Living Rationally Under the Volcano? An Empirical Analysis of Heavy Drinking and Smoking

This study investigates whether models of forward-looking behavior explain the observed patterns of heavy drinking and smoking of men in late middle age in the Health and Retirement Study better than myopic models. We develop and estimate a sequence of nested models which differ by their degree of forward-looking behavior. We also study models which allow for heterogeneity in discounting, and thus test whether certain types of individuals are more likely to show forward-looking behavior than other types. Our empirical findings suggest that forward-looking models with an annual discount factor of approximately 0.78 fit the data the best. These models also dominate other behavioral models based on out-of-sample predictions using data of men aged 70 and over. Myopic models predict rates of smoking and drinking for old individuals which are significantly larger than those found in the data on elderly men.

The Practice and Proscription of Affirmative Action in Higher Education:An Equilibrium Analysis

The paper examines the practice of affirmative action and consequences of its proscription on the admission and tuition policies of institutions of higher education in a general equilibrium. Colleges are differentiated ex ante by endowments and compete for students that differ by race, household income, and academic qualification. Colleges maximize a quality index that is increasing in mean academic score of students, educational resources per student, an income-diversity measure, and a racial-diversity measure. The pool of potential nonwhite students has distribution of income and academic score with lower means than that of whites. In benchmark equilibrium, colleges may condition admission and tuition on race. In a computational model calibrated using estimates from related research, equilibrium has colleges offer tuition discounts and admission preference to nonwhites to promote racial diversity. Equilibrium entails a quality hierarchy of colleges, so the model predicts practices and characteristics of colleges along the hierarchy. Proscription of affirmative action requires that admission and tuition policies are race blind. Colleges then use the informational content about race in income and academic score in reformulating their optimal policies. Admission and tuition policies are substantially modified in equilibrium of the computational model, and both races are significantly affected. Representation of nonwhites falls significantly in all colleges. The drop is particularly pronounced in the top third of the quality hierarchy of colleges.

Peer Effects, Financial Aid, and Selection of Students into Colleges and Universities: An Empirical Analysis

The goal of this paper is to develop predictions regarding market consequences of peer effects in higher education and to offer empirical evidence about the extent to which those predictions are borne out in the data. We develop a model in which colleges seek to maximize the quality of the educational experience provided to their students. From this model we deduce predictions about the hierarchy of schools that emerges in equilibrium, the allocation of students by income and ability among schools, and about the pricing policies that schools adopt. In the empirical analysis, we use both university-level data provided primarily by Petersons and student-level data from the National Postsecondary Student Aid Study obtained from the NCES. The findings of this paper suggest that there is a hierarchy of school qualities which is characterized by substantial stratification by income and ability. The evidence on pricing by ability is supportive of positive peer effects in educational achievement from high ability at the college level. However, the evidence on pricing also suggests that more highly ranked schools exercise some degree of market power. This is reflected in the substantial variation of price with income coupled with discounts to more able students that are modest at best.

Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes

The goal of this paper is to analyze consumer demand in markets with large price uncertainty. We develop a demand model for goods that are subject to habit formation. We show that consumption plans of forward looking individuals depend not only on preferences and current period prices, but also on individual beliefs about the evolution of future prices. Moreover, a mean preserving spread in the price distribution and, hence, an increase in price uncertainty reduces consumption along the optimal path. With smoking as our application, we test the predictions of our model. We use a unique data set of prices for cigarettes collected by the Bureau of Labor Statistics to characterize price uncertainty and price expectations of individuals. We have also obtained access to the restricted use version of the National Education Longitudinal Study, which provides detailed information on smoking behavior of teenagers in the U.S. Our estimation results suggest that teenagers who live in metropolitan areas with a large amount of cigarette price volatility have, on average, significantly lower levels of cigarette consumption. Moreover, these individuals are less likely to start consuming cigarettes. Our results also provide evidence that young individuals are forward looking. Myopic individuals would not respond to an increase in uncertainty about future prices by reducing consumption.

Estimating the General Equilibrium Benefits of Large Policy Changes: The Clean Air Act Revisited

This paper reports the first comprehensive approach for measuring the general equilibrium willingness to pay for large changes in air quality. It is based on a well defined locational equilibrium model. The approach allows estimation of households' indirect utility function and the underlying distribution of household types. With these estimates it is possible to compute a new locational equilibrium and the resulting housing prices in response to exogenous changes in air quality. This permits construction of welfare measures which properly take into consideration the adjustments of households in equilibrium to non-marginal changes in air quality. These types of measures are outside the scope of more traditional approaches. The empirical approach of this paper provides, for the first time, an internally consistent framework for estimation and applied general equilibrium welfare analysis. We compute the general equilibrium willingness to pay for the changes in air quality between 1990 and 1995. We implement our empirical framework using data from Southern California, an area which has experienced dramatic improvements in air quality during the past 20 years. Our findings are by and large supportive for our approach and suggest that accounting for general equilibrium effects in applied welfare can be especially important.

Admitting Students to Selective Education Programs: Merit, Profiling, and Affirmative Action

For decades, colleges and universities have struggled to increase participation of minority anddisadvantaged students. Urban school districts confront a parallel challenge; minority and disadvantaged students are underrepresented in selective programs that use merit-based admission. In their referral and admission policies to such selective programs, school districts may potentially set different admission thresholds based on income and race (affirmative action), and they may potentially take account of differences in achievement relative to ability across race and income groups (profiling). We develop an econometric model that provides a unified treatment of affirmative action and profiling. Implementing the model for an urban district, we find profiling by race and income, and affirmative action for low-income students. Counterfactual analysis reveals that these policies achieve more than 80% of African American enrollment that could be attained by race-based affirmative action

EXPERIMENTATION AND LEARNING IN RATIONAL ADDICTION MODELS WITH MULTIPLE ADDICTIVE GOODS

The purpose of this paper is to explore and evaluate smooth approximation methods for value functions. These approximation methods are increasingly important in numerical dynamic programming since they allow researchers to solve models with a multitude of continuous state variables. In this paper we focus on a new approximation method which has been recently developed in the context of semi-nonparametric estimation by Coppejans (1999). The basic idea of this approach is to represent a function of several variables as superpositions of functions of one variable. The one-dimensional functions as well as the superpositions are represented as B-splines which have nice computational properties. This approach has two distinct advantages. First, it allows us to impose useful properties on the value function such as monotonicity and concavity. Second, and more importantly, it allows us to parameterize the value function by a fairly low dimensional object which alleviates the curse of dimensionality typically encountered in these type of problems. In order to evaluate this new method we compare it with more commonly used methods like Chebychev Polynomials. The comparison of the two methods is based on dynamic model of rational addiction under uncertainty. Orphanides Zervos (1995) argue that uncertainty and learning through experimentation need to be incorporated into the rational addiction framework in order to account for `involuntary'' addiction. We extend their simple model to allow for wealth accumulation as well as uncertainty in income and asset returns. This gives rise to rich dynamic model with five continuous state variables and hence provides a good model to test the two approximation algorithms of interest.

Living Rationally Under the Volcano? Heavy Drinking and Smoking Among the Elderly

Most rational addiction models focus on how drinking and smoking are made when young. Yet, the costs of drinking and smoking generally come later in life. We focus on the decisions of the elderly where individuals know their propensity for addiction but are uncertain about their future earnings and helath status. Using data from the Health and Retirement Survey, we estimate a dynamic stochastic model of heavy drinking and smoking of the elderly. Individuals make decisions not only based upon the current effects of heavy drinking and smoking, but also the future effects of drinking and smoking on earnings, health, and mortality. We are especially interested in the identification of the discount factor. We show how the likelihood function varies with the discount factor and also how behavior decisions vary from not estimating a dyanmic model. In particular, we find that the dynamic model forecasts more drinking and smoking as well as individuals living longer. This is because individuals know when, and when not to, engage in heavy drinking and smoking behavior.rational addition, dynamic discrete choice, economics of the elderly

Measuring the Impact of Air Quality on Housing Markets and Residential Choices in Southern California

No abstract.

Estimating Equilibrium Models of Local Jurisdictions

Research over the past several years has led to development of models characterizing equilibrium in a system of local jurisdictions. An important insight from these models is that plausible single-crossing assumptions about preferences generate strong predictions about the equilibrium distribution of households across communities. To date predictions have not been subjected to formal empirical tests. The purpose of this paper is to provide an integrated approach for testing predictions from this class of models. We first test conditions for locational equilibrium implied by these models. In particular about the distribution of households by income across communities. We then test the models predictions about the relationships among locational equilibrium conditions and housing prices. By drawing inferences from a structural general equilibrium model approach of this paper offers a unified treatment of theory and empirical testing.