Showing papers in "Journal of Political Economy in 1972"

On the Concept of Health Capital and the Demand for Health

Abstract: The aim of this study is to construct a model of the demand for the commodity "good health." The central proposition of the model is that health can be viewed as a durable capital stock that produces an output of healthy time. It is assumed that individuals inherit an initial stock of health that depreciates with age and can be increased by investment. In this framework, the "shadow price" of health depends on many other variables besides the price of medical care. It is shown that the shadow price rises with age if the rate of depreciation on the stock of health rises over the life cycle and falls with education if more educated people are more efficient producers of health. Of particular importance is the conclusion that, under certain conditions, an increase in the shadow price may simultaneously reduce the quantity of health demanded and increase the quantity of medical care demanded.

Market Insurance, Self-Insurance, and Self-Protection

Abstract: The article develops a theory of demand for insurance that emphasizes the interaction between market insurance, “self-insurance,” and “self-protection.” The effects of changes in “prices,” income, and other variables on the demand for these alternative forms of insurance are alalyzed using the “state preference” approach to behavior under uncertainty. Market insurance and self-insurance are shown to be substitutes, but market insurance and self-protection can be complements. The analysis challenges the notion that “moral hazard” is an inevitable consequence of market insurance, by showing that under certain conditions the latter may lead to a reduction in the probabilities of hazardous events.

Education, Income, and Ability

Abstract: Current estimates of the contribution of education to economic growth have been questioned because they ignore the interaction of education with ability. Whether the neglect of ability differences in the analyses of the income-education relationship results in estimates that are too high was considered in an earlier paper by one of the authors (Griliches 1970), and a negative answer was conjectured. In this paper, we pursue this question a bit further, using a new and larger body of data. Unfortunately, a definitive answer to this question is hampered both by the vagueness and elasticity of "education" and "ability" as analytical concepts and by the lack of data on early (preschooling) intelligence. The data examined in this paper are based on a 1964 sample of U.S. military veterans. The variables measured include scores on a mental ability test, indicators of parental status, region of residence while growing up, school years completed before service, and school years completed during or after service. These have allowed us to inquire into the separate effects of parental background, intelligence, and schooling. The basic problem and analytical framework can be set out very simply. Let income be a linear function of education and ability, or, Y a + P1E + P(2G + u, where Y is income, E is education, G is ability,

Specific Human Capital: An Application to Quit Rates and Layoff Rates

Abstract: This study develops the concept of firm-specific human capital which results from training, search, and transfer investments of peculiar value to a particular firm. The effects of firm-specific human capital on firm turnover and wage policies are examined. The optimal sharing of such investments between firm and worker is explored. The important propositions that layoff rates and quit rates are negatively related to the firm's and worker's investments, respectively, in specific capital are tested using cross-section data for a broad set of manufacturing industries. The results support the hypotheses and reconcile past, apparently contradictory, empirical efforts along these lines.

Schooling and Inequality from Generation to Generation

Abstract: For at least half a century schooling has been the chosen instrument of American social reformers. More and better schooling has been seen as an antidote to the brutalization of industrial life. More equal access to schooling has been sought as a powerful vehicle for the equalization of economic opportunity, the redistribution of income, and the elimination of poverty. Until recently, the choice of education as the instrument of those who sought greater equality in the United States has not been based on any direct evidence of its efficacy in bringing higher incomes to the children of the poor. Rather, the popularity of educational reform among liberals and progressives stemmed from more political considerations: educational equalization seemed to offer a strategy for achieving the greater social equality that was politically viable. More equal education, it was confidently asserted, could achieve significantly greater equality of economic opportunity and incomes without challenging the basic economic institutions of society and without requiring any major redistribution of capital. Yet over the past decade, important empirical support has been forthcoming for those who see education as-to quote Horace Mann-"the great equalizer." First, the possibility of more equal schooling achieving a more equal distribution of income seemed to be confirmed by studies of the determinants of individual earnings.' The earnings functions estimated in these studies demonstrated a strong relationship between years of school-

Testing the Assumptions of Production Theory: A Nonparametric Approach

Abstract: We propose methods for testing the validity of such general hypotheses about production processes as quasi-concavity, monotonicity, and homotheticity from data on inputs and outputs (and through the use of duality from data on prices, profits, and costs). The tests are free from any particular parametrization of the production function and, since they are based on linear programming, are in principle easy to compute. They may be used to censor or modify data as well as to test assumptions of production theory.

Money, Debt, and Economic Activity

Abstract: vent output prices and output from adjusting instantaneously. Both the size of deficits and the method of financing affect output and prices. Some principal implications are derived. Several of these are also demonstrated, using a graph to show the interaction of asset markets, output markets, and the financing of the budget deficit. Some main implications of standard analysis are rejected. The basis for several "monetarist" conclusions is shown.

Comments on the Critics

Abstract: My reply to five scholars who have commented on my articles (1) restates the aim and purpose of these articles; (2) explains why the slope of the LM curve is not the key difference between monetarists and neo-Keynesians, and elaborates on what I consider to be the key difference; (3) defends my interpretation of Keynes's theory; (4) documents the existence of a distinctive Chicago tradition that had a great influence on my own work in the field of money; and (5) analyzes the quantity theory antecedents of my formulation of the demand function for money and of the role of money in the economy.

Economies of Scale and Customs Union Theory

Abstract: Internal economies of scale are incorporated systematically into customs union theory. The familiar concepts of trade creation and trade diversion remain relevant, but two new concepts are added, the costreduction effect and the trade-suppression effect. Each has a production and a consumption component. Two union countries facing given world prices from outside are assumed. The main analysis is partial equilibrium and verbal. Three cases are considered; initial production of the importable in both union countries, in one only. and in neither. Some account is taken of oligopoly, product differentiation, and general equilibrium in a multigood model.

An Econometric Analysis of Rent Control

Abstract: Rent control affects the allocation of resources and the distribution of well-being. In New York City in 1968, it is estimated that occupants of controlled housing consumed 4.4 percent less housing service and 9.9 percent more nonhousing goods than they would have consumed in the absence of rent control. The resulting increase in their real income was 3.4 percent. Poorer families received larger benefits than richer families. The cost of rent control to landlords was twice its benefit to their tenants. The estimates are produced within the framework of a simple general equilibrium model; the data are on thousands of families and their apartments.

Racial Discrimination and Trade Unionism

Abstract: Whether the presence of trade unionism in the U.S. economy exacerbates or mitigates the extent of labor market discrimination against black workers depends on the size of union/nonunion wage differentials for black and white workers as well as the extent to which black and white workers are unionized. This paper contains an analysis of the likely determinants of a union's policy regarding race and estimates of the effect of the presence of unionism on the average wage of black workers relative to the average wage of white workers under various types of union organizational structure. The results imply that in 1967 the ratio of black to white male wages might have been 4 percent higher in the industrial union sector and 5 percent lower in the craft union sector than they would have been in the absence of all unionism.

Earnings Profile: Ability and Schooling

Abstract: This study examines the role played by ability in determining earnings differentials along both the earnings profile for given levels of schooling attainment and across schooling levels. Information about these relationships is important for determining more precisely the quantitative contribution of schooling to earnings as well as the "technology" by which schooling increases earnings. The net earnings increment from schooling has been subject to some uncertainty because most studies have lacked data on ability. If people of higher ability have the capacity to earn more (at a given schooling level) and if they also tend, significantly, to acquire more schooling than others, the failure to take ability differences explicitly into account has two consequences: it leads one to overstate the gross contribution of schooling to earnings and to understate the opportunity cost of foregone earnings to high-ability persons who attain high levels of schooling. There is a well-documented, strong, positive relationship between earnings and schooling attainment, and the rising demand for (and expansion of) formal schooling seems to be significantly motivated by the expectation of higher earnings. However, there is little decisive evidence,

Domestic Resource Costs and Effective Protection: Clarification and Synthesis

Abstract: The concept of domestic resource cost (DRC), measuring the opportunity cost of net foreign exchange by activity, is systematically analyzed in relation to the more recent seemingly unrelated literature on the effective protective rate (EPR). The ex ante normative interpretations of DRC as a comparative advantage investment criterion, as well as its use in the ex post measurement of distortions, are discussed. A suggested reinterpretation of Corden's EPR procedure makes the two concepts essentially identical in theory, although still somewhat different in actual measurement and in their respective emphases on normative versus positive applications. This distinction may have some importance in the "substitution problem."

Friedman's Theoretical Framework

Abstract: Milton Friedman's contention that the crucial theoretical difference between Keynesians and monetarists is that Keynesians assume rigid prices is shown to be factually and logically wrong. Distinctively monetarist propositions and prescriptions depend not on price flexibility but on the assumed insensitivity of monetary velocity to interest rates. To avoid this assumption, Friedman's second "monetary theory of nominal income" takes interest rates as exogenous in the short run; but the model has strange inconsistencies and implications. Finally, Friedman's longrun quantity theory propositions are shown to apply only to economies where money is the sole exogenous nominal magnitude.

Time-Series Changes in Personal Income Inequality in the United States from 1939, with Projections to 1985

Abstract: Our commentators (henceforth P-S) cannot be faulted for pointing out a fact of which we are fully aware: the inclusion of the "weeks worked" variable in our model was not rigorous in the sense of explicitly formulating a dependence on human capital, labor supply, and other considerations. We preferred to leave this part of the story out for the time being. Work on this subject is only beginning at the NBER and elsewhere. The problems posed by P-S should be of value in such work. The specific functional form for the inclusion of weeks worked was adopted to facilitate the empirical application of the model. We phrased the insertion of W in a somewhat careless way in the beginning paragraph on our page 37. The sentence should read: "If E* is full-year earnings, actual annual earnings are Ei = E* W7, where W is the fraction of weeks worked during the year." Thus, r* is the full-time rate of return, and k, is defined as C,/E,*. At this level we do not see any particular problems arising with this formulation. The first sentence of the first paragraph on page 37 says, in effect, that the appropriate variables and parameters (including r and Eo) should be starred. Of course, there is no star on the left-hand side of our equation (4). It is calculated by P-S that our parameter estimates imply ko = 0.73, which is rather implausible. Actually, the appropriate coefficient of T is not r*k as they suggest, but r*ko + ko/ T* (1 + ko), as we show on page 38. The T' is the period of positive net investment, which is not assumed but implicit in the income profile. Its value is about 20 years. If so, ko = 0.44, and total "post-school year equivalents" of positive net investment K = 4.4, not 15 as P-S estimate. These estimates are not very secure, but not clearly outrageous. We should keep in mind that these as well as the "rate of return" estimates are not the main targets, but merely by-products of a much-simplified model whose purpose was to study time changes in the aggregate-income variance.

Technological Externalities and Common-Property Resources: An Empirical Study of the U.S. Northern Lobster Fishery

Abstract: This paper demonstrates the effect of technological externalities on the production of northern lobsters, a common-property resource. An increase in effort (that is, size of the industry) of 100,000 traps fished will depress landings per trap for the individual firm by 2.4 pounds. Therefore, the northern lobster industry produces so as to equate average revenue to long-run average cost. Approximately one-half of the present fishing effort would be needed to achieve economic efficiency or marginal cost pricing. The goal of allocative efficiency should be weighed against the strategy to provide somewhat greater employment, especially in rural areas where labor opportunity cost is relatively low.

Optimum Durability, Second-Hand Markets, and Planned Obsolescence

Abstract: Some casual evidence suggests and popular imagination maintains that planned obsolescence is an increasingly important feature of durable goods production in modern capitalist economies (for example, Packard 1961, chaps. 5-12). How often does one hear someone exclaim, "They don't make autos, houses, television sets, etc., which last as well as they did in father's day!" Popular explanations usually attribute such phenomena to the increasing significance of monopoly elements in the economy. In the light of this, we shall mean by "planned obsolescence" the production of goods which are less durable than would arise out of production by perfectly competitive industries.' In recent years, a number of attempts have been made to examine planned obsolescence in the context of economic models. Several authors namely, Martin (1962), Kleiman and Ophir (1966), Levhari and Srinivasan (1969), and Schmalensee (1970), have constructed models for a single durable good without substitutes. The inspiration for some of these

The Risk Element in Occupational and Educational Choices

Abstract: The study contains estimates of the coefficients of variation of income of scientists by age, level of education, and type of employment. The source of data is the 1966 National Register of Scientific and Technical Personnel. The analysis shows that the coefficient of variation tends to decrease as the level of education increases, and to be higher in private industry than in government or educational institutions. Incomes of scientists are found to be lognormally distributed. Estimates of the rate of return to education, which take into account risk differentials, are derived.

On Tuition and the Costs of Higher Education: Prolegomena to a Conceptual Framework

Abstract: What role can and should tuition play in the economics and financing of higher education in the United States? Central to my approach to this question is the belief that tuition is not now, but should be, a price in an economic sense. By this I mean that tuition should perform the function of rationing the available supply of higher educational services and of allocating scarce resources between the sector producing higher educational services (including graduate education and basic research) and the rest of the economy, as well as among different types of institutions of higher education, and even among different parts of the same institu-

Research and Development Costs and Returns: The U.S. Pharmaceutical Industry

Abstract: In this paper I present a simple model of new product development, based upon recent work in the economics of innovation. The model is applied to new prescription drug development and fitted to data for the U.S. pharmaceutical industry. The estimated R & D function relates number of new products developed to expenditure in real dollars. There is a variable measuring the depletion of research opportunities caused by past drug development. The returns function relates company earnings to a distributed-lag form of the number of new drugs introduced in different years. There is allowance for changes in market size. Costs and returns are compared, and the rate of return is computed.

Crime, Youth, and the Labor Market.

Abstract: This research utilizes a model permitting alternative partitioning of the population. classified by labor-market status, which links individual subsets to property crime. The study concentrates on eighteento nineteen-year-old white and nonwhite males. When distinguishing between those not working and all others, we find the former having significantly higher crime rates. Between labor force and not in the labor force, the latter group appears the most criminal. We conclude that economic opportunity is a key factor in generating youthful crime and that, properly weighted, participation rates may be a better measure of economic opportunity than simply unemployment rates.

Unemployment in the Great Depression: Is There a Full Explanation?

Abstract: Professor Rees's reactions to our econometric study of the U.S. labor market, recently published in this Journal (1970), raise a bewildering variety of issues. Many of these issues have to do with "important implications for policy" which "lurk close . . . to the surface," as Rees sees it, of our study. These implications, whatever they may be, remain submerged after one has read Rees's remarks. We shall not attempt to guess at their nature or respond to them. There are, however, two substantive issues raised by Rees which deserve further discussion. Rees asserts that "in this [that is, our] model unemployment arises from the recalcitrance of suppliers and not from deficiencies in demand." This highly misleading statement is corrected in section 1 of this note. Rees also raises the important empirical question of whether our theory does succeed in accounting for labor-market behavior during the period 1929-39. Further study on our part indicates that Rees's skepticism on this point is well founded: our hypothesis accounts for much, but not all, of the observed labor-market rigidity during this period. These results are reported in Section 2.

Additive Utility Functions with Double-Log Consumer Demand Functions

Abstract: Frisch (1959) proposed the adoption of direct additive utility functions to facilitate empirical demand analysis. Double-log demand functions resulting therefrom are composed of the real income effect and the relative price effect. I show that the income elasticities and the own-price elasticities of demand are (approximately) constant (an assumption almost invariably made in applications) when the utility function is a generalized CES type. The income elasticity of marginal utility is the overall elasticity of substitution with no cardinal implications that Frisch stressed upon. The paper examines how approximate the constancy assumption is. A comparison is made with the linear expenditure system that is a special case. I suggest that the implied similarity of utility functions among countries provides the missing basis for international comparisons of purchasing power parities.

Inflationary Finance and the Welfare Cost of Inflation

Abstract: This paper applies previous theoretical and empirical results on inflation and demand for money to a study of inflationary finance and the welfare cost of inflation. The amount of revenue generated by a steady inflation is derived as a function of the inflation rate and some underlying parameters. Empirically, the revenue-maximizing rate is on the order of 140 percent per month with the corresponding revenue approximating 15 percent of national income. It is argued that hyper-inflations become unstable when the revenue-maximizing rate is exceeded. Because inflation leads to higher transaction costs (resulting from greater payment frequencies and reduced use of "money" as a payments medium), there is a net social cost attached to inflationary finance. The model implies that marginal collection costs of inflationary finance exceed 50 percent for all positive rates of inflation-hence, alternative means of raising revenue should be socially preferable. The analysis also provides estimates of the social gain from moving to the optimum quantity of money as 1-3 percent of income.(This abstract was borrowed from another version of this item.)

The Heckscher-Ohlin Theorem in the Multi-Commodity Case

Abstract: Ronald Jones, in his seminal paper (1957) on Heckscher-Ohlin theory, has argued that, for the case of two countries, two factors, and several commodities, the Heckscher-Ohlin theorem would remain valid in the following weak sense: "Ordering the commodities with respect to the capital-labor ratios employed in production is to rank them in order of comparative advantage. Demand conditions merely determine the dividing line between exports and imports; it is not possible to break the chain of comparative advantage by exporting, say, the third and fifth commodities and importing the fourth when they are ranked by factor intensity" (p. 85). It is easy to show, however, that this proposition, although correct for the case where factor prices are not equalized, is untenable as literally stated. When factor-price equalization is realized, a not unimportant case, a variety of crisscrossings are possible.1 Thus, let there be two countries, I and II, with endowments of two factors, K and L, as shown in figure 1 by the two rays from the origin, such that Country I is K-abundant and Country II is L-abundant, in the physical sense. Let us also assume that there are four commodities, w, x, y, and z, all of them characterized by linearly homogeneous production functions with the standard restrictions. We also assume that the strong Samuelson factor-intensity rankings obtain, such that the four commodities can be ordered according to their K/L ratios unambiguously. Let the K/L ratios decline successively for commodities w, x, y, and z. Using the Lerner-Findlay-Grubert technique, we can now take the case

Estimates of Labor Aggregation Functions

Abstract: This paper first describes the estimation of detailed aggregation functions for labor, using both occupational and educational classifications, following the lines pioneered by Bowles but using more powerful statistical techniques and cross-section data of higher quality (for states within the United States, as opposed to countries) and greater quantity. It then shows how the effect of technical progress on the demand for different kinds of labor may be modeled by means of shift parameters within the aggregation function, and provides estimates for them and the other parameters of the aggregation function using time series data for the United States as a whole. The results assembled in the paper indicate that, for the purpose of estimating total growth in output due to labor, a time-dependent CES function with a fine classification of labor should yield the most accurate predictions, provided that the shift parameters can be estimated. Otherwise, there is little to be gained by going beyond wage-weighted linear aggregation. For educational planners, the most obvious implication of the results is that the manpower requirements approach should be abandoned. They suggest that rate-ofreturn analysis with constant relative wage rates should be a less misleading tool for planning, at least in the short run. However, since such analysis is sensitive to changes in wage differentials, and since these in turn are sensitive to the specification of the aggregation structure, it would be much better still to use the CES function approach to obtain a feedback relationship between the growth of the different levels of the educational system and the rates of return to them, via the growth of the labor force and the structure of wages.

Peak-Load Pricing under Regulatory Constraint

Abstract: Peak-load pricing principles are developed for the profit-maximizing firm which is subject to one of three alternative methods of regulatory constraint. A comparison of the Kuhn-Tucker conditions which arises in the various cases indicates that the method of regulation can have a substantial effect on the distribution of price reductions between peak and off-peak users. Under regulation limiting rate of return on capital investment, the price reductions are received entirely by peak-period users. In contrast, when regulation limits profit per unit or return on cost, there are price reductions for all users.

Friedman on the Quantity Theory and Keynesian Economics

Abstract: The article is based on textual evidence from the quantity-theory and Keynesian literature. It shows, first, that the conceptual framework of a portfolio demand for money that Friedman denotes as the "quantity theory" is actually that of Keynesian economics. Conversely, Friedman detracts from the true quantity theory by stating that its formal short-run analysis assumes real output constant, while only prices change. Friedman also incorrectly characterizes Keynesian economics in terms of absolute price rigidity. He does this by overlooking the systematic analysis by Keynes and the Keynesians of the role of downward wage flexibility during unemployment, and of the "inflationary gap" during full employment. Otherwise Friedman's interpretation of Keynes is the standard textbook one of an economy in a "liquiditytrap" unemployment equilibrium. The author restates his alternative interpretation of Keynesian economics in terms of unemployment disequilibrium.

A Keynesian View of Friedman's Theoretical Framework for Monetary Analysis

Abstract: Despite Friedman's numerous trenchant confrontations with "Keynesians," he has never compared his analytical framework with the "Theory of a Monetary Economy" developed by Keynes The purpose of this paper is, therefore, to enumerate a few of the more fundamental conceptual differences between the monetary analysis of Keynes and that of Friedman Keynes's analysis involves (1) the concept of uncertainty in the Knight-Keynes sense, (2) the inapplicability of a Walrasian system to a real world production economy where false trades occur, and (3) the essential properties of money which follow from the existence of uncertainty This paper shows that recognition of these conceptual differences leads to significantly different specification of the demand for money and its supply aspects in the Keynesian system compared with Friedman's theoretical framework In response to some critics, Professor Friedman has elaborated and made more explicit his views on "A Theoretical Framework for Monetary Analysis," a framework which he claims "almost all economists would accept" (Friedman 1970a, p 234) Undoubtedly, this new presentation will evoke wide praise and attention; and the obvious future influence of Friedman's theoretical framework on economic thinking makes a critical examination of certain key elements and assertions of his analysis important Before the dialogue becomes immersed in a critical discussion of the many fine analytical points raised by Friedman, it is essential to begin with a statement of some of the fundamental conceptual differences between the analytical monetary structure developed by Keynes and the model presented by Friedman, for despite Friedman's numerous trenchant confrontations with "Keynesians," he has never compared his analytical

Economic Man in the Classroom

Abstract: Student turmoil and resource pressures have recently prompted a reexamination of the university's role. Among a number of basic questions in the current reexamination, perhaps the most crucial concerns the studentfaculty relationship. In particular, the impact of faculty upon students commands attention because, in the end, this would seem to be the university's primary concern.' In essence, the university's production function has faculty as the principal input; what happens to the student is the principal output. Such output has a number of dimensions, of which \"learning\" is only one. Unfortunately, objective output measurements for learning do not seem to be readily available to the university, save by use of some standardized learning-proxy measure such as Graduate Record Examination scores (Berls 1969). In any event, difficulties with output measurement have tended to shift attention to the input side of the production function. Assessment of teaching effectiveness clearly represents a significant facet of input measurement. Political difficulties with administrative or peer evaluations may suggest the preferability of student evaluations of teachers (hereafter SETS), and, correspondingly, we find a wave of enthusiasm for this approach.2 The present paper is concerned with a potential cost of this method. Central Michigan University recently instituted a comprehensive and compulsory SET program. The program, as far as we have been able to find, has few complete parallels elsewhere. All faculty are evaluated in all