Affirmative action in education: Evidence from engineering college admissions in India

This paper examines an affirmative action program for “lower-caste” groups in engineering colleges in India. We study both the targeting properties of the program, and its implications for labor market outcomes. We find that affirmative action successfully targets the financially disadvantaged: the upper-caste applicants that are displaced by affirmative action come from a richer economic background than the lower-caste applicants that are displacing them. Targeting by caste, however, may lead to the exclusion of other disadvantaged groups. For example, caste-based targeting reduces the overall number of females entering engineering colleges. We find that despite poor entrance exam scores, lower-caste entrants obtain a positive return to admission. Our estimates, however, also suggest that these gains may come at an absolute cost because the income losses experienced by displaced upper-caste applicants are larger than the income gains experienced by displacing lower-caste students. Limited sample sizes in our preferred econometric specifications, however, prevent us from drawing strong conclusions from these labor market findings.     

Psychology, Behavioral Economics, and Public Policy

Economics has typically been the social science of choice to inform public policy and policymakers. In the current paper we contemplate the role behavioral science can play in enlightening policymakers. In particular, we provide some examples of research that has and can be used to inform policy, reflect on the kind of behavioral science that is important for policy, and approaches for convincing policy-makers to listen to behavioral scientists. We suggest that policymakers are unlikely to invest the time translating behavioral research into its policy implications, and researchers interested in influencing public policy must therefore invest substantial effort, and direct that effort differently than in standard research practices.     

Market Efficiency versus Behavioral Finance

Two prominent economists—one the author of A Random Walk Down Wall Street and the other a leading scholar in behavioral finance—debate the current validity of the efficient markets hypothesis (EMH). For over 30 years, the idea that capital markets are efficient and that stock prices reflect all publicly available information dominated academic thinking. But the bubble of the late 1990s and recent advances in behavioral finance have forced a re-thinking.
Behavioralists argue that markets are at least "weakly" predictable. They also point to evidence that small investors —typically day traders— consistently lose money as a result of "loss aversion,""overconfidence," and other behaviors that are not part of the focus of EMH (though, as Malkiel notes, there is room for irrational investors in an EMH world provided there are enough rational investors to counteract and correct them). Proponents of EMH, of course, argue that neither individual investors nor active fund managers reliably outperform markets, so there is no point paying for active management.
Yet these seemingly disparate views lead to important areas of common ground. In particular, both camps agree that individual investors should stick to broad-based, low-cost index funds. And retirement accounts—either 401Ks or social security accounts—should have limited investment selections in order to minimize the possibility that behavioral problems lead to investor mismanagement.     

Public Policy and Extended Families: Evidence from Pensions in South Africa

How are resources allocated within extended families in developingeconomies? This question is investigated using a unique socialexperiment: the South African pension program. Under that programthe elderly receive a cash transfer equal to roughly twice theper capita income of Africans in South Africa. The study examineshow this transfer affects the labor supply of prime-age individualsliving with these elderly in extended families. It finds a sharpdrop in the working hours of prime-age individuals in thesehouseholds when women turn 60 years old or men turn 65, theages at which they become eligible for pensions. It also findsthat the drop in labor supply is much larger when the pensioneris a woman, suggesting an imperfect pooling of resources. Theallocation of resources among prime-age individuals dependsstrongly on their absolute age and gender as well as on theirrelative age. The oldest son in the household reduces his workinghours more than any other prime-age household member.