Friday, July 29, 2011

Revised and Resubmitted

What happened to the plans, plans to dive into deep mathematics and understand the mystery of Mas-Colell? Simple. There were those revise-and-resubmits on pending manuscripts, building up other research projects, and a teaspoon of dread/laziness. Allow me to share a brief overview of the projects:

Endogenous Institutions and the Possibility of Reverse Crowding Out -Since the implementation of New Deal programs in the 1930s voluntary charity (e.g. churches and non-profits) has receded and become dominated by government provision of charitable goods/services. Is this reversible? There are two conditions that must be met for what we call "reverse crowding out" to occur. First, taxes must go down. Second, total provision of the charitable goods and services must at least remain the same. We design an economics experiment that is intentionally staged (to mimic the historical evolution of charity in the U.S.). We allow in later stages for participants to vote on their own tax levels, where the tax is 80% efficient (the selection of tax levels is the endogenous institutions part). One of our central findings is that what we called "reverse crowding out" was rarely obtained. However, one interesting result that emerged regarded TRUST. If groups had a high level of provision in Stage 1 they often did not vote for high taxes later in the experiment. To me, this finding is of serious interest because it indicates that for a slew of things people view taxes as a COMMITMENT DEVICES to secure charitable goods they deem valuable. This causes me to consider a quote from Adam Smith,

"What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these."
Experts with Conflicts of Interest: A Source of Ambiguity? - With specialization comes expertise, people who have deep knowledge about a small sliver of material. We call on these people to guide our actions and provide us with good advice. Yet, many professions whether they are doctors, lawyers, financial advisors, computer specialists, mechanics, etc. have conflicts of interest which could lead to distortion of such advice. Some folks have advocated that conflicts of interest be subject to full disclosure. We  model an experimental environment in which an "expert" knows information with certainty but has a financial incentive to distort the truth. Yet, we are more interested in how the "clients" perceive this advice. The paper has two goals. First, from the point of view of the economics literature this bridges research on ambiguity (which you can think of as situations where known-to-be-relevant information is not known) and "credence goods" (which studies how "experts" decide to treat customers). Moreover, this ambiguity flowing from a conflicted expert is far more naturally occurring than standard balls-and-urns or compound lotteries. The second goal is to show when clients accept advice from the conflicted expert. Clients with low outside options (alternatives) were more likely to take the advice. In our experiment this worked out well; however, if experts lied this may not have been so benign. To me, this suggests that those without greater alternatives are more likely to be hoodwinked in situations where there are conflicts of interest.

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