Working Paper Series

  • The Organization of Consumption, Production and Learning

    Suzanne Scotchmer, Bryan Ellickson, Birgit Grodal, William Zame

    Goldman School of Public Policy Working Paper (August 2005)

    This paper provides an extension of general equilibrium theory that incorporates the actions of individuals both as demanders and suppliers of goods
    and as members of ¯rms, schools, social groups, and contractual relationships. The central notion of the paper is a group: a collection of individuals associated with one another for some purpose. The model takes as primitive an exogenous set of group types, interpretable as (potential) ¯rms, schools, social groups, contracts etc. The types of schools and ¯rms that materialize in equilibrium, as well as the way that agents acquire skills, are determined endogenously in a competitive market, as are the contracts they enter into, and the production and consumption of private commodities. The model is
    well-founded (equilibrium exists) and passes a basic test of perfect competition (coincidence of the core with the set of equilibrium states). Examples
    and Applications illustrate the °exibility and power of the framework.

  • Digital Rights Management and the Pricing of Digital Products

    Suzanne Scotchmer, Yooki Park

    Goldman School of Public Policy Working Paper (July 2005)

    As it becomes cheaper to copy and share digital content, vendors are turning to technical protections such as encryption. We argue that if protection is nevertheless imperfect, this transition will generally lower the prices of content relative to perfect legal enforcement. However, the effect on prices depends on whether the content providers use independent protection standards or a shared one, and if shared, on the governance of the system. Even if a shared system permits content providers to set their prices independently, the equilibrium prices will depend on how the vendors share the costs, and may be higher than with perfect legal protection. We show that demand-based cost sharing generally leads to higher prices than revenue-based cost sharing. Users, vendors and the antitrust authorities will typically have different views on what capabilities the DRM system should have. We argue that, when a DRM system is implemented as an industry standard, there is a potential for collusion through technology.

  • Do Consumers React to the Shape of the Supply?  Water Demand under Heterogeneous Price Structures

    Michael W. Hanemann, Sheila M. Olmstead, Robert N. Stavins

    Goldman School of Public Policy Working Paper (June 2005)

    Urban water pricing provides an opportunity to examine whether consumers react to the
    shape of supply functions. We carry out an empirical analysis of the influence of price and price
    structure on residential water demand, using the most price-diverse, detailed, household-level
    water demand data yet available for this purpose. We adapt the Hausman model of labor supply
    under progressive income taxation to estimate water demand under non-linear prices. Ours is the
    first analysis to address both the simultaneous determination of marginal price and water demand
    under block pricing and the possibility of endogenous price structures in the cross section. In
    order to examine the possibility that consumers facing block prices are more price-responsive, all
    else equal, we test for price elasticity differences across price structures. We find that
    households facing block prices are more sensitive to price increases than households facing
    uniform marginal prices. Tests for endogenous price structures cannot rule out a behavioral
    response to the shape of supply, but suggest that observed differences in price elasticity under
    supply curves of varying shapes may result, in part, from underlying heterogeneity among utility
    service areas.

  • Consumption Externalities, Rental Markets and Purchase Clubs

    Suzanne Scotchmer

    Goldman School of Public Policy Working Paper (May 2005)

    A premise of general equilibrium theory is that private goods are rival. Nevertheless, many private goods are shared, e.g., through borrowing, through coownership, or simply because one person’s consumption affects another person’s wellbeing. I analyze consumption externalities from the perspective of club theory, and argue that, provided consumption externalities are limited in scope, they can be internalized through membership fees to groups. Two important applications are to rental markets and “purchase clubs,” in which members share the goods that they have individually purchased.

  • Torts and the Protection of “Legally Recognized Interests

    Michael W. Hanemann, Sandra A. Hoffmann

    Goldman School of Public Policy Working Paper (April 2005)

    In this paper we examine how one might systematically model the incidences of property created and enforced by tort law and analyze their effect on economic behavior. We then show how such a model can help provide deeper insights into the law and economics analysis of tort, using as an example the search for a unified approach to assessing compensation for nonpecuniary and pecuniary loss. The paper is organized as follows. In Section 1, we present a legal analysis of the entitlement conferred by tort law. This is then formalized in Section 2 in an economic model of the incidences of ownership defined and enforced by tort law. In Section 3 we show how this perspective on tort law can add to our understanding of the design and function of torts by re-examining the literature on insurance and tort compensation for nonpecuniary loss. We conclude in Section 4 with a summary of how tort law functions to create and protect rights in the bundle of rights that makes up property.

  • The Role of Non-Farm Incomes in Reducing Rural Poverty and Inequality in China

    Alain de Janvry, Elisabeth Sadoulet, Nong Zhu

    Goldman School of Public Policy Working Paper (March 2005)

    China’s record in reducing rural poverty has been nothing short of spectacular and should be a source of
    lessons for other countries. Rural poverty reduction is generally sought in the role of agriculture in
    contributing to farm incomes. However, non-farm employment in rural areas can also be a major
    contributor. Using detailed household survey data from Hubei province, we simulate the counterfactual of
    what rural households’ incomes, poverty, and inequality would be in the absence of access to non-farm
    sources of income. Results show that, without non-farm employment, rural poverty would be much higher
    and deeper, and that income inequality would be higher as well. We find that education, proximity to
    town, neighborhood effects, and village effects are crucial in helping particular households gain access to
    these opportunities. We also find that those who stay as pure farmers have non-observable characteristics
    that make them much more productive in agriculture, implying positive selection on these characteristics.
    Moreover, participation in non-farm activities has a positive spillover effect on household farm

  • Using a Structural Model of Educational Choice to Improve Program Efficiency

    Alain de Janvry, Frederico Finan, Elisabeth Sadoulet

    Goldman School of Public Policy Working Paper (February 2005)

    Constructing structural models of educational choice allows to explore design features
    for educational programs and to predict how the program would perform in alternative
    contexts, for instance when accompanied by new complementary programs. We use the
    experience of Progresa, Mexico’s ambitious conditional cash transfer program for
    education in poor rural communities, to construct such a model. The impact of transfers
    on decisions to enroll in secondary school and to repeat a grade in case of failure is
    accurately measured due to randomized treatment in a subset of communities. While
    impact measurements of Progresa on educational attainment are available from reduced
    form estimates, the structural model allows to decompose the channels of influence in
    decision making and to measure their relative importance on observed outcomes. We
    measure the gains from a design where future transfers can be credibly committed in
    spite of political cycles, and from complementary supply-side programs providing
    improved off-school support to students and access to better information about job
    opportunities outside the community offered by education.

  • Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic A

    Michael W. Hanemann, Wolfram Schlenker, Anthony C. Fisher¤

    Goldman School of Public Policy Working Paper (January 2005)

    There has been a lively debate about the potential impact of global climate change
    on U.S. agriculture. Most of the early agro-economic studies predict large damages (see,
    for example, Richard M. Adams, 1989; Harry M. Kaiser et al., 1993; and Adams et al.,
    1995). In an innovative paper Robert Mendelsohn, William D. Nordhaus and Daigee Shaw
    (1994) - hereafter MNS - propose a new approach: using the variation in temperature and
    precipitation across U.S. counties to estimate a reduced form hedonic equation with the
    value of farmland as the dependent variable. A change in temperature and/or precipitation
    is then associated with a change in farmland value which can be interpreted as the impact of
    climate change. Adams et al. (1998) characterize the hedonic approach as a spatial analogue
    approach, and acknowledge that "the strength of the spatial analogue approach is that
    structural changes and farm responses are implicit in the analysis, freeing the analyst from
    the burden of estimating the e®ects of climate change on particular region-speci¯c crops and
    farmer responses." On the other hand, one of the potential disadvantages of the hedonic
    approach is that it is a partial equilibrium analysis, i.e., agricultural prices are assumed to
    remain constant.1 While year-to-year °uctuations in annual weather conditions certainly
    have the potential to impact current commodity prices, especially for crops produced only
    in a relatively localized area, (such as citrus fruits which are grown mainly in California
    and Florida), changes in long-run weather patterns (i.e., changes in climate) might have a
    smaller e®ect on commodity prices because of the greater potential for economic adaptation,
    particularly shifts in growing regions.2 The hedonic approach as implemented by MNS
    predicts that existing agricultural land on average might be more productive and hence result
    in bene¯ts for U.S. farmers.3 The hedonic approach has received considerable attention in our
    judgment in part because the conclusions are at variance with those of some other studies that suggest warming will lead to damages and in part because of the new methodology.

    Although the approach is appealing, it is at the same time vulnerable to problems related
    to misspeci¯cation. Several authors have questioned the particular implementation in MNS (William R. Cline,
    1996; Robert K. Kaufmann, 1998; Darwin (1999b); and John Quiggin and John K. Horowitz,
    1999). Speci¯cally, they suggest that (i) the hedonic approach cannot be used to estimate
    dynamic adjustment costs; (ii) the results are not robust across di®erent weighting schemes;
    and (iii) the inadequate treatment of irrigation in the analysis might bias the results. The ¯rst
    criticism alludes to the fact that some farmers might not ¯nd it pro¯table to switch to new
    cropping patterns given their existing crop-speci¯c ¯xed capital. However, climate change
    will occur only gradually and most costs can thus be seen as variable. In this paper we focus
    on the latter two points, especially the role of irrigation. Previous comments have raised
    theoretical concerns about potential sources of misspeci¯cation related to irrigation. We
    provide an empirical test. Once irrigation is accounted for, we show that results also become
    robust across weighting schemes or models. Elsewhere we extend the analysis in various
    directions: construction and use of climate variables tied more closely to agronomic ¯ndings;
    development of more accurate measures of both climate and soil conditions; adjustment
    for spatial correlation of the error terms in a hedonic regression; and use of recent climate
    scenarios that go beyond the traditional assumption of uniform impacts across regions of
    a doubling of greenhouse gas concentrations in the atmosphere (Wolfram Schlenker et al.,
    2004). We note here that none of the implied changes in the analysis a®ects the arguments
    concerning irrigation discussed in this paper.