Showing papers in "Journal of Economic Perspectives in 1998"

Integration of Trade and Disintegration of Production in the Global Economy

Abstract: The last few decades have seen a spectacular integration of the global economy through trade. The share of imports (or exports) in GDP for the United States has approximately doubled in the last two decades, and if intra-OECD trade is omitted, the same is true for the OECD countries generally. Trade does remain a seemingly small fraction of U.S. GDP. This is not surprising in view of the fact that large economies trade less with others, and more internally. But the modest share of trade in total national income hides the fact that merchandise trade as a share of merchandise value-added is quite high for the United States and the OECD, and has been growing dramatically. In fact, if one focuses on merchandise trade relative to value-added, the world is much more integrated today than at any time during the past century. The rising integration of world markets has brought with it a disintegration of the production process, in which manufacturing or services activities done abroad are combined with those performed at home. Companies are now finding it profitable to outsource increasing amounts of the production process, a process which can happen either domestically or abroad. This represents a breakdown in the vertically-integrated mode of production—the so-called ‘‘Fordist’’ production, exemplified by the automobile industry—on which American manufacturing was built. A number of prominent researchers have referred to the importance of the idea that production occurs internationally: Bhagwati and Dehejia (1994) call this ‘‘kaleidoscope comparative advantage,’’ as firms shift location quickly; Krugman

Learning from the behavior of others : conformity, fads, and informational cascades

Abstract: Learning by observing the past decisions of others can help explain some otherwise puzzling phenomena about human behavior. For example, why do people tend to converge on similar behavior? Why is mass behavior prone to error and fads? The authors argue that the theory of observational learning, and particularly of informational cascades, has much to offer economics, business strategy, political science, and the study of criminal behavior.

State versus Private Ownership

Abstract: Private ownership should generally be preferred to public ownership when the incentives to innovate and to contain costs must be strong. In essence, this is the case for capitalism over socialism, explaining the 'dynamic vitality' of free enterprise. The great economists of the 1930s and 1940s failed to see the dangers of socialism in part because they focused on the role of prices under socialism and capitalism and ignored the enormous importance of ownership as the source of capitalist incentives to innovate. Moreover, the concern that private firms fail to address 'social goals' can be addressed through government contracting and regulation, without resorting to government ownership. The case for private provision only becomes stronger when competition between suppliers, reputational mechanisms, the possibility of provision by private not-for-profit firms, as well as political patronage and corruption, are brought into play.

The Boundaries of the Firm Revisited

Abstract: Why do firms exist? What is their function, and what determines their scope? These remain the central questions in the economics of organization. They are also central questions for business executives and corporate strategists. The worldwide volume of corporate mergers and acquisitions exceeded $1.6 trillion in 1997. It is hard to imagine that so much time, effort and investment bankers’ fees would be spent on adjusting firm boundaries unless there was some underlying economic gain. Indeed, the exceptional levels of merger and acquisition activity over the past two decades are a strong indication that economically significant forces do determine organizational boundaries. The study of firm boundaries originated with the famous essay by Coase (1937), who raised the question of why we observe so much economic activity inside formal organizations if, as economists commonly argue, markets are such powerful and effective mechanisms for allocating scarce resources. Coase’s answer was in terms of the costs of transacting in a world of imperfect information. When the transaction costs of market exchange are high, it may be less costly to coordinate production through a formal organization than through a market. In large part thanks to the work of Williamson (1975, 1985), recent decades have seen a resurgence of interest in Coase’s fundamental insight that firm boundaries can be explained by efficiency considerations. Our understanding of firm boundaries has been sharpened by identifying more precisely the nature and sources of transaction costs in different circumstances. In the process, the focus of

Incentives in Organizations

Abstract: n 1975, Steven Kerr published "On the Folly of Rewarding A, While Hoping for B. " The argument was simple: you get what you pay for. Kerr distilled this unifying theme from a disparate set of examples involving politicians, soldiers, doctors, orphanage directors, professors, and students, as well as manufacturing and clerical employees and even human-resource managers. From these examples, Kerr (pp. 77980) concluded that two main causes of distorted incentives are "fascination with an 'objective' criterion, [where] individuals seek to establish simple, quantifiable standards against which to measure and reward performance" and "overemphasis on highly visible behaviors, [when] some parts of the task are highly visible while others are not." It took agency theory 15 years to express Kerr's title, not to mention to evaluate or extend his conclusions. During this period, agency theory was obsessed with the tradeoff between incentives and insurance, even though clear-eyed observations like Kerr's about the design and performance of real incentive contracts suggested that several other issues are at least as important. Fortunately, recent work has brought agency theory not only to Kerr's position but beyond. In this paper I summarize four new strands in agency theory that help me think about incentives in real organizations. As a point of departure, I begin with a quick sketch of the classic agency model. I then discuss static models of objective performance measurement that sharpen Kerr's argument; repeated-game models of subjective performance assessments; incentives for skill development rather than simply for effort; and incentive contracts between versus within organizations. I con

Understanding the "Family Gap" in Pay for Women with Children

Abstract: As the gender gap in pay between women and men has been narrowing, the 'family gap' in pay between mothers and nonmothers has been widening. One reason may be the institutional structure in the United States, which has emphasized equal pay and opportunity policies but not family policies, in contrast to other countries that have implemented both. The authors now have evidence on the links between one such family policy and women's pay. Recent research suggests that maternity leave coverage, by raising women's retention after childbirth, also raises women's levels of work experience, job tenure, and pay.

Are Cities Dying

Abstract: This paper organizes a discussion of the costs and benefits of cities around the question: Are cities becoming obsolete? While minimizing transport costs for manufactured goods no longer justifies the existence of cities, they still facilitate the division of labor and the flow of ideas. Cities' higher housing, commuting, and pollution costs seem stable over time. Only the costs associated with urban poverty may increase and these costs do not effect many newer cities. Although many older cities will continue their decline, the future of the urban form seems surprisingly bright.

What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading

Abstract: Stable URL:http://links.jstor.org/sici?sici=0895-3309%28199822%2912%3A3%3C69%3AWCWLFT%3E2.0.CO%3B2-TThe Journal of Economic Perspectives is currently published by American Economic Association.Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtainedprior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content inthe JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained athttp://www.jstor.org/journals/aea.html.Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission.The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academicjournals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers,and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community takeadvantage of advances in technology. For more information regarding JSTOR, please contact support@jstor.org.http://www.jstor.orgTue Jun 26 16:25:17 2007

Urban Diversity and Economic Growth

Abstract: At the risk of some simplification, it is possible to identify four periods of intense study of cities by economists. Each of these has led to an increased understanding of the economics of urban areas and the unique role played by cities in the modem economy. The first of these periods occurred in the decade after World War I—only about ten years after the truck revolutionized the transport of goods within urban areas. This period included the first systematic empirical analysis of the forces affecting the location of firms and households within cities. Robert Murray Haig (1926) and a number of other microeconomists at Columbia analyzed the spatial pattems of manufacturing activity in lower Manhattan and in the rest of New York City. Haig jmd his colleagues devoted considerable attention to "where things 'belong' in an urban area" (p. 402), providing the first systematic economic analysis of urban spatial structure. For example, they analyzed the garment industry, concluding that it was destined "by nature" to disperse north of 14th Street, and predicting that it would follow the estabhshed spatial pattem of the cooperage (barrelmaking) industry. Standardization in size and quality of barrels had meant that identical barrels could be made throughout the New York metropolitan area, even in New Jersey, and the introduction of the truck meant that they could be transported cheaply throughout the region and exported. The second of these periods—though not in chronological order—began in the mid-1960s. It formalized many of the insights about location incentives within urban areas which had been uncovered a half century before, mixed them with the logic of Heinrich von Thunen's (1826) ancient theories about agricultural crops and land values, and applied them to the hotisehold sector. The works of William Alonso (1964)

Evidence on Discrimination in Employment: Codes of Color, Codes of Gender

Abstract: There is substantial racial and gender disparity in the American economy. As we will demonstrate, discriminatory treatment within the labor market is a major cause of this inequality. The evidence is ubiquitous: careful research studies that estimate wage and employment regressions, help-wanted advertisements, audit and correspondence studies, and discrimination suits that are often reported by the news media. Yet, there appear to have been periods of substantial reductions in economic disparity and discrimination. For example, Donohue and Heckman provide evidence that racial discrimination declined during 1965–1975.1 Gottschalk has produced statistical estimates that indicate that discrimination against black males dropped most sharply between 1965 and 1975, and that discrimination against women declined during the interval 1973–1994.2 But some unanswered questions remain. Why did the movement toward racial equality stagnate and eventually decline after the mid-1970s? What factors are most responsible for the remaining gender inequality? What is the role of the competitive process in the elimination or reproduction of discrimination in employment?

What Has Economics to Say about Racial Discrimination

Abstract: Stable URL:http://links.jstor.org/sici?sici=0895-3309%28199821%2912%3A2%3C91%3AWHETSA%3E2.0.CO%3B2-IThe Journal of Economic Perspectives is currently published by American Economic Association.Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtainedprior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content inthe JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained athttp://www.jstor.org/journals/aea.html.Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission.JSTOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. Formore information regarding JSTOR, please contact support@jstor.org.http://www.jstor.orgThu Apr 26 15:31:49 2007

The Global Capital Market: Benefactor or Menace?

Abstract: This paper reviews the theoretical functions, history, and policy problems raised by the international capital market. The goal is to offer a perspective on both the considerable advantages the market offers and on the genuine hazards it poses, as well as on the avenues through which it constrains national policy choices. A duality of benefits and risks is inescapable in the real world of asymmetric information and imperfect contract enforcement. I argue, however, that in confronting the global capital market there is no reason to depart from conventional economic wisdom. The way to maximize net benefits is to encourage economic integration while attacking concomitant distortions and other unwanted side-effects at, or close to, their sources.

An Interim Evaluation of Sulfur Dioxide Emissions Trading

Abstract: ide IV of the 1990 Clean Air Act Amendments established the first large-scale, long-term environmental program to rely on tradable emissions permitscalled "allowances" in this program-to control pollution. This program was designed to cut acid rain by reducing sulfur dioxide (SO2) emissions from electric generating plants to about half their 1980 level, beginning in 1995. It is of interest both as a response to an important environmental issue and as a landmark experiment in environmental policy. This experiment comes at a particularly important time, since emission trading is under serious consideration, with strong U.S. backing, for use to deal with global climate change by curbing emissions of carbon dioxide (CO2). The economic stakes in climate change surpass those in acid rain by several orders of magnitude (Intergovernmental Panel on Climate Change, 1996). This article summarizes the results to date of our ongoing empirical analysis of compliance costs and allowance market performance under the U.S. acid rain program.'

Space: The Final Frontier

Abstract: Traditionally, until the early 1990s, spatial economics -- the study of where economic activity takes place and why -- was pretty much neglected. Even now not one of the best-selling introductory textbooks in economics contains a single index entry for "location," "space," or "regions." In the last six or seven years, however, interest in spatial economics has surged. In this article I will try to summarize briefly the reasons for that surge; the key elements of the so-called "new economic geography;" the current state of research; and the prospects and difficulties facing this subfield of economics.

Consumer Prices, the Consumer Price Index, and the Cost of Living

Abstract: After presenting major findings and recommendations, the CPI Commission reiterates the estimate of a 1.1 percentage point per annum upward bias. It rejects the contention that the BLS already makes substantial corrections for quality change; that quality improvements and new products accrue only to the rich; and that procedures to make more extensive quality adjustments, valuations of new products, and adjustments for commodity and outlet substitution are impractical. The bias in the CPI can be sharply reduced, as the authors detail in this paper. Coauthors are Ellen R. Dulberger, Robert J. Gordon, Zvi Griliches, and Dale W. Jorgenson.

Recent Trends in the Size Distribution of Household Wealth

Abstract: Based on the Survey of Consumer Finances, the distribution of wealth in the United States became much more unequal in the 1980s and that trend continued, albeit at a slower pace, in the 1990s. The only households that saw their mean net worth rise in absolute terms between 1983 and 1995 were those in the top 20 percent and the gains were particularly strong for the top one percent. All other groups were particularly strong for the top one percent. All other groups suffered real wealth losses, including the median household, and declines were particularly precipitous at the bottom. Racial disparities widened, and young households also lost out over this period.

Distinguished Lecture on Economics in Government: The Private Uses of Public Interests: Incentives and Institutions

Abstract: As a long-time student of the public sector, I welcomed the opportunity to come to Washington as a member of the Council of Economic Advisers and later to become the Chairman of the Council, partly because it gave me an opportunity to study at first hand this immensely important part of our economy and society and to test my ideas against the reality of government in action. To be sure, I came also as an activist, if not with a fully articulated agenda, at least with a view about what it was that government should, and should not be doing. My reference point was the fundamental theorems of welfare economics which, as some describe them, proved that the market left to itself would produce efficient allocations. Many saw in these theorems the vindication of Adam Smith’s faith in the invisible hand leading the self-interested decisions of each person to maximize the well-being of the nation as a whole. Today, many of us look at the fundamental theorem not as a description of the world, but as an explication of the conditions under which a market equilibrium will be Pareto efficient. These conditions are quite strong. The importance of some of the more explicit assumptions—like the lack of externalities and the completeness of markets—has long been known. In the last two decades, we have explored much more seriously the consequences of the informational assumptions implicit in the belief that markets are efficient. In particular, it has been shown that in the presence of imperfect information or incomplete markets, the economy will not be Pareto efficient; in other words, there Joseph Stiglitz is Senior Vice President and Chief Economist, World Bank, Washington, D.C. Stiglitz was a member of the Council of Economic Advisers from 1993–95, and chairman

Evidence on Discrimination in Mortgage Lending

Abstract: Much of the controversy about whether mortgage lenders discriminate against minorities can be explained in terms of the confusion about how to define discrimination. Based on the legal definition, careful studies of loan denial rates, such as that done by the Federal Reserve Bank of Boston, represent an appropriate method for testing for discrimination by lenders. Based on that study, it is quite clear that lenders discriminate. The fact that minorities have higher default rates on average than whites is irrelevant to the interpretation of the race coefficient in such models. Nonetheless, more research on and discussion about the relationship between the race of the applicant and delinquencies, defaults, and losses would be desirable.

U.S. Industry Adjustment to Economic Deregulation

Abstract: conomic deregulation does not happen overnight. It takes time for lawmakers and regulators to dismantle regulatory regimes, and then it takes more time for the deregulated industries to adjust to their new competitive environment. Federal regulatory agencies and the U.S. Congress began liberalizing pricing, entry, and exit in the transportation, financial, energy, and communications industries during the mid-1970s. But while some smaller industries such as intercity bus transportation and air cargo have been fully deregulated during that time, the only major American industries fully deregulated to date are airlines and motor carriers. As to the pace of industry adjustment, consider airlines. Economic deregulation of the airline industry began in 1974 when the Civil Aeronautics Board first encouraged experiments with discount fares. It was completed in 1983 when all regulations on fares, entry, and exit were eliminated. Yet more than 20 years after the deregulatory process began, the airline industry continues to shed inefficiencies that accumulated over decades of regulation and to find new ways to market their service. Indeed, the airlines' latest marketing innovation-selling discount fares on the Internet-would be illegal if fares were still regulated. It is not surprising that deregulated (or partially deregulated) industries are slow to achieve maximum efficiency. When regulatory restrictions on pricing, operations, and entry (especially from new firms), have been enforced for decades, managers and employees of regulated firms settle into patterns of inefficient production and missed opportunities for technological advance and entry into new markets. Deregulation frees an industry from the state's control over prices, entry, and exit, although, of course, firms are still subject to antitrust laws and safety regulations. After deregulation, some costs usually fall in short order, but it takes

Rankings of U.S. Economics Departments

Abstract: Economics departments in the United States are ranked using the criterion of publication in a set of eight leading journals. The publication period is 1990-94 inclusive, and faculty assignments to departments are for fall semester 1995. The ranking is compared with the publication-based rankings of Conroy-Dusansky, which it updates, and Scott-Mitias, as well as with the survey-based rankings of the National Research Council and of U.S. News and World Report. Important issues considered include current accuracy of software matching using electronic indexes, objectivity of criteria, contemporaneity of survey response, and correlations between rankings.

Evidence on Discrimination in Consumer Markets

Abstract: Economists have contributed to the measurement of racial and ethnic discrimination in consumption and to the identification of its causes, especially in housing markets and car sales. To test the hypothesis that discrimination exists, economists have turned to regression analysis and to audits, a matched-pair survey technique. Economists also have developed audit-based measures of the incidence and severity of discrimination. Audit studies find continuing high levels of discrimination against minorities in the marketing of available housing and in car prices. Audit studies also find that discrimination can be caused both by economic agents' prejudice and by their search for profits.

Conflicts and Choices in Biodiversity Preservation

Abstract: The purpose of this article is to examine the preservation of biodiversity as an economic problem. Using a very simple prototype model, the authors discuss how to include diversity in the objective function and how to develop a simple cost-benefit ranking criterion for ordering priorities. Then they analyze data on endangered species preservation decisions in the United States to shed light on the conformity of theory with practice. A basic theme is that the core issue in biodiversity preservation today is the fuzziness of the objective function.

Economics of the Endangered Species Act

Abstract: , where he wrote: ‘‘By these means can the seductive little beauties, whetherof the feathered, furred, or scaly tribe . . . be preserved through endless time inundiminished abundance, furnishing the incentive that leads us away from our dullbooks or wearying cares, the crowded streets, the congregations of eager men, thetrials and excitement of business, . . . strengthening our nerves, renewing our holdof life, and elevating our moral nature.’’The Endangered Species Act is probably the most comprehensive of all ourenvironmental laws. It is often portrayed as the exemplar of ‘‘prohibitive policy . . .one of the most extreme forms of government intervention’’ (Yaffee, 1982). Assuch, it is no wonder the Act has proven controversial. Although the benefits ofprotecting endangered species accrue to the entire nation, a significant fraction ofthe costs imposed by the Act are borne by private landowners. About 90 percent ofthe nearly 1,100 species of plants and animals listed as endangered or threatenedunder the Act are found on private land. The combination of broad benefits andconcentrated costs can fan political firestorms, and many landowners complain thatthe costs of complying with the Act are too high (GAO, 1995a). The pressure toanswer the question of whether these costs exceed the social benefits has thrusteconomics into the heat of the debate over reauthorization of the EndangeredSpecies Act.

Corporate finance, the theory of the firm and organizations

Abstract: In his classic 1937 article, ‘‘The Nature of the Firm,’’ Ronald Coase asked one of the most fundamental questions in economics: Why are there firms? Or, in Coase’s words, ‘‘If production could be carried out without any organisation at all, well might we ask, why is there any organisation?’’ Initially, few economists seemed interested in answering Coase’s question, but it is now one of the central questions in economic theory, industrial economics and management strategy. Five years before the publication of Coase’s article, Adolf Berle and Gardiner Means (1932) published their now famous book, The Modern Corporation and Private Property. Berle and Means documented that a large portion of corporate assets were controlled by managers with minimal ownership stakes in their firms. Like Coase, they raised a fundamental question about the functioning of firms: Will corporate managers continue to act in the interest of investors despite their small ownership stakes? Understanding the agency costs stemming from the ‘‘divorce of ownership from control’’ is now the central issue in corporate finance, and has been for some time. Over half a century after these famous works, we have some of the answers to these questions. Williamson (1975), Klein, Crawford, and Alchian (1978), Grossman and Hart (1986), and Hart and Moore (1990) have made substantial progress answering Coase’s question. Alchian and Demsetz (1972), Mirrlees (1976), Jensen

Index Number Issues in the Consumer Price Index

Abstract: he Boskin Commission has fulfilled a useful purpose. There is now un-precedented public interest in price measurement issues and an increasedawareness on the part of academics about the difficult problems involvedin measuring price change in a dynamic economy. There is also increased coop-eration between economists and statisticians in attempting to solve these problems.This comment offers some perspectives on the magnitude of the differences be-tween the fixed base Laspeyres price index that statistical agencies produce and atheoretical cost of living index, along with some thoughts about what can be doneto reduce these differences or ‘‘biases.’’

Getting Prices Right: What Should Be Done?

Abstract: Much of the profession accepts that the CPI likely overstates the rate of increase of the cost-of-living. It is less clear that there are sound and feasible steps that the BLS can adopt to improve matters in the short run. There are unresolved conceptual and identification problems in the measurement of quality. Superlative price indexes are not feasible, and feasible approximations are not superlative, and may not even be better. The need for a single index that aggregates over heterogeneous consumers with different incomes, tastes, and needs casts serious doubt on the cost-of-living approach.

Takings, Compensation and Endangered Species Protection on Private Lands

Abstract: Preserving endangered species on private land benefits the public, but may confer cost on landowners if property is 'taken.' Government compensation to landowners can offset costs, although the Endangered Species Act does not require compensation. The authors survey private economic incentives for species preservation created by alternative property rights and compensation regimes. Compensation will effect investments in land and the willingness of landowners to collect and impart information about their land's preservation value. The authors also address government incentives and how deadweight costs of compensation will influence design of property rights, and how government's susceptibility to interest group pressure may cause inefficient preservation.

Globalization, Labor Markets and Policy Backlash in the Past

Abstract: The late nineteenth and twentieth centuries have many things in common. Both periods recorded fast growth, convergence, and labor-market integration between OECD members. Both periods witnessed intense debate about who gained and who lost from globalization. Furthermore, the earlier period saw a retreat from global liberalism long before the interwar deglobalization disaster. Did globalization of that time plant seeds of its own destruction? Are there lessons for the present?

Discrimination in the Post-Civil Rights Era: Beyond Market Interactions

Abstract: This comment argues that discrimination against blacks remains important, especially in labor markets, but that its extent is modest both by historical standards and in relation to supply-side racial disparities It contends that the racial skills gap is endogenous, reflecting the effects of historical and ongoing discrimination; and that the moral obligation to reduce disparities in skills between the races is no less than the obligation to fight market discrimination Finally, it suggests that imperfect information may be a more pervasive and intractable cause of racial discrimination today than is behavior based on agents' purported distaste for associating with blacks

Quality Change in Price Indexes

Abstract: Price indexes provide the fundamental building blocks for measuring the general price level along with real incomes and real output. But the most important single price index for the United States, the CPI, has been criticized as significantly underestimating the pace of quality change. This paper sketches the issues involved in the measurement of quality change in price indexes. It reviews the theory of quality change, discusses how the Bureau of Labor Statistics deals with quality change, and provides examples of measurement issues in practice. It concludes with a proposal to resolve the massive uncertainties in this area.