We investigate the relative significance of differences in cognitive skills and discrimination in explaining racial/ethnic wage gaps. We show that cognitive test scores taken prior to entering the labor market are influenced by schooling. Adjusting the scores for racial/ethnic differences in education at the time the test is taken reduces their role in accounting for the wage gaps.
We also consider evidence on parental and child expectations about education and on stereotype-threat effects. We find both factors to be implausible alternative explanations for the gaps we observe. We argue that policies need to address the sources of early skill gaps and to seek to influence the more malleable behavioral abilities in addition to their cognitive counterparts.
Such policies are far more likely to be effective in promoting racial and ethnic equality for most groups than are additional civil rights and affirmative action policies targeted at the workplace.
Previous studies show that controlling for ability measured in the teenage years eliminates young adult wage gaps for all groups except black males, for whom the gap is reduced by approximately three-fourths. This suggests that disparity in skills, rather than the differential treatment of such skills in the market, produces racial and ethnic wage differentials.
However, minority children and their parents may have pessimistic expectations about receiving fair rewards for their skills in the labor market and so they may invest less in skill formation. Poor schools may also depress cognitive achievement, even in the absence of any discrimination.
We find that the evidence on expectations is mixed. Although all groups are quite optimistic about the future schooling outcomes of their children, minority parents and children have more pessimistic expectations about child schooling relative to white children and their parents when the children are young.
At later ages, expectations are more uniform across racial and ethnic groups. Gaps in ability across racial and ethnic groups also open up before the start of formal schooling, and the different trajectories of Hispanic and black students indicate that differences in schooling cannot be the source of cognitive disparities. Finally, test scores depend on schooling attained at the time of the test.
Adjusting for differences in schooling attainment at the age the test is taken reduces the power of measured ability to shrink wage gaps for blacks, but not for other minorities.
We also document the presence of disparities in noncognitive traits across racial and ethnic groups. These characteristics have been shown elsewhere to be important for explaining the labor market outcomes of adults. This evidence points to the importance of early (preschool) family factors and environments in explaining both cognitive and noncognitive ability differentials by ethnicity and race.
American Economic Review Papers and Proceedings 92, no. 2 (2002): 433-437
Complexity, Flexibility and the Make-or-Buy Decision
65 years ago, Ronald Coase (1937) asked what determines whether production will be organized in a firm or through the market, later coined the "make-or-buy" decision. This question was put center stage by Oliver Williamson (1975, 1985) who further developed Transaction Costs Economics(TCE), arguing that incomplete contracts and specific relationships overshadowed by opportunism, asymmetric information and bounded rationality, will lead vertical processes to integrate.
Benjamin Klein et al. (1978) enhanced TCE with the "hold-up" problem: in the face of incomplete contracts, specificity and opportunistic behavior, integration can help promote ex ante investment incentives. Sanford Grossman and Oliver Hart (1986) (followed by Hart and John Moore (1990)) developed the Property Rights Theory (PRT) of the firm (See Hart, 1995).
PRT formally model the hold-up problem, offered a precise definition of integration via ownership and residual control rights, and analyzed the costs and benefits of integration in a unified manner. However, PRT narrowed the focus of the make-or-buy question on one type of transaction cost - the hold up problem.
This paper focuses attention on a different kind of transaction cost: haggling and friction due to ex post changes and adaptations when contracts are incomplete. The level of a transaction's complexity, which is associated with contractual incompleteness, will be the shifting parameter that determines both incentive schemes and integration decisions.
This focus is motivated by a careful examination of procurement decisions in industry, and has strong empirical content since the exogenous shifter (complexity) seems easier to measure than specificity.
Journal of Political Economy 110, no. 4 (2002): 854-882
The Market for Reputations as an Incentive Mechanism
Reputational career concern provide incentive for short lived agent to work hard, but it is well known that these incentive disappear as an agent reaches retirement. This paper investigates the effect of a market for firm reputation on the life-cycle incentives of firm owners to exert effort.
A dynamic general equilibrium model with moral hazard and adverse selection generates two main results. First, incentives of young and old agents are quantitatively equal, implying that incentives are "ageless" with a market for reputations.
Second, good reputations cannot act as effective sorting devices: in equilibrium, more able agent cannot outbid lesser ones in the market for good reputations. In addition, welfare analysis shows that social surplus can fall if clients observe trade in firm reputation. (JELC70, D82, L14, L15)
Rand Journal of Economics 32, no. 3 (Autumn 2001): 387-407
Incentives versus Transaction Costs: A Theory of Procurement Contracts
Inspired by facts from the private-sector construction industry, we develop a model that explains many stylized facts of procurement contracts.
The buyer in our model incurs a cost of providing a comprehensive design and is faced with a tradeoff between providing incentives and reducing ex post transaction costs due to costly renegotiation. We show that cost-plus contracts are preferred to fixed-price contracts when a project is more complex.
We briefly discuss how fixed-price or cost-plus contracts might be preferred to other incentive contracts. Finally, our model provides some microfoundations for ideas from Transaction Cost Economics.
A common complaint about online auctions for consumer goods is the presence of ``snipers,'' who place bids in the final seconds of sequential ascending auctions with predetermined ending times. The literature conjectures that snipers are best-responding to the existence of ``incremental" bidders that bid up to their valuation only as they are outbid. Snipers aim to catch these incremental bidders at a price below their reserve, with no time to respond. As a consequence, these incremental bidders may experience regret when they are outbid at the last moment at a price below their reservation value. We measure the effect of this experience on a new buyer's propensity to participate in future auctions. We show the effect to be causal using a carefully selected subset of auctions from eBay.com and instrumental variables estimation strategy. Bidders respond to sniping quite strongly and are between 4 and 18 percent less likely to return to the platform.
Auctions versus Negotiations in Procurement: An Empirical Analysis
Patrick Bajari, Robert McMillan
Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we consider several possible determinants that may influence the choice of auctions versus negotiations. We then examine a comprehensive data set of private sector building contracts awarded in Northern California during the years 1995-2000.
The analysis suggests a number of possible limitations to the use of auctions. Auctions may perform poorly when projects are complex, contractual design is incomplete and there are few available bidders.
Furthermore, auctions may stifle communication between buyers and sellers, preventing the buyer from utilizing the contractor's expertise when designing the project. Some implications of these results for procurement in the public sector are discussed. JEL classifications: D23, D82, H57, L14, L22, L74.
Contracting for Government Services: Theory and Evidence from U.S. Cities
Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this “make-or-buy” choice that highlights the trade-off between productive efficiency and the costs of contract administration.
We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions.
Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services. JEL codes: D23, D73, H11, L33