reduction in India. The sectoral and geographic composition of growth is also important, as is the need to redress existing inequalities in human resource development and between rural and urban areas.

Oligopsony and monopsonistic competition in labor markets

Abstract: We argue that models of oligopsony or monopsonistic competition provide insights and explanation for many empirical phenomena in labor markets. Using a simple model with job differentiation and preference heterogeneity, we illustrate how such models can be employed to explain the existence of wage dispersion, the persistence of labor market discrimination, market failures in the provision of training and the anomalous employment effects of minimum wages.

School Vouchers: A Critical View

Abstract: This paper marshals available evidence from both the U.S. and other countries on the effects of private schools, peer effects, and competition to demonstrate that that any gains in overall student achievement from a large scale voucher program are at best likely to be small. Moreover, given the tendency of parents to judge schools in part by the characteristics of a school's students, a universal voucher system would undoubtedly harm large numbers of disadvantaged students. Although the case for a small means tested voucher program is somewhat stronger, it will do little to improve education for low-performing students.

The Role of Economics in Climate Change Policy

Abstract: Many policy problems have frustratingly long histories of inefficient regulation that can be difficult or impossible to reverse, even where large efficiency gains might be had from doing so. Climate change is an exception, however, because little real action has been undertaken to date. It presents an unusual opportunity for an efficient economic policy to be employed right from the beginning. However, the opportunity could easily be lost. Ongoing negotiations conducted under the auspices of the United Nations Framework Convention on Climate Change have so far produced the Kyoto Protocol, a deeply flawed agreement that manages to be both economically inefficient and politically impractical. In this article, we examine the key economic characteristics of climate change and argue that economic theory provides good guidance on the design of an efficient and politically realistic policy. Because climate change involves vast uncertainties and has potentially enormous distributional effects, neither of the standard market-based environmental policy instruments is a viable approach: a tradable permit system would be inefficient, and an emissions tax would be politically unrealistic. However, a hybrid policy, combining the best features of the two, would be an efficient and practical approach. We then compare our hybrid proposal to the Kyoto Protocol and argue that it overcomes the Protocol’s shortcomings.

Institutional Determinants of Labor Reallocation in Transition

Abstract: The transition process differed in the countries of the Former Soviet Union (FSU) and those of Central and Eastern Europe (CEE) in terms of reallocation of labor real wage, employment and output adjustment. We sift through the theoretical and empirical literature to find an explanation for these diverging adjustment trajectories and conclude that they can be explained by the fact that the CEE countries adopted social policies that upheld wages at the bottom of the distribution forcing the old sector to restructure or collapse while the FSU countries allowed wages to free-fall not forcing the hand of the old sector.

The NAIRU in Theory and Practice

Abstract: AIRU stands for the nonaccelerating ine ation rate of unemployment. It is beyond dispute that this acronym is an ugly addition to the English language. There are, however, two issues that fail to command consensus among economists, which we address in this essay. The e rst issue is whether the concept of the NAIRU is a useful piece of business cycle theory. We believe it is, and we begin this paper by attempting to explain why. In our view, the NAIRU is approximately a synonym for the natural rate of unemployment. This concept follows naturally from any theory that says that changes in monetary policy, and aggregate demand more generally, push ine ation and unemployment in opposite directions in the short run. Once this short-run tradeoff is admitted, there must be some level of unemployment consistent with stable ine ation. The second issue is why the NAIRU changes over time and, in particular, why it fell in the second half of the 1990s. This question is more dife cult, and the answer is open to debate. Most likely, various factors are at work, including demographics and government policies. Yet one hypothesis stands out as particularly promising: e uctuations in the NAIRU appear related to e uctuations in productivity. In the 1970s, the NAIRU rose when productivity growth slowed. In the 1990s, the NAIRU fell when productivity growth sped up. Developing and testing models that explain the links among ine ation, unemployment and productivity remains a challenge for students of business cycle theory.

Pharmaceuticals and the developing world.

Abstract: Pharmaceuticals have greatly improved health in developing countries, but many people in developing countries do not obtain even inexpensive pharmaceuticals and little pharmaceutical R&D is oriented toward products needed by developing countries, such as a malaria vaccine. Access to existing products could be improved by facilitating differential pricing, for example by subsidizing donation programs, and reforming health care delivery. R&D incentives could be improved if rich countries or international organization committed to purchase needed products when they are developed and make them available to the poor.

The great divide and beyond : Financial architecture in transition

Abstract: A growing and deepening divide has opened up between transition countries where economic development has taken off and those caught in a vicious cycle of institutional backwardness and macroeconomic instability This “Great Divide” is visible in almost every measure of economic performance: GDP growth, investment, government finances, growth in inequality, general institutional infrastructure and increasingly in measures of financial development Strategies for financial development have differed dramatically across countries and over time, offering interesting opportunities to study the links between real and financial sector development

Competition and Corporate Governance in Transition

Abstract: This paper examines the elements of institutional development critical to the enhancement of company performance in transition economies. This includes initial conditions, forms of privatization, institutional frameworks and the competitiveness of markets. Comparing empirical evidence, the paper concludes that there is a clear distinction in effectiveness of policies followed and their impact between Central Europe and CIS countries. This divergence is attributed to fundamentally different political attitudes toward reform, the need of CIS governments to gain political support for reform and as a consequence of the desire of Central European countries to join European Union.

Perspectives on the U.S. Current Account Deficit and Sustainability

Abstract: This essay considers the underpinnings of the large U.S. current account deficit. It then tackles the question of whether the U.S. current account deficit is sustainable. A current account deficit is "sustainable" at a point in time if neither it, nor the associated foreign capital inflows, nor the negative net international investment position are large enough to induce significant changes in economic variables, such as consumption or investment or interest rates or exchange rates. Even if the current account deficit is sustainable by this definition today, its trajectory could still be creating future risks for the U.S. and global economy.

How Vouchers Could Change the Market for Education

Abstract: small probability that vouchers will, in the foreseeable future, be adopted on a large scale in any school district or state. At the moment, only three states have adopted publicly funded voucher programs, and all of these programs are limited in scale. Nonetheless, in recent years, over 40 state legislatures have considered proposals to provide some type of voucher program or tuition tax credit for at least some families in a given state or school district, and the Children's Scholarship Fund (see (http://www.scholarshipfund.org)) has helped create or expand privately funded voucher programs in numerous cities. As vouchers become a more significant part of education policy debates, the time is right to consider what we know and do not know about the likely effects of adopting various voucher schemes. In the balance of this paper, I describe both empirical and theoretical work on education that speaks to this topic. I argue that we cannot confidently predict the outcomes that would result from various voucher schemes, and I also stress that debates over vouchers per se are not informative. Details concerning funding, targeting and discretion in the use of vouchers should greatly affect the outcomes associated with any particular voucher program. Still, empirical evidence on the performance of public versus private schools as well as numerical results from existing simulation models suggest that policymakers should be able to design voucher programs that would be helpful to minority students in large cities. Public schools in large cities often perform poorly in minority neighborhoods, and this is especially true in economically disadvantaged areas.

Evolution and Game Theory

Abstract: Introduced by John von Neumann and Oskar Morgenstern (1944), energized by the addition of John Nash’s (1950) equilibrium concept, and popularized by the strategic revolution of the 1980s, noncooperative game theory has become a standard tool in economics. In the process, attention has increasingly been focused on game theory’s conceptual foundations. Two questions have taken center stage: Should we expect Nash equilibrium play—that is, should we expect the choice of each player to be a best response to the choices of the other players? If so, which of the multiple Nash equilibria that arise in many games should we expect? In the 1980s, game theorists addressed these questions with models based on the assumptions that players are perfectly rational and have common knowledge of this rationality. In the 1990s, however, emphasis has shifted away from rationalitybased to evolutionary models. One reason for this shift was frustration with the limitations of rationality-based models. These models readily motivated one of the requirements of Nash equilibrium, that players choose best responses to their beliefs about others’ behavior, but less readily provided the second requirement, that these beliefs be correct. Simultaneously, rationality-based criteria for choosing among Nash equilibria produced alternative “equilibrium refinements”—strengthenings of the Nash equilibrium concept designed to exclude implausible Nash equilibria—with sufficient abandon as to prompt despair at the thought of ever choosing one as the “right” concept. A second reason for the shift away from rationality-based game theory was a change in the underlying view of what games represent. It was once typical to interpret a game as a literal description of an idealized interaction, in which an assumption of perfect rationality appeared quite