The Behavioral and Social Sciences Achievements and Opportunities (1988) / Chapter Skim
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3. Choice and Allocation
3. Choice and Allocation
Pages 83-126
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From page 83... ...
Choice and Allocation
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From page 85... ...
In looking more narrowly at markets and related economic activities, current research considers such questions as: How are choices in markets affected by the availability of information and the structure of incentives? When and how do efforts to influence incentives through regulation contribute to more or less efficient market systems?
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From page 86... ...
But important decisions are often assigned to groups—boards of directors, committees, legislatures, and the like. Such decisions, or collective choices, involve a social process that introduces a range of considerations quite different from those involved in individual decision making.
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From page 87... ...
A major theoretical finding of the l950s, whose significance is only gradually being recognized in practice, was a general proof that whenever a system of majority rule is used to choose among more than two alternatives, the outcome will in general depend on the order in which pairs of options are considered, the so-called voting agenda. This general mathematical property of majority rule under these conditions makes it highly susceptible to manipulation.
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From page 88... ...
Furthermore, this phenomenon has been shown to hold not only for majority rule, but for most of the voting rules in common use that entail subdividing the set of alternatives into a series of votes. Two avenues of research in this area are now under intensive study: explicit treatments of improved, fairer agenda setting for those social decisions that involve sequential voting among alternatives, and the development of amalgamated-preference decision schemes that require only a single, simultaneous vote and are not subject to serious distortions due to strategic voting.
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From page 89... ...
Plurality multimember districts have come under increasing attack in federal courts for diluting the voting strength of racial and linguistic groups, and testimony based on collective choice theory has played a critical role in these challenges to multimember districts. Certain provisions for majority runoff elections have also come under challenge as racially discriminatory in their effects.
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From page 90... ...
In particular, models based in part on game theory have permitted researchers to reexamine and develop new understanding about many complex institutional arrangements (for example, the veto powers of the "big five" in the United Nations Security Council, the character of the U.S. presidential electoral college, voting rules in the European Economic Community)
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From page 91... ...
Although overall research progress in the study of agendas and voting systems has been driven largely by theoretical work, a substantial commitment exists to empirical testing, observation, and application. The descriptive literature on political parties, interest groups, committees, and related organizational forms is rich, but needs further codification in terms of collective-choice models.
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From page 92... ...
More recent research has broadened the theoretically admissible sources of change and sources of stability in the face of pressures for changes by focusing on less formalized variables in the organization and its environment and studying closely the evolutionary movements that bring organizations more slowly but just as surely into new alignments with new capabilities. Organizational Politics and Institutional Constraints Research in the past decade has focused on two informal features of organization that have far-reaching implications: organizational politics and institutional constraints.
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From page 93... ...
Using both theoretical and empirical techniques, researchers have developed insights into the formation of commodity and financial markets, the evolution of regulatory structure, the emergence of legal rules, the development of political institutions, and the principles of organizational change generally. Much of the theorizing and empirical research on organizational evolution focuses on environmental factors.
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From page 94... ...
Since most entrepreneurs come from existing organizations, the dynamics of organizations undoubtedly affect the rates at which entrepreneurs are spun off and the likelihood that new organizational forms will establish footholds in competitive environments. Some recent lines of theory and research emphasize rational-adaptive learning and copying; others emphasize competitive selection.
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From page 95... ...
One central research problem in market and nonmarket economies and in other organizational structures- is that of analyzing the interaction between incentives and information. Prices, the sine qua non of markets, accomplish two things.
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From page 96... ...
In both of these areas, leading theoretical work has been followed up and engaged in a vigorous dialogue with empirical findings in a variety ot contexts. Public Goods and Strategic Revelation Collective or public goods are goods whose benefits cannot be closely partitioned according to who paid how much for them police, roads, and welfare are common examples.
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From page 97... ...
At one time many researchers believed that no voluntary organizational arrangement or allocation mechanism could effectively solve the problem of strategic revelation or selective nondisclosure. In fact, it was proven in the 1970s that no mechanism can possibly achieve both full revelation and full allocative efficiency at the same time; in a broad class of collective choice situations, it is always in someone's interest to disguise or misrepresent his or her true preferences.
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From page 98... ...
Yet such remedies for imperfect information involve real economic costs, which are called transaction costs. Such costs have been the subject of intense efforts at measurement.
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From page 99... ...
Traditional regulatory efforts to maximize the public welfare are based on shifting the incentives or extracting private information that otherwise might lead firms to maximize profits at the relative expense of environmental or consumer health and safety. The question is to what degree those regulatory solutions are flawed because they distort the incentives of firms to minimize production costs, inviting costly efforts to circumvent regulation or requiring costly monitoring to ensure compliance.
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From page 100... ...
The research indicated that cable television would primarily increase the likelihood of effective competition with the three national networks, in part by improving the market position of UHF independent stations. These results influenced subsequent decisions by the Federal Communications Commission and by the several congressional oversight committees to relax regulatory constraints on cable television.
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From page 101... ...
Stated most strongly, the hypothesis of rational expectations implies that financial markets are fully efficient, with the asset prices prevailing at time taking into account all available information on possible price movements. The innovative feature of such theories is that past price movements are taken to have no particular value in predicting future prices.
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From page 102... ...
The rational-expectations approach has been applied in areas other than financial markets. For example, the life-cycle and permanent-income theories of consumption and savings behavior imply that a person's consumption rate is determined by income and wealth considered over the lifetime.
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From page 103... ...
It has proved to be an important area concerning the interplay of individual preferences with organizational structures, an area comprised principally of analyses about information flows and the information underlying decisions. Principal-Agent Models One main line of work on contractual relationships is the study of the principal-agent contract.
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From page 104... ...
. It has been shown that the kinds of sharecropper contracts and related organizational structures observed were quite consistent with the model's predictions.
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From page 105... ...
There are many problems of organization for which there simply do not exist centuries of experience, and the careful analysis of such problems, using the principal-agent paradigm, allows one to identify, at least in crude form, what kinds of contractual structures may be optimal. For example, many questions of public policy concern kinds of contracts and transactions firms should be allowed to engage in, and these problems can only be analyzed with some theory in mind as to why firms want to use particular contractual arrangements.
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From page 106... ...
Recent theoretical result yield modem of sequences of off in p~te-in~adon sRuadons that make possible to estimate the flue to agents of alternative rules. It has also been possible to account msthematicaDy for the fact that Then a bargaining situation occurs repeatedly, bargainers may develop reputations far toughness that affect outcomes.
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From page 107... ...
The notion of reputation or credibility is also central to the theory of repeated interactions. People in such interactions are sensitive not only to the future and their understanding of how long the relationship may continue, but also to the existence of private information.
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From page 108... ...
The development of standardized software and operating systems would decrease the costs of performing such experiments and generate a large body of empirical data free from the effects of uncontrollably differing experimental designs. JOBS, WAGES, AND CAREERS The study of jobs and labor markets incorporates virtually all the issues that arise with respect to individual and collective choice: imperfect information, varying incentives and expectations, problems of negotiating and enforcing contractual agreements, and pressures of organizational inertia and change.
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From page 109... ...
The degree to which cyclical, frictional, or structural factors predominate in a given level of unemployment has important implications for the type and effectiveness of programs or policies that would be appropriate for reducing unemployment. Recent research with aggregate data on the business cycle and its temporal covariates indicates that overall wage rates respond only slowly to swings in productivity associated with downturns in the business cycle.
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From page 110... ...
Although there has been little empirical work on structural unemployment, a striking finding of theoretical studies on job searching and recruiting is that relatively minor mistakes by individuals in assessing the job market can be expected to result in excessively long periods of unemployment for some workers. Research on unemployment has been limited by the scarcity of detailed and reliable data on search protocols and decision behavior.
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From page 111... ...
The resulting reduction in the competitive pool of workers would increase the wages of somewhat more skilled workers, who would therefore support minimum wage legislation. But more significantly, in labor markets that provide long-term incentives for workers' diligence and learning (in the form of delayed compensation such as premiums for seniority)
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From page 112... ...
1 12 / The Behavioral and Social Sconces Profiles of Employee Tenure on Brat Job . _ ~~ ~ Even1uaI V-m on lob 30 20 10 o 50 e o 30 20 e 0 o <1 Year 1-5 Years 5-20 Years 20+ Years Years on Curren1 Job Nag i~ gum ~ I_ an 6 most Job _ eventual Snare ~ ~ Yam or more .
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From page 113... ...
In a time of rapid technological and social change, many workplace and labor policies, such as programs of on-thejob training and retraining, depend importantly on assumptions about the nature of work careers. The labor market in America is often viewed as turbulent, with frequent shifts from one employer to another, especially in contrast to European traditions of job stability or the nenko system of lifetime employment in Japan.
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From page 114... ...
According to the neoclassical economic theory of this labor-market phenomenon, these gaps reflect intragroup differences in average individual experience and investment in human capital (education and training)
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From page 115... ...
One theory that tries to account for the excessive number of women in lower paying occupations on the basis of personal characteristics and rational choice: in anticipation that they will interrupt their employment to bring up a family, women make different occupational choices from men, selecting occupations that qualify them for jobs they can leave and reenter easily. Since men do not interrupt employment to bring up a family, these "easy-come, easy-go" jobs would be highly segregated, and since experience premiums would not be sought, the jobs would be at low wages.
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From page 116... ...
Analytic attention has also focused on the effects of husbands discouraging their wives from job training or employment that would modify their regular home activities or of persuading their wives to leave their jobs when the husbands relocate. These effects may be reinforced by differential job ladders and training programs for men's and women's positions in firms, firm-wide job evaluation systems that underestimate the training and conditions of jobs held primarily by women, and institutionalized requirements in many jobs held primarily by men to work overtime or relocate at the employer's bidding.
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From page 117... ...
In this view, the "primary labor market" includes both career movement within firms (internal labor markets) and movement among highskilled jobs among firms.
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From page 118... ...
New Sources of Data on Jobs and Careers A central limitation facing researchers interested in explaining labor market phenomena is the lack of longitudinal data on individual work histories, work arrangements within firms, and the ways that both change over time that is detailed enough to distinguish competing theories of employment contracting, job search, employment, job design, career patterning, and wage allocation. At present, sizable research investments in dynamic data bases are largely devoted to samples based on households and families.
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From page 119... ...
Longitudinal data for large representative samples of firms, jobs, and workers would allow researchers to see how external forces on organizations, including business cycles and attitudinal and technological changes, compare with factors inside organizations, including managerial structures, promotion practices, and compositions of work forces, to shape hiring and recruitment, the design of jobs, and career outcomes. In addition, data could be obtained on decision making that affects employment in the face of sometimes rapidly changing technologies, contractual arrangements with employees, suppliers, and customers of firms, and organizational perceptions, politics, and cultures in firms over time.
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From page 120... ...
And because of the growth of extensive privately held computer records regarding individuals, households, and firms such as files maintained by business information companies, direct-mail firms, political action committees, health insurance consortia, credit bureaus, and the like and the availability of increasingly sophisticated records-linkage software and fast, powerful computer workstations and supercomputers, federal agencies have become even less willing to make edited data accessible to researchers, even after identifying information has been deleted. In fact, there is no instance on record of a qualified scientific researcher using such records-linkage possibilities to identify individuals, much less using such information inimically; however, researchers do share the concern that less benign interests may exploit public-access files in ways that would not be acceptable either to those who have disclosed the information or to the agencies that have ultimate fiduciary responsibility for it.
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From page 121... ...
The advances do suggest, however, that continued research along the lines already initiated is fully warranted, and can be expected to generate valuable new knowledge in such diverse areas as regulatory and legislative reform, the design of financial markets, job segregation and wage gaps, and assessment of the implications and effects of corporate mergers and takeovers. We recommend a total of $56 million annually to support research on these topics.
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From page 122... ...
Such research will involve all three kinds of research work: theory development; empirical studies, including the collection of longitudinal data, particularly when repeated interactions are the issue; and laboratory and field experiments. For the study of mechanisms and institutions that promote organizational durability, flexibility, and effectiveness (as well as their opposites)
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From page 123... ...
The results indicate that these properties are powerful determinants of traders' preferences and show in detail how they can be expected to work. Laboratory experiments, although far from a substitute for field research which, among other things, is needed to check on the idealizations introduced in the laboratory constitute an efficient complement that permits much greater control over research variables and overcomes the need to wait for many events to occur in the real world in order to test every plausible hypothesis.
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From page 124... ...
Data on expectation-formation at the individual level, for example, possibly including programs of laboratory experiments, would help isolate the causes of departure from rational-expectations hypotheses that are observed in financial markets. Study of rigidities underlying unemployment at the macroeconomic level require detailed data on contract structure and the stickiness of price adjustments.
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From page 125... ...
We estimate that the total range of appropriate efforts to improve access to the most useful data that now exist in a series of academic research centers, government agencies, and private sources will cost approximately $S million annually, of which $1 million should be especially directed to the exploration and cultivation of private record centers (such as insurance clearinghouses) and unused corporate and local government archives for research purposes.
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