Archive for the ‘Journal of Economic Perspectives’ Category

Systematic Bias and Nontransparency in US Social Security Administration Forecasts

July 7, 2015 Comments off

Systematic Bias and Nontransparency in US Social Security Administration Forecasts (PDF)
Source: Journal of Economic Perspectives

In the conclusion of the article, we argue that the Social Security Administration and its Office of the Chief Actuary should follow best practices in academia and many other parts of government and make their forecasting procedures public and replicable, and should calculate and report calibrated uncertainty intervals for all forecasts. In a companion paper, we offer an explanation for the origin of the biases reported here and propose simple structural ways of changing the system to fix the problems going forward.

The Wages of Sinistrality: Handedness, Brain Structure, and Human Capital Accumulation

January 23, 2015 Comments off

The Wages of Sinistrality: Handedness, Brain Structure, and Human Capital Accumulation (PDF)
Source: Journal of Economic Perspectives

In this paper, I argue that the phenomenon of handedness can provide insight into some of the issues surrounding economists’ recent exploration of early biological and environmental influences on people’s long-run outcomes. I review prior research showing that left- and right-handed individuals have different brain structures, particularly with regard to language processing. Using five datasets from the United States and the United Kingdom, I show that, consistent with prior research, both maternal left-handedness and poor infant health increase the likelihood of a child being left-handed. Thus, handedness can be used to explore the long-run effects of differential brain structure generated in part by genetics and in part by poor infant health.

Lefties exhibit economically and statistically significant human capital deficits relative to righties, even conditional on infant health and family background. Compared to righties, lefties score a tenth of a standard deviation lower on measures of cognitive skill and, contrary to popular wisdom, are not overrepresented at the high end of the distribution. Lefties have more emotional and behavioral problems, have more learning disabilities such as dyslexia, complete less schooling, and work in occupations requiring less cognitive skill. Differences between left- and right-handed siblings, which offer a way of controlling for qualities of family upbringing, are similar in magnitude. Interestingly, lefties with left-handed mothers show no cognitive deficits relative to righties. Some of these facts have been documented previously, though not across the range of datasets used here.

Lefties also have 10–12 percent lower annual earnings than righties, roughly equivalent to the return to a year of schooling in these samples. A large fraction of this gap can be explained by observed differences in cognitive skills and emotional or behavioral problems. Lefties work in more manually intensive occupations than do righties, further suggesting that their primary labor market disadvantage is cognitive rather than physical. This paper is the first to document these patterns.

Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics

August 14, 2014 Comments off

Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics (PDF)
Source: Journal of Economic Perspectives

There is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This has lead to attempts to provide explanations-using both standard economic theory and behavioral economics-for why certain individuals may be attracted to such an apparently unprofitable activity. Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship. Differences in risk aversion provide a plausible and intuitive interpretation of entrepreneurial activity. In addition, a growing literature has begun to highlight the potential importance of overconfidence in driving entrepreneurial outcomes. Such a mechanism may appear at face value to work like a lower level of risk aversion, but there are clear conceptual differences-in particular, overconfidence likely arises from behavioral biases and misperceptions of probability distributions. Finally, nonpecuniary taste-based factors may be important in motivating both the decisions to enter into and to persist in entrepreneurship.

The Economics of Slums in the Developing World

January 24, 2014 Comments off

The Economics of Slums in the Developing World
Source: Journal of Economic Perspectives

The global expansion of urban slums poses questions for economic research as well as problems for policymakers. We provide evidence that the type of poverty observed in contemporary slums of the developing world is characteristic of that described in the literature on poverty traps. We document how human capital threshold effects, investment inertia, and a “policy trap” may prevent slum dwellers from seizing economic opportunities offered by geographic proximity to the city. We test the assumptions of another theory — that slums are a just transitory phenomenon characteristic of fastgrowing economies — by examining the relationship between economic growth, urban growth, and slum growth in the developing world, and whether standards of living of slum dwellers are improving over time, both within slums and across generations. Finally, we discuss why standard policy approaches have often failed to mitigate the expansion of slums in the developing world. Our aim is to inform public debate on the essential issues posed by slums in the developing world.

The Top 1 Percent in International and Historical Perspective

August 15, 2013 Comments off

The Top 1 Percent in International and Historical Perspective (PDF)
Source: Journal of Economic Perspectives

The top 1 percent income share has more than doubled in the United States over the last thirty years, drawing much public attention in recent years. While other English speaking countries have also experienced sharp increases in the top 1 percent income share, many high‐income countries such as Japan, France, or Germany have seen much less increase in top income shares. Hence, the explanation cannot rely solely on forces common to advanced countries, such as the impact of new technologies and globalization on the supply and demand for skills. Moreover, the explanations have to accommodate the falls in top income shares earlier in the twentieth century experienced in virtually all high‐income countries. We highlight four main factors. The first is the impact of tax policy, which has varied over time and differs across countries. Top tax rates have moved in the opposite direction from top income shares. The effects of top rate cuts can operate in conjunction with other mechanisms. The second factor is indeed a richer view of the labor market, where we contrast the standard supply-side model with one where pay is determined by bargaining and the reactions to top rate cuts may lead simply to a redistribution of surplus. Indeed, top rate cuts may lead managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment. The third factor is capital income. Overall, private wealth (relative to income) has followed a U-shaped path over time, particularly in Europe, where inherited wealth is, in Europe if not in the United States, making a return. The fourth, little investigated, element is the correlation between earned income and capital income, which has substantially increased in recent decades in the United States.

Evaluating the Medical Malpractice System and Options for Reform

August 18, 2011 Comments off

Evaluating the Medical Malpractice System and Options for Reform (PDF)
Source: Journal of Economic Perspectives
From Stanford Graduate School of Business News:

It’s not hard to find critics of the medical malpractice system in the United States. There is widespread agreement that it simply does not do what it should. “It both fails to compensate patients who have suffered from bad medical care, and compensates those who haven’t,” writes Daniel P. Kessler, a professor at the Stanford Graduate School of Business and Stanford Law School, and senior fellow at the Hoover Institution.

Moreover, malpractice issues add significant costs to the health care system. Although the amount of money devoted to legal costs and the settlement of malpractice claims is less than 1% of the nation’s health care spending, the cost of unnecessary treatments (known in the literature as “defensive medicine”) by doctors who fear they might be accused of negligence is staggering — approximately $50 billion a year, or 2-3% of total health spending, says Kessler.

Understanding why the system performs so badly, and what might be done to improve it, is more difficult than simply recognizing the problem. In a recent paper, Kessler reviews the work of more than 60 researchers to understand the operation of the malpractice system and the empirical evidence about its effects. He then explores the major efforts to reform the system and evaluates their potential for success.
“Evidence from several studies based on variation in states’ laws suggests that wisely chosen reforms have the potential to reduce health care spending significantly with no adverse impact on patient health outcomes,” he says.

Reforming Payments to Healthcare Providers: The Key to Slowing Healthcare Cost Growth While Improving Quality?

May 26, 2011 Comments off

Reforming Payments to Healthcare Providers: The Key to Slowing Healthcare Cost Growth While Improving Quality? (PDF)
Source: Journal of Economic Perspectives

The seemingly intractable debate about how to slow the growth of healthcare costs in the United States and elsewhere has traditionally boiled down to efforts to limit practices and quantities directly. In public healthcare programs, the focus in the United States is often on tighter price regulation. For example, the Balanced Budget Act of 1997 achieved most of its savings by reducing the growth of regulated prices in Medicare for physicians, hospitals, and most other healthcare providers. The Affordable Care Act of 2010 also achieved most of its “scored” budgetary savings (which were used as a partial offset for the costs of coverage expansions) through reducing Medicare price growth (Elmendorf, 2010). An often-discussed alternative is to regulate the quanitity of care by using available evidence on benefits, and potentially also costs, to restrict use of costly treatments through coverage restrictions or denials.

These blunt instruments of price limits and quantity regulation can affect specific types of costs in the short term. But over time, attempts to regulate prices have not been a solution to rising healthcare costs, either because the tight price regulations have been repealed or delayed due to provider opposition and concerns about access, or because changes in the mix of services provided overwhelmed any effect of lower prices for individual services. Other countries have more aggressively limited quantities based on technology evaluations of the value of care (for an overview of the British approach, see National Institute for Health Research webpage: But global restrictions on access to treatments have not been acceptable to the American public, especially if they are based on cost, and they appear to be a source of increasing concern in other countries as well (for example, Timmins, 2010). Maybe more importantly, the blunt instruments of price and quantity regulation discourage flexibility needed for a type of health care innovation with great potential: the trend toward “personalized” medicine – that is, health care that does much more to take individual clinical and genetic characteristics, as well as preferences, explicitly into account to achieve better outcomes while avoiding low-value treatments.