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Economists have long speculated that individuals care about both their absolute income and their income relative to others. We use a simple theoretical framework and a randomized manipulation of access to information on peers' wages to provide new evidence on the effects of relative pay on individual utility. A randomly chosen subset of employees of the University of California was informed about a new website listing the pay of all University employees. All employees were then surveyed about their job satisfaction and job search intentions. Our information treatment doubles the fraction of employees using the website, with the vast majority of new users accessing data on the pay of colleagues in their own department. We find an asymmetric response to the information treatment: workers with salaries below the median for their pay unit and occupation report lower pay and job satisfaction, while those earning above the median report no higher satisfaction. Likewise, below-median earners report a significant increase in the likelihood of looking for a new job, while above-median earners are unaffected. Our findings indicate that utility depends directly on relative pay comparisons, and that this relationship is non-linear.

Little is known about the mechanisms underlying the transfer of economic status between generations. This paper addresses the question of whether inter-generational correlations in health contribute to the perpetuation of economic status. We examine inter-generational correlations in birth weight, a key indicator of the health of newborns that we link to future educational attainment and earnings using a unique data set based on California births from 1960s to the present. We use names and birth dates to link the records of mothers and children. We also identify mothers who are siblings. We show that there is a strong intergenerational correlation in the birth weight of mothers and children, but that a measure of household income at the time of the mother's birth is also predictive of low birth weight and that there is an interaction between maternal low birth weight and poverty in the production of low birth weight. Together these findings suggest that intergenerational correlations in health could play a role in the intergenerational transmission of income. Parent's income affects child health, and health at birth affects future income.

Increasingly, local governments compete by offering substantial subsidies to industrial plants to locate within their jurisdictions. This paper uses a novel research design to estimate the local consequences of successfully bidding for an industrial plant, relative to bidding and losing, on labor earnings, public finances, and property values. Each issue of the corporate real estate journal Site Selection includes an article titled "The Million Dollar Plant" that reports the county where a large plant chose to locate (i.e., the 'winner'), as well as the one or two runner-up counties (i.e., the 'losers'). We use these revealed rankings of profit-maximizing firms to form a counterfactual for what would have happened in the winning counties in the absence of the plant opening. We find that the plant opening announcement is associated with a 1.5% trend break in labor earnings in the new plant's industry in winning counties, as well as increased earnings in the same industry in counties that neighbor the winner. Further, there is modest evidence of increased expenditures for local services, such as public education.Property values may provide a summary measure of the net change in welfare, because the costs and benefits of attracting a plant should be capitalized into the price of land. If the winners and losers are homogeneous, a simple model suggests that any rents should be bid away. We find a positive, relative trend break of approximately 1.1-1.7% in property values. Since the winners and losers have similar observables in advance of the opening announcement, the property value results may be explained by heterogeneity in subsidies from higher levels of government (e.g., states) and/or systematic underbidding. Overall, the results undermine the popular view that the provision of local subsidies to attract large industrial plants reduces local residents' welfare.

Poor and uneducated patients may not know what health care is desirable and, if fully insured, have little incentive to minimize the costs of their care. Partly in response to these concerns, most states have moved a substantial portion of their Medicaid caseloads out of traditional competitive fee-for-service (FFS) care, and into mandatory managed care (MMC) plans that severely restrict the choice of provider. We use a unique longitudinal data base of California births in order to examine the impact of this policy on pregnant women and infants. California phased in MMC creating variation in the timing of MMC. We identify the effects of MMC using changes in the regime faced by individual mothers between births. Some counties adopted single-carrier plans, while others adopted regimes with at least two carriers. Hence, we also ask whether competition between at least two carriers improved MMC outcomes. We find that MMC reduced the quality of prenatal care and increased low birth weight, prematurity, and neonatal death. Our results suggest that the competitive FFS system provided better care than the new MMC system, and that requiring the participation of at least two plans did not improve matters.

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This paper shows how parental preferences for sons versus daughters affect divorce, child custody, marriage, shotgun marriage when the sex of the child is known before birth, and fertility stopping rules. We document that parents with girls are significantly more likely to be divorced, that divorced fathers are more likely to have custody of their sons, and that women with only girls are substantially more likely to have never been married. Perhaps the most striking evidence comes from the analysis of shotgun marriages. Among those who have an ultrasound test during their pregnancy, mothers carrying a boy are more likely to be married at delivery. When we turn to fertility, we find that in families with at least two children, the probability of having another child is higher for all-girl families than all-boy families. This preference for sons seems to be largely driven by fathers, with men reporting they would rather have a boy by more than a two to one margin. In the final part of the paper, we compare the effects for the U.S. to five developing countries.

Many economists and educators of diverse political beliefs favor public support for education on the premise that a more educated electorate enhances the quality of democracy. While some earlier studies document an association between schooling and citizenship, little attempt has been made to address the possibility that unobservable characteristics of citizens underlie this relationship. This paper explores the effect of extra schooling induced through compulsory schooling laws on the likelihood of becoming politically involved in the US and the UK. We find that educational attainment is related to several measures of political interest and involvement in both countries. For voter turnout, we find a strong and robust relationship between education and voting for the US, but not for the UK. Using the information on validated voting, we find that misreporting of voter status can not explain our estimates. Our results suggest that the observed drop in voter turnout in the US from 1964 to 2000 would have been 10.4 to 12.3 percentage points greater if high school attainment had stayed at 1964 rates, holding all else constant. However, when we condition on registration, our US results approach the UK findings. This may indicate that registration rules present a barrier to low-educated citizens' participation.

Families in developing countries face enormous financial risks from major illness both in terms of the cost of medical care and the loss in income associated with reduced labor supply and productivity. We test whether access to microfinancial savings and lending institutions helps Indonesian families smooth consumption after declines in adult health. In general, results support the importance of these institutions in helping families to self-insure consumption against health shocks.

We estimate the effect of maternal education on birth outcomes using data from the Vital Statistics Natality files for 1970 to 1999. We also assess the importance of four potential channels through which maternal education may improve birth outcomes: use of prenatal care, smoking behavior, marriage, and fertility. In an effort to account for unobserved characteristics of women that could induce spurious correlation, we pursue two distinct empirical strategies. First, we construct panel data by linking women in different years of the Vital Statistics records and examine the effects of changes in education on changes in birth outcomes. Second, we have compiled a new data set on openings of two and four year colleges between 1940 and 1990. We use data about the availability of colleges in the woman's county in her 17th year as an instrument for maternal education Our findings using the two approaches are similar. Higher maternal education improves infant health, as measured by birthweight and gestational age. It also increases the probability that a new mother is married, reduces parity, increases use of prenatal care, and reduces smoking, suggesting that these are important pathways for the ultimate effect on health.

Families in developing countries face enormous financial risks from major illness both in terms of the cost of medical care and the loss in income associated with reduced labor supply and productivity. We test whether access to microfinancial savings and lending institutions helps Indonesian families smooth consumption after declines in adult health. In general, results support the importance of these institutions in helping families to self-insure consumption against health shocks.

Real estate agents in the US typically charge a 6 percent commission, regardless of the price of the house sold. As a consequence, the commission fee from selling a house will differ dramatically across cities depending on the average price of housing, although the effort necessary to match buyers and sellers may not be that different. We use a simple economic model and cross-city data to measure the effect of the fixed commission rate on market entry by real-estate agents. We show that if the commission rate does not vary and if there are low barriers to entry to the real-estate brokerage business, the entry of real-estate agents into cities with high housing prices is socially inefficient. Consistent with our model, we find that when the average price of land in a city increases, (1) the fraction of real-estate brokers in a city increases; (2) the productivity of an average real-estate agent (houses sold per hour worked) falls; and (3) the real wage of a typical real-estate agent remains unchanged. We can not completely rule out the alternative explanation that these results reflect unmeasured differences in the quality of broker services. However, we present evidence that as the average price of housing in a city increases, there is only a small increase in the amount of time a buyer spends searching for a house, and the average time a house for sale stays on the market falls.

Eighty five percent of Italian men aged 18-33 live with their parents. In this paper we use micro data from the Bank of Italy Survey of Households' Income and Wealth from 1989 to 1998 to explain this remarkably high rate of cohabitation. We argue that Italian parents like to live with their children and a rise in their income makes it possible for them to offer their children higher consumption in exchange for their presence at home. Children prefer to live on their own but are willing to exchange some independence for extra consumption. We test the predictions of the model by estimating the effect of parental income on the probability that children live with their parents. The key econometric issue is the endogeneity of parental income. In order to identify the causal effect of parental income on children’s living arrangements we use changes in parents’ retirement age induced by the 1992 reform of the Italian social security as an instrument for parental income. By raising retirement age, this reform forced some fathers to remain in the labor market longer than the cohort immediately preceding them, therefore raising their income. Our instrumental variable estimates indicate that a rise in parents' income significantly raises the children’s propensity to live at home: a $500 increase in annual parental income results in a 3 to 3.5 percentage point rise in the proportion of children living with their parents.

We estimate the effect of high school graduation on participation in criminal activity accounting for endogeneity of schooling. We begin by analyzing the effect of high school graduation on incarceration using Census data. Instrumental variable estimates using changes in state compulsory attendance laws as an instrument for high school graduation uncover a significant reduction in incarceration for both blacks and whites. When estimating the impact of high school graduation only, OLS and IV estimators estimate different weighted sums of the impact of each schooling progression on the probability of incarceration. We clarify the relationship between OLS and IV estimates and show that the 'weights' placed on the impact of each schooling progression can explain differences in the estimates. Overall, the estimates suggest that completing high school reduces the probability of incarceration by about .76 percentage points for whites and 3.4 percentage points for blacks. We corroborate these findings using FBI data on arrests that distinguish among different types of crimes. The biggest impacts of graduation are associated with murder, assault, and motor vehicle theft. We also examine the effect of drop out on self-reported crime in the NLSY and find that our estimates for imprisonment and arrest are caused by changes in criminal behavior and not educational differences in the probability of arrest or incarceration conditional on crime. We estimate that the externality of education is about 14-26% of the private return to schooling, suggesting that a significant part of the social return to education comes in the form of externalities from crime reduction.

A semiparametric estimator for evaluating the parameters of data generated under a sample selection process is developed. This estimator is based on the generalized maximum entropy estimator and performs well for small and ill-posed samples. Theoretical and sampling comparisons with parametric and semiparametric estimators are given. This method and standard ones are applied to three small-sample empirical applications of the wage-participation model for female teenage heads of households, immigrants, and Native Americans.