Showing papers in "Journal of Political Economy in 1974"

Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition

Abstract: A class of differentiated products is completely described by a vector of objectively measured characteristics. Observed product prices and the specific amounts of characteristics associated with each good define a set of implicit or "hedonic" prices. A theory of hedonic prices is formulated as a problem in the economics of spatial equilibrium in which the entire set of implicit prices guides both consumer and producer locational decisions in characteristics space. Buyer and seller choices, as well as the meaning and nature of market equilibrium, are analyzed. Empirical implications for hedonic price regressions and index number construction are pointed out.

Are Government Bonds Net Wealth

Abstract: The assumption that government bonds are perceived as net wealth by the private sector is crucial in demonstrating real effects of shifts in the stock of public debt. In particular, the standard effects of "expansionary" fiscal policy on aggregate demand hinge on this assumption. Government bonds will be perceived as net wealth only if their value exceeds the capitalized value of the implied stream of future tax liabilities. This paper considers the effects on bond values and tax capitalization of finite lives, imperfect private capital markets, a government monopoly in the production of bond "liquidity services," and uncertainty about future tax obligations. It is shown within the context of an overlapping-generations model that finite lives will not be relevant to the capitalization of future tax liabilities so long as current generations are connected to future generations by a chain of operative intergenerational transfers (either in the direction from old to young or in the direction from young to old). Applications of this result to social security and to other types of imposed intergenerational transfer schemes are also noted. In the presence of imperfect private capital markets, government debt issue will increase net wealth if the government is more efficient, at the margin, than the private market in carrying out the loan process. Similarly, if the government has monopoly power in the production of bond "liquidity services," then public debt issue will raise net wealth. Finally, the existence of uncertainty with respect to individual future tax liabilities implies that public debt issue may increase the overall risk contained in household balance sheets and thereby effectively reduce household wealth.(This abstract was borrowed from another version of this item.)

Advertising as Information

Abstract: This paper tries to show how the major features of the behavior of advertising can be explained by advertising's information function. For search qualities advertising provides direct information about the characteristics of a brand. For experience qualities the most important information conveyed by advertising is simply that the brand advertises. This contrast in advertising by these qualities leads to significant differences in its behavior. How does advertising provide information to the consumer? The producer in his advertising is not interested directly in providing information for consumers. He is interested in selling more of his product. Subject to a few constraints, the advertising message says anything the seller of a brand wishes. A mechanism is required to make the selling job of advertising generate information to the consumer. [Авторский текст]

A Theory of Social Interactions

Abstract: This essay incorporates a general treatment of social interactions into the modern theory of consumer demand. Section 1 introduces the topic and explores some of the existing perspectives on social interactions and their importance in the basic structure of wants. In Section 2, various characteristics of different persons are assumed to affect the utility functions of some persons, and the behavioral implications are systematically explored. Section 3 develops further implications and applications in the context of analyzing intra-family relations, charitable behavior, merit goods and multi-persons interactions, and envy and hatred. The variety and significance of these applications is persuasive testimony not only to the importance of social interactions, but also to the feasibility of incorporating them into a rigorous analysis.

Family Investments in Human Capital: Earnings of Women

Abstract: It has long been recognized that consumption behavior represents mainly joint household or family decisions rather than separate decisions of family members. Accordingly, the observational units in consumption surveys are "consumer units," that is, households in which income is largely pooled and consumption largely shared. More recent is the recognition that an individual's use of time, and particularly the allocation of time between market and nonmarket activities, is also best understood within the context of the family as a matter of interdependence with needs, activities, and characteristics of other family members. More generally, the family is viewed as an economic unit which shares consumption and allocates production at home and in the market as well as the investments in physical and human capital of its members. In this view, the behavior of the family unit implies a division of labor within it. Broadly speaking, this division of labor or "differentiation of roles" emerges because the attempts to promote family life are necessarily constrained by complementarity and substitution relations in the household production process and by comparative

Social Security, Induced Retirement, and Aggregate Capital Accumulation

Abstract: For the great majority of Americans, the most important form of household wealth is the anticipated social security retirement benefits. In 1971 the aggregate value of these annuities was approximately $2 trillion or some 60 percent of other household assets. This paper uses an extended life-cycle model to analyze the impact of social security on the individual's simultaneous decision about retirement and saving. Econometric evidence, using an estimated time series of "social security wealth," indicates that social security depresses personal saving by 30-50 percent. Implications of this research for the theory of consumption and for the level and distribution of income are discussed.

Searching for the Lowest Price When the Distribution of Prices Is Unknown

Abstract: Publisher Summary This chapter describes the process of searching for the lowest price when the distribution of prices is unknown. Economists are interested in the rules that searchers follow because these rules determine the demand functions that sellers in such markets face and also determine, in part, the nature of the markets themselves. Although the only way to settle the question of what rules searchers follow is by observation, very little empirical work has been done on this problem. The qualitative behavior of persons searching optimally from unknown distributions is the same as that of persons searching optimally from known distributions. The problem is best stated by focusing on a very general and abstract formulation of the problem of optimal search. Economists can without great loss assume that the qualitative properties of demand functions that arise from optimal search from unknown distributions are the same as those that arise from optimal search from known distributions.

Home Investments in Children

Abstract: By the time children enter first grade, significant differences in verbal and mathematical competence exist among them.' These differences reflect variations in (1) inherent ability, and (2) the amounts of human capital acquired before the children reach the age of six.2 The stocks of acquired human capital reflect, in turn, varying inputs of time and other resources by parents, teachers, siblings, and the child. The process of acquiring preschool human capital is analogous to the acquisition of human capital through schooling or on-the-job training. Assuming a constant rental rate for human capital, earnings can be interpreted as a measure of capital stocks at later ages. The IQalso can be interpreted as such a measure of human capital stocks. It is related to some commonly used inputs of human capital, for it is well known that measured IQis not independent of years of schooling acquired before the age of testing. At preschool ages IQmeasures should be related to human capital inputs in early childhood as well as to inherent genetic ability. Viewing measured ability as an index of the stock of human capital puts a different light on earnings functions which include ability and schooling. If contemporaneous ability and schooling measures are used to predict earnings (as in Hansen, Weisbrod, and Scanlon 1970), it is not surprising to find that earnings are more closely related to an ability measure, which

An Economic Theory of Suicide

Abstract: Although sociologists have developed and tested numerous theories about suicide, economists have not analyzed this phenomenon. We derive an economic theory of suicide and test its implications using: (1) data by age in many developed countries; (2) a time series, 1947-67, by age group in the United States; (3) a cross section by state and age group in 1960. Most of our predictions are verified. Particularly striking are the response to unemployment, as strong in the postwar period as in the Depression and stronger among older individuals, and the negative effect of increased permanent incomes among all but the youngest age group, a result found in both the time series and the cross section.

Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run

Abstract: This paper analyzes the effects of changes in relative commodity prices on the distribution of income among factors of production in the context of two models of a simple, two-good economy. In the first model capital is treated as a specific factor in each industry, with labor mobile between industries. The assumption of specificity determines the direction of factor income changes, with magnitudes depending on substitutability between factors and on intensities of factor use within the two industries. In the second model, capital is viewed as a quasi-fixed factor. For the short run, this model is identical to the model first considered. For the long run, this model is identical to the Stolper-Samuelson model in which the direction and magnitude of factor income changes depend solely on relative factor intensities. The difference between the short-run and long-run determinants of changes in factor incomes gives rise to a conflict between factor owners' short-run and long-run interests.

Wage Comparisons--A Selectivity Bias

Abstract: The economics of information have been established by now as an integral part of economic analysis. However, surprisingly little has been written on the implications of search (and in particular, job search) for the estimation of the wage function and its ramifications in such cases as the estimation of the determinants of labor force participation, age-earning profiles, rates of return and rates of depreciation of human capital, degree of discrimination, etc. Given a wage offer distribution, the parameters of the observed wage distribution depend on the intensity of search. The lower a person’s wage demands the greater the chance of his finding an acceptable job, but the lower the wage he expects to receive and the wider the dispersion of acceptable wages around their mean. On the other hand, the job seeker may opt for a more ambitious search strategy, raising his minimum wage demand and consequently increasing the risk of remaining unemployed, but also increasing the expected wage and decreasing the dispersion of available offers. Models of wage offer distribution have traditionally been based on empirical observation of observed wage distribution. This approach may involve certain biases when applied to secondary labor groups â€" married women, teenagers and the aged. This paper attempts to point out some of these biases and suggests a method for their correction.

Effects of Child-Care Programs on Women's Work Effort

Abstract: In recent years, Congress has considered a variety of work-subsidy programs designed to encourage work among welfare recipients. Many of these programs would subsidize individuals only if they work some minimum number of hours. Commonly used techniques cannot give direct answers to relevant policy questions since a tied offer is involved, and hence the offer cannot be treated as a simple wage change. The essence of the problem involves utility comparisons between two or more discrete alternatives. Such comparisons inherently require information about consumer preferences in a way not easily obtained from ordinary labor-supply functions. To make such comparisons, I present a method for directly estimating consumer indifference surfaces between money income and nonmarket time. Once these surfaces are determined, they can be used to compare a variety of alternative programs to investigate whether or not there is scope for Pareto-optimal redistribution of income transfers and time, improving the general level of welfare of the community at large without reducing the welfare of individuals receiving income transfers. Knowledge of these indifference surfaces allows us to estimate reservation wages to estimate the value of nonworking-women's time (Gronau 1973), laborforce participation functions, hours-of-work functions, and welfare losses due to income tax programs (Harberger 1964). I demonstrate that direct estimation of indifference surfaces allows us, at least in principle, to relax

The Screening Hypothesis and the Returns to Education

Abstract: The screening hypothesis suggests that intereducational earnings differentials, even when standardized for differences due to noneducational factors, reflect no direct productivity-enhancing effects of education but only its effects as a device for signaling preexisting ability differences. But three predictions in the spirit of the hypothesis are not in fact borne out. First, rates of return to uncompleted courses (dropouts) are as high as to completed courses. Second, standardized educational differentials rise with age, although employers have better information about older employees' abilities. Third, if screening is the main function of education, it could be done more cheaply by simpler testing procedures. Yet these are not used widely despite the profits that could, according to the hypothesis, be made by those developing them.

The Value of Changes in the Probability of Death or Injury

Abstract: One of the more puzzling questions encountered in public investment decision making (especially in the health and transport fields) concerns the value placed on improvements (or reductions) in the safety of human life. Schelling (1968) appears to have been the first to suggest that any potential change in the fatal (or nonfatal) accident rate may be regarded as a (typically small) change in the probability of death (or nonfatal accident) for any particular individual. Mishan (1971) takes a similar view of the problem and argues that, if alternative resource allocations are to be compared solely on the basis of "potential Pareto improvements," then public investment projects which increase the safety of human life will be recommended only if the total of sums which individuals would be prepared to forfeit to effect such probability changes (and the other desirable consequences of the investment) exceeds the capital costs of the projects concerned. Given the manner in which Schelling and Mishan formalize the problem, the central question is therefore the nature of the Hicksian "compensating variations" in wealth1 for various changes in probability of death or injury. In fact, even if Mishan's potential Pareto improvement criterion is rejected as a basis for allocative decisions, information concerning these compensating variations will still be relevant for all but those public investment decisions which completely ignore private preferences. The primary purpose of this paper is to develop a qualitative analysis of compensating variations for changes in the probability of an individual's own2 fatal accident. In addition, brief consideration will also be given to

International Capital Flows and Portfolio Equilibrium

Abstract: This paper develops a model of international capital flows from a general equilibrium model of the financial markets of an open economy. Capital flows are viewed as the mechanism by which a domestic excess demand for money is removed and consequently the key explanatory variables in the model are changes in domestic income, the currentaccount balance, changes in domestic monetary instruments, and changes in foreign interest rates since these will all affect either the demand for or supply of money. The quarterly estimates of the capital flow equation for Australia, Italy, Germany, and the Netherlands appear to be consistent with the hypotheses derived from the model.

Competitive Firm and the Theory of Input Demand under Price Uncertainty

Abstract: In this paper, we examine the behavior of the competitive firm faced with making input-hiring decisions under conditions of price uncertainty. Unlike Sandmo and Baron, among others, we show categorically that a marginal increase in uncertainty stimulates a decline in the firm's output, provided the absolute risk aversion is decreasing. Furthermore, the implications of a change in expected price remain unchanged, but those of a change in input price need not be the same as in the certainty case. Specifically, the input demand function is downward sloping only if the production function is well behaved.

Short-Run and Long-Run Equilibrium for a Small Open Economy

Abstract: This paper deals with a small open economy in which capital goods employed by a given industry are temporarily immobile and can be reallocated only gradually over an extended period of time. The shortrun responses of employment, factor returns, and output levels to exogenous changes in commodity prices and endowments, as well as the following time-absorbing adjustment process of the endogenous variables to long-run equilibrium, are analyzed. In addition, it is argued that this short-run theory provides a better explanation of factorowner reactions to trade policies than conventional long-run international trade theory.

A Conditional Logit Model of Occupational Choice

Abstract: The theory of human capital' provides a convenient framework for analyzing the choice of occupation by individual workers. The present paper is devoted to an investigation of the implications of this framework. Section II briefly discusses the human capital approach to occupational choice. Section III reviews the conditional logit statistical model elaborated in McFadden (1968). Section IV discusses the generation of the data. Section V presents the empirical results of this study, that is, tests of hypotheses about the variables influencing occupational choice and estimates of the relative weights given to variables in selecting an occupation. Section VI offers a brief conclusion.

Cattle as Capital Goods and Ranchers as Portfolio Managers: An Application to the Argentine Cattle Sector

Abstract: Microeconomic models, treating cattle as capital goods and producers as portfolio managers, provide a theoretical framework for an econometric model of the Argentine cattle sector. Argentine agricultural stagnation has been partially attributed to a lack of producer price response, but this paper shows that the cattle sector exhibits strong price response and that producers correctly differentiate their behavior toward animals of different age and sex. The long-run price response of slaughter is positive, but the short-run response is negative because animals must be withheld to permit increases in future output. This negative short-run response implies that devaluation is unlikely to increase beef exports for at least 2 years.

Taxes, Spending, and Property Values: Supply Adjustment in a Tiebout-Oates Model

Abstract: This paper extends the capitalization approach of Wallace E. Oates to consider supply adjustment in a local public goods market of the sort hypothesized by Charles M. Tiebout. It is shown that Oates's singleperiod cross-section analysis-demonstrated demand conditions approximated Tiebout's hypotheses in a situation in which supply was not in long-run equilibrium. Analysis of capitalization of taxes, school expenditures, and road maintenance expenditures over five successive census periods in the Boston area indicates a move toward equilibrium in the market for schooling, but not in all other markets for local public goods.

Group Segregation and Optimal Jurisdictions

Abstract: Even if people are entirely devoid of any feelings toward each other (sympathetic or antipathetic) at a personal level, they may find it in their interests to set up and join associations which are segregated on the basis of income and/or tastes. This paper constructs a model to show how wealth, technology, and preferences can interact to provide common incentives for people to form segregated groups for the provision of local collective goods-that is, goods which cannot readily be supplied and priced on a variable unit-of-services basis, but which are best provided communally at the same level to all members of the association, in such a way that nonmembers are excluded from enjoying them altogether.

Research and Development Activity and Profitability: A Distributed Lag Analysis

Abstract: There are at least three ways in which profits and R & D may be related. First, profits may influence subsequent R & D. Second, R & D may influence subsequent profits. And third, it is possible that R & D and profits are influenced simultaneously by some third factor. For example, government support or exogenous surges in demand could increase both at the same time. Although the first two of these relations involve influences of one variable on another over time, the problem of distinguishing between a simultaneous and a recursive relation has not been tackled in previous work. The current study employs distributed lag techniques with pooled time-series and cross-section data to discriminate among the alternative types of time relations. A sample of seven industries containing 111 firms covering the 1950-65 period was used to test these relations. The results indicate a tendency for R & D to influence future profitability and to be influenced by past profitability.

Private Savings: Ultrarationality, Aggregation, and 'Denison's Law'

Abstract: The article examines the behavior of the ratio of gross private saving to gross national product-the gross private savings rate or GPSRfor the United States during the period 1898-1969. It emerges that the GPSR defined to include consumer durables expenditures and the imputed return on durables has no trend over the period and that its year-to-year variation is extremely small except for the World War I, World War II, and Great Depression years. This stability prevailed in the face of pronounced shifts in the composition of private savings from personal saving to durables expenditure and corporate saving, and a redistribution of income from the private to public sectors. The notion of ultrarationality, in which households subsume corporate and government spending and saving in their budget decisions, is used to explain the stability of the GPSR despite the important changes in its composition.. Leading implications of this stability for theory and policy are explored: one important conclusion is that, under full employment, fiscal policy can neither affect aggregate expenditure nor alter the ratio of investment to consumption.

Rational Expectations and Bayesian Analysis

Abstract: The approach in this paper is the development of models that describe the process by which rational expectations may be developed within a market. The concept of Bayesian learning is introduced. Consistent and rational expectations are introduced in models where the firms cannot immediately move to equilibrium. Three different models are developed which demonstrate the interaction of Bayesian learning and expectations in achieving a market equilibrium. These models are dynamic and describe the transition process toward equilibrium. Two of the models involve unknown parameters about which the firms learn. The third is a control theory model explicitly involving adjustment costs.

Comments on Selectivity Biases in Wage Comparisons

Abstract: These comments on selectivity biases in wage comparisons stem from Gronau's paper on the subject in this issue of the Journal and assume that the reader is familiar with his paper. Consider a group of persons who differ in their home price of time W0, but who are alike in having the same discount rate r, search cost C, and distribution (W) of market wage offers W. I shall call such a group a "homogeneous" group. Let E be the mean market wage of persons in the group who, after a "sufficiently long period of search," are employed in the market; pw is the mean and a' the variance of their common wageoffer distribution; ,uwo is the mean and a2wo the variance of the home price of time W' in the group; and 0 is the group's labor-force participation rate. Then the search theory used by Gronau implies that:

The Honest Government's Guide to the Revenue from the Creation of Money

Abstract: The analysis of the revenue from the creation of fiat money is usually carried out in terms of comparative statics. Given the value of relevant parameters, the rate of inflation which maximizes revenue is characterized as the one yielding the highest stream of revenue once all adjustments have been completed: either some rate of monetary expansion is set, and the results corresponding to the long-run values of the variables are analyzed (Friedman 1971), or the inflation rate is fixed at the outset and adjustments taken to be instantaneous, but assuming away any effect of the once-and-for-all changes in real cash balances on the variable to be maximized (revenues), that is, assuming that those changes are met by once-and-for-all changes in the price level (Bailey 1956). Of course, both procedures amount to the same thing. This is, indeed, the correct analysis in processes in which the transition period can be assumed away because the long-run value of the variable to be maximized is reached asymptotically from the very beginning, so that the highest stream at any point is also the stream with the highest present value at the initial point. This is not so in the case of the revenue

Benefits of Women's Education within Marriage

Abstract: Studies of the returns to education have generally investigated the relationship between individuals' investments in formal education and on-the-job training and their labor-market productivity. It is well recognized, however, that other factors besides formal education and training contribute to a person's effective stock of human capital (and hence to productivity); these factors include early childhood environment, parents' behavior (see Dugan 1969), and associations with other individuals. There is general agreement, for example, that a child's development is affected by the ability and performance of peers in school. At a later stage, a significant part of an individual's college and graduate education appears to result from association with fellow students, the more able students contributing to the education of all. After formal schooling is completed, close associates are likely to continue to affect an individual's further educational development and to influence the rate of depreciation of the individual's stock of knowledge. One of the more persuasive explanations of the observed strong positive relationship between formal education and labor-market productivity is that, in addition to providing specific skills, formal education improves the individual's ability to acquire and assimilate information, to perceive and understand changing conditions, and to respond effectively.' From

Interpretations of Departures from the Pareto Curve Firm-Size Distributions

Abstract: Empirical firm-size data show concavity when size is plotted against rank (largest firm = rank 1) on a log-log scale, a departure from the Pareto distribution which shows a straight line Two reasons for this departure are proposed One is an exponential decay in the effect of a unit increase in size upon the firm's future growth It is shown analytically that the greater the decay rate, the greater the concavity The other is an effect of mergers and acquisitions Based on Federal Trade Commission data, the actual firm-size distribution in 1969 is compared with a hypothetical one where all mergers and acquisitions in 1948-69 were "undone" to demonstrate their effect

An Optimal Program for Managing Common Property Resources with Congestion Externalities

Abstract: The purpose of this paper is to derive an optimum program for managing a common-property natural resource-fish, fowl, and some groundwater resources-whose rate of growth of the resource stock depends on the resource stock level and the current rate of "extraction." Looking forward in time, the dynamic property of this problem is provided by the fact that an instantaneous increase in the natural stock of a resource forever increases the physical productivity of that resource, while the externality aspect is of course inherent in the common-propertyness assumption. Congestion externalities arise from a specification of the aggregate production function which implies interdependent microproduction functions. It will be shown that if the resource stock initially is sufficiently small it will be socially optimal to have a period of no extraction. When extraction begins, it and the variable factor increase faster than the resource stock is increasing. Charges reflecting the imputed marginal social value of the resource are a decreasing function of the level of the stock. These results differ from Vernon Smith's recent static treatment of the same problem (Smith 1968)1 and are discussed below.

Household and economy: toward a new theory of population and economic growth.

Abstract: This is an outline of a revised Malthusian model in which the value of human time and changes in that value are pivotal and limitations imposed by natural resources are mitigated by technological progress. Increased value of human time will result in fewer children per household with each child embodying greater investments in human capital. This investment will result in lower infant mortality and in greater productivity in the economically active years. This model predicts declining rates of population growth and declining rates of infant mortality.