Economics

Economics
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The Review of Agricultural Economics, 29(3):446-493. (2007)

The Productivity Argument for Investing in Young Children

James J.Heckman

This paper presents a productivity argument for investing in disadvantaged young children. For such investment, there is no equity-efficiency tradeoff.

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Proc. Of the Asia Pacific Symposium on Information Visualization (APVIS 06), 2006

BiblioViz: A System for Visualization Bibliography Information

Zeqian Shen, Michael Ogawa, Soon Tee Teoh, Kwan-Liu Ma, Zeqian Shen, Michael Ogawa, Soon Tee Teoh, Kwan-Liu Ma

The InfoVis 2004 contest led to the development of several bibliography visualization systems. Even though each of these systems o#ers some unique views of the bibliography data, there is no single best system o#ering all the desired views. We have thus studied how to consolidate the desirable functionalities of these systems into a cohesive design.

We have also designed a few novel visualization methods. This paper presents our findings and creation: BiblioViz, a bibliography visualization system that gives the maximum number of views of the data using a minimum number of visualization constructs in a unified fashion.

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IEEE Transactions on Visualization and Computer Graphics, 12, 6, (Nov 2006), pp. 1429-1439

Visual Analysis of Large Heterogeneous Social Networks by Semantic and Structural Abstraction

Zeqian Shen, Kwan-Liu Ma, Tina Eliassi-Rad, Zeqian Shen, Kwan-Liu Ma, Tina Eliassi-Rad

Social network analysis is an active area of study beyond sociology. It uncovers the invisible relationships between actors in a network and provides understanding of social processes and behaviors.

It has become an important technique in a variety of application areas such as the Web, organizational studies, and homeland security. This paper presents a visual analytics tool, OntoVis, for understanding large, heterogeneous social networks, in which nodes and links could represent different concepts and relations, respectively. These concepts and relations are related through an ontology (a.k.a. a schema).

OntoVis is named such because it uses information in the ontology associated with a social network to semantically prune a large, heterogeneous network. In addition to semantic abstraction, OntoVis also allows users to do structural abstraction and importance ltering to make large networks manageable and to facilitate analytic reasoning. All these unique capabilities of OntoVis are illustrated with several case studies.

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In Finis Welch and Eric Hanushek, eds., Handbook on the Economics of Education, Vol. 1, Amsterdam: Elsevier, pp. 697-812. (2006)

Interpreting the Evidence on Life Cycle Skill Formation

Flavio Cunha, James J.Heckman, Lance Lochner, Dimitriy Masterov

This paper presents economic models of child development that capture the essence of recent findings from the empirical literature on skill formation. The goal of this essay is to provide a theoretical framework for interpreting the evidence from a vast empirical literature, for guiding the next generation of empirical studies, and for formulating policy. Central to our analysis is the concept that childhood has more than one stage. We formalize the concepts of self-productivity and complementarity of human capital investments and use them to explain the evidence on skill formation. Together, they explain why skill begets skill through a multiplier process.

Skill formation is a life cycle process. It starts in the womb and goes on throughout life. Families play a role in this process that is far more important than the role of schools. There are multiple skills and multiple abilities that are important for adult success.

Abilities are both inherited and created, and the traditional debate about nature versus nurture is scientifically obsolete. Human capital investment exhibits both self-productivity and complementarity. Skill attainment at one stage of the life cycle raises skill attainment at later stages of the life cycle (self-productivity). Early investment facilitates the productivity of later investment (complementarity).

Early investments are not productive if they are not followed up by later investments (another aspect of complementarity). This complementarity explains why there is no equity-efficiency trade-off for early investment. The returns to investing early in the life cycle are high. Remediation of inadequate early investments is difficult and very costly as a consequence of both self-productivity and complementarity.

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In Diane Coyle, Wendy Alexander, and Brian Ashcroft, eds., New Wealth for Old Nations: Scotland’s Economic Prospects, Princeton: Princeton University Press, pp. 119-165. (2005)

Skill Policies for Scotland

James J.Heckman, Dimitriy Masterov

This paper argues that skill formation is a life-cycle process and develops the implications of this insight for Scottish social policy. Families are major producers of skills, and a successful policy needs to promote effective families and to supplement failing ones. We present evidence that early disadvantages produce severe later disadvantages that are hard to remedy.

We also show that cognitive ability is not the only determinant of education, labor market outcomes and pathological behavior like crime. Abilities differ in their malleability over the life-cycle, with noncognitive skills being more malleable at later ages. This has important implications for the design of policy. The gaps in skills and abilities open up early, and schooling merely widens them.

Additional university tuition subsidies or improvements in school quality are not warranted by Scottish evidence. Company sponsored job training yields a higher return for the most able and so this form of investment will exacerbate the gaps it is intended to close.

For the same reason, public job training is not likely to help adult workers whose skills are rendered obsolete by skill-biased technological change. Targeted early interventions, however, have proven to be very effective in compensating for the effect of neglect.

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Quarterly Journal of Economics 120, no. 1 (2005): 131-172

Profit Sharing and the Role of Professional Partnerships

Steve Tadelis, Jonathan Levin

When it is hard to assess product quality, firms will sub-optimally hire low ability workers. We show that organizing as a profit-sharing partnership can alleviate these problems.

Our theory explains the historical prevalence of profit sharing in professional service industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting, and the relative scarcity of profit sharing in other industries.

It also sheds light on features of partnerships such as up-or-out promotion systems, and on recent trends in professional service industries.( JEL codes: D20, D82, J33, J44, J54, L22.

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The Journal of Law and Economics, 48(1):1-39. (2005).

Labor Market Discrimination and Racial Differences in Premarket Factors

Pedro Carneiro, James J.Heckman, Dimitriy Masterov

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.

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in Laura B. Nielsen and Robert L. Nelson, eds., Handbook of Research on Employment Discrimination: Rights and Realities, New York: Springer. (2005)

Understanding the Sources of Ethnic and Racial Wage Gaps and Their Implications for Policy

Pedro Carneiro, James J.Heckman, Dimitriy Masterov

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.

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American Economic Review Papers and Proceedings 92, no. 2 (2002): 433-437

Complexity, Flexibility and the Make-or-Buy Decision

Steve Tadelis

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.

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Journal of Political Economy 110, no. 4 (2002): 854-882

The Market for Reputations as an Incentive Mechanism

Steve Tadelis

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)

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