Showing papers by "National Bureau of Economic Research published in 1986"

A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix

Abstract: This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.

Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits and Market Value

Abstract: This paper presents evidence that firms' patents, profits and market value are systematically related to the"technological position" of firms' research programs. Further, firms are seen to "move" in technology space in response to the pattern of contemporaneous profits at different positions. These movements tend to erode excess returns."Spillovers" of R&D are modelled by examining whether the R&D of neighboring firms in technology space has an observable impact on the firm's R&D success. Firms whose neighbors do much R&D produce more patents per dollar of their own R&D,with a positive interaction that gives high R&D firms the largest benefit from spillovers. In terms of profit and market value, however, their are both positive and negative effects of nearby firms' R&D. The net effect is positive for high R&D firms, but firms with R&D about one standard deviation below the mean are made worse off overall by the R&D of others.

The Value of Waiting to Invest

Abstract: This paper studies the optimal timing of investment in an irreversible project where the benefits from the project and the investment cost follow continuous-time stochastic processes. The optimal investment rule and an explicit formula for the value of the option to invest are derived, assuming that the option is valued by risk-averse investors who are well diversified. The same analysis is applied to the scrapping decision. Simulations show that this option value can be significant, and that for reasonable parameter values it is optimal to wait until benefits are twice the investment costs.

Cointegration and Tests of Present Value Models

Abstract: In a model where a variable Y[sub t] is proportional to the present value, with constant discount rate, of expected future values of a variable y[sub t] the "spread" S[sub t]= Y[sub t] - [theta sub t] will be stationary for some [theta] whether or not y[sub t]must be differenced to induce stationarity. Thus, Y[sub t] and y[sub t] are cointegrated. The model implies that S[sub t] is proportional to the optimal forecast of [delta Y{sub t+1}] and also to the optimal forecast of S*[sub t], the present value of future [delta y{sub t}]. We use vector autoregressive methods, and recent literature on cointegrated processes, to test the model. When Y[sub t] is the long-term interest rate and y[sub t] the short-term interest rate, we find in postwar U.S. data that S[sub t] behaves much like an optimal forecast of S*[sub t] even though as earlier research has shown it is negatively correlated with [delta Y{sub t+1}]. When Y[sub t] is a real stock price index and y[sub t] the corresponding real dividend, using annual U.S. data for 1871-1986 we obtain less encouraging results for the model, al-though the results are sensitive to the assumed discount rate.

Hysteresis and the European Unemployment Problem

Abstract: European unemployment has been steadily increasing for the last 15 years and isexpected to remain very high for many years to come. In this paper, we argue thatthis fact implies that shocks have much more persistent effects on unemployment thanstandard theories can possibly explain. We develop a theory which can explain suchpersistence, and which is based on the distinction between insiders and outsiders inwage bargaining. We argue that if wages are largely set by bargaining betweeninsiders and firms, shocks which affect actual unemployment tend also to affectequilibrium unemployment. We then confront the theory to both the detailed facts ofthe European situation as well as to earlier periods of high persistent unemploymentsuch as the Great Depression in the US.

Pricing to Market when the Exchange Rate Changes

Abstract: It has been widely remarked that US import prices have not fully reflected movements in the exchange rate. This paper begins with an investigation of the actual extent of "pricing to market" by foreign suppliers. It shows that pricing to market is a real phenomenon, but not universal; in particular, evidence on German export prices suggests that stickiness of import prices is largely confined to machinery and transport equipment. The paper then considers a number of possible models. While the evidence is not sufficient to distinguish among thesemodels, it seems probable that a full explanation will involve both dynamics and imperfect competition.

The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors

Abstract: A linearization of a rational expectations present value model for corporate stock prices produces a simple relation between the log dividend-price ratio and mathematical expectations of future log real dividend changes and future real discount rates. This relation can be tested using vector autoregressive methods. Three versions of the linearized model, differing in the measure of discount rates, are tested for U. S. time series 1871-1986: versions using real interest rate data, aggregate real consumption data, and return variance data. The results yield a metric to judge the relative importance of real dividend growth, measured real discount rates and unexplained factors in determining the dividend-price ratio.

Chapter 1 Labor supply of men: A survey

Abstract: Publisher Summary This chapter presents a survey on the labor supply of men. This survey of male labor supply covers the determinants of whether men work for pay in the labor market and, if so, the determinants of their hours of work. The chapter also discusses the work behavior of men prior to their retirement from the labor force. Moreover, even though there are noteworthy investigations into the labor supply of men in many different countries, this survey is restricted almost entirely to the Anglo-American literature. The chapter identifies the major time-series and cross-section empirical regularities in male labor supply behavior. It is these that any economic theory should be designed to address. The chapter presents the canonical static model of labor supply and then immediately proceeds to deal with the problems in applying this model at the aggregative level. The static model is amended to handle the situation of nonlinear budget constraints. The chapter concludes with an outline of the most popular life-cycle model of labor supply. The chapter also addresses the issues in and results from the estimation of the static model. Problems in specifying the model are first considered and then the results are presented from the U.S. nonexperimental literature, the British literature, and the U.S. experimental literature. The chapter also discusses the estimates from the applications of the life-cycle model.

The Rigidity of Prices

Abstract: This paper presents evidence on the amount of price rigidity that exists in individual transaction prices Using the Stigler-Kindahi data, I examine the behavior of individual buyers' prices for certain products used in manufacturing My most important findings are: 1The degree of price rigidity in many industries is significant It is not unusual in some industries for prices to individual buyers to remain unchanged for several years 2Even for what appear to be homogeneous commodities, the correlation of price changes across buyers is very low 3There is no evidence that there is an asymmetry in price rigidity In particular, prices are not rigid down-ward 4The fixed costs of changing price at least to some buyers seem trivial There are plenty of instances where small price changes occur 5The level of industry concentration is strongly correlated with rigid prices The more concentrated the industry, the longer is the average spell of price rigidity 6There appears to be a relationship between price rigidity, size of price change, and the length of time a buyer and seller deal with each otherI interpret the findings as evidence that it is erroneous to focus attention on price as the exclusive mechanism to allocate resources Nonprice rationing is not a fiction, it is a reality of business and may be the efficient response to economic uncertainty

Hysteresis in Unemployment

Abstract: The recent European experience of high persistent unemployment has led to the development of theories of unemployment hysteresis embodying the idea that the equilibrium unemployment rate depends on the history of the actual unemployment rate. This paper summarizes two directions of research on hysteresis that appear especially promising. Membership theories are based on the distinction between insiders and outsiders and explore the idea that wage setting is largely determined by firms' incumbent workers rather than by the unemployed. Duration theories explore the idea that the long term unemployed exert much less downwards pressure on wages than do the short term unemployed.

Search Method Use by Unemployed Youth

Abstract: In this paper I investigate the use of different search methods by unemployed youth. I present a job search model which shows that search method choices should be related to their costs and expected productivities, as well as other factors such as nonwage income and wage offer distributions. I then present empirical evidence on the use of these methods and their effects on employment outcomes. These results show that the most frequently used search methods, which are friends and relatives and direct applications without referral, are also the most productive in generating job offers and acceptances. Econometric evidence then shows that the number of methods used is affected by factors which presumably reflect market opportunities as well as income sources and needs. While the use of specific search methods respond differently to these factors, they are chosen in a manner which generates positive average effects on employment outcomes for those who use them. The results are thus consistent with the search model presented here.

The Pure Theory of Country Risk

Abstract: This paper attempts to survey, and to put into perspective, recent lterature that has analyzed the nature of credit relations between developed and developing countries.This analysis has made use of recent advances in the economics of information and strategic interaction. Traditional concepts of solvency and liquidity are of little help in understanding problems of soverign debt. Creditors do not have the means to seize the assets of a borrower in default. Hence the borrower who is expected eventually to repay his debts should be able to borrow to meet any current debt-service obligations. A problem that is essential to a theory of international lending is that of enforcement. The difficulty is one of ensuring that the two sides of a loan contract adhere to it, in particular that the borrower repays the lender and the lenders can commit themselves to penalize the borrower if he does not.

Multicountry, Multifactor Tests of the Factor Abundance Theory

Abstract: This paper presents conceptually correct tests of the Heckscher-Ohlin proposition that trade in commodities can be explained in terms of an interaction between factor input requirements and factor endowments. Most prior work that claims top resent tests of this hypothesis have used intuitive but inappropriate generalizations of the traditional two by two model to deal with a multidimensional reality. Moreover, prior work has in general used measurements on only two of the three variables(trade, factor input requirements and factor endowments) that are required for a proper test of the H-O theory.We derive an exact specification of the H-O interaction in a multicountry, multicommodity, multifactor world in the form of the Heckscher-Ohlin-Vanek (H-O-V) theorem which equates the factors embodied in net trade to excess factor supplies.This theorem implies sign and rank propositions analogous to those implicitly studied by Leontief, but it also implies hypotheses about the parameters linking factor contents and factor supplies. Accordingly, we conduct tests of the sign and rank propositions as well as several parametric hypotheses which permit various assumptions about measurement errors, nonproportional consumption and technological differences. Our analysis uses separately measured data on trade, factor input requirements and endowments for twenty-seven countries and twelve factors in 1967. Tests of the Leontief type sign and rank propositions sharply reject this facet of the H-O-V model. In particular, the sign of net factor exports infrequently predicts the sign of excess factor supplies and therefore does not systematically reveal factor abundance.The results from an extended set of tests conducted in a regression context reject the H-O-V hypothesis of an exact relationship between factor contents and national factor supplies. Support is found for the H-O--V assumption of homothetic preferences, but estimates of the parameters linking factor contents and factor supplies are found to differ significantly from their theoretical values. We find there is clear evidence that the departure of the estimated coefficients from their theoretical values is importantly related to differences across countries in the matrix of factor input requirements and, by implication, to violation of the assumption of factor price equalization. We also find that errors of measurement in both trade and national factor supplies are an important reason for rejection of the H-O-V hypothesis.

Political Parties and the Business Cycle in the United States, 1948-1984

Abstract: This paper tests the existence and the extent of a politically induced business cycle in the U.S. in the post-World War II period. The cycle described in this paper is different from the traditional "political business cycle" of Nordhaus. It is based on a systematic difference between the monetary policies of the two parties in a model with labor contracts. From an explicit optimization problem we derive a system of equations for output and money growth. Then we successfully test the non-linear restriction imposed by the theory on the parameters of the system of equations. We cannot reject the hypothesis that money growth has been systematically different under the two types of administration and that this difference contributes to explain output fluctuations.

The value of patents as indicators of inventive activity

Abstract: Introduction In this paper we present an overview of a series of studies pursued at the NBER during the last decade which used patent statistics to study different aspects of the economics of technological change. It consists of five substantive sections: a description of our firm level data; a report on the relationship between RD a report on the relationship between patents, the stock market value of firms, and their RD a summary of work on the estimation of the value of patent rights based on patent renewal data; and a description of the use of patent data to estimate the importance of R&D spillovers. A brief set of conclusions closes the paper. The NBER R&D data base and the growth of US firms in the 1970s A major achievement of the NBER project has been the development and construction of a large data set covering the economic and technological performance of most publicly traded US manufacturing companies from the early 1960s through the early 1980s. It is the result of a detailed match of publicly available sales, employment, investment, R&D, and balance sheet information from the Compustat tapes (based on company 10–K filings with the SEC) with data acquired from the US Patent Office on patents issued to all organizations between 1969 and 1982.

Research and Development and Intraindustry Spillovers: an Empirical Application of Dynamic Duality

Abstract: In this paper we estimate a model of production and investment based on the theory of dynamic duality and are particularly Interested in the effects of R&D spillovers and in calculating the social and private rates of return We identify and estimate three effects associated with the intraindustry R&D spillover First, costs decline as knowledge expands for the externality-receiving firms Second, production structures are affected, as factor demands change in response to the spillover Third, the rates of capital accumulation are affected by the R&D spillover These cost-reducing, factor-biasing and capital adjustment effects of the spillover are estimated for four industries The existence of R&D spillovers implies that the social and private rates of return to R&D capital differ We estimate that the social return exceeds the private return in each industry However, there is significant variation across industries in the differential between the social and private rates of return

Informal Job Search and Black Youth Unemployment

Abstract: In this paper I analyze how young black and white unemployed jobseekers use various methods of search, and the employment outcomes which result from their use.The focus is on distinguishing informal search methods (i.e.,friends and relatives or direct application without referral) from more formal ones in analyzing racial differences.The results show that the two informal methods of search account for about 90% of the difference in employment probabilities between white and black youth. This also accounts for 57-71% of the difference in unemployment rates between the two. Furthermore, most of these results reflect differences in the ability of these methods to generate job offers, as opposed to differences in search effort or job acceptance rates. However, our ability to explain these differences through personal, family, and household characteristics was generally quite limited.

The Allocation of Credit and Financial Collapse

Abstract: This paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders. It illustrates that (1) the allocation of credit is inefficient and at times can be improved by government intervention, and (2) small changes in the exogenous risk-free interest rate can cause large (discontinuous) changes in the allocation of credit and the efficiency of the market equilibrium. These conclusions suggests a role for government as the lender of last resort.

Maximum Likelihood Estimation of Generalized Ito Processes with Discretely Sampled Data

Abstract: In this paper, we consider the parametric estimation problem for continuous time stochastic processes described by general first-order nonlinear stochastic differential equations of the Ito type We characterize the likelihood function of a discretely-sampled set of observations as the solution to a functional partial differential equation The consistency and asymptotic normality of the maximum likelihood estimators are explored, and several illustrative examples are provided

Market Structure and Cyclical Fluctuations in U.S. Manufacturing

Abstract: The relevance of imperfect competition for models of aggregate economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization. Measuring properly the size of industry markups of price over marginal cost is important both for assessing the role of market structure and for determining the extent to which excess capacity is a significant feature accompanying imperfect competition in American industry. Using a panel data set on four-digit Census manufacturing industries, this paper expands recent work by Robert Hall on the importance of market structure for understanding cyclical fluctuations. We outline a methodology for estimating industry markups of price over cost and the influence of market structure on cyclical movements in total factor productivity. While we find evidence to support the proposition that price exceeds marginal cost in U.S. manufacturing, our results offer only limited support for the notion that markups are importantly related to differences in industry concentration, though the effect of unionization is important. Concentration effects are important only in industries producing durable goods or differentiated consumer goods. In addition, much of the estimated markup of price over marginal cost is accounted for by fixed costs related to overhead labor, advertising, and central office expenses; we do not find compelling evidence of substantial evidence of excess capacity in most industries.

Government Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom, 1701-1918

Abstract: The British data from the early 1700s through World War I provide an unmatched opportunity for studying the effects of temporary changes in government purchases. In this paper I examine the effects of these changes on interest rates, the quantity of money, the price level, and budget deficits. Temporary increases in government purchases--showing up in the sample as increases in military outlays during wartime--had positive effects on long-term interest rates. The effect on the growth rate of money (bank notes) was positive only during the two periods of suspension of the gold standard (1797-1821 and 1914-1918). As long as convertibility of bank notes into specie was maintained, there was no systematic relation of government spending to monetary growth. Similarly, the main interplay between temporary government spending and inflation occurred during the periods of suspension. Temporary changes in military spending accounted for the bulk of budget deficits from the early 1700s through 1918. This association explains the main increases in the ratio of the public debt to GNP, as well as the decreases that typically occurred during peacetime. Over the sample of more than two hundred years, I found only two examples of major budget deficits that were unrelated to wartime -- one associated with compensation payments to slaveowners in 1835-36 and the other with a political dispute over the income tax in 1909-10. Because of the "exogeneity" of these deficits, it is interesting that interest rates showed no special movements at these times.

News or Noise? An Analysis of GNP Revisions

Abstract: This paper studies the nature of the errors in preliminary GNP data,It first documents that these errors are large. For example, suppose theprelimimary estimate indicates that real GNP did not change over therecent quarter; then one can be only 80 percent confident that the finalestimate (annual rate) will be in the range from -2.8 percent to +2.8percent. The paper also documents that the revisions in GNP data are notforecastable, This finding implies that the preliminary estimates are theefficient given available information. Hence, the Bureau of EconomicAnalysis appears to follow efficient statistical procedures, in making itspreliminary estimates.

Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists

Abstract: No abstract is available for this paper.

Agency Costs, Collateral, and Business Fluctuations

Abstract: Bad economic times are typically associated with a high incidence of financial distress, e.g., insolvency and bankruptcy. This paper studies the role of changes in borrower solvency in the initiation and propagation of the business cycle. We first develop a model of the process of financing real investment projects under asymmetric information, extending work by Robert Townsend. A major conclusion here is that when the entrepreneurs who borrow to finance projects are more solvent (have more "collateral"), the deadweight agency costs of investment finance are lower. This model of investment finance is then embedded in a dynamic macroeconomic setting. We show that, first, since reductions in collateral in bad times increase the agency costs of borrowing, which in turn depress the demand for investment, the presence of these financial factors will tend to amplify swings in real output. Second, we find that autonomous factors which affect the collateral of borrowers (as in a "debt-deflation") can actually initiate cycles in output.