Dismal Science

Kevin Lewis

December 23, 2009

It's all 'bad' news! Voters' perception of macroeconomic policy competence

Joshy Easaw
Public Choice, forthcoming

The purpose of the present paper is to consider how voters form perceptions about macroeconomic policy competence by focusing on the role of recent macroeconomic news: Do their perceived views of good news matter as much as bad news when they form beliefs about the incumbent government's competence in managing the macroeconomy, in particular, with regard to their ability to control inflation and unemployment? We find that 'bad' news about unemployment persists when households are forming their perceived competence, whereas "good" news does not. That is, voters tend to display pessimistic bias when forming perceptions about the incumbent government's competence.


Upon Daedalian Wings of Paper Money: Adam Smith and the Crisis of 1772

Hugh Rockoff
NBER Working Paper, December 2009

Adam Smith advocated laissez faire for most sectors of the economy, but he believed that banking and finance required several forms of regulation including usury laws and the prohibition of small-denomination bank notes. Smith's support for banking regulation appears to have been a response to the shocks that hit the Scottish banking system during the time that he was composing the Wealth of Nations. The most important was the Crisis of 1772, which has been described as the first modern banking crisis faced by the Bank of England. It resembles the Crisis of 2008 in a number of striking ways. This paper describes the Crisis of 1772, the other shocks that hit the Scottish banking system, and the evolution of Smith's views on the regulation of banking. It is based on Smith's writings, the secondary sources, and a quantification of the new issues of Scottish bank notes during Smith's era.


Why income comparison is rational

David Wolpert
Games and Economic Behavior, forthcoming

A major factor affecting a person's happiness is the gap between their income and their neighbors', independent of their own income. This effect is strongest when the neighbor has moderately higher income. In addition a person's lifetime happiness often follows a "U" shape. Previous models have explained subsets of these phenomena, typically assuming the person has limited ability to assess their own (hedonic) utility. Here I present a model that explains all the phenomena, without such assumptions. In this model greater income of your neighbor is statistical data that, if carefully analyzed, would recommend that you explore for a new income-generating strategy. This explains unhappiness that your neighbor has greater income, as an emotional "prod" that induces you to explore, in accord with careful statistical analysis. It explains the "U" shape of happiness similarly. Another benefit of this model is that it makes many falsifiable predictions.


The Origin of Behavior

Thomas Brennan & Andrew Lo
MIT Working Paper, November 2009

We propose a single evolutionary explanation for the origin of several behaviors that have been observed in organisms ranging from ants to human subjects, including risk-sensitive foraging, risk aversion, loss aversion, probability matching, randomization, and diversification. Given an initial population of individuals, each assigned a purely arbitrary behavior with respect to a binary choice problem, and assuming that offspring behave identically to their parents, only those behaviors linked to reproductive success will survive, and less reproductively successful behaviors will disappear at exponential rates. This framework generates a surprisingly rich set of behaviors, and the simplicity and generality of our model suggest that these behaviors are primitive and universal.


Law and Finance "at the Origin"

Ulrike Malmendier
Journal of Economic Literature, December 2009, Pages 1076-1108

What are the key determinants of financial development and growth? A large literature debates the relative importance of countries' legal and political environment. In this paper, I present evidence from ancient Rome, where an early form of shareholder company, the societas publicanorum, developed. I show that the societas publicanorum flourished in a legally underdeveloped but politically supportive environment (Roman Republic) and disappeared when Roman law reached its height of legal sophistication but the political environment grew less supportive (Roman Empire). In the Roman case, legal development appears to have mattered little as long as the law as practiced was flexible and adapted to economic needs. The "law as practiced," in turn, reflected prevalent political interests. After discussing parallels in more recent history, I provide a brief overview of the literature on law and finance and on politics and finance. The historical evidence suggests that legal systems may be less of a technological constraint for growth than previously thought -- at least "at the origin."


Medium of Exchange Matters: What's Fair for Goods Is Unfair for Money

Sanford DeVoe & Sheena Iyengar
Psychological Science, forthcoming

Organized groups face a fundamental problem of how to distribute resources fairly. We find people view it as less fair to distribute resources equally when the allocated resource invokes the market by being a medium of exchange rather than a good that holds value in use. Importantly, these differences in fairness can be attributed to the extent a resource is a medium of exchange and not other essential properties of money (i.e., a unit of account or a store of value). These findings suggest that egalitarian outcomes have a greater likelihood of being accepted as fair when the resources being distributed take the form of in-kind goods rather than cash transfers.


Financial decision making in collective society - A field test on Israeli kibbutz members and city residents

Mosi Rosenboim, Tal Shavit & Amir Shoham
Journal of Socio-Economics, January 2010, Pages 30-36

This comparison of Israeli kibbutz members to city residents examines how of individualistic/collective society affects financial decision making. Findings revealed that kibbutz members are more risk averse and discount the future more than city residents, undermining the assumption that collective society accords a safety net. We claim that the collective financial management of the kibbutz reduces individuals' financial knowledge and experience, causing them to be more risk averse in financial decisions, and thus overpowering the safety net offered by the collective society. In addition, we argue that despite privatization, individuals still operate according to collective ideas in handling their personal finances, but less than before the onset of the privatization process.


Nonmonetary Sanctions and Rewards in An Experimental Coordination Game

Subhasish Dugar
Journal of Economic Behavior & Organization, forthcoming

A growing body of experimental research documents that nonmonetary sanctions and rewards may be important instruments for enforcing efficient behavior. This study contributes to this literature by reporting results from a laboratory experiment. The experiment is designed to test whether nonmonetary sanctions or rewards alone can yield the optimal level of efficiency in a game with Pareto-ranked equilibria. Performance based disapproval and approval ratings, assigned by group members, are used as proxies for nonmonetary sanction and reward, respectively. Although these ratings are costless and payoff neutral, results show that expression of disapproval facilitates coordination on the most efficient equilibrium. In contrast, statement of approval induces subjects to converge towards the most inefficient outcome. We conclude that induced approval and disapproval ratings have asymmetric behavioral effects on coordination.


Lab Experiments Are a Major Source of Knowledge in the Social Sciences

Armin Falk & James Heckman
Science, 23 October 2009, Pages 535-538

Laboratory experiments are a widely used methodology for advancing causal knowledge in the physical and life sciences. With the exception of psychology, the adoption of laboratory experiments has been much slower in the social sciences, although during the past two decades the use of lab experiments has accelerated. Nonetheless, there remains considerable resistance among social scientists who argue that lab experiments lack "realism" and generalizability. In this article, we discuss the advantages and limitations of laboratory social science experiments by comparing them to research based on nonexperimental data and to field experiments. We argue that many recent objections against lab experiments are misguided and that even more lab experiments should be conducted.


Multidimensional tests for economic behavior differences across cultures

Mariah Ehmke, Jayson Lusk & Wallace Tyner
Journal of Socio-Economics, January 2010, Pages 37-45

We investigate whether cultural differences exist across a broader set of economic behaviors than previously tested. A variety of cultural dimensions of economic relevance were identified based on anthropological and sociological literatures. Experiments were constructed to measure these dimensions in an economic context. Data were collected in China, France, Niger, and two locations in the United States. Data analysis reveals significant differences across countries in all types of economic behavior considered, suggesting strong cultural influences on multiple types of economic behavior and preferences. When making pair-wise group comparisons we see certain patterns of similarity arising across locations for specific types of behavior. Only the two United States locations share nearly identical behavior across experiments. Other locations may share similar strategic behavior to each other, but dissimilar individual economic preferences or vice versa.

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