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Population EconomicsGiven varying transaction costs, differential market access, and varying roles of informal (family) and formal (commercial banks, stock market) institutions, economies grow neither uniformly nor evenly. Depending on its flaws an economy can generate intergenerational inequality. Similarly, an aging population may require increased family support systems, with pension funds often promoted as a modern alternative. Indeed, pension funds may speed a more general development of financial markets. Migration is also a family response to adverse shocks or persistent cross-sectional inequality, but again formal-sector intermediation with insurance is an alternative. More generally, what determines the trade off between personal and market relations? These topics in demography require increasingly sophisticated general-equilibrium empirical methods. The family has long been central in population research. Center member Gary Becker and others continue to pioneer in this area. Ironically, given the early controversies and misgivings within economics and across other disciplines, this so-called economic approach to the study of the family has now become standard. Here at Chicago we continue to move forward, with additional faculty extending many of the earlier models. Center member Pierre-Andre Chiappori blends rigorous price theoretical concepts with survey data to discern from observables what happens within the "black-box" of the family. Other recent efforts have focused on the endogenous formation of preferences. Member Casey Mulligan studies the intergenerational transmission of the work ethic and the influence of this (beyond parental income) on occupation choice and adolescent labor supply. Mulligan and member Lars Hansen study the formation of inter-temporal discount rates, with an eye toward understanding asset-pricing anomalies and the apparently diverse behavior of the poor versus the rich in formal markets. Member Robert Townsend is studying the family both in poor ethnic urban neighborhoods in Chicago and in rural areas, especially among ethnic minority groups in Northeast Thailand, a timely topic given the Asian economic crises. Related activities include the work of Robert Townsend's student Edward Seiler, on India and research affiliate Anna Paulson's work on remittances and migration patterns in Thailand, Mexico, and other countries. In Thailand, up to two months of income is from remittances, and seasonal migration is huge. Now, since the crisis, reverse migration is found. Again, in a slightly larger context, at Chicago's economists to understand theoretically and measure empirically the role of the family relative to the larger institutional or market context. Townsend is focusing in particular on the role of family in providing insurance and credit to its members, that is, help in times of stress (illness, old age, death of a family member, unemployment, crop diseases, drought or floods, and price movements) and help in the financing of fertilizer/pesticide, help with occupation choice and aid with small business and other investments. He places the family in the context of the larger network of friends and family, and then compares this with the role of neighborhood or village-level institutions such as rice banks and savings and loan associations as well as the role of national-level institutions such as the Bank for Agriculture and Agricultural Cooperatives, insurance companies, and commercial banks. For example, intergeneration transfers may be direct, but an alternative is for savings to be intermediated. Does the mix of direct and indirect transfers vary with the state of development? More generally, when do shoulder length personal relations replace arms length impersonal market relations, or vice versa? Another of Madrian related projects addresses the question of how the system of health insurance provision in the United States affects various labor market outcomes such as employment, job choice, hours worked and wages. The unpredictable nature of medical expenditures and their accompanying variability indicate that most individuals have a strong demand for health insurance coverage. But substantial differences in both the price and extent of coverage available from the patchwork array of institutional providers of health insurance in the U.S. -- employers, unions, group associations, Medicare, Medicaid, and insurance companies serving the individual non-group market -- result in individuals making employment decisions in part on the basis of health insurance coverage. Older individuals, for example, who receive health insurance from their employers but who are not yet eligible for Medicare may postpone retirement (see Madrian under aging projects). Again, more generally, access to insurance and credit from informal and formal sources may influence life cycle behavior and outcomes - savings, labor market participation, occupation choice, prevalence of disease and so on. The data base associated with members Robert Michael, the NLS-Y, and member Robert Fogel, on the life course of almost 40,000 Union Army Veterans, can thus be used to test analytic foundations when these data are tied to other information such as the role of the family or kin-networks and the role of formal affiliations. More theoretically-related work is that of member Pierre-Andre Chiappori on French life and automobile insurance markets, scrutinizing empirically whether there is adverse selection among a menu of contracts over and above the measured variables which insurance companies have available to them. It is often said that formal, "outside" institutions such as insurance companies do not have the information about their clients to which family members and kinship groups have access. It is thus surprising if the choice of insurance contracts by individuals can be predicted by information to which insurance companies do have access. Similarly, member Tomas Philipson is studying the evolution of health insurance in the United States given its aging population. He seeks to study several predictions of competitive insurance under asymmetric information, allowing Philipson and Mulligan to directly assess how the private mortality information of consumers and their experienced mortality covaries with the prices and amount of life insurance held. Using data from the Health and Retirement Survey and Asset and Health Dynamics Among the Oldest Old, the project will provide an increased understanding of the empirical relevance of commonly-argued information barriers to trade in old-age insurance. These barriers have often provided the primary explanation for the lack of complete old-age insurance, especially among widows (see under "aging" projects). The broadest version of this research studies the differential use of currency (Mulligan) and uneven access to stock and other financial markets among families and firms stratified by income (Hansen and prospective new faculty member John Heaton). Townsend does the same in his study of Hispanic and African American minorities in Chicago neighborhoods. What imperfections account for striking anomalies, that is, for the use of limited financial instruments and for limited market access in the face of apparent benefits? Note again that the larger the barrier to access, the greater is the potential role (or burden) of the family if not of networks of friends and relatives. Research on labor markets continues at Chicago unabated. Jim Heckman is extending his pioneering research on labor markets to Latin America (with Fernando Alvarez), coordinating with the Inter-American Development Bank on improving the collection and use of labor market surveys. Heckman's recent efforts have focused on whether or not to subsidize college attendance to reduce wage inequality, and more generally how to evaluate labor market programs. As noted, Mulligan is studying occupational choice. Member Kevin Murphy continues to look at differential labor market participation among males and females, a theme which ties into the work of Chiappori on the family unit mentioned earlier. One can thus place the behavior of family/household units in the larger context of institutions and markets, and as is already apparent, this has implications for the evolution of a given economy over time. We are thus led to the study of economic growth, a particular strength at Chicago. Becker and Murphy continue to work on fertility and growth, Becker and Nancy Stokey focus on the family's investment in children's education, hence their seminal contributions to the literature on human capital and growth. Member David Meltzer has studied health and mortality and its impact on growth (see "Health" project list). The latest work of James Heckman on wage inequality on job-training programs suggests that micro program evaluation is not ultimately possible without theoretical, general-equilibrium, dynamic underpinnings. One of the most important of these lessons is that there is no inherent method of choice for conducting program evaluations. The choice between experimental and non-experimental methods, or among alternative econometric estimators, should be guided by the underlying economic models, the available data, and the questions being addressed. Too much emphasis has been placed on formulating alternative econometric methods to correct for selection bias and too little given to the quality of the underlying data. Though it is expensive, obtaining better data is the only way to solve the evaluation problem in a convincing way. However, better data are not synonymous with social experiments. We conclude with a note on methods and character that may have been missed in the discussion above. First is the emphasis on theoretical underpinnings, that is, the explicit modeling of incentives, to name one of several examples. Second is the increasingly international and empirical character of the research and faculty here at Chicago, with projects and new measurements in Europe, Latin America, and Asia. Finally, to recapitulate: the idea is not simply to postulate a model and then accept or reject it empirically, with existing or new data, but rather to consider a broader range of models and ask how models vary in their ability to explain salient features of the data. More generally, the work of Chiappori, Hansen, Heckman, and Townsend is general-equilibrium in character but microeconomic in its fitting to data. This raises many challenging methodological issues, e.g. how to test when the models are not nested and some of the micro data is at variance with a given model.
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