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Working Paper Series

  • 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.

  • Group Decisions: Analyzing Decision Strategy and Structure in Households

    Michael W. Hanemann, Wiktor Adamowicz, Joffre Swait, Reed Johnson, David Layton, Michel Regenwetter, Torsten Reimer, Robert Sorkin

    Goldman School of Public Policy Working Paper (January 2005)

    We begin the paper by critically reviewing the unitary model (Vermeulen, 2002), which (1) assumes that a single preference represents all agents in the group, or equivalently, that all agents have identical preferences; (2) imposes the choice of a benevolent dictator on the group; (3) assumes the group’s budget to be a single pooled value; (4) does not allow bargaining or negotiation, (5) nor permits knowledge or experience differences between members to lead to the use of different decision-making strategies. The impact of policies affecting group members differentially, for example, cannot be correctly assessed in the unitary model because its use will lead to erroneous welfare inferences (Vermeulen, 2002). Clearly, the need for alternative models is pressing.

    In the remainder of this paper we will synthesize the literature across disciplines with a view towards characterizing the shortcomings of current approaches to modeling group decisions. Subsequently we broach a number of issue areas that we believe future research must address to improve our understanding of group decisions and to enhance our ability to model and predict outcomes from such decisions. We then present a conceptual model of group decisionmaking that arose from our discussions and, we feel, synthesizes the multidisciplinary views represented in the workshop. We conclude by proposing a number of specific research questions 3 that we believe should be addressed in the short term.

  • Fishery Management Under Multiple Uncertainty

    Michael W. Hanemann, Anthony Fisher, Larry Karp, Christopher Costello, Gautam Sethi

    Goldman School of Public Policy Working Paper (October 2004)

    Among others who point to environmental variability and managerial uncertainty as causes of ¯shery collapse, Roughgarden and Smith (1996) argue that three sources of uncertainty are important for ¯sheries management: variability in ¯sh dynamics, inaccurate stock size estimates, and inaccurate implementation of harvest quotas. We develop a bioeconomic model with these three sources of uncertainty, and solve for optimal escapement based on measurements of ¯sh stock in a discrete-time model. Among other results we ¯nd: (1) when uncertainties are high, we generally reject the constant-escapement rule advocated in much of the existing literature, (2) inaccurate stock estimation a®ects policy in a fundamentally di®erent way than the other sources of uncertainty, and (3) the optimal policy leads to signi¯cantly higher commercial pro¯ts and lower extinction risk than the optimal constant-escapement policy (by 42% and 56%, respectively).

  • Consumer Demand with Several Linear Constriants:  A Global Analysis

    Michael W. Hanemann

    Goldman School of Public Policy Working Paper (October 2004)

    Economists sometimes find themselves in the position of having to extend the
    neoclassical model of consumer demand to settings where, in addition to the conventional budget
    constraint, there are one or more additional linear constraints that restrict the consumer’s utility
    maximization problem. Examples include point rationing [Tobin-Houthakker (1950-51), Tobin
    (1952)]; models of time allocation where the time constraint cannot be collapsed into the budget
    constraint [de Serpa (1971); de Donnea (1972); McConnell (1975); Lyon (1978) Larson and
    Shaikh (2001)]; and multi-period portfolio allocation problems [Diamond and Yaari (1972)].
    Without exception, the existing literature has focused on differential properties of the resulting
    demand functions-i.e. issues such as the effect of rationing on demand elasticities, the Le
    Chatelier—Samuelson Theorem, the generalization of the Hick-Slutsky decomposition, and other
    comparative static results [see Kusumoto (1976), Chichilnisky and Kalman (1978), Hatta (1980),
    Wan (1981) and the references cited above]. By employing some “tricks with utility functions”
    in the spirit of Gorman (1976), I am able to obtain a global characterization of these demand
    functions. Specifically, I develop an algorithm for deriving the demand functions that apply
    when there are M linear constraints from those that apply when these is only a single constraint.
    The algorithm permits one to derive all of the existing comparative static results in a simple and
    compact manner. It also has some value for empirical demand analysis, because it shows how to compute the demand functions associated with maximization problems involving multiple linear constraint based on direct or indirect utility functions associated with known conventional demand functions.

    The paper is organized as follows. Section 2 presents some preliminary results which are
    needed for the main analysis, but are also of interest as “tricks” in their own right. Section 3
    considers the utility maximization problem with two linear constraints, summarizes the existing
    comparative static results, develops the new Global Representation Theorem, and shows how
    this can be used to derive and sharpen the existing comparative static results. Section 4 considers
    a utility maximization problem with three linear constraints and develops the analogous Global
    Representation Theorem for the solution to this problem in terms of known demand functions
    associated with a conventional single-constraint problem; the results developed here provide the
    basis for extension to problems involving more than three linear constraints. Section 5 offers
    some concluding observations.

  • The Impact of Global Warming on U.S. Agriculture: An Econometric Analysis of Optimal Growing Conditi

    Michael W. Hanemann

    Goldman School of Public Policy Working Paper (October 2004)