Showing papers in "Journal of Political Economy in 1978"
TL;DR: This paper analyzed the earnings of foreign-born adult white men, as reported in the 1970 Census of Population, through comparisons with the native born and among the foreign born by country of origin, years in the United States, and citizenship.
Abstract: The earnings of foreign-born adult white men, as reported in the 1970 Census of Population, are analyzed through comparisons with the native born and among the foreign born by country of origin, years in the United States, and citizenship. Differences in the effects of schooling and postschool training are explored. Although immigrants initially earn less than the native born, their earnings rise more rapidly with U.S. labor market experience, and after 10 to 15 years their earnings equal, and then exceed, that of the native born. Earnings are unrelated to whether the foreign born are U.S. citizens.
2,998 citations
TL;DR: In this article, the authors show that no variable apart from current consumption should be of any value in predicting future consumption, except real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices.
Abstract: Optimization of the part of consumers is shown to imply that the marginal utility of consumption evolves according to a random walk with trend. To a reasonable approximation, consumption itself should evolve in the same way. In particular, no variable apart from current consumption should be of any value in predicting future consumption. This implication is tested with time-series data for the postwar United States. It is confirmed for real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices. The paper concludes that the evidence supports a modified version of the life cycle--permanent income hypothesis.
2,721 citations
TL;DR: In this paper, it is shown that ties represent negative "personal" externalities which are usually, but not always, internalized by the family, and that ties tend to deter migration, to reduce the employment and earnings of migrating wives, and to increase the employment of their husbands.
Abstract: An economic definition of family ties relevant to migration decisions leads to the exploration of their effects on the probability of migration, on consequent changes in employment and earnings of family members, and on family stability. It is shown that ties represent negative "personal" externalities which are usually, but not always, internalized by the family. ties tend to deter migration, to reduce the employment and earnings of migrating wives, and to increase the employment and earnings of their husbands. The growth of labor market attachment of women creates an increase in migration ties, which both deters migration and contributes to marital instability. Conversely, growing marital instability stimulates migration and reinforces the upward trends in women's labor force participation.
1,169 citations
TL;DR: In this article, an analysis of unanticipated money growth is extended to output and the price level (GNP deflator) for recent U.S. experience, and the results support the key hypothesis of a one-to-one, contemporaneous link between anticipated money and the GNP level.
Abstract: Earlier analysis of unanticipated money growth is extended to output (GNP) and the price level (GNP deflator) for recent U.S. experience. Price level determination is more complicated than output determination, because both anticipated and unanticipated money movements are involved. Empirical results accord well with the model--notably, they support the key hypothesis of a one-to-one, contemporaneous link between anticipated money and the price level. Precise estimates are obtained for the lagged responses of output and prices to unanticipated money movements. Cross-equation comparisons indicate that the price response to unanticipated money movements has a longer lag than the output response. A form of lagged adjustment in money demand can account for this difference. The forecasts for inflation average 5.5 percent per year for 1977-80.
634 citations
TL;DR: In this paper, a dynamic linear demand schedule for labor is estimated and tested, based on the hypothesis of rational expectations and assumptions about the orders of the Markov processes governing technology.
Abstract: A dynamic linear demand schedule for labor is estimated and tested. The hypothesis of rational expectations and assumptions about the orders of the Markov processes governing technology impose over...
580 citations
TL;DR: In this paper, a model of labor supply is formulated which takes explicit account of nonlinearities in the budget set which arise because the net, after-tax wage depends on hours worked.
Abstract: A model of labor supply is formulated which takes explicit account of nonlinearities in the budget set which arise because the net, after-tax wage depends on hours worked. These nonlinearities may lead to a convex budget set due to the effect of progressive marginal tax rates, or they may lead to a nonconvex budget set due to the effect of government transfer programs such as AFDC or a negative income tax. The nonlinearities affect both the marginal wage and the "virtual" nonlabor income which the individual faces. The model is estimated on a sample of prime-age males from the Gary negative income tax experiment.
575 citations
TL;DR: In this article, the authors used the RANN Division of the National Science Foundation (NSF) under Grant # NSF SIA-00739 and by the Electric Power Research Institute (EPI) under grant # RP871-1.
Abstract: This work was supported by the RANN Division of the National Science Foundation, under Grant # NSF SIA-00739, and by the Electric Power Research Institute, under Grant # RP871-1.
555 citations
TL;DR: In this article, the authors show that the limitation of firm size caused by loss of control across hierarchic levels depends crucially on the nature of the supervision process and that if the employees cannot identify the times at which their performance is monitored, there is no limit imposed on the firm size by the heights of the hierarchical structure.
Abstract: We show that limitation of firm size caused by loss of control across hierarchic levels depends crucially on the nature of the supervision process. If the employees cannot identify the times at which their performance is monitored, there is no limit imposed on the firm size by the heights of the hierarchical structure. "Loss of control" may impose such a limit if the employees are aware of the times at which they are being monitored. The analysis also shows the rationale for hierarchical wage differentials for essentially identical employees.
437 citations
TL;DR: In this article, the effects of anticipations of government sales policies on the real price of gold were analyzed and it was shown that even risk-neutral investors require this rate of return as inducement to hold gold in the face of the asymmetric risk of a price collapse.
Abstract: This paper is an analysis of the effects of anticipations of government sales policies on the real price of gold. Although the risk of a future government gold auction depresses the price, it also causes the price to rise in percentage terms faster than the real rate of interest and at an increasing rate. Even risk-neutral investors require this rate of return as inducement to hold gold in the face of the asymmetric risk of a price collapse. Announcements making a government auction more probable cause a sudden drop in the price. Government attempts to peg the price or to defend a price ceiling with sales from its stockpile must result eventually in a sudden attack by speculators.
434 citations
TL;DR: In this paper, the authors developed a natural measure of the amount of relative price variability, which is correlated with the rate of change in the price level using data for consumer goods in both the Netherlands and the United States.
Abstract: The paper develops a natural measure of the amount of relative price variability. The variance of relative price change is shown to be correlated with the rate of change in the price level using data for consumer goods in both the Netherlands and the United States. This association has been noted in other data for a variety of countries. Using a multisectoral supply-and-demand framework, the paper goes on to show how changes in relative prices and ultimately the variance of relative price changes are related to supply conditions changes in real income and the amount of unanticipated inflation. The model is used as the basis for an analysis of movements in the prices of consumer goods in the United States for the period 1929-75. The amount of unanticipated inflation (measured as the difference between the actual rate and a time-series predictor) is a more important determinant of relative price variability than the rate of inflation.
421 citations
TL;DR: In this article, a model of a single market in which goods of different qualities are sold and sellers advertise is presented, where buyers react plausibly but not optimally to experience gained by purchasing and to sellers' advertising.
Abstract: This essay presents a model of a single market in which goods of different qualities are sold and sellers advertise. Sellers advertise noncooperatively, knowing rivals' outlays and buyers' behavior patterns. Buyers react plausibly but not optimally to experience gained by purchasing and to sellers' advertising. Various properties of equilibria are analyzed. For some parameter values, the lowest-quality brands have the largest equilibrium market shares, advertising budgets, and profits. This is especially likely if buyers' behavior indicates confidence that better brands spend more on advertising.
TL;DR: In this article, a Cobb-Douglas production function is modified so that unionization is included as a variable and the resulting functional form is similar to that used to isolate the effect of worker quality in previous studies.
Abstract: In order to estimate the effects of unions on worker productivity, a Cobb-Douglas production function is modified so that unionization is included as a variable The resulting functional form is similar to that used to isolate the effect of worker quality in previous studies Using state by two-digit SIC observations for US manufacturing, unionization is found to have a substantial positive effect on output per worker However, this result depends on two important assumptions which we cannot verify directly; attempts to relax these assumptions are not conclusive
TL;DR: In this paper, the authors examined the joint determination of labor contract length and the degree of wage indexation in a neoclassical model modified to incorporate short-term wage rigidities and uncertainty, both real and monetary.
Abstract: This paper examines the joint determination of labor contract length and the degree of wage indexation in a neoclassical model modified to incorporate short-term wage rigidities and uncertainty, both real and monetary. A number of propositions are demonstrated. Optimal indexing may not insulate the real sector from unanticipated monetary shocks. For any given degree of indexing, contract length decreases with the level of uncertainty and increases with the cost of contracting. If indexing is costly, indexing provisions will appear only in longer contracts. The proportion of contracts indexed will increase with the variance of monetary disturbances. Finally, monetary variability may cause resource misallocation among industries. Some related policy implications are noted.
TL;DR: In this paper, a variety of functional forms, estimation methods, and definitions of the real after-tax rate of return invariably lead to the conclusion of a substantial interest elasticity of saving and the implications of this result for the analysis of the efficiency and equity of the current U.S. tax treatment of income from capital are explored.
Abstract: This study presents new estimates of consumption functions based on aggregate U.S. time-series data. The results are striking: a variety of functional forms, estimation methods, and definitions of the real after-tax rate of return invariably lead to the conclusion of a substantial interest elasticity of saving. The implications of this result for the analysis of the efficiency and equity of the current U.S. tax treatment of income from capital are explored. In reducing the real net rate of return, current tax treatment significantly retards capital accumulation. This in turn causes an enormous waste of resources and redistributes a substantial fraction of gross income from labor to capital. Rough estimates of the loss welfare exceed 50 billion per year (a present value close to 1 trillion!) and of the redistribution from labor to capital exceed one-seventh of the capital's share of gross Income.It also suggests that the usual calculations of tax burdens by income class substantially overestimate both the ...
TL;DR: The authors analyzes the dynamic response to a relative price change in a two-sector model when the movement of capital from one sector to another requires the use of economic resources, and the adjustment process is analyzed as a problem in investment theory; owners of capital balance the costs of capital movement with the expected future benefits.
Abstract: This paper analyzes the dynamic response to a relative price change in a two sector model when the movement of capital from one sector to another requires the use of economic resources. The adjustment process is analyzed as a problem in investment theory; owners of capital balance the costs of capital movement with the expected future benefits. The expectations of capital owners concerning future rental rates in the two industries are shown to play a critical role in determining the efficiency of the adjustment process. When expectations are "rational," the competitive adjustment path maximizes the present discounted value of the economy's final output. When expectations are not rational, the competitive adjustment past is distorted and diverges from the socially optimal path. The paper also analyzes the implications of different assumptions concerning the technology of the adjustment process, establishing that both the adjustment path of the economy and its ultimate long-run equilibrium depend critically...
TL;DR: In this paper, the authors explore how to use distributional weights to analyze investment projects and to determine an optimum income-tax structure, and explore alternative "solutions" to these difficulties.
Abstract: In the cost-benefit analysis of commodity taxes or subsidies, distributional weights complicate the standard textbook "triangle analysis." Net benefits are maximized with optimal subsidies in some circumstances, optimal taxes in others. Demand and supply elasticities play important roles in determining these weighted-welfare effects of commodity taxation. I then explore how to use distributional weights (a) to analyze investment projects and (b) to determine an optimum income-tax structure. In all these applications, the use of distributional weights is shown to have very strong and (to many people) disquieting implications. A final section explores alternative "solutions" to these difficulties.
TL;DR: In this paper, a critical examination of four mistaken propositions that characterize much of the conventional wisdom on capital income taxation is presented, and the analysis then shows the correct approach to evaluate the welfare cost of alternative tax treatments of capital income when taxes affect both the supply of labor and the timing of consumption.
Abstract: The paper begins with a critical examination of four mistaken propositions that characterize much of the conventional wisdom on capital income taxation. The analysis then shows the correct approach to evaluating the welfare cost of alternative tax treatments of capital income when taxes affect both the supply of labor and the timing of consumption.
TL;DR: In this article, a model of union behavior applicable to the United Mine Workers (UMW) and based on maximization of the expected utility of the median-aged member of the union is developed.
Abstract: In order to investigate the preferences of union members and the formation of union bargaining goals, a model of union behavior applicable to the United Mine Workers (UMW) and based on maximization of the expected utility of the median-aged member of the union is developed. The relationships determining the optimal wage-ton tax policy of the UMW are estimated over the 1948-73 period. It is found that (1) union members are quite risk averse with a coefficient of relative risk aversion greater than 2.5; (2) union members discount future benefits at the relatively low rate of 3.5-4.5 percent annually; and (3) union members value a dollar spent on fixed fringe benefits almost 40 percent more than a dollar spent on discretionary income. The latter result suggests that the income tax makes nontaxable fringe benefits a relatively attractive method of compensation. Another result which may be important for national energy policy is that the bargaining goals of the UMW are not very responsive to shifts in the dema...
TL;DR: In this paper, the problem of optimal exchange intervention is approached using the techniques derived in the "targets, instruments, and indicators" literature, and the optimal exchange policy is one of permitting the appropriate degree of exchange-rate flexibility rather than one of complete fixity or complete flexibility of the exchange rate.
Abstract: The problem of optimal exchange intervention is approached using the techniques derived in the "targets, instruments, and indicators" literature. The optimal exchange-rate policy is one of permitting the appropriate degree of exchange-rate flexibility rather than one of complete fixity or complete flexibility of the exchange rate. Although the problem of the optimal exchange-rate regime has been analyzed in these terms before, criteria previously employed, emphasizing the geographical or functional location of disturbances, are seen to be inappropriate for a portfolio balance model with some degree of capital mobility.
TL;DR: One-half of the total effect of imprisonment is attributed to deterrence as discussed by the authors, and the most recent experience of rising criminal activity is in no small way, a manifestation of the movements in deterrent variables.
Abstract: Crime of almost every variety has increased enormously over the past 80 years in England, at the same time that the risk of capture and severity of punishment have declined. This paper presents an attempt to understand these profiles and their interrelationship. Comparisons with the United States are also stressed. In performing this analysis, methodologies were developed and implemented to isolate the deterrent component from the incapacitation component of punishment. One-half of the total effect of imprisonment is ascribed to deterrence. In addition, the most recent experience of rising criminal activity is shown to be, in no small way, a manifestation of the movements in deterrent variables.
TL;DR: In this paper, the authors used a likelihood ratio test to test the adequacy of three joint hypotheses: Friedman's model, rational expectations, and some arbitrary conditions on the disturbance process in the consumption function.
Abstract: Estimates of a rational expectations version of Friedman's time-series consumption model are obtained by imposing the pertinent restrictions across the stochastic processes for consumption and income. A likelihood ratio test is used to test the adequacy of three joint hypotheses: namely, Friedman's model, rational expectations, and some arbitrary conditions on the disturbance process in the consumption function. The paper treats both the cases in which income is econometrically exogenous with respect to consumption and those in which it is not. The macroeconomics of this exogeneity condition are briefly discussed.
TL;DR: In this paper, a model is developed that explains the allocation of an individual's time among work and two types of leisure activities: time spent with spouse, and times spent with paramour.
Abstract: In this paper a model is developed that explains the allocation of an individual's time among work and two types of leisure activities: time spent with spouse, and time spent with paramour. Data from two recent magazine surveys are available that can be used to test the predictions of the model regarding the determinants of time spent with paramour. The results of estimating the equation explaining time spent with paramour, by the Tobit estimator, are generally supportive of the model, although more evidence is needed before any definitive conclusions can be drawn. The model can also be applied to the allocation of time among other types of leisure activities.
TL;DR: In this paper, the authors argue that the results of applications of the Chow test in tests for rationality cannot be unambiguously interpreted and present a different method for testing the rationality hypothesis, which requires less restrictive assumptions and hence gives less ambiguous answers.
Abstract: In a recent paper, Pesando (1975) tests and rejects the hypothesis that the Livingston price expectations data are rational in the sense of Muth (1961). He asserts that this finding calls into question the results of a number of published studies which have employed the Livingston data, such as Gibson (1972), Pyle (1972), Turnovsky and Wachter (1972), and Lahiri (1976). More recently, Carlson (1977) has argued that the price expectations series employed by these researchers is fundamentally flawed. He notes that the data may have been judgmentally adjusted by Livingston in an inconsistent fashion. Carlson presents a new series of expected inflation rates based on the original responses to the Livingston surveys. He likewise tests the hypothesis that this series is rational. Using techniques similar to Pesando's, he also rejects the rationality proposition. The purpose of this paper is to argue that there is a serious weakness in the tests carried out by Pesando and Carlson. In particular, the results of applications of the Chow procedure in tests for rationality cannot be unambiguously interpreted. There is a different method for testing the rationality hypothesis, however, which requires less restrictive assumptions and hence gives less ambiguous answers. When applied to the Carlson data, this test suggests the hypothesis of Muthian rationality cannot be rejected. The data employed by Pesando fail the rationality test, however. Section I briefly describes the data employed. Section II criticizes the Chow test procedure, and section III presents the results of new tests for rationality.
TL;DR: In this paper, the authors developed a model of a speculative market in which this redistribution of wealth among traders with different information and ability can be studied, and the average deviation from efficiency was shown to depend on traders' characteristics such as the quality and diversity of their information and their risk aversion.
Abstract: It is commonly felt that a financial market achieves informational efficiency as traders with the best information and the most skill make profits at the expense of those with inferior information or ability and come to dominate the market. This paper develops a model of a speculative market in which this redistribution of wealth among traders with different information and ability can be studied. In the short run the market tends toward increased efficiency, but in neither the short nor the long run is full efficiency likely. The average deviation from efficiency is shown to depend on traders' characteristics such as the quality and diversity of their information and their risk aversion.
TL;DR: In this article, conditions for an operative interegenerational transfer motive are derived without special assumptions about the form of the utility function, and the rate at which individuals discount heirs' utility relative to the market interest rate.
Abstract: In a Samuelson overlapping-generations model, conditions for an operative interegenerational transfer motive are derived without special assumptions about the form of the utility function. Crucial in determining if transfers will be positive is the rate at which individuals discount heirs' utility relative to the market interest rate. It is also shown that transfers of human capital (such as investment in education) are not equivalent to ordinary bequests for the bonds-as-net-wealth controversy. If intergenerational transfers take the form of human capital, issuance of government bonds or social security can affect the equilibrium solution, even if the transfer motive is fully operative.
TL;DR: In this paper, the authors used the theory of covariance-stationary stochastic processes to investigate the sign and significance of the relationship between employment and real wages, and found that when appropriate distributed lags are estimated, the data suggest that employment is negatively correlated with real wages.
Abstract: In this paper, the theory of covariance-stationary stochastic processes is used in order to investigate the sign and the significance of the relationship between employment and real wages. It is shown that when appropriate distributed lags are estimated the data suggest that employment and real wages are negatively correlated. The response appears to be non-contemporaneous and statistically significant.
TL;DR: In this article, the authors show that inflation causes capricious changes in the effective rate of tax on capital income and therefore in the real net rate of return that savers receive.
Abstract: Our tax system was designed for an economy with little or no inflation. The current paper shows that inflation causes capricious changes in the effective rate of tax on capital income and therefore in the real net rate of return that savers receive. This is not only a temporary disequilibrium effect but one which persists in steady-state equilibrium. Unlike earlier papers by Feldstein and by Green and Sheshinski, the current study recognizes that firms finance investment by both debt and equity in a ratio that depends on the tax rates and on the rate of inflation.
TL;DR: In this paper, it was shown that the direct substitution effect tends to dominate the interaction effect with the third good, if the two substitutes are close, and the A-A's proposition is shown to be a useful price-theoretic construction, though not a direct implication of the law of demand.
Abstract: Gould and Segall argued that the introduction of a third, composite good vitiates the Alchian and Allen (A-A) theorem that a common charge on two substitute goods leads, real income held constant, to a relative increase in the consumption of the higher to lower quality commodity. Using Hicks's third law, however, it is demonstrated that the direct substitution effect tends to dominate the interaction effect with the third good, if the two substitutes are close. Absolute changes are also investigated and some operational propositions offered with casual supporting observations. A-A's proposition is shown to be a useful price-theoretic construction, though not a direct implication of the law of demand.
TL;DR: In this article, the authors derived an econometrically meaningful test of the Tiebout hypothesis and demonstrated that previous tests are inappropriate. And they showed that the appropriate test requires joint estimation of a set of structural equations determining housing purchases and locational choices utilizing data for both median and nonmedian voters across metropolitan area jurisdictions.
Abstract: This paper derives an econometrically meaningful test of the Tiebout hypothesis and demonstrates that previous tests are inappropriate. The implications generated by two closely related models of voter-determined local fiscal variables and individual resident housing choices are compared. We demonstrate that when the Tiebout mechanism operates without interference, housing quantity and location choices are Pareto efficient, while they are not when frictions interfere with its operation. We show that the appropriate test requires joint estimation of a set of structural equations determining housing purchases and locational choices utilizing data for both median and nonmedian voters across metropolitan area jurisdictions.
TL;DR: In this paper, the problem of deriving shadow prices for use in project evaluation when the existing allocation is characterized by ad valorem trade distortions is addressed, and the analysis is used to clarify and resolve the long-standing debate among effective-rate-of-protection and domestic-resource-cost proponents as to the respective merits of their measures as methods of project evaluation.
Abstract: The paper addresses the problem of deriving shadow prices for use in project evaluation when the existing allocation is characterized by ad valorem trade distortions. The analysis is used to clarify and resolve the long-standing debate among effective-rate-of-protection and domestic-resource-cost proponents as to the respective merits of their measures as methods of project evaluation. The derivation of shadow factor prices is then extended to three major factor market imperfections familiar from extensive trade-theoretic analysis.