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Volume 17, Number 3, Summer 2003
Symposium: Global Poverty Reduction
Halving Global Poverty by Timothy Besley and Robin Burgess
The Millennium Development Goals—global targets that the world's leaders set at the Millennium Summit in September 2000—are an ambitious agenda for reducing poverty. As a central plank, these goals include halving the proportion of people living below a dollar a day from around 30 percent of the developing world's population in 1990 to 15 percent by 2015—a reduction in the absolute number of poor of around one billion. This paper examines what economic research can tell us about how to fulfill these goals. It begins by discussing poverty trends on a global scale—where the poor are located in the world and how their numbers have been changing over time. It then discusses the relationship of economic growth and income distribution to poverty reduction. Finally, it suggests an evidence-based agenda for poverty reduction in the developing world.
Can Foreign Aid Buy Growth? by William Easterly
The widely publicized finding that "aid promotes growth in a good policy environment" is not robust to the inclusion of new data or alternative definitions of "aid," "policy" or "growth." The idea that "aid buys growth" is on shaky ground theoretically and empirically. It doesn't help that aid agencies face poor incentives to deliver results and underinvest in enforcing aid conditions and performing scientific evaluations. Aid should set more modest goals, like helping some of the people some of the time, rather than trying to be the catalyst for society-wide transformation.
Symposium: Stock Options
The Trouble with Stock Options by Brian J. Hall and Kevin J. Murphy
The benefits of stock options are often not large enough to offset the inefficiency implied by the large divergence between the cost of options to companies and the value of options to risk-averse, undiversified executives and employees. Moreover, the benefits of options can often be achieved more effectively and economically through other means. Why are options so prevalent? Several explanations include changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent-seeking. We offer an alternative hypothesis: boards and managers incorrectly perceive stock options to be inexpensive because options create no accounting charge and require no cash outlay.
Executive Compensation as an Agency Problem by Lucian Arye Bebchuk and Jesse M. Fried
This paper provides an overview of the main theoretical elements and empirical underpinnings of a "managerial power" approach to executive compensation. Under this approach, the design of executive compensation is viewed not only as an instrument for addressing the agency problem between managers and shareholders but also as part of the agency problem itself. Boards of publicly traded companies with dispersed ownership, we argue, cannot be expected to bargain at arm's length with managers. As a result, managers wield substantial influence over their own pay arrangements, and they have an interest in reducing the saliency of the amount of their pay and the extent to which that pay is de-coupled from managers' performance. We show that the managerial power approach can explain many features of the executive compensation landscape, including ones that many researchers have long viewed as puzzling. Among other things, we discuss option plan design, stealth compensation, executive loans, payments to departing executives, retirement benefits, the use of compensation consultants, and the observed relationship between CEO power and pay. We also explain how managerial influence might lead to substantially inefficient arrangements that produce weak or even perverse incentives.
Articles
Why Have Americans Become More Obese? by David M. Cutler, Edward L. Glaeser and Jesse M. Shapiro
Americans have become considerably more obese over the past 25 years. This increase is primarily the result of consuming more calories. The increase in food consumption is itself the result of technological innovations which made it possible for food to be mass prepared far from the point of consumption, and consumed with lower time costs of preparation and cleaning. Price changes are normally beneficial, but may not be if people have self-control problems. This applies to some, but not most, of the population.
The Negative Income Tax and the Evolution of U.S. Welfare Policy by Robert A. Moffitt
The negative income tax proposed by Milton Friedman represents one of the fundamental ideas of modern welfare policy. However, the academic literature has raised two difficulties with it, one challenging its purported work incentives and the other suggesting the possible superiority of work requirements. In addition, work requirement approaches have gained ground in actual U.S. welfare policy over the last 30 years and the number of different programs has proliferated, another development counter to the negative income tax. On the other hand, the Earned Income Tax Credit has produced a negative-income-tax-like program on a vast scale.
The Economics and Law of Sexual Harassment in the Workplace by Kaushik Basu
Suppose a firm has a widespread reputation for sexually harassing its employees. When a person signs up to work for such a firm, it would appear that both the firm and the worker are better off by virtue of the 'exchange'. Is there a case then for government to ban sexual harassment in the workplace? Starting from this question, this paper constructs an argument for legislative intervention. This 'economic approach' is applied to other labor market practices and is used to evaluate and critique the current law concerning sexual harassment in the U.S. and other nations.
In Honor of Matthew Rabin: Winner of the John Bates Clark Medal by Colin Camerer and Richard H. Thaler
Matthew Rabin's Clark medal honors his abilities to digest huge amounts of nuanced psychology, create simple models capturing that psychology, and do behavioral economics with those models. After warming up by solving hard problems in modeling pre-game communication, his behavioral career began with a seminal paper on reciprocity. He also created models of "present-bias" in time discounting, and derived some surprises from them, and implications (e.g., deadline-setting and sin taxes). Matthew has also studied quasi-Bayesian models of judgment biases (confirmation and overgeneralization from small samples), overprojection of current feelings into the future, and how moral rules differ from moral tastes.
Retrospectives: Who Invented Instrumental Variable Regression? by James H. Stock and Francesco Trebbi
The instrumental variables estimator first appeared explicitly in Appendix B of The Tariff on Animal and Vegetable Oils by Philip G. Wright (1928). It has been suggested that this appendix was written by Philip's son Sewall Wright, then already an important genetic statistician. To find out who wrote Appendix B, we use stylometric statistics to compare it to other texts known to have been written solely by the father and son. The sharp results are consistent with contextual and historical evidence on the authorship of Appendix B and on the origination of the idea of IV estimation.
Features
Recommendations for Further Reading
Comments: Gordon Tullock, Samuel Bowles and Herbert Gintis, Axel Michaelowa, Warwick J. McKibbin and Peter Wilcoxen
Notes