Robert Waldmann

Income Distribution and Infant Mortality

Comparing two countries in which the poor have equal real incomes, the one in which the rich are wealthier is likely to have a higher infant mortality rate. This anomalous result does not appear to spring from measurement error in estimating the income of the poor, and the association between high infant mortality and income inequality is still present after controlling for other factors such as education, medical personnel, and fertility. The positive association of infant mortality and the income of the rich suggests that measured real incomes may be a poor measure of social welfare.

Why Are Professional Forecasters Biased? Agency versus Behavioral Explanations

Professional forecasters may not simply aim to minimize expected squared forecast errors. In models with repeated forecasts the pattern of forecasts reveals valuable information about the forecasters even before the outcome is realized. Rational forecasters will compromise between minimizing errors and mimicking prediction patterns typical of able forecasters. Simple models based on this argument imply that forecasts are biased in the direction of forecasts typical of able forecasters. Our models of strategic bias are rejected empirically as forecasts are biased in directions typical of forecasters with large mean squared forecast errors. This observation is consistent with behavioral explanations of forecast bias.

Ruling Out Multiplicity and Indeterminacy: The Role of Heterogeneity

It is well known that economies of scale that are external to the individual decision makers can lead to self-fulfilling prophecies and the multiplicity or even indeterminacy of equilibrium. We argue that the importance of this source of multiplicity and indeterminacy is overstated in representative agent models, as they ignore the potential stabilizing effect of heterogeneity. We illustrate this in a version of Matsuyamas (1991) two-sector model with increasing returns to scale. Two main results are shown. First, sufficient homogeneity with respect to individual productivity leads to the instability and non-uniqueness of a given stationary state and the indeterminacy of the corresponding stationary state equilibrium. Second, sufficient heterogeneity leads to the global saddle-path stability and the uniqueness of a given stationary state and the global uniqueness of equilibrium.

Stability properties of a growth model

The inclusion of a labour/leisure choice in endogenous growth models has interesting and somewhat counter-intuitive effects. In existing one sector models, a condition for indeterminacy is that labour demand is upward-sloping, which is difficult to reconcile with the evidence. In this paper we give conditions for indeterminacy in a one sector model with decreasing returns to labour. We show that this requires that consumption and leisure are both highly intertemporally substitutable while the factors of production are highly complementary.

Implausible Results or Implausible Data? Anomalies in the Construction of Value-Added Data and Implications for Estimates of Price-Cost Markups

In a recent article in this Journal, Robert Hall (1988) argued that many American industries charge prices well above marginal costs, suggesting either that firms fail to maximize profits or that the possession of substantial market power by firms is the rule rather than the exception. Hall found price exceeding marginal cost not only in manufacturing-where high concentration and the plausible existence of important economies of scale suggest the importance of market power-but in relatively unconcentrated nonmanufacturing industries as well. Subsequent research has confirmed Halls claim that price exceeds marginal cost in U.S. manufacturing industries. Domowitz, Hubbard, and Petersen (1988) applied Halls method to a more detailed and complete manufacturing data set and rejected the null of price equal to marginal cost at high levels of significance. Hall, however, analyzes nonmanufacturing industries as well. Since theories of the causes of markups can be tested more easily with a larger sample of industries and since further work to uncover the determinants and welfare effects of the market power apparently possessed by U.S. firms would

Infant mortality, relative income and public policy

Do health outcomes depend on relative income as well as on an individuals absolute level of income? We use infant mortality as a health status indicator and find a significant and positive link between infant mortality and income inequality using cross-national data for 93 countries. Holding constant the income of each of the three poorest quintiles of a countrys population, we find that an increase in the income of the upper 20% of the income distribution is associated with higher, not the lower infant mortality. Our results are robust and not just caused by the concave relationship between income and health. The estimates imply a decrease in infant mortality by 1.5% for a one percentage point decrease in the income share of the richest quintile. The overall results are sensitive to public policy: public health care expenditure, educational outcomes, and access to basic sanitation and safe water can explain the inequality–health relationship. Thus, our findings support the hypothesis of public disinvestment in human capital in countries with high income inequality. However, we are not able to determine whether public policy is a confounder or mediator of the relationship between income distribution and health. Relative deprivation caused by the income distance between an individual and the individuals reference group is another possible explanation for a direct effect from income inequality to health.

Income Distribution, Infant Mortality, and Health Care Expenditure

Do health outcomes depend on relative income as well as on an individual?s absolute level of income? We use infant mortality as a health status indicator and ?nd a signi?cant and positive link between infant mortality and income inequality using cross-national data for 98 countries. Holding constant the income of each of the three poorest quintiles of a countrys population, we ?nd that an increase in the income of the upper 20% of the income distribution is associated with higher, not lower infant mortality. Our results imply that a one percentage point decrease in the income share of the richest quintile correlates with a decrease in infant mortality by nearly two percent. The surprisingly positive coe¢cient becomes insignificant when we control for public health care expenditure. Low public expenditure on health care seems to translate into limited access to health care for the poor.

Cigarette Smoking, Pregnancy, Forward Looking Behavior and Dynamic Inconsistency

This paper addresses two aspects of the model of rational addiction: forward looking behavior and time consistent preferences. It explores smoking by women before, during and after pregnancy using the European Community Household Panel (ECHP).Pregnancy is used as an instrument for a partially predictable future decrease in smoking. Women reduce the average number of cigarettes they smoke and many quit in the period 10 to 15 months before the birth of a child. Our analysis suggests that this effect may be stronger for married than for unmarried women, corresponding to the higher probability that the pregnancies of married women are planned. Pregnancy is also used as an instrument to estimate the parameters of a structural model of addiction. The estimates imply that cigarettes are highly addictive. Finally, we present statistically significant evidence that, even when the expected number of cigarettes smoked one month after the interview is taken into account, expected smoking further in the future has an independent effect on current consumption. This effect remains even when we impose the highest theoretically possible coefficient on expected cigarettes smoked one month after the interview. This means that the null of time consistency is (barely) rejected against the alternative of time inconsistency.

The Relative Efficiency of Public and Private Health Care

A health care system is efficient when an increase in spending results in significant improvements in the health of a population. We test the relative efficiency of public and private health care spending in reducing infant and child mortality using cross-national data for 163 countries. There are two remarkable findings: First, an increase in public funds is both, significantly correlated with a lower mortality and significantly more efficient in reducing mortality than private health care expenditure. Second, private health care expenditure is in all estimations associated with higher, not lower, mortality, although this association is often not statistically significant. The results suggest, holding total health care expenditure constant, a potential decrease in total infant mortality in the 163 countries from 6.9 million deaths (2002) to 4.2-5.3 million deaths for completely publicly financed health care systems, but an increase to 9.0-10.0 million deaths for completely privately financed health care. We can explain some of the estimated difference in the efficiency of public and private health care expenditure by geographies and socioeconomic factors such as HIV prevalence, sanitation standards, corruption, and income distribution. However, the efficiency dfference remains large and statistically significant in all regressions.

Dynamically Inconsistent Preferences and Money Demand

This paper focuses on two main issues. First, we find that, on average, households’ discount rates decline. This implies dynamically inconsistent preferences. Second, we calculate an indicator of the degree of dynamic inconsistency that may help us to understand how households overcome their self-control problems. We use a micro dataset containing households’ reports on the compensation for receiving hypothetical rewards with delays. We find that individuals with more severely dynamicly inconsistent preferences on average hold a statistically significantly lower share of their total wealth in checking accounts. A possible interpretation is that subjects use precommitment strategies to limit their temptation to consume immediately.