Do Unto Others...

Kevin Lewis

November 30, 2009

"Today Mr. Pigou's intellectual legacy is being rediscovered, and, unlike those of Messrs. Keynes and Friedman, it enjoys bipartisan appeal. Leading Republican-leaning economists such as Greg Mankiw and Gary Becker have joined Democrats such as Paul Krugman and Amartya Sen in recommending a Pigovian approach to policy. Much of President Barack Obama's agenda - financial regulation, cap and trade, health care reform - is an application of Mr. Pigou's principles. Whether the president knows it or not, he is a Pigovian." ["An Economist's Invisible Hand," John Cassidy, The Wall Street Journal, November 28, 2009]


Exploiting moral wiggle room: Illusory preference for fairness? A comment

Tara Larson & Monica Capra
Judgment and Decision Making, October 2009, Pages 467-474

We designed an experiment to test the robustness of Dana, Weber, and Kuang's (DWK), 2007 results. DWK observed that, when participants were given a "costless" way - the click of a button - to ignore the consequences of their actions on others' payoffs, they chose to remain ignorant and fair behavior diminished. By implementing a double-blind experiment together with a design that controls for alternative explanations for the observed behavior, we confirmed DWK's findings.


Progressive Revenue Sharing in Major League Baseball: The Effect on Player Transfers and Talent Distribution

Joel Maxcy
Review of Industrial Organization, November 2009, Pages 275-297

Major League Baseball's system of sharing revenue between clubs was altered significantly in 1997. The arrangement progressively redistributes income from the highest toward the lowest revenue-generating clubs. The purpose of the new method was to alleviate growing disparity in revenue generation. However, under the progressive system the lowest revenue producing clubs bear the highest marginal tax rates, and theoretically problems of competitive imbalance may be amplified. Changes in talent distribution are observed by analyzing player mobility; an empirical model of player transfers is developed and tested. Confirmation is obtained that low revenue clubs acted on increased incentives to divest talent.


Driven to drink: Sin taxes near a border

Timothy Beatty, Erling Røed Larsen & Dag Einar Sommervoll
Journal of Health Economics, December 2009, Pages 1175-1184

This paper investigates household purchasing behavior in response to differing alcohol and tobacco taxes near an international border. Our study suggests that large tax differentials near borders induce economically important tax avoidance behavior, which may limit a government's ability to raise revenue and potentially undermine important health and social policy goals. We match novel supermarket scanner and consumer expenditure data to measure the size and scope of the effect for households and stores. We find that stores near/far from the international border have statistically significantly lower/higher sales of beer and tobacco than comparable stores far/near the border. Moreover, we find that households near the border report higher consumption of these same goods. This is consistent with households facing lower prices. Finally, we find measures of externalities associated with these goods are higher near the border.


Does Corporate Investment Drive a "Race to the Bottom" in Environmental Protection? A Reexamination of the Effect of Environmental Regulation on Investment

Peter Madsen
Academy of Management Journal, forthcoming

Many fear that the mobility of corporate investment creates a "race to the bottom" in international environmental regulations as firms invest in the countries with the weakest environmental protections. But the relationship between environmental regulation and investment is poorly understood. I hypothesize that inter-country institutional distance and firm environmental capabilities moderate the relationship between the stringency of a country's environmental regulations and firm investment in that country. Analysis of investment in the international automobile industry supports these hypotheses. Study results suggest that attracting corporate investment and preserving local environmental quality need not be opposing policy objectives.


Assessing U.S. State Susceptibility to Environmental Regulatory Competition

David Konisky
State Politics & Policy Quarterly, Winter 2009, Pages 404-428

In this article, I examine the environmental race-to-the-bottom argument by studying whether state susceptibility to interstate economic competition helps explain which U.S. states engage in environmental regulatory competition. Specifically, I create a susceptibility index using four state economic attributes: overall growth, unemployment, manufacturing growth, and manufacturing employment. Studying state enforcement of federal environmental programs, I find little evidence that states, which are theoretically more susceptible to interstate economic competition are more likely to respond strategically to the regulatory behavior of economic competitor states. These results cast doubt on the idea that the environmental regulatory competition predicted by race-to-the-bottom theory is mediated by intrastate economic conditions.


Warming increases the risk of civil war in Africa

Marshall Burke, Edward Miguel, Shanker Satyanath, John Dykema & David Lobell
Proceedings of the National Academy of Sciences, 8 December 2009, Pages 20670-20674

Armed conflict within nations has had disastrous humanitarian consequences throughout much of the world. Here we undertake the first comprehensive examination of the potential impact of global climate change on armed conflict in sub-Saharan Africa. We find strong historical linkages between civil war and temperature in Africa, with warmer years leading to significant increases in the likelihood of war. When combined with climate model projections of future temperature trends, this historical response to temperature suggests a roughly 54% increase in armed conflict incidence by 2030, or an additional 393,000 battle deaths if future wars are as deadly as recent wars. Our results suggest an urgent need to reform African governments' and foreign aid donors' policies to deal with rising temperatures.


Are there basic physical constraints on future anthropogenic emissions of carbon dioxide?

Timothy Garrett
Climatic Change, forthcoming

Global Circulation Models (GCMs) provide projections for future climate warming using a wide variety of highly sophisticated anthropogenic CO2 emissions scenarios as input, each based on the evolution of four emissions "drivers": population p, standard of living g, energy productivity (or efficiency) f and energy carbonization c (IPCC WG III 2007). The range of scenarios considered is extremely broad, however, and this is a primary source of forecast uncertainty (Stott and Kettleborough, Nature 416:723-725, 2002). Here, it is shown both theoretically and observationally how the evolution of the human system can be considered from a surprisingly simple thermodynamic perspective in which it is unnecessary to explicitly model two of the emissions drivers: population and standard of living. Specifically, the human system grows through a self-perpetuating feedback loop in which the consumption rate of primary energy resources stays tied to the historical accumulation of global economic production - or p×g - through a time-independent factor of 9.7±0.3 mW per inflation-adjusted 1990 US dollar. This important constraint, and the fact that f and c have historically varied rather slowly, points towards substantially narrowed visions of future emissions scenarios for implementation in GCMs.


The Progressive Increase of Food Waste in America and Its Environmental Impact

Kevin Hall, Juen Guo, Michael Dore & Carson Chow
PLoS ONE, November 2009, e7940

Food waste contributes to excess consumption of freshwater and fossil fuels which, along with methane and CO2 emissions from decomposing food, impacts global climate change. Here, we calculate the energy content of nationwide food waste from the difference between the US food supply and the food consumed by the population. The latter was estimated using a validated mathematical model of metabolism relating body weight to the amount of food eaten. We found that US per capita food waste has progressively increased by ~50% since 1974 reaching more than 1400 kcal per person per day or 150 trillion kcal per year. Food waste now accounts for more than one quarter of the total freshwater consumption and ~300 million barrels of oil per year.


Trade-based Diffusion of Labor Rights: A Panel Study, 1986-2002

Brian Greenhill, Layna Mosley & Aseem Prakash
American Political Science Review, November 2009, Pages 669-690

This article investigates the nature of the linkages between trade and labor rights in developing countries. Specifically, we hypothesize that a "California effect" serves to transmit superior labor standards from importing to exporting countries, in a manner similar to the transmission of environmental standards. We maintain that, all else being equal, the labor standards of a given country are influenced not by its overall level of trade openness, but by the labor standards of its trading partners. We evaluate our hypothesis using a panel of 90 developing countries over the period 1986-2002, and we separately examine the extent to which the labor laws and the actual labor practices of the countries are influenced by those of their export destinations. We find that strong legal protections of collective labor rights in a country's export destinations are associated with more stringent labor laws in the exporting country. This California effect finding is, however, weaker in the context of labor rights practices, highlighting the importance of distinguishing between formal legislation and actual implementation of labor rights.


Government size and growth: Accounting for economic freedom and globalization

Andreas Bergh & Martin Karlsson
Public Choice, January 2010, Pages 195-213

We examine the relationship between government size and economic growth, controlling for economic freedom and globalization, and using Bayesian Averaging over Classical Estimates in a panel of rich countries. Countries with big government have experienced above average increases in the KOF globalization index and in the Fraser institute's Economic freedom index. To maintain comparability with earlier studies, we use two sample periods: 1970-1995 and 1970-2005. Government size robustly correlates negatively with growth. We also find some evidence that countries with big government can use economic openness and sound economic policies to mitigate negative effects of big government.


Federal Competition and Economic Growth

John William Hatfield & Katrina Kosec
Stanford Working Paper, September 2009

We examine the question of how competition between governments within metropolitan areas affects economic growth outcomes. Using data on metropolitan statistical areas (MSAs) in the United States, we find that the number of county governments is significantly and positively correlated with the average annual growth rate of income per employee over 1969-2006. Exploiting exogenous variation in the natural topography of our MSAs to instrument for the number of county governments, we find evidence supporting a causal interpretation of the effect of inter-jurisdictional competition on economic growth. Furthermore, our estimates suggest that not accounting for the endogeneity of interjurisdictional competition may lead to systematic underestimation of its growth-enhancing benefits. A natural question is whether our findings merely reflect some form of reversion to the mean. Quite to the contrary, we find that higher inter-jurisdictional competition was already associated with higher income in 1969, and that the disparity only grew over the intervening 37 years.


Reluctance to Lead: U.S. Trade Policy in Flux

Vinod Aggarwal
Business and Politics, October 2009

The U.S. is no longer providing leadership in trade policy. In recent years, we have seen a sharp turn toward a rapid proliferation of bilateral preferential trade agreements, accords that are likely to undermine the World Trade Organization (WTO). By pursuing a strategy of 'competitive liberalization' both on a sectoral basis under the Bill Clinton administration, and then a policy of seeking bilateral arrangements under the George W. Bush administration, this article argues that American administrations have undermined the coalition for free trade in the United States. Consequently, protectionist industries including textiles, steel, and agriculture have made further liberalization more difficult and thus the prospects for promoting continued trade liberalization have grown dimmer.


The consequences of the US DOJ's antitrust activities: A macroeconomic perspective

Andrew Thomas Young & William Shughart
Public Choice, forthcoming

Do the antitrust law enforcement activities of the US Department of Justice act as exogenous "technology shocks" or as "markup shocks" limiting market power and promoting economic growth? We analyze annual time series data from 1947 to 2003 on three measures of federal antitrust intervention: the ratio of the Antitrust Division's budgetary expenditures to GDP as well as the numbers of civil and criminal antitrust cases instituted. We find that changes in the levels of these policy variables act like negative technology shocks and that the negative effects are transitory; antitrust policy generates no subsequent offsetting increases in productivity.


On the 'Hot Potato Effect' of Inflation: Intensive Versus Extensive Margins

Randall Wright, Lucy Qian Liu & Liang Wang
University of Pennsylvania Working Paper, November 2009

Conventional wisdom is that inflation makes people spend money faster, trying to get rid of it like a "hot potato," and this is a channel through which inflation affects velocity and welfare. Monetary theory with endogenous search intensity seems ideal for studying this. However, in standard models, inflation is a tax that lowers the surplus from monetary exchange and hence reduces search effort. We replace search intensity with a free entry (participation) decision for buyers - i.e., we focus on the extensive rather than intensive margin - and prove buyers always spend their money faster when inflation increases. We also discuss welfare.


Foreign Demand for Domestic Currency and the Optimal Rate of Inflation

Stephanie Schmitt-Grohé & Martín Uribe
NBER Working Paper, November 2009

More than half of U.S. currency circulates abroad. As a result, much of the seignorage income of the United States is generated outside of its borders. In this paper we characterize the Ramsey-optimal rate of inflation in an economy with a foreign demand for its currency. In the absence of such demand, the model implies that the Friedman rule - deflation at the real rate of interest - maximizes the utility of the representative domestic consumer. We show analytically that once a foreign demand for domestic currency is taken into account, the Friedman rule ceases to be Ramsey optimal. Calibrated versions of the model that match the range of empirical estimates of the size of foreign demand for U.S. currency deliver Ramsey optimal rates of inflation between 2 and 10 percent per annum. The domestically benevolent government finds it optimal to impose an inflation tax as a way to extract resources from the rest of the world in the form of seignorage revenue.

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