The American Economist- Fall 2004

Executive Compensation Incentives in a Volatile Market
by Miles B. Cahill and Alaina C. George
Recent literature has been conflicted as to whether executive compensation schemes have significant incentive pay elements. The most well-known study supporting the existence of pay-for-performance used data corresponding to the recent bull market of the 1990s. This paper estimates a similar model of incentive pay using data from more recent volatile markets of 1999-2001, and finds that the incentive component of executive pay has at least diminished, and has perhaps reversed. Thus, incentive pay ma be something of a "fair weather" phenomenon.
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Short-Term Output Fluctuations in Poland: An Application of the IS-MP-AS Model
by Yu Hsing
This paper examines output fluctuations in Poland based on an extended IS-MP-AS model (Romer, 2000) and the Taylor rule (1993, 1998, 1999). Empirical results show that real output is negatively influenced by the expected inflation rate, the deficit/GDP ratio, and the euro interest rate while it is positively affected by real appreciation and stock prices. Policy implications are that expansionary fiscal policy would not generate expected outcomes and that the conventional approach of currency devaluation to stimulate the economy may not apply to Poland due to the National Bank of Poland's potential reaction to raise the interest rate.
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Exploring Values in the Classroom: Three Exercises for Introductory Economics
by Lester Hadsell
We present three classroom exercises designed to explore issues of fairness and equity in economics. In each exercise, students put economics in context as they consider the art of economics in addition to the science. The active learning nature of the exercises involves students as they consider (1) the free-rider problem, (2) the contrast between democratic and free-market ideals, and (3) externalities. Each exercise, including discussion, will fit into a 50-minute class period. The author has used the exercises in introductory microeconomics courses, in classes of 30 to 50 students.
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The Determinants of Health Status in Sub-Saharan Africa (SSA)
by Bichaka Fayissa and Paulos Gutema
This study examines the determinants of health status (as measured by life expectancy at birth) in SSA based on the Grossman (1972) theoretical model which considers the economic (the ratio of health expenditure to GDP and the per capita food availability index), social (the illiteracy rate and alcohol consumption), and environmental factors (urbanization rate and carbon dioxide emission per capita index). The coefficients of the health status function are estimated by one-way and two-way panel data analyses.

The two-way random-effect model results suggest that a decrease in illiteracy rate and an increase in the food availability index are well positively associated with improvements in life expectancy at birth. Overall results also suggest that a health policy that may focus on the provision of health services, family planning programs, and emergency aids to the exclusion of other demographic issues may serve little in schemes aimed at improving the current health status of the region.
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Upstream Mergers, Downstream Mergers, and Unionized Oligopoly
by Shu-hua Chang
In a duopolistic industry characterized by unobserved vertical contracts, and where there are two vertical chains with two upstream manufacturers selling to two downstream retailers, we show that the wage is jointly determined by the union and the firm through bargaining and that the wage bargaining power of the union under different regimes, regardless of whether an upstream merger or a downstream merger takes place, will determine the degree of the welfare damage effect. It is also found that an upstrea or a downstream monopolist, regardless of whether it possesses the right to franchise, will exert no impact on the equilibrium outputs and total profit, and will only affect the distribution of profits within the vertical chain.
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Is the Dorfman-Steiner Rule Always Optimal?
by Stacey Brook
Common economic wisdom states that the Dorfman-Steiner advertising rule must be met for profit maximization with respect to advertising effort, and either quantity or price. This is true given that the demand equation is not independent with respect to advertising and price or quantity (inverse demand equation). In other words, using an independent linear demand specification the Dorfman-Steiner rule is an identity and thus always holds even with output levels off the equilibrium path.
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From Poverty to Obesity: Exploration of the Food Choice Constraint Model and the Impact of an Energy-Dense Food Tax
by Seth S. Martin
Obesity has reached epidemic proportions in the United States and is disproportionately concentrated in poor populations. This paper explores the role that poverty may play in driving the present obesity epidemic. Current literature supports a food choice constraint model in which one's ability to purchase healthy foods falls with income in a standard budget constraint shift fashion because healthy foods (nonenergy-dense foods) are relatively costly. This model is reinforced by a biological preference for energy-dense foods. Theoretically, a tax on energy-dense food would reduce the prevalence of obesity, along with obesity-related disease, and therefore should be carefully considered by the American people.
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A Note on Government Budgets
by Ben L. Kyer and Gary E. Maggs
The standard pedagogical examination of government budgets includes the distinction between cyclical and structural deficits and surpluses and changes thereof. This paper extends the regular classroom analysis and graphically demonstrates that cyclical changes in the government budget can be decomposed and stated as the summation of the expenditure effect and the revenue effect.
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Comparative Economics: A Reference Guide
by Tahany Naggar and Ali K. Naggar
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Book Reviews:

A.J. Kondonassis, Economic Development and Economic Integration
by Lall Ramrattan
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Joseph S. Nye, Jr., Soft Power: The Means to Success in World Politics
by Donna A. Cristo More…