AEAweb: JEL: Contents: March 1998

Journal of Economic Literature
Vol. 36, No. 1, March 1998

Contents

Psychology and Economics
Matthew Rabin      11

Emotions and Economic Theory
Jon Elster      47

Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions
Samuel Bowles      75

Trends in the Well-Being of American Women, 1970-1995
Francine D. Blau      112

The Approach of Institutional Economics
Geoffrey M. Hodgson      166

Capital-Market Imperfections and Investment
R. Glenn Hubbard      193

Because psychology systematically explores human judgment, behavior, and well-being, it can teach us important lessons about how humans differ from the way they are traditionally described by economists. This essay discusses a selection of psychological findings relevant to economics. While standard economics assumes that each person maximizes stable and coherent preferences given rationally-formed probabilistic beliefs, psychological research teaches us about ways to describe preferences more realistically, about biases in belief-formation, and about ways it is misleading to conceptualize people as attempting to maximize stable, coherent, and accurately perceived preferences.

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Economists and psychologists who study emotions have worked in near-total isolation from each other. The article discusses some areas in which economists might take account of emotions. After a survey of the main features of emotions as analyzed by psychologists and physiologists, the article discusses three aspects of the relation between emotion and choice. (1) Given that emotions may be intrinsically valuable or instrumentally useful, can one choose to have them? (2) Can emotions supplement rationality in cases where it yields indeterminate prescriptions for choice? (3) When an emotion and self-interest suggest different courses of action, how do they interact to produce a final decision?

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Drawing on experimental economics, anthropology, social psychology, sociology, history, the theory of cultural evolution as well as more conventional economic sources, I review models and evidence concerning the impact of economic institutions on preferences, broadly construed. I identify a number of ways in which the form of economic organization of a society appears to influence the process of human development by shaping tastes, the framing of choice situations, psychological dispositions, values, and other determinants of individual behavior. I conclude by commenting on some implications for economic theory and policy analysis.

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This paper examines the trends in the well-being of American women over the last 25 years, a time of significant changes in the relative economic status of women and in the labor market as a whole. Substantial evidence is obtained of rising gender equality in labor market outcomes and in the allocation of housework within married couple families. However, parallel to the recent evidence of the declining labor market position of lower skilled men, there has been a similar deterioration in the economic status of less educated women, especially high school dropouts, across a wide variety of dimensions.

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This paper assesses the "old" institutional economics, it emphasizes the importance of key "old" institutionalist themes concerning the necessity of habits and rules, and the role of institutions. A problem in the alternative theoretical program of the "new" institutionalism is the untenability of its assumption of an original, institution-free, "market" or "state of nature." Even optimizing behavior requires the prior existence of habits and rules. Although it still lacks a complete and systematic theory, the "evolutionary" approach of the "old" institutionalists tackles the problem of the interactive relationship of actor to structure without analytical reduction to one or the other.

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Over the past decade, a number of researchers have extended conventional models of business fixed investment to incorporate a role for "financial constraints" in determining investment. This paper reviews developments and challenges in this empirical research, and uses advances in models of information and incentive problems to motivate those developments and challenges. First, I describe analytical underpinnings of models of capital-market imperfections in the investment process, and illustrate the principal testable implications of those models. Second, I motivate tests and describe and critique existing empirical studies. Third, the review considers applications of the underlying models to a range of investment activities, including inventory investment, R&D, employment demand, pricing by imperfectly competitive firms, business formation and survival, and risk management. Fourth, I discuss implications of this research program for analysis of effects of investment of monetary policy and tax policy. Finally, I examine some potentially fruitful avenues for future research.

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