CAN INCOME EQUALITY INCREASE COMPETITIVENESS?

This paper explores the relationship between income distribution, prices, production efficiency and aggregate output in a decentralized search economy. We show that income distribution determines how competitive the market is, and thereby affects production efficiency and aggregate output. It is shown that it is generally possible to engineer a judicious transfer of income from high to low income individuals which simultaneously increases income equality, competitiveness, and aggregate output.Search, Price Dispersion, Income Inequality, Consumer/Household Economics, D83,

Does Quality Time Produce Quality Children? Evidence on the Intergenerational Transmission of Human Capital Using Parental Deaths

This paper uses variation created by parental deaths in the amount of time children spend with each parent to examine whether the parent-child correlation in schooling outcomes stems from a causal relationship. Using a large sample of Israeli children who lost one parent during childhood, we find a series of striking patterns which show that the relationship is largely causal. Relative to children who did not lose a parent, the education of the deceased parent is less important in determining child outcomes, while the education of the surviving parent becomes a stronger factor. Moreover, within the group of families that lost a parent, this pattern intensifies when a child loses a parent earlier in life – the education of the deceased parent becomes even less important, while the effect of the surviving parent's schooling intensifies. These results provide strong evidence that there is a causal connection between parent and child schooling, which is dependent on the child's interaction time with each parent. These findings help us understand why educated parents typically spend more time with their children – they are more effective in producing human capital in their children.intergenerational mobility, education

LONGEVITY ACROSS GENERATIONS

Labor and Human Capital,

Distributional Welfare Impacts of Public Spending: The Case of Urban versus National Parks

This study examines the optimal allocation of funds between national and urban parks. Since travel costs to national parks are significantly higher than to urban parks, poor households tend to visit the latter more frequently, whereas rich households favor the former. Therefore, allocating public funds to improving the quality of national parks at the expense of urban parks disproportionately benefits high income households. By developing a theoretical model and implementing it using Israeli data, findings indicate all households, except for the richest decile, prefer that the park authority divert a larger proportion of its budget from national to urban parks.budget allocation, income distribution, national parks, urban parks, Public Economics,

Corruption and Openness

We report an intriguing empirical observation. The relationship between corruption and output depends on the economy's degree of openness: in open economies, corruption and GNP per capita are strongly negatively correlated, but in closed economies there is no relationship at all. This stylized fact is robust to a variety of different empirical specifications. In particular, the same basic pattern persists if we use alternative measures of openness, if we focus on different time periods, if we restrict the sample to nclude only highly corrupt countries, if we restrict attention to specific geographic areas or to poor countries, and if we allow for the possible endogeneity of the corruption measure. We find that the extent to which corruption affects output is determined primarily by the degree of financial openness. The difference between closed and open economies is mainly due to the different effect of corruption on capital accumulation. We present a model, consistent with these findings, in which the main channel through which corruption affects output is capital drain.corruption openness growth

CORRUPTION AND OPENNESS

We consider a neoclassical growth model with endogenous corruption. Corruption and wealth, which are co-determined in equilibrium, are shown to be negatively correlated. Richer countries tend to be less corrupt, and corrupt economies tend to be poorer. This observation gives rise to the following puzzle: If poorer countries do indeed experience higher levels of corruption, and if indeed as suggested by a number of empirical studies corruption hampers growth, then how did rich countries, who were poor once, become rich? Our answer is simple. In the past, economies were mostly "closed" in the sense that it was difficult to transfer illicit money outside of the economy. In contrast, today's economies are mostly open. In the relatively closed economies of the 19th century, the gains from corruption remained inside the country and became part of the economy's productive capital. In contrast, in today's open economies, corrupt agents smuggle stolen money abroad depleting their country's stock of capital. We confirm this intuitive explanation by testing the hypothesis that the effect of corruption on wealth depends on the economy's degree of openness using cross-country data.Corruption, Growth, Openness, International Development, F2, H0, O1, O4,

Competitive Equilibrium of an Industry with Labor Managed Firms and Price Risk

This paper studies the effect of output-price uncertainty in an industry comprised of labor-managed firms (LMFs) in which the number of LMFs and their membership are determined endogenously. The exit condition for a risk-averse LMF member is formulated and the effect of various economic variables on the equilibrium quantities and prices are examined. We find that the equilibrium in our setting is similar to the one that emerges in a ‘capitalistic’ economy where firms are owned by profit-maximizing agents. However, the effects of increases in risk and risk aversion differ from those found in a short-run analysis of a single LMF.Labor Managed Firms, Cooperatives, Price Risk, Risk Aversion, Long-Run., Agribusiness,

THE MYSTERY OF MONOGAMY

This paper examines why developed countries are monogamous while rich men throughout history have tended to practice polygyny (multiple wives). Wealth inequality naturally produces multiple wives for rich men in a standard model of the marriage market. This paper argues that the sources of inequality, not just the level of inequality, determine the equilibrium degree of monogamy or polygamy. In particular, when inequality is determined more by disparities in human capital versus non-labor income (such as land, capital, corruption), the outcome is more monogamous. This explains why developed countries, where human capital is the main source of income and inequality, are monogamous while less-developed economies tend to be polygynous. The results are driven by the larger inequality in the value of women in the marriage market in modern economies. When the value of human capital increases, rich men increasingly value quality women who can help them raise quality children more efficiently. As a result, high quality women are valued much more than low quality women, which makes polygyny less affordable for rich men. In this manner, we show that male inequality generates polygyny, but female inequality reduces it. Using data from Cote d'Ivoire, we provide evidence for all the main implications of the model. In particular, we control for a man's total income and show that polygyny increases with non-labor income but decreases with labor income and education. These patterns are strong even within social groups where norms regarding polygyny are likely to be constant.Marriage, Monogamy, Polygyny, Human Capital, Inequality, J12, J24, O10, O40, Labor and Human Capital,

REGULATING IRRIGATION VIA BLOCK-RATE PRICING: AN ECONOMETRIC ANALYSIS

In this paper, we adapt Burtless and Hausman's (1978) methodology in order to estimate farmer's demand for irrigation water under increasing block-rate tariffs and empirically assess its effect on aggregate demand and inter-farm allocation efficiency. This methodology overcomes the technical challenges raised by increasing block rate pricing and accounts for both observed and unobserved technological heterogeneity among farmers. Employing a micro panel data documenting irrigation levels and prices in 185 Israeli agricultural communities in the period 1992-1997 we estimate water demand elasticity at -0.3 in the short run (the effect of a price change on demand within a year of implementation) and -0.46 in the long run. We also find that, in accordance with common belief, switching from a single to a block price regime, yields a 7% reduction in average water use while maintaining the same average price. However, based on our simulations we estimate that the switch to block prices will result in a loss of approximately 1% of agricultural output due to inter-farm allocation inefficiencies.Block-Rate Pricing, Irrigation, C13, Q15, Q28, Resource /Energy Economics and Policy,

The Economics of Collective Brands

We consider the consequences of a shared brand name such as geographical names used to identify high quality products, for the incentives of otherwise autonomous firms to invest in quality. We contend that such collective brand labels improve communication between sellers and consumers, when the scale of production is too small for individual firms to establish reputations on a stand alone basis. This has two opposing effects on member firms’ incentives to invest in quality. On the one hand, it increases investment incentives by increasing the visibility and transparency of individual member firms, which increases the return from investment in quality. On the other hand, it creates an incentive to free ride on the group’s reputation, which can lead to less investment in quality. We identify parmater values under which collective branding delivers higher quality than is achievable by stand alone firms.