Showing papers in "Journal of Political Economy in 1977"
TL;DR: In this paper, it was shown that discretionary policy does not result in the social objective function being maximized, and that there is no way control theory can be made applicable to economic planning when expectations are rational.
Abstract: Even if there is an agreed-upon, fixed social objective function and policymakers know the timing and magnitude of the effects of their actions, discretionary policy, namely, the selection of that decision which is best, given the current situation and a correct evaluation of the end-of-period position, does not result in the social objective function being maximized. The reason for this apparent paradox is that economic planning is not a game against nature but, rather, a game against rational economic agents. We conclude that there is no way control theory can be made applicable to economic planning when expectations are rational.
7,652 citations
TL;DR: In this paper, a model with overlapping labor contracts with each labor contract being made for two periods was constructed, and the authors argued that monetary policy has the ability to affect the short run behavior of output, though it has no effects on long run output behavior.
Abstract: The paper is concerned with the role of monetary policy and argues that activist monetary policy can affect the behavior of real output, rational expectations notwithstanding. A rational expectations model with overlapping labor contracts is constructed, with each labor contract being made for two periods. These contracts inject an element of short-run wage stickiness into the model. Because the money stock is changed by the monetary authority more frequently than labor contracts are renegotiated, and, given the assumed form of the labor contracts, monetary policy has the ability to affect the short-run behavior of output, though it has no effects on long-run output behavior.
1,909 citations
TL;DR: In this paper, a theoretical analysis of marital dissolution, incorporating uncertainty about outcomes of marital decisions into a framework of utility maximization and the marriage market, is presented, and the implications of the theoretical analysis with cross-sectional data, primarily the 1967 Survey of Economic Opportunity and the Terman sample.
Abstract: This paper focuses on the causes of marital instability. Section I develops a theoretical analysis of marital dissolution, incorporating uncertainty about outcomes of marital decisions into a framework of utility maximization and the marriage market. Section II explores implications of the theoretical analysis with cross-sectional data, primarily the 1967 Survey of Economic Opportunity and the Terman sample. The relevance of both the theoretical and empirical analyses in explaining the recent acceleration in divorce rates is also discussed.
1,712 citations
TL;DR: This article explored the possibility that the positive relation between inflation and unemployment may be more than coincidental and pointed out that this relation may be due to the empirical phenomenon of an apparent positive relation.
Abstract: In the past several decades, professional views on the relation between inflation and unemployment have gone through two stages and are now entering a third. The first was the acceptance of a stable trade-off (a stable Phillips curve). The second was the introduction of inflation expectations, as a variable shifting the short-run Phillips curve, and of the natural rate of unemployment, as determining the location of a vertical long-run Phillips curve. The third is occasioned by the empirical phenomenon of an apparent positive relation between inflation and unemployment. The paper explores the possibility that this relation may be more than coincidental.
1,642 citations
TL;DR: This paper formalized the trichotomy of work in the market, work at home, and leisure, and showed that an increase in income increases leisure, reduces work on the market and leaves work on home unchanged.
Abstract: The paper tries to formalize the trichotomy of work in the market, work at home, and leisure. Time is used at home to produce home goods that are perfect substitutes for market goods, where home production is subject to diminishing marginal productivity. An increase in the market wage rate is expected to reduce work at home, while its effect on leisure and work in the market is indeterminate. An increase in income increases leisure, reduces work in the market, and leaves work at home unchanged. These conclusions are supported by empirical tests based on the Michigan Income Dynamics data, as well as by previous time budget studies. Further implications for labor supply, fertility, gain from marriage, demand for child care, and the measurement of home output are investigated.
837 citations
TL;DR: In this article, a general non-cooperative trading equilibrium is described in which prices depend in a natural way on the buying and selling decisions of the traders, avoiding the classical assumption that individuals must regard prices as fixed.
Abstract: A general model of noncooperative trading equilibrium is described in which prices depend in a natural way on the buying and selling decisions of the traders, avoiding the classical assumption that individuals must regard prices as fixed. The key to the approach is the use of a single, specified commodity as "cash," which may or may not have intrinsic value. The model, in several variants, is treated as a noncooperative game, in the spirit of Nash and Cournot. The rules of the game, including the price-forming mechanism, are independent of behavioral or equilibrium assumptions, which enter, instead, through the solutions of the game.
644 citations
TL;DR: In this paper, the potential of monetary policy to stabilize fluctuations in output and employment is demonstrated in a stochastic rational expectations model in which firms choose, considering average profitability, to set prices in advance of the period when they apply to goods sold.
Abstract: The potential of monetary policy to stabilize fluctuations in output and employment is demonstrated in a stochastic rational expectations model in which firms choose, considering average profitability, to set prices in advance of the period when they apply to goods sold. This lead time in pricing decisions increases the fluctuations of output about the normal employment level. But proper use of a feedback monetary policy rule can reduce these fluctuations even though expectations are rational and people know the policy rule. It is noted that use of a rule-dictated policy sometimes requires the monetary authorities to penalize the economy in the short run for the sake of beneficial system effects of the rule upon the relevant steady-state distributions.
499 citations
TL;DR: In this paper, the authors examined the pattern of unemployment and inflation in the United States during the four presidential election periods from 1957 through 1972, and concluded that the myopic hypothesis does a superior job of explaining aggregate demand policy, as reflected by the unemployment rate.
Abstract: Under the hypothesis of a myopic electorate, vote-loss-minimizing behavior by the party in power subject to a dynamic inflation-unemployment relation is shown to generate a stable electoral policy cycle. The pattern of unemployment and inflation in the United States during the four presidential election periods from 1957 through 1972 is then examined for evidence of whether or not the administration believes the electorate is myopic. The conclusion is that the myopic hypothesis does a superior job of explaining aggregate demand policy, as reflected by the unemployment rate, during the second and third election periods, while the hypothesis that the administration believes the electorate is rational does a better job in the first and fourth periods.
468 citations
TL;DR: In this paper, subjectively a horse with a low winning probability is exaggerated and one with a high probability of winning is depressed, and subjectively, a risk lover tends to take more risk as his capital dwindles.
Abstract: Subjective and estimated objective winning probabilities are obtained from 20,247 harness horse races. It is shown that subjectively a horse with a low winning probability is exaggerated and one with a high probability of winning is depressed. Various hypotheses characterizing the bettors' behavior to explain the observed subjective-objective probability relation are explored. Under some simplified assumptions, a utility of wealth function of a decision maker is derived, and a quantitative summary measure of his risk attitude is defined. Attitude toward risk of a representative bettor is examined. It is found that he is a risk lover and tends to take more risk as his capital dwindles.
413 citations
TL;DR: In this article, a two-sector model of exchange rate determination for a mall open economy with flexible prices is presented. But the model satisfies the homogeneity postulate but it is shown that an increase in the rate of expansions of money supply leads to an instantaneous deterioration of the real exchange rate.
Abstract: This paper analyzes a two-sector model of exchange rate determination for a mall open economy with flexible prices. Residents are assumed to hold both domestic and foreign currency and to have rational expectations. The model satisfies the homogeneity postulate but it is shown that an increase in the rate of expansions of money supply leads to an instantaneous deterioration of the real exchange rate. In the long run, however, the latter moves back to its previous level.
387 citations
TL;DR: In this paper, a test capable of discriminating between expense-preference and profit-maximizing behavior was developed and applied to the banking industry, a highly regulated industry, and it was shown that an expense preference theoretical framework better explains the behavior of regulated firms than does a profit maximization framework.
Abstract: Recent work on the theory of the firm under regulation suggests that managers of regulated firms may be utility maximizers rather than profit maximizers. There is, however, very little empirical evidence on managerial behavior in regulated industries. This article examines one kind of utility-maximizing behavior that seems particularly applicable to regulated firms: expense-preference behavior. Specifically, I develop a test capable of discriminating between expense-preference and profit-maximizing behavior and apply it to the banking industry, a highly regulated industry. My findings indicate that an expense-preference theoretical framework better explains the behavior of regulated firms than does a profit-maximization framework.
TL;DR: This article examined how well the basic properties of the traditional 2 × 2 model of a competitive economy, commonly used in much of the pure theory of international trade, generalize when more goods and factors are considered.
Abstract: This paper examines how well the basic properties of the traditional 2 × 2 model of a competitive economy, commonly used in much of the pure theory of international trade, generalize when more goods and factors are considered. The notion of factor intensity and the Hekscher-Ohlin, Stolper-Samuelson, and Rybczynski theorems are discussed. The role played by the no-joint-production assumption as opposed to small dimensionality in the latter two results is stressed. The mathematical appendix provides a compact and formal statement of the properties discussed in the text.
TL;DR: In this paper, a generalization of the cross-section logit model was proposed to deal with sequences of discrete events in panel data. But the model was applied to panel data on labor force participation of married women and the distribution of participation probabilities is U-shaped, indicating that most women have participation probabilities near zero or near one.
Abstract: In this paper, we discuss statistical problems that arise in studying sequences of quantal responses (e.g., labor force participation) in panel data on heterogeneous populations (i.e., populations in which there is unobserved variation in response probabilities). Assuming that response probabilities are governed by a beta distribution, we derive a generalization on of the cross-section logit model to enable it to deal with sequences of discrete events in panel data. This model is applied to panel data on labor force participation of married women. One of our findings is that the distribution of participation probabilities is U shaped, indicating that most women have participation probabilities near zero or near one.
TL;DR: In this paper, an integrated peak load pricing model was developed and estimated with data for roads in the San Francisco Bay Area, and the results suggest that current user charges are well below optimal peak tolls.
Abstract: Optimal tolls, capacities, and service levels for highways can be determined jointly by way of an integrated peak-load pricing model. In this paper, such a model is developed and estimated with data for roads in the San Francisco Bay Area. The results suggest optimal peak user tolls of 2-7 cents per automobile mile on rural highways, 2-9 cents on suburban highways, and 6-35 cents on central city highways. Although our results are to some degree dependent on the interest rate, time value, and peak demand configuration assumed, one basic conclusion holds up under all alternative assumptions: current user charges are well below optimal peak tolls. However, our results also suggest considerably higher rush-hour speeds than currently prevail on Bay Area roads, and the lower travel time costs suggested by our analysis (relative to the current situation) should to some degree offset the corresponding higher user charges.
TL;DR: Two models of investment in health are presented which explicitly recognize the random nature of illness and death and how exposure to pollution should vary with age and how workers should respond to information about occupational dangers.
Abstract: This paper presents two models of investment in health which explicitly recognize the random nature of illness and death. The first model examines life-cycle behavior of investment and health capital when the motive for investing in health is to decrease the probability of illness. In the second model the individual invests in health through his choice of occupation. This determines the extent of his exposure to a pollutant, such as asbestos, which increases the probability of death. The model examines how exposure to pollution should vary with age and predicts how workers should respond to information about occupational dangers.
TL;DR: The authors show that if territory goes to the nation which values it most as a source of revenue, nations will be shaped to maximize joint revenue, net of collection costs, and show how this fits the pattern of European experience from Roman times to the present.
Abstract: If territory goes to the nation which values it most as a source of revenue, nations will be shaped to maximize joint revenue, net of collection costs. Trade, as a major potential revenue source, should imply large nations; rent should imply small nations; and labor should imply that nations will have closed boundaries or be culturally homogeneous (to maximize exit costs). I show how this fits the pattern of European experience from Roman times to the present. Results of preliminary numerical tests of predictions of the theory are given.
TL;DR: The authors showed that the tax on pure land rents is at least partly shifted, and that the price of land may be increased by the imposition of a tax on the land The authors.
Abstract: The classic example of an unshiftable tax is the general tax on pure rental income. Since Ricardo, economists have believed that the annual net rental income of unimproved land falls by the amount of the annual tax and its price by the capitalized value of this tax. This paper shows that these conclusions are false, that the tax on pure land rents is at least partly shifted, and that the price of land may be increased by the imposition of a tax. Implications are suggested for the analysis of the corporate income tax and the taxation of natural resources.
TL;DR: In this paper, the simple form of the capital-asset pricing model is modified to describe durable goods with risky capital appreciation and constant service yield, assuming that auctioned paintings are sampled from a fixed underlying stock of paintings.
Abstract: Price indices for pre-World War II paintings are developed from U.S. and U.K. auction prices, assuming that auctioned paintings are sampled from a fixed underlying stock of paintings. The simple form of the capital-asset pricing model is modified to describe durable goods with risky capital appreciation and constant service yield. Estimated parameters for U.S. paintings are β = 0.82 (SE = 0.34), R 2 = .24, service yield = 1.6 percent (SE = 7 percent). To individual collectors, "performance" is positive to the extent that they value the service yield above 1.6 percent. Paintings are "inefficient." Regressions using U.K. data have no significant β coefficients.
TL;DR: In this paper, the authors present some empirical results on tax capitalization using data on output measures to correct for the influence of local public benefits on property values and find that when such information is included in the analysis, the statistical results are more consistent with theoretical predictions than when expenditure levels are used.
Abstract: Within the past decade several efforts have been made to investigate econometrically the extent to which fiscal differentials between communities are capitalized into property values (see, eg, Orr 1968; Oates 1969, 1973; Church 1974; Meadows 1976) Economic theory suggests that under certain conditions, if a community has higher tax rates than average, its property values will be lower, other things being equal (see Polinsky and Shavell 1976) Similarly, local public services "better" than average should result in higher property values' In several important studies of tax capitalization (Orr 1968; Oates 1969), expenditures on various local public benefits have been used to proxy the quantity and quality of local public services It is widely recognized that such measures are deficient because of the untenable assumption that output can be measured by expenditures on inputs The purpose of this essay is to present some empirical results on tax capitalization using data on output measures to correct for the influence of local public benefits on property values We find that when such information is included in the analysis, the statistical results are more consistent with theoretical predictions than when expenditure levels are used In particular, our results suggest capitalization rates close to 90 percent In Section II the econometric literature on property tax capitalization is discussed briefly, with special attention focused upon the treatment of public benefits In Section III we estimate the parameters of a tax-
TL;DR: In this article, an empirical analysis based on cross-sectional data from the U.S. has been conducted to investigate the deterrent effect of capital punishment on murder and related violent crimes.
Abstract: Investigation of the deterrent effect of capital punishment has implications far beyond the propriety of execution as punishment since it concerns the general question of offenders' responsiveness to incentives. This study challenges popular allegations by earlier researchers denying the deterrence hypothesis. The empirical analysis based on cross-sectional data from the U.S. corroborates my earlier analysis of the time series. Findings indicate a substantial deterrent effect of punishment on murder and related violent crimes and support the economic and econometric models used in investigations of other crimes. Distinctions between classes of executing and nonexecuting states are also examined in light of theory and evidence.
TL;DR: This paper presented a set of certainty-equivalence axioms which allow the individual's preferences to be expressed by a cardinal utility index in the case of quantifiable single-good, uncertain (or certain) prospects.
Abstract: This paper presents a set of certainty-equivalence (CE) axioms which allow the individual's preferences to be expressed by a cardinal utility index in the case of quantifiable single-good, uncertain (or certain) prospects. This axiom set differs from the von Neumann-Morgenstern (NM) axiom set. The analysis is extended to the multigood case, and its implications for risk taking are derived. Various tests reported in the literature on experimental psychology show the CE theory to outperform the von Neumann-Morgenstern one. Further, the CE theory satisfactory explains the Allais paradox, which contradicts the NM theory, and is thus to be preferred to the latter as a positive theory for decisions under uncertainty.
TL;DR: In this article, the equilibrium distribution of market clearing prices is asymptotically normal with a standard deviation that varies inversely with the volume of trade, given underlying supply and demand conditions.
Abstract: A futures contract is to a forward contract as payment in currency is to payment by check. An organized market facilitates trade among strangers. Such a market trades a standardized contract under appropriate rules. The equilibrium distribution of market clearing prices is asymptotically normal with a standard deviation that varies inversely with the volume of trade, given underlying supply and demand conditions. Empirical relations giving the commission and margin per contract as a function of the volume of trade and outstanding commitments for 23 commodities support the theory. Also, comparisons of pertinent aspects of 51 commodities divided into active, less active, and dormant groups are consistent with the theory.
TL;DR: In this paper, the optimal marginal adjustment model of portfolio behavior is used to determine the long-term interest rate of six major categories of bond market investors, and the associated structural model of interest rate determination, which is restricted by the underlying demand-for-bonds equations, fits the data about as well as do previously developed unrestricted reduced-form term-structure equations.
Abstract: Because transactions costs are smaller for allocating new cash flows than for reallocating existing asset holdings, financial flow variables are important determinants of investors' short-run asset demands. The demand-for-bonds equations implied by the resulting "optimal marginal adjustment" model of portfolio behavior constitute the demand side of a structural supply-demand model of the determination of the long-term interest rate. Empirical results, based on demand-for-bonds equations estimated using U.S. data for six major categories of bond market investors, support the optimal marginal adjustment model and show that the associated structural model of interest rate determination, which is restricted by the underlying demand-for-bonds equations, fits the data about as well as do previously developed unrestricted reduced-form term-structure equations.
TL;DR: In this article, the relationship between education and income results because schooling allows individuals to earn higher income or because higher income individuals purchase more of all normal goods including schooling, including schooling.
Abstract: This paper attempts to determine whether the relationship between education and income results because schooling allows individuals to earn higher income or because higher income individuals purchase more of all normal goods, including schooling. Education is treated as a joint product, producing potential wage gains and utility simultaneously. The framework permits estimation of the rental price of a unit of education, net of consumption effects. The major finding is that education does causally produce income. By moving from 0 years of schooling to 12 years, the mean individual approximately triples his wealth. More surprising is that education is a bad." Individuals stop short of acquiring the wealth-maximizing level of education because of the disutility associated with school attendance.
TL;DR: In this paper, the importance of uncertainty regarding the rate of rice change as an argument in the long-run money demand function was investigated, and the predicted relationship between price uncertainty and money demand was unambiguously positive.
Abstract: This paper investigates the importance of uncertainty regarding the rate of rice change as an argument in the long-run money demand function. Increased inflation uncertainty is assumed to lower the stream of monetary services yielded by a given level of real cash balances. The effects on money demand of such changes in the "quality" of money are, in general, theoretically indeterminate. If it is assumed, however, that the monetary service flow is proportional to the real money stock and that the demand for money is interest inelastic, then the predicted relationship between price uncertainty and money demand is unambiguously positive. The empirical findings of this paper, where price uncertainty is operationally measured by the variability of the rate of price change, strongly confirm this positive relationship. These results have important implications for the theory of inflation, the optimum quantity of money, and the potential government tax revenue from money creation.
TL;DR: In this paper, the effect of lifetime uncertainty on optimal consumption decisions was studied and it was shown that if the utility function is Cobb-Douglas and the rate of return is not too large relative to the amount of future discounting then lifetime uncertainty will always increase consumption.
Abstract: This paper studies the effect of lifetime uncertainty on optimal consumption decisions. It is shown that for risk averters changing the distribution of lifetime uncertainty decreases consumption due to the higher probability of having a longer life and increases consumption due to the desire for sure consumption in the present. The stronger of these effects determines the effect of lifetime uncertainty on optimal consumption decisions. The major result is that if the utility function is Cobb-Douglas and the rate of return is not too large relative to the amount of future discounting then lifetime uncertainty will always increase consumption.
TL;DR: Barro has recently reopened the public debt controversy by arguing that taxation and public debt are equivalent in effects as discussed by the authors, which is a misnomer, largely because Ricardo was not a Ricardian on this issue.
Abstract: Robert Barro has recently reopened the public debt controversy. He argues that taxation and public debt are equivalent in effects. James Buchanan criticized Barro for ignoring earlier literature, especially Ricardo. Buchanan saw Barro as following Ricardo's reasoning. While Buchanan's interpretation of Ricardo is the orthodox one, this note argues that it is erroneous. Ricardo in fact denied that taxation and public debt are equivalent. The "Ricardian Equivalence Theorem" is, consequently, a misnomer, largely because Ricardo was not a Ricardian on this issue. Rather, Ricardo enunciated a nonequivalence theorem.
TL;DR: In this article, the correlation between interest rates and prices has been analyzed and it has been termed the Gibson Paradox, which has been characterized by the Kitchin Phenomenon.
Abstract: This paper analyzes the correlation between interest rates and prices which as persisted for the past quarter of a millennium and has been termed the Gibson Paradox. Spectral techniques confirm the correlation between long-term interest rates and prices for very long-term swings (the Gibson Paradox), but indicate a significant short cycle correlation only for short-term interest rates, which we term the Kitchin Phenomenon. Past explanations of these correlations have often failed to distinguish cycle lengths and term of interest rates involved. Our analysis rejects Irving Fisher's "price expectation" explanation and the Sargent-Wicksell velocity of money explanations. We propose alternative explanations which in part relate to the characteristic behavior of governments during wartime and in part to distributional effects of unanticipated inflation. Our analysis strongly suggests that prior to World War I nominal long and short rates of interest can be regarded as real rates.
TL;DR: In this paper, a discrete version of the author's incentive-compatible auction mechanism for public goods is applied to the problem of social choice (voting) among distinct mutually exclusive alternatives, which is a bidding mechanism characterized by unanimity, provision for the voluntary compensation of voters harmed by a winning proposition, and incentives for "reasonable" bidding by excluding members of a collective from maximal increase in benefit if they fail to agree on the proposition with largest surplus.
Abstract: A discrete version of the author's incentive-compatible Auction Mechanism for public goods is applied to the problem of social choice (voting) among distinct mutually exclusive alternatives. This Auction Election is a bidding mechanism characterized by (1) unanimity, (2) provision for the voluntary compensation of voters harmed by a winning proposition, and (3) incentives for "reasonable" bidding by excluding members of a collective from maximal increase in benefit if they fail to agree on the proposition with largest surplus. Four of five experiments with six voters, bidding privacy, monetary rewards, and cyclical majority rule structure choose the best of three propositions.
TL;DR: In this article, the authors compare consumer choice under uncertain lifetimes with the behavior that would arise if each individual's lifetime were announced at birth, and conclude that the expected utility under uncertain lifetime exceeds that under known lifetime when the latter expectation is based on preannouncement survival probabilities.
Abstract: This paper contrasts consumer choice under uncertain lifetimes with the behavior that would arise if each individual's lifetime were announced at birth. In a model that includes life insurance and excludes investments in human capital, the expected utility under uncertain lifetimes exceeds that under known lifetimes when the latter expectation is based on preannouncement survival probabilities. This conclusion emerges, first, because the model without human capital contains no planning benefits from knowledge of the horizon and, second, because the prior announcement of lifetimes forces risk-averse consumers to undertake an extra gamble that they could otherwise avoid by using life insurance. This paper explores the role of uncertain lifetimes in an intertemporal model of consumer choice. The analysis compares the behavior of consumption and utility under a stochastic horizon with that which would arise under certainty where each individual's length of life is announced at birth. In a model that includes life insurance and excludes investments in human capital, the expected utility under uncertain lifetimes exceeds the expected utility under known lifetimes when the latter expectation is based on preannouncement (ex ante) survival probabilities. This conclusion emerges, first, because the model without human capital accumulation contains no planning benefits from knowledge of the horizon; and, second, because the prior announcement of the time of death forces riskaverse consumers to undertake an extra gamble that could have been avoided by the use of life insurance in the uncertainty case. The possibility of accumulating human capital implies planning benefits from knowledge of the time of death. The ability to match investments with the horizon implies that expected lifetime wealth is lower in the case of uncertain lifetime than in the case where lifetimes are