Showing papers in "Journal of Political Economy in 1981"
TL;DR: The authors analyzes compensation schemes which pay according to an individual's ordinal rank in an organization rather than his output level and shows that wages based upon rank induce the same efficient allocation of resources as an incentive reward scheme based on individual output levels.
Abstract: This paper analyzes compensation schemes which pay according to an individual's ordinal rank in an organization rather than his output level. When workers are risk neutral, it is shown that wages based upon rank induce the same efficient allocation of resources as an incentive reward scheme based on individual output levels. Under some circumstances, risk-averse workers actually prefer to be paid on the basis of rank. In addition, if workers are heterogeneous inability, low-quality workers attempt to contaminate high-quality firms, resulting in adverse selection. However, if ability is known in advance, a competitive handicapping structure exists which allows all workers to compete efficiently in the same organization.
4,711 citations
TL;DR: In a general equilibrium model of a labor economy, the size of government, measured by the share of income redistributed, is determined by majority rule as mentioned in this paper, where voters rationally anticipate the disincentive effects of taxation on the labor-leisure choices of their fellow citizens and take the effect into account when voting.
Abstract: In a general equilibrium model of a labor economy, the size of government, measured by the share of income redistributed, is determined by majority rule. Voters rationally anticipate the disincentive effects of taxation on the labor-leisure choices of their fellow citizens and take the effect into account when voting. The share of earned income redistributed depends on the voting rule and on the distribution of productivity in the economy. Under majority rule, the equilibrium tax share balances the budget and pays for the voters' choices. The principal reasons for increased size of government implied by the model are extensions of the franchise that change the position of the decisive voter in the income distribution and changes in relative productivity. An increase in mean income relative to the income of the decisive voter increases the size of government.
4,696 citations
TL;DR: The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined in this article, where increased price is shown to be a means of assuring contractual performance.
Abstract: The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined. Increased price is shown to be a means of assuring contractual performance. A necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance. This will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm-specific assets. Advertising investments thereby become a positive indicator of likely performance.
3,681 citations
TL;DR: In this paper, the concept of self-control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization, where the individual at a point in time is assumed to be both a farsighted planner and a myopic doer.
Abstract: The concept of self-control is incorporated in a theory of individual intertemporal choice by modeling the individual as an organization. The individual at a point in time is assumed to be both a farsighted planner and a myopic doer. The resulting conflict is seen to be fundamentally similar to the agency conflict between the owners and managers of a firm. Both individuals and firms use the same techniques to mitigate the problems which the conflicts create. This paper stresses the implications of this agency model and discusses as applications the effect of pensions on saving, saving and the timing of income flows, and individual discount rates.
1,675 citations
TL;DR: In this article, a rational political explanation for the notorious inefficiency of pork-barrel projects with an optimization model of legislative behavior and legislative institutions is presented. But the model emphasizes the importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation.
Abstract: This essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions. The model emphasizes the (economically arbitrary, from a welfare point of view) importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation. We explore the implications of a legislator's objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale.
1,636 citations
TL;DR: In this paper, the role of current income in providing new information about future income and signalling changes in permanent income is analyzed using time-series analysis to quantify the revision in permanent incomes induced by an innovation in the current income process.
Abstract: The paper analyzes the role of current income in providing new information about future income and thus signalling changes in permanent income Using time-series analysis to quantify the revision in permanent income induced by an innovation in the current income process, a structural econometric model of consumption is developed The rejection of the joint rational expectations-permanent income hypothesis is both statistically and quantitatively significant The paper also shows that the test of the rational expectations-permanent income hypothesis proposed by Hall is based on the reduced form of this structural model and reconciles Sargent's consumption paper with Hall's
1,342 citations
TL;DR: In this paper, the authors developed a simple model which illustrates that interindustry specialization and trade are also accompanied by intraindustry specialization, which reflects scale economies and consumers' taste for a diversity of products.
Abstract: Several recent empirical studies of trade suggest that interindustry specialization and trade, which reflect the conventional forces of comparative advantage, are also accompanied by intraindustry specialization, which reflects scale economies and consumers' taste for a diversity of products. This paper develops a simple model which illustrates this argument. Two main results are developed. First, the nature of trade depends on how similar countries are in their factor endowments. As countries become more similar, the trade between them will increasingly become intraindustry in character. Second, the effects of opening trade depend on its type. If intraindustry trade is sufficiently dominant, the advantages of extending the market will outweigh the distributional effects, and the owners of scarce as well as of abundant factors will be better off.
990 citations
TL;DR: The authors formulates and estimates a structural intertemporal model of labor supply using theoretical characterizations derived from an economic model of lifetime behavior, and a two-step empirical analysis yields estimates of inter-temporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life-cycle wage growth and shifts in the lifetime wage path.
Abstract: This paper formulates and estimates a structural intertemporal model of labor supply. Using theoretical characterizations derived from an economic model of lifetime behavior, a two-step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life-cycle wage growth and shifts in the lifetime wage path.
745 citations
TL;DR: The authors used historical U.S. data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation and found that only a negligible fraction of actual capital accumulation can be traced to life-cycle or "hump" savings.
Abstract: This paper uses historical U.S. data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation. The evidence presented indicates that intergenerational transfers account for the vast majority of aggregate U.S. capital formation; only a negligible fraction of actual capital accumulation can be traced to life-cycle or "hump" savings. A major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age-earnings and age-consumption profiles. These profiles are simply too flat to generate substantial life-cycle savings. This paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers. Life-cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers.
727 citations
TL;DR: The 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century (since the Bretton Woods conference) into flexible (though managed) rates as discussed by the authors.
Abstract: Recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates. The 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century (since the Bretton Woods conference) into a regime of flexible (though managed) rates. As a consequence of the emergence of the new legal and economic system traders, national governments and international organisations were confronted with new economic problems, choices and instruments. During the 1970s ex-change rates fluctuated widely and inflation rates accelerated. The international monetary system had to accommodate extraordinarily large oil-related shocks which affected trade flows in goods and assets. Huge oil payments had to be recycled. Uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier. These developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets. They were associated with a large slide in the value of the US dollar, and resulted in speeding up the creation of new institutions like the European monetary system which provided the formal framework for the management of exchange rates among members.
623 citations
TL;DR: In the absence of public annuities, these risk-sharing arrangements provide powerful incentives for marriage and family formation as discussed by the authors, and they can substitute by more than 70 percent for perfect market annuity markets.
Abstract: Families can self-insure against uncertain dates of death through implicit or explicit agreements with respect to consumption and interfamily transfers. Interfamily transfers need have nothing to do with altruistic feelings; they may simply reflect risk-sharing behavior of completely selfish family members. Although family annuity markets are incomplete, even small families can substitute by more than 70 percent for perfect market annuities. Given adverse selection and transaction costs, family risk pooling may be preferred to public market annuities. In the absence of public annuities, these risk-sharing arrangements provide powerful incentives for marriage and family formation.
TL;DR: In this paper, the authors focus on the distinction between temporary and permanent movements in government purchases and show that under plausible conditions, the temporary case involves an output response that is positive, less than one-to-one with the change of government purchases, and larger than that generated by an equal-sized, but permanent, shift in purchase.
Abstract: The theoretical analysis focuses on the distinction between temporary and permanent movements in government purchases. Under plausible conditions, the temporary case involves an output response that is positive, less than one-to-one with the change in government purchases, and larger than that generated by an equal-sized, but permanent, shift in purchase. The equilibrium real rate of return rise in the temporary case, but changes little in the permanent one. Defense purchases are divided empirically into "permanent" and "temporary" components by considering the role of (temporary) wars. No temporary shifts in nondefense purchases were isolated. Empirical results verify an expansionary output effect for temporary purchases that exceeds that of permanent purchases. The results for some other expectational hypotheses are found to be generally supportive of the theory.
TL;DR: In the absence of annuities, after an initial period influenced by borrowing constraints, under constant relative risk aversion, uncertain lifetime depresses consumption by a proportion increasing with age if the elasticity of intertemporal substitution in consumption is "small" as discussed by the authors.
Abstract: This paper asks whether the continued accumulation, or mild dissaving, observed among the retired can be explained by uncertain lifetime. In the absence of annuities, after an initial period influenced by borrowing constraints, under constant relative risk aversion, uncertain lifetime depresses consumption by a proportion increasing with age if the elasticity of intertemporal substitution in consumption is "small." Illustrative computations, based on actual income and survival data, show that plausible elasticities are sufficiently small to give this effect. The reduction in consumption is large enough to explain much of the lack of decumulation by the elderly.
TL;DR: In this paper, the authors show that transaction costs cause bid-ask spreads to be an equilibrium property of asset markets, and that with transaction costs, the probability of a limit order executing does not go to unity as the order is placed infinitesimally close to a counterpart market quote.
Abstract: By considering investor order placement strategy, this paper demonstrates that transaction costs cause bid-ask spreads to be an equilibrium property of asset markets. With transaction costs, the probability of a limit order executing does not go to unity as the order is placed infinitesimally close to a counterpart market quote; thus, with certainty of execution at the counterpart market quote, a "gravitational pull" is generated that keeps counterpart quotes from being placed infinitesimally close to each other. An equilibrium spread is defined and its size linked to market thinness; implications are noted for the design of a trading system.
TL;DR: In this article, the authors investigated whether compensation among local jurisdiction is, by itself, sufficient to ensure efficient provision of local public goods and showed that competition among numerous jurisdictions is not sificient to guarantee public sector efficiency.
Abstract: The paper investigates whether compensation among local jurisdiction is, by itself, sufficient to ensure efficient provision of local public goods. Jurisdictions have fixed boundaries, and each has an entrenched government with the power to tax and supply the public good. Residents can move costlessly among jurisdictions. It is shown that competition among numerous jurisdictions is not sificient to guarantee public sector efficiency. Though residents can "vote with their feet," land is immobile. Hence, governments can unsurp some land rents for their own ends. Increasing the number of jurisdictions limits but cannot completely eliminate the ability to exercise discretionary governmental power.
TL;DR: In this paper, it is shown that with imperfect job information flows, the distribution of job offerings becomes more attractive when there are more vacancies and more unemployed, and that workers become more selective in the jobs they accept.
Abstract: With imperfect job information flows, it is plausible that the distribution of job offerings becomes more attractive when there are more vacancies and more unemployed. With word-of-mouth communication, this condition is derived. Given this condition, steady-state equilibrium is not efficient, with welfare increased by the introduction of unemployment compensation even though all agents are risk neutral. In this way workers become more selective in the jobs they accept.
TL;DR: The authors showed that the inheritance received by children is inversely related to both children's income and parental education, and that bequests are "compensatory" in that low-income children inherit more than their advantaged contemporaries.
Abstract: Unequal inheritance of material wealth is commonly considered a major cause of inequality in consumption. However, theoretical models of the intergenerational transmission of inequality by Becker, Blinder, and Ishikawa imply that unequal inheritance may either increase or reduce consumption inequality. Differences in inherited wealth resulting from unequal parental incomes increase inequality in recipients' consumption. However, unequal bequests caused by differences among families in the endowed ability of children or the costs of producing human capital are equalizing. Empirical results confirm these predictions: The inheritance received by children is inversely related to both children's income and parental education. Thus bequests are "compensatory" in that (ceteris paribus) low-income children inherit more than their advantaged contemporaries.
TL;DR: In this paper, two economies, represented by diamond-type overlapping-generations models and differing only in their pure rates of time preference, are compared under autarky and openness.
Abstract: Two economies, represented by Diamond-type overlapping-generations models and differing only in their pure rates of time preference, are joined together. Capital formation, balance-of-payments behavior, and welfare are compared under autarky and openness. With a positive natural rate of growth, the low-time-preference country runs a current account surplus in the steady state but not necessarily outside it. If preexisting capital is not shiftable between countries, integration in the world economy makes the high-time-preference country worse off in the short run. The ranking of stationary utility levels under autarky and openness is ambiguous.
TL;DR: In this paper, three exchange-rate regimes (a float, a one-sided peg, and a cooperative peg) are evaluated and compared in terms of efficiency and welfare levels.
Abstract: Three exchange-rate regimes--a float, a one-sided peg, and a cooperative peg-are evaluated and compared in terms of efficiency and welfare levels. The framework of analysis embodies country-specific monies, with the money of each country being used to transact in its commodity markets and its currency-denominated bonds. Welfare levels depend only on consumption levels. In the presence of perfect foresight all equilibrium allocations are Pareto efficient. In a floating exchange-rate regime the perfect foresight equilibrium allocation coincides with an equilibrium of a costless barter economy. The same result holds in a one-sided peg if the pegging country's exchange-rate stabilizing authority breaks even over time. In a cooperative peg regime there is a different equilibrium allocation for each combination of exchange-rate levels and monetary policies. Problems of policy coordination and conflicts in desired monetary policies are discussed.
TL;DR: In this article, a simple model for the determination of tariff and nontariff barriers to trade across industries within the United States, using 1970 trade data, was developed and tested for determining the trade barriers.
Abstract: This paper develops and tests a simple model for the determination of tariff and nontariff barriers to trade across industries within the United States, using 1970 trade data We find that nontariff trade restrictions have supplemented tariff protection in the United States Both tariff and nontariff trade restrictions are biased toward industries in which the United States has an apparent comparative disadvantage in world trade and away from industries in which consumer welfare losses from protection would be great We also find substantial evidence that tariff and nontariff trade restrictions predominate in industries with very different market characteristics
TL;DR: The authors used an infinite-horizon model based on individual maximizing behavior to study whether explosive price-level paths unrelated to monetary growth can be equilibrium paths under rational expectations, and showed that implosive price level paths and divergent paths for capital asset prices are not equilibria under either monetary regime.
Abstract: This paper uses an infinite-horizon model based on individual maximizing behavior to study whether explosive price-level paths unrelated to monetary growth--speculative hyperinflations--can be equilibrium paths under rational expectations. In a pure fiat money regime, speculative hyperinflations can be excluded only through severe restrictions on individual preferences; but when the government fractionally backs the currency by guaranteeing a minimal real redemption value for money, speculative hyperinflations are impossible, even if agents are not completely certain that they can redeem their money in any given period. The analysis also confirms that implosive price-level paths and divergent paths for capital asset prices are not equilibria under either monetary regime.
TL;DR: In this paper, the welfare cost of capital income taxation is analyzed in a general equilibrium framework, where the private sector is represented by a competitive household endowed with perfect foresight and an infinite life.
Abstract: The welfare cost of capital income taxation is analyzed in a general equilibrium framework, where the private sector is represented by a competitive household endowed with perfect foresight and an infinite life. The value of the welfare cost depends essentially on the elasticity of substitution between capital and labor in the production function. Numerical estimates are presented for different values of the parameters of the model. The welfare gain obtained by the abolition of the capital income tax is smaller when the private sector is not endowed with perfect foresight (it is reduced by about 40 percent when expectations are myopic). The allocation efficiency cost of the corporate tax dwarfs the intertemporal welfare cost.
TL;DR: The case for positive time preference is absolutely compelling, unless there is an infinite time horizon with the expectation of unending technological advance combined with what we call "drastically diminishing marginal utility" as mentioned in this paper.
Abstract: The case for positive time preference is absolutely compelling, unless there is an infinite time horizon with the expectation of unending technological advance combined with what we call "drastically diminishing marginal utility." This finding holds both in the positive and normative senses. A corollary is that savings are interest elastic.
TL;DR: In this article, a model of exchange-rate and current-account determination for a small economy peopled by infinitely lived, utility-maximizing households was developed, which implies that an increase in government spending may lead to a surplus on current account.
Abstract: The paper develops a model of exchange-rate and current-account determination for a small economy peopled by infinitely lived, utility-maximizing households. In this setting, a central-bank purchase of foreign exchange has no real effects when central-bank foreign reserves earn interest at the world rate and proceeds are returned to the public. In contrast, an increase in the monetary growth rate does have real effects, even in the long run. The model developed here implies that an increase in government spending may lead to a surplus on current account. The external adjustment process predicted by the model is one in which consumption, real balances, and external assets all rise or fall simultaneously.
TL;DR: In this article, a testable price dispersion model is proposed, in which the explanatory variable is the magnitude of the unperceived money growth, and the model receives support from empirical analysis.
Abstract: A price dispersion equation is tested with data from the German hyperinflation. The equation is derived from a version of Lucas's and Barro's partial information-localized market models. In this extension, different excess demand elasticities across commodities imply a testable dispersion equation, in which the explanatory variable is the magnitude of the unperceived money growth. In order to test this hypothesis a price dispersion series is constructed, and a measure of the unperceived part of money growth is estimated. The model receives support from the empirical analysis, although it is evident that unincluded variables have important effects on price dispersion.
TL;DR: In this article, a simple scheme is proposed to measure monopoly pricing behavior, where the coefficient of the tax rate term in a price equation identifies the ratio of price to marginal cost, and no direct measurement of costs is required, so a major problem for other empirical studies of monopoly is avoided.
Abstract: A simple scheme is proposed to measure monopoly pricing behavior. The coefficient of the tax rate term in a price equation identifies the ratio of price to marginal cost. No direct measurement of costs is required, so a major problem for other empirical studies of monopoly is avoided. Empirical results for cross-section time-series data support rejection of atomistic competition but also provide evidence against the operation of an effective cartel in the cigarette industry. The model represents an alternative interpretation of related results in a recent paper by Barzel. Application of the methodology to other markets is feasible.
TL;DR: In this article, the authors explore the implications for econometric practice of the principle that people's observed behavior will change when their constraints change and propose a proper definition of people's constraints, which includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell.
Abstract: This paper explores some of the implications for econometric practice of the principle that people's observed behavior will change when their constraints change. In dynamic contexts, a proper definition of people's constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell. Changes in agents' perceptions of these laws of motion (or constraints) will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess. Until very recently, received dynamic econometric practice ignored this principle. The practice of dynamic econometrics should be changed so that it is consistent with the principle that people's rules of choice are influenced by their constraints. This is a substantial undertaking and involves major adjustments in the ways that we formulate, estimate, and simulate econometric models.
TL;DR: In this article, the authors formulate and test a model of collusive pricing in the presence of antitrust enforcement and show that a cartel's optimal price is likely to be neither the competitive price nor the price that the cartel would set in the absence of the antitrust enforcement, but rather an intermediate price that depends on the levels of enforcement efforts and penalties.
Abstract: In this paper we formulate and test a model of collusive pricing in the presence of antitrust enforcement. We show that a cartel's optimal price is likely to be neither the competitive price nor the price that the cartel would set in the absence of antitrust enforcement but rather an intermediate price that depends on the levels of antitrust enforcement efforts and penalties. Our empirical results reveal that increasing antitrust enforcement in the presence of a credible threat of large damage awards has the deterrent effect of reducing mark-ups in the bread industry.
TL;DR: In this paper, it was argued that under linear or concave demand, the capital cost of a firm of minimum efficient scale is an upper bound on the present value of the monopoly profit stream that can be shielded from entry.
Abstract: Dixit has recently presented a model in which established firms select capacity to discourage entry but cannot employ threats they would not rationally execute after entry. Entry deterrence in a slight modification of this model involves the classical limit-price output. Under linear or concave demand, however, the capital cost of a firm of minimum efficient scale is an upper bound on the present value of the monopoly profit stream that can be shielded from entry. It is argued that this suggests the general unimportance of entry barriers erected by scale economies.