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The American Family and Family Economics
Shelly Lundberg and Robert A. Pollak
Gary Becker's path-breaking Treatise on the Family (1981) subjected individuals' decisions about sex, marriage, childbearing, and childrearing to rational choice analysis. The American family has changed radically in recent decades; we survey these changes as well as the ongoing effort to understand partnering, parenting, and care of the elderly as results of maximizing choices made by individuals. First, we describe the recent changes in the American family: the separation of sex, marriage, and childbearing; fewer children and smaller households; converging work and education patterns for men and women; class divergence in partnering and parenting strategies; and the replacement of family functions and home production by government programs and market transactions. Second, we examine recent work in family economics that attempts to explain these changes. Third, we point out some challenging areas for further analysis and highlight issues of commitment in two primary family relationships: those between men and women, and those between parents and children. Finally, we consider the effectiveness of policies to target benefits to certain family members (for instance, children) or to promote marriage and fertility.
Marriage and Divorce: Changes and their Driving Forces
Betsey Stevenson and Justin Wolfers
We document key facts about marriage and divorce, comparing trends through the past 150 years and outcomes across demographic groups and countries. While divorce rates have risen over the past 150 years, they have been falling for the past quarter century. Marriage rates have also been falling, but more strikingly, the importance of marriage at different points in the life cycle has changed, reflecting rising age at first marriage, rising divorce followed by high remarriage rates, and a combination of increased longevity with a declining age gap between husbands and wives. Cohabitation has also become increasingly important, emerging as a widely used step on the path to marriage. Out-of-wedlock fertility has also risen, consistent with declining "shotgun marriages". Compared with other countries, marriage maintains a central role in American life. We present evidence on some of the driving forces causing these changes in the marriage market: the rise of the birth control pill and women's control over their own fertility; sharp changes in wage structure, including a rise in inequality and partial closing of the gender wage gap; dramatic changes in home production technologies; and the emergence of the Internet as a new matching technology. We note that recent changes in family forms demand a reassessment of theories of the family and argue that consumption complementarities may be an increasingly important component of marriage. Finally, we discuss how these facts should inform family policy debates.
The Economics of Lesbian and Gay Families
Dan A. Black, Seth G. Sanders and Lowell J. Taylor
In this essay, we provide some statistics about the gay and lesbian population in the United States, and ask if analysis based on economic reasoning can provide insight into the family outcomes we observe. We do not start with a hypothesis of innate differences in preferences, but instead seek to understand how differences in constraints systematically alter incentives faced by gay, lesbian, and heterosexual people. Our work reinforces a central theme of Gary Becker's: that family life and economic life are interwoven. Decisions within families—including couples' decisions to commit to one another, divorce, bear children, or adopt children—are intrinsically connected to other economic decisions, including human capital accumulation, labor supply, occupational choice, consumption, and decisions about where to live. We provide evidence addressing number of questions: Do differing biological constraints faced by gay, lesbian, and heterosexual couples affect choices over children? Do differences in fertility (or anticipated fertility), again owing to differences in constraints, influence where people live? Do same-sex couples have patterns of household specialization that differ in predictable fashion from heterosexual couples?
Guess Who’s Been Coming to Dinner? Trends in Interracial Marriage over the 20th Century
Roland G. Fryer Jr.
This paper studies marriages across black, white, and Asian racial lines. Marrying across racial lines is a rare event, even today. Interracial marriages account for approximately 1 percent of white marriages, 5 percent of black marriages, and 14 percent of Asian marriages. Following a brief history of the regulation of race and romance in America, I analyze interracial marriage using census data from 1880–2000, uncovering a rich set of cross-section and time-series patterns. I investigate the extent to which three different theories of interracial marriage can account for the patterns discovered. After also testing a social exchange theory and a search model, I find the data are most consistent with a Becker-style marriage market model in which objective criteria of a potential spouse, their race, and the social price of intermarriage are central.
Biological Basics and the Economics of the Family
Donald Cox
Many economic models of the family are based on a generic "person 1–person 2" household or "parent–child" family, rather than their anatomically correct counterparts: sons and daughters, fathers and mothers, and grandfathers and grandmothers. These economic models can offer powerful insights into family behavior, but also can leave certain patterns unexplained and neglect potentially important crosscurrents. "Bio-founded" approaches explicitly consider sex differences in reproductive capabilities and constraints, and can illuminate differences in the goals and interests of men versus women regarding preferences for a mate, decisions to marry or to terminate a marriage, how much to invest in a relationship, how much to invest in children, and how much to value the quality relative to the quantity of children Melding biological insights with family economics can cast new light on existing knowledge and open up novel paths for research. This paper generates biologically based hypotheses about family behavior by using Hamilton's rule, which holds that the costs and benefits of altruistic acts are weighted by the closeness of the genetic relationship, and by noting various fundamentals of human reproductive biology (for instance, a father might be uncertain of his genetic relationship to offspring, but a mother almost never is). This strategy generates a unified approach for modeling diverse aspects of family behavior. My discussion of biological fundamentals will include applications, empirical illustrations, and suggestions for how to merge these basics with current economic thinking.
Disagreement and the Stock Market
Harrison Hong and Jeremy C. Stein
A large catalog of variables with no apparent connection to risk has been shown to forecast stock returns, both in the time series and the cross-section. For instance, we see medium-term momentum and post-earnings drift in returns—the tendency for stocks that have had unusually high past returns or good earnings news to continue to deliver relatively strong returns over the subsequent six to twelve months (and vice-versa for stocks with low past returns or bad earnings news); we also see longer-run fundamental reversion—the tendency for "glamour" stocks with high ratios of market value to earnings, cashflows, or book value to deliver weak returns over the subsequent several years (and vice-versa for "value" stocks with low ratios of market value to fundamentals). To explain these patterns of predictability in stock returns, we advocate a particular class of heterogeneous-agent models that we call "disagreement models." Disagreement models may incorporate work on gradual information flow, limited attention, and heterogeneous priors, but all highlight the importance of differences in the beliefs of investors. Disagreement models hold the promise of delivering a comprehensive joint account of stock prices and trading volume—and some of the most interesting empirical patterns in the stock market are linked to volume.
Investor Sentiment in the Stock Market
Malcolm Baker and Jeffrey Wurgler
Investor sentiment, defined broadly, is a belief about future cash flows and investment risks that is not justified by the facts at hand. The question is no longer whether investor sentiment affects stock prices, but how to measure investor sentiment and quantify its effects. One approach is "bottom up," using biases in individual investor psychology, such as overconfidence, representativeness, and conservatism, to explain how individual investors underreact or overreact to past returns or fundamentals. The investor sentiment approach that we develop in this paper is, by contrast, distinctly "top down" and macroeconomic: we take the origin of investor sentiment as exogenous and focus on its empirical effects. We show that it is quite possible to measure investor sentiment and that waves of sentiment have clearly discernible, important, and regular effects on individual firms and on the stock market as a whole. The top-down approach builds on the two broader and more irrefutable assumptions of behavioral finance—sentiment and the limits to arbitrage—to explain which stocks are likely to be most affected by sentiment. In particular, stocks that are difficult to arbitrage or to value are most affected by sentiment.
What Do Laboratory Experiments Measuring Social Preferences Reveal About the Real World?
Steven D. Levitt and John A. List
A critical question facing experimental economists is whether behavior inside the laboratory is a good indicator of behavior outside the laboratory. To address that question, we build a model in which the choices that individuals make depend not just on financial implications, but also on the nature and extent of scrutiny by others, the particular context in which a decision is embedded, and the manner in which participants and tasks are selected. We present empirical evidence demonstrating the importance of these various factors. To the extent that lab and naturally occurring environments systematically differ on any of these dimensions, the results obtained inside and outside the lab need not correspond. Focusing on experiments designed to measure social preferences, we discuss the extent to which the existing laboratory results generalize to naturally-occurring markets. We summarize cases where the lab may understate the importance of social preferences as well as instances in which the lab might exaggerate their importance. We conclude by emphasizing the importance of interpreting laboratory and field data through the lens of theory.
Hedge Funds: Past, Present, and Future
René M. Stulz
Assets managed by hedge funds have grown faster over the last ten years than assets managed by mutual funds. Hedge funds and mutual funds perform the same economic function, but hedge funds are largely unregulated while mutual funds are tightly regulated. This paper compares the organization, performance, and risks of hedge funds and mutual funds. It then examines whether one can expect increasing convergence between these two investment vehicles and concludes that the performance gap between hedge funds and mutual funds will narrow, that regulatory developments will limit the flexibility of hedge funds, and that hedge funds will become more institutionalized.
How Wages Change: Micro Evidence from the International Wage Flexibility Project
William T. Dickens, Lorenz Goette, Erica L. Groshen, Steinar Holden, Julian Messina, Mark E. Schweitzer, Jarkko Turunen and Melanie E. Ward
Workers' wages are not set in a spot market. Instead, the wages of most workers—at least those who do not switch jobs—typically change only annually and are mediated by a complex set of institutions and factors such as contracts, unions, standards of fairness, minimum wage policy, transfers of risk, and incomplete information. The goal of the International Wage Flexibility Project (IWFP)—a consortium of over 40 researchers with access to individual workers' earnings data for 16 countries—is to provide new microeconomic evidence on how wages change for continuing workers. We investigate the extent of wage flexibility, with a particular focus on the extent of downward wage rigidity; and explore how measures of wage flexibility are affected by the wage-setting regimes that typically vary by country.
Retrospectives: Edgeworth’s Hedonimeter and the Quest to Measure Utility
David Colander
In this article, I discuss some earlier debates about the foundations of utility and its measurement, focusing on the contributions of Francis Y. Edgeworth (1845–1926), a famous British economist who was a leader in the development of a more mathematically structured economics in the late 1800s, and Irving Fisher (1867–1947), one of the first quantitative U.S. economists, best-known today for his work on the quantity theory and interest rate theory. Edgeworth argued that utility was directly measurable and that new developments in "physio-psychology" would make it possible to develop a "hedonimeter" that would allow economists to develop a firm physiological underpinning of utility. Fisher, while agreeing with Edgeworth that it was important to have a workable measure of utility, disagreed with Edgeworth about the possibility of doing so with a hedonimeter and, hence, of having any physiological underpinnings of utility. He argued that instead of searching for physiological underpinnings of utility, economists should instead rely upon backward induction from observed behavior to measured utility. Neither of these views about the possibility of utility measurement carried through, and attempts to measure utility were abandoned in the 1930s, when utility measurement and happiness considerations were determined to be outside the purview of economics. Both Edgeworth and Fisher knew that their approaches to utility measurement opened up a Pandora's box of problems; they opened that box, nonetheless, because they felt that theoretical economics had to be relevant to policy, and, to be relevant, it had to face the problems.
Markets: Gift Cards
Jennifer Pate Offenberg
The Mobil Oil Company introduced the first retail gift card that recorded value on a magnetic strip in 1995. In under a decade, such gift cards replaced apparel as the number one item sold during the Christmas season. This study will discuss the reasons for the strong surge in the gift card market. It will then consider the value of gift cards as an intermediate option between two alternatives: purchasing a physical gift, which could possibly be returned or exchanged, versus giving cash. Empirical data on the resale price of gift cards from an Internet auction website provide information on the value that recipients place on gift cards suggesting that the difference between the cost of a gift card to the giver and its value to the recipient is substantial, although perhaps not quite as large as the parallel gap involved in physical gifts.
Recommendations for Further Reading
Timothy Taylor
Notes