The social rate of discount is a crucial driver of the social cost of carbon (SCC), that is, the expected present discounted value of marginal damages resulting from emitting one ton of carbon today. Policy makers should set carbon prices to the SCC using a carbon tax or a competitive permits market. The social discount rate is lower and the SCC higher if policy makers are more patient and if future generations are less affluent and policy makers care about intergenerational inequality. Uncertainty about the future rate of growth of the economy and emissions and the risk of macroeconomic disasters (tail risks) also depress the social discount rate and boost the SCC provided intergenerational inequality aversion is high. Various reasons (e.g., autocorrelation in the economic growth rate or the idea that a decreasing certainty-equivalent discount rate results from a discount rate with a distribution that is constant over time) are discussed for why the social discount rate is likely to decline over time. A declining social discount rate also emerges if account is taken from the relative price effects resulting from different growth rates for ecosystem services and of labor in efficiency units. The market-based asset pricing approach to carbon pricing is contrasted with a more ethical approach to policy making. Some suggestions for further research are offered.
Frederick van der Ploeg
Maria Soledad Martinez Peria and Mu Yang Shin
The link between financial inclusion and human development is examined here. Using cross-country data, the behavior of variables that try to capture these concepts is examined and preliminary evidence of a positive association is offered. However, because establishing a causal relationship with macro-data is difficult, a thorough review of the literature on the impact of financial inclusion, focusing on micro-studies that can better address identification is conducted. The literature generally distinguishes between different dimensions of financial inclusion: access to credit, access to bank branches, and access to saving instruments (i.e., accounts). Despite promising results from a first wave of studies, the impact of expanding access to credit seems limited at best, with little evidence of transformative effects on human development outcomes. While there is more promising evidence on the impact of expanding access to bank branches and formal saving instruments, studies show that some interventions such as one-time account opening subsidies are unlikely to have a sizable impact on social and economic outcomes. Instead well-designed interventions catering to individuals’ specific needs in different contexts seem to be required to realize the full potential of formal financial services to enrich human lives.
Jacob K. Goeree, Philippos Louis, and Jingjing Zhang
Majority voting is the predominant mechanism for collective decision making. It is used in a broad range of applications, spanning from national referenda to small group decision making. It is simple, transparent, and induces voters to vote sincerely. However, it is increasingly recognized that it has some weaknesses. First of all, majority voting may lead to inefficient outcomes. This happens because it does not allow voters to express the intensity of their preferences. As a result, an indifferent majority may win over an intense minority. In addition, majority voting suffers from the “tyranny of the majority,” i.e., the risk of repeatedly excluding minority groups from representation. A final drawback is the “winner-take-all” nature of majority voting, i.e., it offers no compensation for losing voters. Economists have recently proposed various alternative mechanisms that aim to produce more efficient and more equitable outcomes. These can be classified into three different approaches. With storable votes, voters allocate a budget of votes across several issues. Under vote trading, voters can exchange votes for money. Under linear voting or quadratic voting, voters can buy votes at a linear or quadratic cost respectively. The properties of different alternative mechanisms can be characterized using theoretical modeling and game theoretic analysis. Lab experiments are used to test theoretical predictions and evaluate their fitness for actual use in applications. Overall, these alternative mechanisms hold the promise to improve on majority voting but have their own shortcomings. Additional theoretical analysis and empirical testing is needed to produce a mechanism that robustly delivers efficient and equitable outcomes.
Punishment has been regarded as an important instrument to sustain human cooperation. A great deal of experimental research has been conducted to understand human punishment behavior, in particular, informal peer punishment. What drives individuals to incur cost to punish others? How does punishment influence human behavior? Punishment behavior has been observed when the individual does not expect to meet the wrongdoers again in the future and thus has no monetary incentive to punish. Several reasons for such retributive punishment have been proposed and studied. Punishment can be used to express certain values, attitudes, or emotions. Egalitarianism triggers punishment when the transgression leads to inequality. The norm to punish the wrongdoers may also lead people to incur costs to punish even when it is not what they intrinsically want to do. Individuals sometimes punish wrongdoers even when they are not the victim. The motivation underlying the third-party punishment can be different than the second-party punishment. In addition, restricting the punishment power to a third party can be important to mitigate antisocial punishment when unrestricted second-party peer punishment leads to antisocial punishments and escalating retaliation. It is important to note that punishment does not always promote cooperation. Imposing fines can crowd out intrinsic motivation to cooperate when it changes people’s perception of social interactions from a generous, non-market activity to a market commodity and leads to more selfish profit-maximizing behavior. To avoid the crowding-out effect, it is important to implement the punishment in a way that it sends a clear signal that the punished behavior violates social norms.
Iñigo Hernandez-Arenaz and Nagore Iriberri
Gender differences, both in entering negotiations and when negotiating, have been proved to exist: Men are usually more likely to enter into negotiation than women and when negotiating they obtain better deals than women. These gender differences help to explain the gender gap in wages, as starting salaries and wage increases or promotions throughout an individual’s career are often the result of bilateral negotiations. This article presents an overview of the literature on gender differences in negotiation. The article is organized in four main parts. The first section reviews the findings with respect to gender differences in the likelihood of engaging in a negotiation, that is, in deciding to start a negotiation. The second section discusses research on gender differences during negotiations, that is, while bargaining. The third section looks at the relevant psychological literature and discusses meta-analyses, looking for factors that trigger or moderate gender differences in negotiation, such as structural ambiguity and cultural traits. The fourth section presents a brief overview of research on gender differences in non- cognitive traits, such as risk and social preferences, confidence, and taste for competition, and their impact in explaining gender differences in bargaining. Finally, the fifth section discusses some policy implications. An understanding of when gender differences are likely to arise on entering into negotiations and when negotiating will enable policies to be created that can mitigate current gender differences in negotiations. This is an active, promising research line.
Ingela Alger and Donald Cox
Which parent can be expected to be more altruistic toward their child, the mother or father? All else equal, can we expect older generation members to be more solicitous of younger family members or vice versa? Policy interventions often target recipients by demographic status: more money being put in the hands of mothers, say, or transfers of income from young to old via public pensions. Economics makes predictions about pecuniary incentives and behavior but tends to be agnostic about how, say, a post-menopausal grandmother might behave, just because she is a post-menopausal grandmother. Evolutionary theory fills this gap by analyzing how preferences of family members emerge from the Darwinian exigencies of “survive and reproduce.” Coin of the realm is so-called “inclusive fitness,” reproductive success of oneself plus that of relatives, weighted by closeness of the relationship. Appending basic biological traits onto considerations of inclusive fitness generates predictions about preferences of family members. A post-menopausal grandmother with a daughter just starting a family is predicted to care more about her daughter than the daughter cares about her, for example. Evolutionary theory predicts that mothers tend to be more altruistic toward children than fathers, and that close relatives would be inclined to provide more support to one another than distant relatives. An original case study is provided, which explains the puzzle of diverging marriage rates by education in terms of heterogeneity in preferences for commitment. Economists are justifiably loathe to invoke preferences to explain trends, since preference-based explanations can be concocted to explain just about anything. But the evolutionary approach does not permit just any invocation of preferences. The dictates of “survive and reproduce” sharply circumscribe the kinds of preference-related arguments that are admissible.
Nikolaus Robalino and Arthur Robson
Modern economic theory rests on the basic assumption that agents’ choices are guided by preferences. The question of where such preferences might have come from has traditionally been ignored or viewed agnostically. The biological approach to economic behavior addresses the issue of the origins of economic preferences explicitly. This approach assumes that economic preferences are shaped by the forces of natural selection. For example, an important theoretical insight delivered thus far by this approach is that individuals ought to be more risk averse to aggregate than to idiosyncratic risk. Additionally the approach has delivered an evolutionary basis for hedonic and adaptive utility and an evolutionary rationale for “theory of mind.” Related empirical work has studied the evolution of time preferences, loss aversion, and explored the deep evolutionary determinants of long-run economic development.
Deborah J. Street and Rosalie Viney
Discrete choice experiments are a popular stated preference tool in health economics and have been used to address policy questions, establish consumer preferences for health and healthcare, and value health states, among other applications. They are particularly useful when revealed preference data are not available. Most commonly in choice experiments respondents are presented with a situation in which a choice must be made and with a a set of possible options. The options are described by a number of attributes, each of which takes a particular level for each option. The set of possible options is called a “choice set,” and a set of choice sets comprises the choice experiment. The attributes and levels are chosen by the analyst to allow modeling of the underlying preferences of respondents. Respondents are assumed to make utility-maximizing decisions, and the goal of the choice experiment is to estimate how the attribute levels affect the utility of the individual. Utility is assumed to have a systematic component (related to the attributes and levels) and a random component (which may relate to unobserved determinants of utility, individual characteristics or random variation in choices), and an assumption must be made about the distribution of the random component. The structure of the set of choice sets, from the universe of possible choice sets represented by the attributes and levels, that is shown to respondents determines which models can be fitted to the observed choice data and how accurately the effect of the attribute levels can be estimated. Important structural issues include the number of options in each choice set and whether or not options in the same choice set have common attribute levels. Two broad approaches to constructing the set of choice sets that make up a DCE exist—theoretical and algorithmic—and no consensus exists about which approach consistently delivers better designs, although simulation studies and in-field comparisons of designs constructed by both approaches exist.
José Luis Pinto-Prades, Arthur Attema, and Fernando Ignacio Sánchez-Martínez
Quality-adjusted life years (QALYs) are one of the main health outcomes measures used to make health policy decisions. It is assumed that the objective of policymakers is to maximize QALYs. Since the QALY weighs life years according to their health-related quality of life, it is necessary to calculate those weights (also called utilities) in order to estimate the number of QALYs produced by a medical treatment. The methodology most commonly used to estimate utilities is to present standard gamble (SG) or time trade-off (TTO) questions to a representative sample of the general population. It is assumed that, in this way, utilities reflect public preferences. Two different assumptions should hold for utilities to be a valid representation of public preferences. One is that the standard (linear) QALY model has to be a good model of how subjects value health. The second is that subjects should have consistent preferences over health states. Based on the main assumptions of the popular linear QALY model, most of those assumptions do not hold. A modification of the linear model can be a tractable improvement. This suggests that utilities elicited under the assumption that the linear QALY model holds may be biased. In addition, the second assumption, namely that subjects have consistent preferences that are estimated by asking SG or TTO questions, does not seem to hold. Subjects are sensitive to features of the elicitation process (like the order of questions or the type of task) that should not matter in order to estimate utilities. The evidence suggests that questions (TTO, SG) that researchers ask members of the general population produce response patterns that do not agree with the assumption that subjects have well-defined preferences when researchers ask them to estimate the value of health states. Two approaches can deal with this problem. One is based on the assumption that subjects have true but biased preferences. True preferences can be recovered from biased ones. This approach is valid as long as the theory used to debias is correct. The second approach is based on the idea that preferences are imprecise. In practice, national bodies use utilities elicited using TTO or SG under the assumptions that the linear QALY model is a good enough representation of public preferences and that subjects’ responses to preference elicitation methods are coherent.
In many countries of the world, consumers choose their health insurance coverage from a large menu of often complex options supplied by private insurance companies. Economic benefits of the wide choice of health insurance options depend on the extent to which the consumers are active, well informed, and sophisticated decision makers capable of choosing plans that are well-suited to their individual circumstances. There are many possible ways how consumers’ actual decision making in the health insurance domain can depart from the standard model of health insurance demand of a rational risk-averse consumer. For example, consumers can have inaccurate subjective beliefs about characteristics of alternative plans in their choice set or about the distribution of health expenditure risk because of cognitive or informational constraints; or they can prefer to rely on heuristics when the plan choice problem features a large number of options with complex cost-sharing design. The second decade of the 21st century has seen a burgeoning number of studies assessing the quality of consumer choices of health insurance, both in the lab and in the field, and financial and welfare consequences of poor choices in this context. These studies demonstrate that consumers often find it difficult to make efficient choices of private health insurance due to reasons such as inertia, misinformation, and the lack of basic insurance literacy. These findings challenge the conventional rationality assumptions of the standard economic model of insurance choice and call for policies that can enhance the quality of consumer choices in the health insurance domain.