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Notes on How Economists Think . .

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  • Robert A. Pollak

Abstract

What does economic theory teach that is relevant to thinking about public policy in general and welfare reform in particular? At a very general level, economic theory emphasizes two basic themes. Individuals are rational. Hence, they respond in predictable ways to changes in incentives, for example, to changes in market prices, taxes, and welfare rules. Equilibrium matters. Individuals' responses to an initial change in the incentives they face have feedback effects: their responses to the initial change affect the incentives facing others and induce second, third, and subsequent rounds of responses. Economists focus on the long-run equilibrium implications of this sequence of responses. Economists are most comfortable talking about real markets, such as markets for consumer goods and labor markets, but equilibrium conditions are crucial in metaphorical markets such as marriage markets and political markets. Indeed, many of the much ballyhooed examples of "unintended consequences" of government policies are equilibrium responses to rules, regulations, and policies that should have been anticipated -- the Savings and Loan fiasco is a case in point. I begin by elaborating on these two themes of individual rationality and equilibrium responses, then argue for the importance of gedanken experiments, and, finally, discuss some empirical issues.

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Bibliographic Info

Paper provided by Northwestern University/University of Chicago Joint Center for Poverty Research in its series JCPR Working Papers with number 35.

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Date of creation: 01 Jun 1998
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Handle: RePEc:wop:jopovw:35

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  1. Lundberg, Shelly & Plotnick, Robert D, 1995. "Adolescent Premarital Childbearing: Do Economic Incentives Matter?," Journal of Labor Economics, University of Chicago Press, vol. 13(2), pages 177-200, April.
  2. Hilary Williamson Hoynes, 1996. "Work, Welfare, and Family Structure: What Have We Learned?," NBER Working Papers 5644, National Bureau of Economic Research, Inc.
  3. Duncan Thomas, 1990. "Intra-Household Resource Allocation: An Inferential Approach," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 635-664.
  4. James J. Heckman & Jeffrey A. Smith, 1995. "Assessing the Case for Social Experiments," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 85-110, Spring.
  5. Gary S. Becker, 1960. "An Economic Analysis of Fertility," NBER Chapters, in: Demographic and Economic Change in Developed Countries, pages 209-240 National Bureau of Economic Research, Inc.
  6. Lundberg, S.J. & Pollak, R.A. & Wales, T.J., 1994. "Do Husbands and Wives Pool Their Resources? Evidence from U.K. Child Benefit," Working Papers 94-6, University of Washington, Department of Economics.
  7. Charles F. Manski, 1996. "Learning about Treatment Effects from Experiments with Random Assignment of Treatments," Journal of Human Resources, University of Wisconsin Press, vol. 31(4), pages 709-733.
  8. Shelly Lundberg & Robert A. Pollak, 1996. "Bargaining and Distribution in Marriage," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 139-158, Fall.
  9. Heckman, James J, 1995. "Lessons from the Bell Curve," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1091-1120, October.
  10. Behrman, Jere R. & Pollak, Robert A. & Taubman, Paul, 1995. "From Parent to Child," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226041568, June.
  11. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "General Equilibrium Treatment Effects: A Study of Tuition Policy," NBER Working Papers 6426, National Bureau of Economic Research, Inc.
  12. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169.
  13. Pollak, R.A., 1997. "Risk Regulation," Washington University 97-01, Business, Law and Economics Center, John M. Olin School of Business, Washington University.
  14. David M. Blau, 1999. "The Effect Of Income On Child Development," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 261-276, May.
  15. Gary Burtless, 1995. "The Case for Randomized Field Trials in Economic and Policy Research," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 63-84, Spring.
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