Economic Inquiry

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FIDDLING WITH VALUE: VIOLINS AS AN INVESTMENT?

KATHRYN GRADDY, PHILIP E. MARGOLIS

This paper measures the returns to investing in violins, using two different datasets. One dataset includes 337 observations on repeat sales of the same violins at auction and at dealer sales starting in the mid‐nineteenth century, and another dataset includes over 2,500 observations on sales of individual violins at auction since 1980. Overall, real returns for the dataset on repeat sales for the period 1850–2008 have been approximately 3.5%. Real returns to the overall portfolio of individual sales since 1980 have been about 3.3%. The price path has been stable with a slight negative correlation to stocks and bonds....

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HETEROGENEOUS RATES OF TIME PREFERENCE AND THE DECISION TO SMOKE

ROBERT L. SCHARFF, W. KIP VISCUSI

Economic Inquiry > 49 > 4 > 959 - 972

Individuals with higher personal rates of time preference will be more likely to smoke. Although previous studies have found no evidence of a relationship between smoking and rates of time preference, analysis of implicit rates of time preference associated with workers' wage fatality risk trade‐offs indicates that smokers have higher rates of time preference with respect to years of life. Current smokers have an implied rate of time preference of 13.8% as compared to 8.1% for nonsmokers. Current smokers who are blue‐collar workers have rates of time preference with respect to years of life of 16.3% compared to 7.8% for nonsmoking blue‐collar workers...

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RISK‐TAKING BEHAVIOR IN THE PRESENCE OF NONCONVEX ASSET DYNAMICS

TRAVIS J. LYBBERT, CHRISTOPHER B. BARRETT

Economic Inquiry > 49 > 4 > 982 - 988

A growing literature on poverty traps emphasizes the links between multiple equilibria and risk avoidance. However, multiple equilibria may also foster risk‐taking behavior by some poor people. We illustrate this idea with a simple analytical model in which people with different wealth and ability endowments make investment and risky activity choices in the presence of known nonconvex asset dynamics. This model underscores a crucial distinction between familiar static concepts of risk aversion and forward‐looking dynamic risk responses to nonconvex asset dynamics. Even when unobservable preferences exhibit decreasing absolute risk aversion, observed behavior may suggest that risk aversion actually increases with wealth near perceived dynamic asset thresholds. Although high ability individuals are not immune from poverty traps, they can leverage their capital endowments more effectively than lower ability types and are therefore less likely to take seemingly excessive risks. In general, linkages between behavioral responses and wealth dynamics often seem to run in both directions. Both theoretical and empirical poverty trap research could benefit from making this two‐way linkage more explicit...

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DO MERGERS REALLY REDUCE COSTS? EVIDENCE FROM HOSPITALS

TERESA D. HARRISON

Economic Inquiry > 49 > 4 > 1054 - 1069

In this paper, we compare potential and realized cost savings from hospital mergers. Our approach isolates changes in realized cost savings due to different output mixes from systematic changes due to time and also provides a measure of the potential cost savings due to scale economies. Our findings suggest that economies of scale are present for merging hospitals and they realize these cost savings immediately following a merger. However, we also show that over time, cost savings from the merger decrease and the proportion of hospitals experiencing positive cost savings declines....

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ECONOMIES OF SCALE IN THE HOUSEHOLD: PUZZLES AND PATTERNS FROM THE AMERICAN PAST

TREVON D. LOGAN

Economic Inquiry > 49 > 4 > 1008 - 1028

Estimates of household economies of scale are critical for measuring income and living standards, yet we know little about how these scale economies change over time. I use American household expenditure surveys to produce the first comparable historical estimates of household scale economies. I find that scale economies changed significantly from 1888 to 1935 for all expenditure categories considered (food, clothing, entertainment, and housing), but not all trends in scale economies are consistent with theoretical predictions. As such, our notions about household economies of scale must be reassessed in light of this historical evidence....

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PATENT POOL FORMATION AND SCOPE OF PATENTS

CORINNE LANGINIER

Economic Inquiry > 49 > 4 > 1070 - 1082

Basic innovations are often fundamental to the development of applications that may be developed by other innovators. In this setting, we investigate whether patent pools can rectify the lack of incentives for a developer to invest in applications. Following Green and Scotchmer, we wonder whether broad basic patents are necessary to provide enough incentives for basic innovators. We show that patent pools are more likely to be formed with patents of very different breadths, or patents of similarly wide breadths. Furthermore, although patent pools rectify the lack of developer incentives, they may reduce the incentive for doing basic research...

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CHEATING IN CONTESTS

SCOTT M. GILPATRIC

Economic Inquiry > 49 > 4 > 1042 - 1053

Wherever competition is used to motivate a desirable activity or productive effort it may also motivate undesirable and therefore prohibited behavior—that is, cheating—that the organizer of the contest attempts to police. For example, when workers compete for promotion, bonuses, or other rewards, they may misrepresent their output (i.e., commit fraud) or increase their output by unacceptable means (e.g., violate regulations). We show how the extent of cheating is determined by the payoffs at stake in the contest, the random component of output, probability of cheating being detected, number of contestants, and the penalty associated with being found to have cheated. We find that while greater enforcement reduces cheating, it may also reduce productive effort. We also identify how two particular aspects of enforcement, the awarding of default victories and use of correlated rather than independent audits, affect cheating behavior....

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MILITARY SPENDING AND THE GROWTH‐MAXIMIZING ALLOCATION OF PUBLIC CAPITAL: A CROSS‐COUNTRY EMPIRICAL ANALYSIS

PANTELIS KALAITZIDAKIS, VANGELIS TZOUVELEKAS

Economic Inquiry > 49 > 4 > 1029 - 1041

In this paper we present an endogenous growth model to analyze the growth maximizing allocation of public investment among N different types of public capital. Using this general model of public capital formation, we analyze the stability of the long‐run equilibrium and we derive the growth‐maximizing values of the shares of public investment allocated to the different types of public capital, as well as the growth‐maximizing tax rate (amount of total public investment as a share of GDP). Then we proceed with an empirical investigation of the theoretical implication of the model that both the effects of the shares of public investment and the tax rate on the long‐run growth rate are non‐linear, following an inverse U‐shaped pattern. Using data of public investment in infrastructure and military capital formation, we derive empirical estimations that confirm the theoretical implications of the model....

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A COMPARATIVE ANALYSIS OF THE NATIVITY WEALTH GAP

THOMAS K. BAUER, DEBORAH A. COBB‐CLARK, VINCENT A. HILDEBRAND, MATHIAS G. SINNING

Economic Inquiry > 49 > 4 > 989 - 1007

We investigate the relative wealth position of immigrant households residing in Australia, Germany, and the United States. In Germany and the United States, wealth differentials stem from differences in the educational attainment and demographic characteristics of the native and immigrant populations, rather than income differentials. In contrast, the small nativity wealth gap in Australia exists because immigrants to Australia do not translate their relative educational and demographic advantage into a wealth advantage. Overall, we find substantial disparity in the economic well‐being of immigrant and native families which is largely consistent with domestic labor markets and immigration policies....

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DOES WAL‐MART SELL INFERIOR GOODS?

EMEK BASKER

Economic Inquiry > 49 > 4 > 973 - 981

I estimate the aggregate income elasticity of Wal‐Mart's and Target's revenues using quarterly data for 1997–2006. I find that Wal‐Mart's revenues increase during bad times, whereas Target's revenues decrease, consistent with Wal‐Mart selling “inferior goods” in the technical sense of the term. An upper bound on the aggregate income elasticity of demand for Wal‐Mart's wares is −0.5. (JEL L81, D12)

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SELL LOCAL! THE NEXT LOGICAL STEP

PHILIP THOMPSON, HART HODGES

Economic Inquiry > 49 > 4 > 1117 - 1117

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THE IMPACT OF AIDS ON INCOME AND HUMAN CAPITAL

PEDRO CAVALCANTI FERREIRA, SAMUEL PESSÔA, MARCELO RODRIGUES DOS SANTOS

Economic Inquiry > 49 > 4 > 1104 - 1116

This paper studies the impact of HIV/AIDS on per capita income and education. It explores two channels on how HIV/AIDS affects income that have not been sufficiently stressed by previous literature: the reduction of the incentives to stay in school due to shorter expected longevity and the reduction in productivity of experienced workers. In the model, individuals live for three periods, may get infected in the second period, and with some probability die of AIDS before reaching the third period of their lives. Parents care for the welfare of the future generations so that they will maximize lifetime utility of their dynasty. The simulations predict that the most affected countries in Sub‐Saharan Africa in the future will be, on average, 30% poorer than they would be without AIDS. Schooling will decline in some cases by 40%. These figures are dramatically reduced with widespread medical treatment, as it increases the survival probability and productivity of infected individuals....

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2010 Editor's Report

R. Preston McAfee

Economic Inquiry > 49 > 4 > 1118 - 1122

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POSSIBILITY OF DYING AS A UNIFIED EXPLANATION OF WHY WE DISCOUNT THE FUTURE, GET WEAKER WITH AGE, AND DISPLAY RISK‐AVERSION

BHAGWAN CHOWDHRY

Economic Inquiry > 49 > 4 > 1098 - 1103

I formulate a simple and parsimonious evolutionary model that shows that because most species face a possibility of dying because of external factors, called extrinsic mortality in the biology literature, it can simultaneously explain (a) why we discount the future, (b) get weaker with age, and (c) display risk‐aversion. The paper suggests that testable restrictions—across species, across time, or across genders—among time preference, aging, and risk‐aversion could be analyzed in a simple framework...

INFONA - science communication portal

Economic Inquiry

FIDDLING WITH VALUE: VIOLINS AS AN INVESTMENT?

HETEROGENEOUS RATES OF TIME PREFERENCE AND THE DECISION TO SMOKE

RISK‐TAKING BEHAVIOR IN THE PRESENCE OF NONCONVEX ASSET DYNAMICS

DO MERGERS REALLY REDUCE COSTS? EVIDENCE FROM HOSPITALS

ECONOMIES OF SCALE IN THE HOUSEHOLD: PUZZLES AND PATTERNS FROM THE AMERICAN PAST

PATENT POOL FORMATION AND SCOPE OF PATENTS

CHEATING IN CONTESTS

MILITARY SPENDING AND THE GROWTH‐MAXIMIZING ALLOCATION OF PUBLIC CAPITAL: A CROSS‐COUNTRY EMPIRICAL ANALYSIS

A COMPARATIVE ANALYSIS OF THE NATIVITY WEALTH GAP

DOES WAL‐MART SELL INFERIOR GOODS?

SELL LOCAL! THE NEXT LOGICAL STEP

THE IMPACT OF AIDS ON INCOME AND HUMAN CAPITAL

2010 Editor's Report

POSSIBILITY OF DYING AS A UNIFIED EXPLANATION OF WHY WE DISCOUNT THE FUTURE, GET WEAKER WITH AGE, AND DISPLAY RISK‐AVERSION

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