Overview

Suppose the public decision maker (hereafter called the planner) faces a specific cost- or surplus-sharing problem and has made up his mind about the just outcome (e.g., he adopts one of the five paramount methods for sharing the cost of a public good discussed in Chapter 6). He still has one difficulty to solve before his favorite solution is implemented, namely, he must elicit from individual agents a report of their preferences (in this particular example, he must find out about the individual benefits from consuming the public good).

Information about individual preferences is fundamentally private to the agent himself. Even if I have clear evidence that you prefer wine over beer, I cannot deny your right of pretending to the contrary.

Thus, in a legal and practical sense, all information about preferences must emanate from the concerned agents themselves. This implies that an agent can influence the outcome of the mechanism by falsifying his preferences (e.g., by understating or overstating the benefit he derives from the public good). Of course, he will manipulate in such fashion only when it is in his interest to do so.

The preceding chapters have shown that an isomorphic structural pattern occurs at various levels of Japanese organizations: the workshop, as composed of the J-firm, the production department, and R&D department, and the government bureaucracy. In contrast to the hierarchical coordination prevalent in Western organizations, this structural pattern features relatively autonomous operating units connected horizontally without hierarchical control. In the normal course of affairs, the role of leadership here is to facilitate horizontal communication among operating units and to make strategic decisions in a constituent-based manner. We have seen that such a structural pattern is very effective in allowing an organization to adapt its operations to a continually changing environment in a time-efficient manner.

One problem with this structure is that radical organizational innovation and strategic reorientation requiring some constituent groups to make a sacrifice are not likely to occur endogenously unless they are brought on by a significant external shock such as would affect organizational viability. The Japanese organization may thus exhibit a tendency toward “progressive conservatism.” It is progressive in that it is capable of adapting itself to continually changing environments in a Nash-improving (consensual-building) manner, and it is conservative in that it is resistant to radical reorientation involving non-Pareto-improving change. Radical organizational innovation and strategic reorientation that forces some constituent groups to make a sacrifice would in general occur as a matter of organizational survival in response to drastic environmental shocks.

By the time the Pacific War ended with the unconditional surrender of Japan in August 1945, about one-quarter of Japan's national assets (excluding weaponry) existing at the beginning of the year had been destroyed. In the ensuing years, soldiers returning from the battlefields and immigrants from former colonial lands, as well as those released from war materials production, joined the ranks of the job seekers. The number of job seekers during the first few years of the postwar period was about one-quarter of the total labor force. The level of production in 1946 dropped to about 40 percent of the prewar level of 1934-6. For most Japanese, the 1940s were nothing but a series of daily struggles for survival. The entire nation was swept up in great social turmoil and drastic institutional changes.

Upon the new ground of the institutions shaped in the turmoil, however, the engine of growth started to run in the 1950s. An unprecedented growth rate of more than 10 percent per annum was realized throughout the 1960s, and the gains from this growth were widely distributed among diverse social groups. Even so, Japan was still considered a “fragile flower” because of its meager natural resources. Then in the 1970s Japan was hit by a series of shocks - environmental pollution, escalating oil prices, the shift to a flexible exchange system, and new waves of technological innovation.

In microeconomic textbooks, the firm is treated as a profit-maximizing agent whose technological opportunities are exogenously given in the form of the production function or the cost function. In other words, economists have treated phenomena that determine the costs of the firm as purely technological events occurring inside a “black box” and have relegated the task of inquiring about what occurs inside that box to industrial engineers. Thus, in microeconomics the firm can be identified with a single-minded entrepreneur who operates the black box to maximize profits in response to market signals.

This mechanical view of the firm was challenged some half century ago in a celebrated article by Ronald Coase entitled “The Nature of the Firm,” in which he asked why the firm emerged at all in the market mechanism. His answer was that a firm would arise and attempt to extend the range of its control as long as its costs were less than the costs of achieving the same result by market transactions. However, the significance of this article was not fully recognized until transaction cost economics, or the new institutional economics, revived interest in the question. As an alternative to market transactions, transaction cost economics identified the mode of transactions internalized in the firm with hierarchies.

The firm as a hierarchy may be visualized as follows: It is composed of many specialized operating units. The activities of these units are coordinated through layers of administrative offices.

Abstract

The “marginality principle” states that the share of joint output atrributable to any single factor of production should depend only on that factor's own contribution to output. This property, together with symmetry and efficiency, uniquely determines the Shapley value. A similar result characterizes Aumann—Shapley pricing for smooth production functions with variable input levels.

Introduction

In a perfectly competitive market, the wage of a laborer equals his marginal product. No ethical judgment need be made as to whether marginal productivity is a “just” rule of compensation so long as competitive markets are accepted as the correct form of economic organization. Nevertheless, the idea that rewards should be in proportion to contributions has considerable ethical appeal in itself, and appears to reflect widely held views about what constitutes “just compensation” without any reference to the theory of perfect competition.

In this paper we shall ask what “compensation in accordance with contribution” means in the absence of competition. How does the marginality principle translate into a rule of distributive justice when cooperation rather than competition is the mode of economic organization?

Unfortunately, if we attempt to translate marginalism directly into a cooperative sharing rule, difficulties arise. For, except in very special cases, the sum of individuals' marginal contributions to output will not equal total output.

The opportunity to deliver the Richard T. Ely Lecture, from which this chapter is derived, afforded me some very personal satisfactions. Ely, unbeknownst to him, bore a great responsibility for my economic education, and even for my choice of profession. The example of my uncle, Harold Merkel, who was a student of Commons and Ely at Wisconsin before World War I, taught me that human behavior was a fit subject for scientific study, and directed me to economics and political science instead of high energy physics or molecular biology. Some would refer to this as satisficing, for I had never heard of high energy physics or molecular biology, and hence was spared an agonizing weighing of alternative utiles. I simply picked the first profession that sounded fascinating.

Ely's influence went much further than that. My older brother's copy of his Outlines of Economics – the 1930 edition – was on our bookshelves when I prepared for high school debates on tariffs versus free trade, on the Single Tax of Henry George. It provided me with a sufficiently good grounding in principles that I was later able to take Henry Simons' intermediate theory course at the University of Chicago, and the graduate courses of Frank Knight and Henry Schultz without additional preparation.

The Ely textbook, in its generation, held the place of Samuelson (1947) or Bach in ours.

INTRODUCTION

Why are normative theories so prevalent in the study of judgment and choice, yet virtually absent in other branches of science? For example, imagine that atoms and molecules failed to follow the laws supposed to describe their behavior. Few would call such behavior irrational or suboptimal. However, if people violate expected utility axioms or do not revise probabilities in accord with Bayes's theorem, such behavior is considered suboptimal and perhaps irrational. What is the difference, if any, between the two situations? In the latter we implicitly assume that behavior is purposive and goal-directed while this is less (if at all) obvious in the former. (It is problematic how one might treat plant and animal behavior according to a descriptive–normative dichotomy.) Therefore, if one grants that behavior is goal-directed, it seems reasonable to assume that some ways of getting to the goal are better, in the sense of taking less time, making fewer errors, and so on, than others. Indeed, much of decision research concerns evaluating and developing ways for improving behavior, thereby reflecting a strong engineering orientation (Edwards, 1977; Hammond, Mumpower and Smith, 1977; Keeney and Raiffa, 1976). Moreover, comparison of actual behavior with normative models has been important in focusing attention on the discrepancies between them, and this in turn has raised important questions about the causes of such discrepancies.

This book is a collection of papers presented at a conference, “Decision Making: Descriptive, Normative, and Prescriptive Interactions,” held in Boston at the Harvard Business School during June 16–18, 1983. The conference was one of several celebrating the 75th anniversary of the Harvard Business School. It might equally have been held as a celebration of the renaissance of interest in the analysis of decision making under uncertainty that has occurred in recent years. Not since the early 1950s, in the aftermath of the pathbreaking work by von Neumann and Morgenstern, has so much intellectual enthusiasm been directed at the question of how people should, and do, behave when called upon to take action in the face of uncertainty.

When Amos Tversky visited Harvard in the spring of 1982, the three of us had long discussions about the philosophy behind the contribution made by various disciplines to research on decision making. It was clear that mathematicians (decision theorists) are interested in proposing rational procedures for decision making – how people should make decisions if they wish to obey certain fundamental laws of behavior. Psychologists are interested in how people do make decisions (whether or not rational) and in determining the extent to which their behavior is compatible with any rational model. They are also interested in learning the cognitive capacities and limitations of ordinary people to process the information required of them if they do not naturally behave rationally, but wish to.

The focus of our attention is the individual decision maker facing a choice involving uncertainty about outcomes. We will consider how people do make decisions, how “rational” people should make decisions, and how we might help less rational people, who nevertheless aspire to rationality, to do better. When we speak of nonrational people, we do not mean those with diminished capacities; we refer instead to normal people who have not given thought to the process of decision making or, even if they have, are unable, cognitively, to implement the desired process. Our decision makers are not economic automatons; they make mistakes, have remorse, suffer anxieties, and cannot make up their minds. We start with a premise, not that people have well thought out preferences, but that they may be viewed as having divided minds with different aspirations, that decision making, even for the individual, is an act of compromise among the different selves.

For our purposes we shall augment the usual dichotomy that distinguishes between the normative and descriptive sides (the “ought” and the “is”) of decision making, by adding a third component: the prescriptive side. We do this because much of our concern in this paper addresses the question: “How can real people – as opposed to imaginary, idealized, super-rational people without psyches – make better choices in a way that does not do violence to their deep cognitive concerns?” And we find that much that we have to say on these matters does not fit conveniently into the usual normative or descriptive niches.

Introduction

It has been much remarked that different solutions become equivalent in the setting of economies in which there is “perfect competition”; that is, no individual can affect the overall outcome. The conjecture that the core coincides with competitive (Walras) allocations was made as far back as 1881 by Edgeworth [11]. His insight has been confirmed in increasing generality in a series of papers [20,9,2,14,13,7,8,1] over the last three decades. Another line of inquiry originated with the recent introduction of a value for games by Shapley [17]. It was found that this also coincided with the above two [19,6,3].

The equivalence phenomenon is striking in view of the fact that these solutions are posited on entirely different grounds. If we restrict ourselves to smooth, transferable utilities, then the result is even sharper: not only do the solutions coincide, but they are also unique (i.e., consist of a single payoff). Our aim here is to give another view of this “coincident payoff” by putting it on an axiomatic foundation. As an upshot of our approach, we get a “metaequivalence” theorem, by way of a categorization: Any solution coincides with this payoff if and only if it satisfies our axioms.

The transferable utility assumption is undoubtedly restrictive.

Lassie died one night. Millions of viewers, not all of them children, grieved. At least, they shed tears. Except for the youngest, the mourners knew that Lassie did not really exist. Whatever that means. Perhaps with their left hemisphere they could articulate that they had been watching a trained dog and that that dog was still alive, healthy, and rich; mean while in their right hemispheres, or some such place (if these phenomena have a place), the real Lassie had died.

Did they enjoy the episode?

We know they would not have enjoyed the death of the dog that played Lassie. Did the adults and older children wish that Lassie had not died? Do the dry-eyed parents of a moist-eyed teenager wish their child had not watched? If he had not watched, what would have been his grief at breakfast, reading the news that Lassie was dead? And would he regret missing the final episode?

What about declaring that Lassie did not die and showing an alternative episode, one that was filmed after Lassie's death was screened, and explaining that, Lassie being only fictional, the screen writers thought it best, in view of the widespread grief (evidenced by some people's wanting to know where to send flowers) to rewrite the story?

I do not think it works. But maybe a substitute screen writer could be blamed for an unauthentic episode.

Although screening programs for neural tube defects (NTDs) are routine and cost-effective in Great Britain their potential use in the United States has been hotly debated. In this chapter we report the attitudes of 338 prospective patients seeking genetic counseling about the use of amniocentesis for prenatal diagnosis. We have integrated these attitudes with the expected accuracy and complications of a comprehensive screening program for NTDs and have estimated the proportion of these prospective parents who would benefit from a maternal serum alpha-fetoprotein (AFP) screening program. Thus, we have addressed perhaps the most critical problem related to the decision of whether or not to institute an AFP screening program: “What are the implications of the attitudes of prospective parents toward the desirability of a large-scale screening program for the prenatal detection of NTDs?” In a larger sense, we are addressing a prototypical problem for many policy analyses: How can the personal attitudes of individual members of society be integrated into decisions affecting the medical care of society as a whole?

METHODS

Summary of screening plan. Figure 28.1 summarizes the policies analyzed in this paper. Maternal serum AFP concentration is measured at a gestational age between 16 and 18 weeks. If the concentration of AFP is above a predetermined level (typically either 2.5 times the median or two standard deviations above the mean), the serum test is repeated.

DISCUSSION OUTLINE: DESCRIPTIVE/PRESCRIPTIVE/NORMATIVE INTERACTIONS IN MEDICAL DECISION MAKING

Issues relating to values and preferences

Valued consequences that are typically reflected in formal models of medical decision making include the following:

• survival (length of life)

• quality of life

• symptoms

• physical function

• social function

1. Are preferences regarding these attributes fixed or labile? How do they change with age, physical status, mental status, interactions with physicians? Prescriptively or normatively, how does one deal with the existence of “multiple selves”? Is the prescriptive solution more complicated than just trying to assess the uncertainty about future preferences, and then take expectations across all possible future utility functions? If perfectly or imperfectly knowable, should future preferences substitute for present preferences in decisions with future consequences?

Examples: labor and anesthesia (Christensen–Szalanski)

smoking and addictive behaviors

myopia, ignorance, or uncertainty about old age

euthanasia (Schelling)

1. Are some preference functions normatively “better” than others? When is it appropriate for the physician to intervene to try to change patients' preferences?

2. What are the ethical implications for informed consent?

Example: a couple's desire to have a baby at home, under the care of a midwife

1. Issues in assessing utilities for health outcomes: Assuming that preferences are stable and measurable, what is the best way to measure them? While proper von Neumann–Morgenstern utility functions may be the prescriptive goal, are there other means to that end that are more reliable or acceptable than using lottery techniques, e.g., category scaling, magnitude estimation? […]