Using the result that under the null hypothesis of no misspecification an asymptotically efficient estimator must have zero asymptotic covariance with its difference from a consistent but asymptotically inefficient estimator, specification tests are devised for a number of model specifications in econometrics. Local power is calculated for small departures from the null hypothesis. An instrumental variable test as well as tests for a time series cross section model and the simultaneous equation model are presented. An empirical model provides evidence that unobserved individual factors are present which are not orthogonal to the included right-hand-side variable in a common econometric specification of an individual wage equation.

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Specification Tests in Econometrics

This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model for convergence in standards of living, that is, for whether poor countries tend to grow faster than rich countries. The evidence indicates that, holding population growth and capital accumulation constant, countries converge at about the rate the augmented Solow model predicts. This paper takes Robert Solow seriously. In his classic 1956 article Solow proposed that we begin the study of economic growth by assuming a standard neoclassical production function with decreasing returns to capital. Taking the rates of saving and population growth as exogenous, he showed that these two vari- ables determine the steady-state level of income per capita. Be- cause saving and population growth rates vary across countries, different countries reach different steady states. Solow's model gives simple testable predictions about how these variables influ- ence the steady-state level of income. The higher the rate of saving, the richer the country. The higher the rate of population growth, the poorer the country. This paper argues that the predictions of the Solow model are, to a first approximation, consistent with the evidence. Examining recently available data for a large set of countries, we find that saving and population growth affect income in the directions that Solow predicted. Moreover, more than half of the cross-country variation in income per capita can be explained by these two variables alone. Yet all is not right for the Solow model. Although the model correctly predicts the directions of the effects of saving and

/pdf/a-contribution-to-the-empirics-of-economic-growth-27cl5gkqam.pdf

A Contribution to the Empirics of Economic Growth

An intertemporal model for the capital market is deduced from the portfolio selection behavior by an arbitrary number of investors who aot so as to maximize the expected utility of lifetime consumption and who can trade continuously in time. Explicit demand functions for assets are derived, and it is shown that, unlike the one-period model, current demands are affected by the possibility of uncertain changes in future investment opportunities. After aggregating demands and requiring market clearing, the equilibrium relationships among expected returns are derived, and contrary to the classical capital asset pricing model, expected returns on risky assets may differ from the riskless rate even when they have no systematic or market risk. ONE OF THE MORE important developments in modern capital market theory is the Sharpe-Lintner-Mossin mean-variance equilibrium model of exchange, commonly called the capital asset pricing model.2 Although the model has been the basis for more than one hundred academic papers and has had significant impact on the non-academic financial community,' it is still subject to theoretical and empirical criticism. Because the model assumes that investors choose their portfolios according to the Markowitz [21] mean-variance criterion, it is subject to all the theoretical objections to this criterion, of which there are many.4 It has also been criticized for the additional assumptions required,5 especially homogeneous expectations and the single-period nature of the model. The proponents of the model who agree with the theoretical objections, but who argue that the capital market operates "as if" these assumptions were satisfied, are themselves not beyond criticism. While the model predicts that the expected excess return from holding an asset is proportional to the covariance of its return with the market

http://jpkc.fudan.edu.cn/picture/article/296/c7/92/0e8c302443d092d8b77a256079cf/3a6483db-591a-42b5-b904-e2430eb26c6a.pdf

An intertemporal capital asset pricing model

Norms have never been absent from the study of international politics, but the sweeping “ideational turn” in the 1980s and 1990s brought them back as a central theoretical concern in the field. Much theorizing about norms has focused on how they create social structure, standards of appropriateness, and stability in international politics. Recent empirical research on norms, in contrast, has examined their role in creating political change, but change processes have been less well-theorized. We induce from this research a variety of theoretical arguments and testable hypotheses about the role of norms in political change. We argue that norms evolve in a three-stage “life cycle” of emergence, “norm cascades,” and internalization, and that each stage is governed by different motives, mechanisms, and behavioral logics. We also highlight the rational and strategic nature of many social construction processes and argue that theoretical progress will only be made by placing attention on the connections between norms and rationality rather than by opposing the two.

/pdf/international-norm-dynamics-and-political-change-37ig9r9dlq.pdf

International Norm Dynamics and Political Change

Is public expenditure productive

This paper presents a simple model of market equilibrium to explain why firms that maximize the value of their shares pay dividends even though the funds could instead be retained and subsequently distributed to shareholders in a way that would allow them to be taxed more favorably as capital gains. The two principal ingredients of our explanation are: (1) the conflicting preferences of shareholders in different tax brackets and (2) the shareholders' desire for portfolio diversification, we show that companies will pay a positive fraction of earnings in dividends. We also provide some comparative static analysis of dividend behavior with respect to tax parameters and to the conditions determining the riskiness of the securities.

Why Do Companies Pay Dividends

Introduction to "The Distributional Aspects of Social Security and Social Security Reform"

The housing sector is now (September 2007) at the root of three distinct but related problems: (1) a sharp decline in house prices and the related fall in home building; (2) a subprime mortgage problem that has triggered a substantial widening of all credit spreads and the freezing of much of the credit markets; and (3) a decline in home equity loans and mortgage refinancing that could cause greater declines in consumer spending. Each of these could by itself be powerful enough to cause an economic downturn. The combination could cause a very serious recession unless there are other offsetting forces. In this paper, I discuss each of these and then comment on the implications for monetary policy.

Housing, Credit Markets and the Business Cycle

The Effects of Tax Based Incentives on National Saving and Government Revenue

Given the current corporate tax structure in the U.S., inflation may have an important impact on the production decisions of firms, notably the choice of capital durability. This paper presents a model of competitive behavior in which firms may choose the durability of their capital goods. We find that in the presence of inflation, the taxation of corporate profits may influence both the choice of asset life and the market value of equity. In particular, the failure to index depreciation allowances depresses share values and biases the choice of asset life toward greater durability. Integrating this analysis with the traditional one-sector monetary growth model, we study the general equilibrium impact of inflation on such long run characteristics of the economy as output per capita and the real rate of return received by investors.

Martin Feldstein

Papers

Why Do Companies Pay Dividends

Introduction to "The Distributional Aspects of Social Security and Social Security Reform"

Housing, Credit Markets and the Business Cycle

The Effects of Tax Based Incentives on National Saving and Government Revenue

Inflation and the Choice of Asset Life