This paper analyzes the causal relationships between marriage and subjective well-being in a longitudinal data set spanning 17 years. We find evidence that happier singles opt more likely for marriage and that there are large differences in the benefits from marriage between couples. Potential, as well as actual, division of labor seems to contribute to spouses’ well-being, especially for women and when there is a young family to raise. In contrast, large differences in the partners’ educational level have a negative effect on experienced life satisfaction.
We analyze an economy where firms undertake both innovation and adoption of technologies from the world technology frontier. The selection of high-skill managers and firms is more important for innovation than for adoption. As the economy approaches the frontier, selection becomes more important. Countries at early stages of development pursue an investment-based strategy, which relies on existing firms and managers to maximize investment but sacrifices selection. Closer to the world technology frontier, economies switch to an innovation-based strategy with short-term relationships, younger firms, less investment, and better selection of firms and managers. We show that relatively backward economies may switch out of the investment-based strategy too soon, so certain policies such as limits on product market competition or investment subsidies, which encourage the investment-based strategy, may be beneficial. However, these policies may have significant long-run costs because they make it more likely that a society will be trapped in the investment-based strategy and fail to converge to the world technology frontier.
A new decision theory is proposed to explain the violations of expected utility theory through the role of random errors. The main premise of the new theory is that individuals make random errors when they compute the expected utility of a risky lottery. When being distorted by error, the expected utility of a lottery should neither exceed the utility of the highest possible outcome nor fall below the utility of the lowest possible outcome. This crucial assumption implies that the expected utility of a lottery is likely to be overvalued (undervalued) by random errors, when it is close to the utility of the lowest (highest) possible outcome. The new theory explains many stylized empirical facts such as the fourfold pattern of risk attitudes, the common consequence effect (Allais paradox), the common ratio effect and violations of betweenness. The model fits the data from ten well-known experimental studies at least as well as cumulative prospect theory.
This paper reviews the recent theoretical and empirical literature that relates education to growth, and draws some lessons for the Swedish experience. First, the “human capital accumulation” approach is discussed: agents decide, at each moment of their lives, to forego time or resources to improve their future productivity. The quality of the educational system is argued to be a crucial determinant of the decision to invest in human capital and of the growth rate of the economy. Hence, qualified teachers and appropriate incentive schemes within the schooling sectors are important for the long-run performance of the economy. Next, the trade-off between basic innovation (promoted by a restricted subset of economic activities) and learning-by-doing (which occurs at a more diffuse level in the economy) is analysed. It is argued that the former can be fostered by investments in “elite” research institutions, while the latter depends on the average educational attainment of the working population. Finally, the relationship between education, growth and inequality is discussed. The second part of the paper analyses recent trends in educational attainments in Sweden. Data show that enrolment rates in tertiary education in Sweden have lagged behind the major industrialised countries during the 1980s. Quantitatively, however, this is unlikely to be a major explanation of the productivity slowdown experienced by Sweden after 1970. But it is emphasised that (i) low educational premiums may harm incentives for people to invest in human capital; and (ii) low relative wages and low-power incentive schemes for teachers may cause a deterioration in the quality of education with negative effects on long-run growth.
Elicitation methods in decision-making under risk allow us to infer the utilities of outcomes as well as the probability weights from the observed preferences of an individual. An optimally efficient elicitation method is proposed, which takes the inevitable distortion of preferences by random errors into account and minimizes the effect of such errors on the inferred utility and probability weighting functions. Under mild assumptions, the optimally efficient method for eliciting utilities and probability weights is the following three-stage procedure. First, a probability is elicited whose subjective weight is one half. Second, the utility function is elicited through the midpoint chaining certainty equivalent method using the probability elicited at the first stage. Finally, the probability weighting function is elicited through the probability equivalent method.
Multilevel or mixed effects models are commonly applied to hierarchical data. The level 2 residuals, which are otherwise known as random effects, are often of both substantive and diagnostic interest. Substantively, they are frequently used for institutional comparisons or rankings. Diagnostically, they are used to assess the model assumptions at the group level. Inference on the level 2 residuals, however, typically does not account for "data snooping", i.e. for the harmful effects of carrying out a multitude of hypothesis tests at the same time. We provide a very general framework that encompasses both of the following inference problems: inference on the "absolute" level 2 residuals to determine which are significantly different from 0, and inference on any prespecified number of pairwise comparisons. Thus, the user has the choice of testing the comparisons of interest. As our methods are flexible with respect to the estimation method that is invoked, the user may choose the desired estimation method accordingly. We demonstrate the methods with the London education authority data, the wafer data and the National Educational Longitudinal Study data.
This paper analyzes the relationship between the diffusion of new technologies and the decentralization of firms. Centralized control relies on the information of the principal, which we equate with publicly available information. Decentralized control, on the other hand, delegates authority to a manager with superior information. However, the manager can use her informational advantage to make choices that are not in the best interest of the principal. As the available public information about the specific technology increases, the trade-off shifts in favor of centralization. We show that firms closer to the technological frontier, firms in more heterogeneous environments and younger firms are more likely to choose decentralization. Using three datasets of French and British firms in the 1990s, we report robust correlations consistent with these predictions.
The impact of aging on healthcare expenditure (HCE) has been at the center of a prolonged debate. This paper purports to shed light on several issues of this debate by presenting new evidence on the "red herring" hypothesis advanced by Zweifel, Felder and Meier (1999). This hypothesis amounts to distinguishing a mortality from a morbidity component in healthcare expenditure (HCE) and claiming that failure to make this distinction results in excessive estimates of future growth of HCE. A re-estimation based on a much larger data set is performed, using the refined econometric methodology. The main contribution is consistency, however. Rather than treating the mortality component as a residual in forecasting, its dynamics are analyzed in the same detail as that of the morbidity component when predicting the impact of population aging on the future growth of HCE. For the case of Switzerland, it finds this impact to be relatively small regardless of whether or not the mortality component is accounted for, thus qualifying the "red herring" hypothesis.
We investigate empirically how industrialized countries and US states share consumption risk at horizons between 1 and 30 years. US federal states share about 50% of their permanent idiosyncratic risk through cross-state capital income flows. While insurance against transitory fluctuations in output is virtually complete, OECD countries do not share any of their permanent idiosyncratic risk. Our results suggest that purely transaction cost based theories cannot explain the home bias, since the potential welfare gains from insurance against permanent shocks would by far outweigh that of insuring against transitory variation. We conclude that permanent and transitory shocks constitute two qualitatively different kinds of risk and that various forms of endogenous market incompleteness may render permanent shocks a lot harder to insure, in particular at the international level.
The idea to learn about international capital mobility from saving and investment data remains appealing. Our approach is based on VAR methods and overcomes some of the problems associated with saving–investment regressions when the data are non-stationary. We propose a new measure of long-run capital mobility that can be easily calculated as a by-product of the estimation procedure of a cointegrated VAR. In an application to historical US and British data, we find long-run capital mobility to have been remarkably stable over the century whereas variations in the mobility of capital primarily seem to have affected short-run capital flows.
