Essays on Individual and Collective Decision Making

Abstract

This dissertation contains three essays on individual and collective decision making. Understanding and modeling how individuals make choices is at the heart of economics. In chapter I, I empirically estimate the degree to which the marginal utility of income changes across income groups. The estimation is based on survey responses indicating willingness to pay to avoid unpleasant experiences and relies on the assumption that the associated disutility is equal on average across income groups. This assumption implies that any differences in average willingness to pay for relief are entirely driven by differences in marginal utilities of income. The results suggest that marginal utility of income is constant across income groups, implying that (cardinal) utility is roughly linear in dollars. While this paper is primarily about how individuals make choices, a better understanding of individual preferences and motivation can inform collective decisions, where the preferences or needs of different people must be considered simultaneously.

How to provide effective information to policymaker’s who are making collective decisions is the focus of chapter II where we show how to get unbiased estimates of welfare from observational outcomes with heterogeneous populations. Though ubiquitous in research and practice, mean-based “value-added” measures may not fully inform policy or welfare considerations when policies have heterogeneous effects, impact multiple outcomes, or seek to advance distributional objectives. In this paper we formalize the importance of heterogeneity for calculating social welfare and quantify it in an enormous public service provision problem: the allocation of teachers to elementary school classes. Using data from the San Diego Unified School District we estimate heterogeneity in teacher value-added over the lagged student test score distribution. Because a majority of teachers have significant comparative advantage across student types, allocations that use a heterogeneous estimate of value-added can raise scores by 34-97% relative to those using only standard value-added estimates. These gains are even larger if the social planner has heterogeneous preferences over groups. Because reallocations benefit students on average at the expense of teachers’ revealed preferences, we also consider a simple teacher compensation policy, finding that the marginal value of public funds would be infinite for bonuses of up to 14% of baseline pay. These results, while specific to the teacher assignment problem, suggest more broadly that using information about effect heterogeneity might improve a broad range of public programs—both on grounds of average impacts and distributional goals.

While chapter II focuses on how to aid in collective decision making, Chapter III focuses on understanding how, in real life, collective decisions are made. I examine how preference formation may directly lead to state fiscal policy interdependence. I start by laying out a formal model for state fiscal interdependence. The model is built on two core ideas. First, voters look at “similar" states via news coverage to determine what a normal level of public spending is. Second, governments respond to these shifting preferences by maximizing the probability of reelection. The model informs an empirical analysis which uses state newspaper articles to form a new metric of state inter-connectivity. This metric is compared against established metrics used in the literature.