Showing papers in "Journal of Political Economy in 1982"
TL;DR: In this paper, the role of wages and rents in allocating workers to locations with various quantities of amenities is discussed, and it is shown that if the amenity is also productive, then the sign of the wage gradient is unclear while the rent gradient is positive.
Abstract: This study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities. The theory demonstrates that if the amenity is also productive, then the sign of the wage gradient is unclear while the rent gradient is positive. The theory is extended to include the housing market and nontraded goods. These extensions require little modification of the conclusion. The empirical work on wages shows that the regional wage differences can be explained largely by these local attributes. With the use of site price data, implicit prices are estimated and quality of life rankings for the cities are computed.
2,940 citations
TL;DR: In this article, a simple barter model with identical risk-neutral agents where trade is coordinated by a stochastic matching process is analyzed for a simple single-agent setting, and it is shown that there are multiple steady-state rational expectations equilibria, with all non-corner solution equilibrium inefficient.
Abstract: Equilibrium is analyzed for a simple barter model with identical risk-neutral agents where trade is coordinated by a stochastic matching process. It is shown that there are multiple steady-state rational expectations equilibria, with all non-corner solution equilibria inefficient. This implies that an economy with this type of trade friction does not have a unique natural rate of unemployment.
1,853 citations
TL;DR: In this article, directly unproductive, profit-seeking (DUP) activities are defined as a general concept that embraces a wide range of recently analyzed economic activities, including the subset of rent-seeking activities considered by Krueger.
Abstract: This paper propses directly unproductive, profit-seeking (DUP) activities as a general concept that embraces a wide range of recently analyzed economic activities, including the subset of rent-seeking activities considered by Krueger. It then proceeds to provide a synthesis and generalization of the welfare-theoretic analysis of such activities by developing a fourfold categorization of cases depending on the levels of distortions before and after the DUP activity. Thus a unification and overview of the subject are achieved.
1,215 citations
TL;DR: In this article, the authors present evidence that most of the unemployment fluctuations of the seventies (unlike those in the sixties) were induced by unusual structural shifts within the U.S. economy.
Abstract: A substantial fraction of cyclical unemployment is better characterized as fluctuations of the "frictional" or "natural" rate than as deviations from some relatively stable natural rate. Shifts of employment demand between sectors of the economy necessitate continuous labor reallocation. Since it takes time for workers to find new jobs, some unemployment is unavoidable. This paper presents evidence that most of the unemployment fluctuations of the seventies (unlike those in the sixties) were induced by unusual structural shifts within the U.S. economy. Simple time-series models of layoffs and unemployment are constructed that include a measure of structural shifts within the labor market. These models are estimated and a derived natural rate series is constructed.
1,128 citations
TL;DR: In this paper, a reverse Averch-Johnson result is shown for durable-goods monopolists: if a monopolist is able to rent his product rather than sell it, or to make binding promises about his future production, such problems are ameliorated, and it is shown that the seller will cause a greater deadweight loss than the other types of monopolies.
Abstract: Durable-goods monopolists face special problems because the sale of their products creates a secondhand market not controlled by the monopolist. To the extent the monopolist is able to rent his product rather than sell it, or to make binding promises about his future production, such problems are ameliorated. Given the inability to do the above, the monopolist is led to producing goods less durable than those produced by either competitive firms or monopolist returns. A reverse Averch-Johnson result--that monopolist sellers may invest less in fixed costs (including plant modernization and research and development) than would the renters--is shown. It is also shown that, even though sellers have less monopoly power than renters and nondurable-goods monopolists, it is possible that the seller will cause a greater deadweight loss than the other types of monopolies.
946 citations
TL;DR: In this article, the authors re-examine some recent tests of whether holders of shares with higher dividend yields receive higher risk-adjusted rates of return to compensate for the heavier taxes on dividend payments than on long-term capital gains.
Abstract: This paper reexamines some recent tests of whether holders of shares with higher dividend yields receive higher risk-adjusted rates of return to compensate for the heavier taxes on dividend payments than on long-term capital gains. Our particular concern is with tests using short-run measures of dividend yield--that is, measures that seek to deduce the differential tax burden on dividends over long-term capital gains from differences in rates of return on shares that do not pay a cash dividend during the return interval. We show that such measures are inappropriate for that purpose. Any yield-related effects associated with such measures must arise from sources other than the long-term tax differential. For the short-run measures considered here, the yield-related effects found in some tests are traced to biases, one of a fairly subtle kind, introduced by dividend announcement effects.
643 citations
TL;DR: In this article, the authors report on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one-priced security, where returns to the security depended upon a randomly drawn state of nature.
Abstract: The study reports on the ability of competing models of market information integration and dissemination to explain the behavior of simple laboratory markets for a one-priced security. Returns to the security depended upon a randomly drawn state of nature. Some agents (insiders), whose identity was unknown to other agents, knew the state before the markets opened. With replication of market conditions, the predictions of a fully revealing rational-expectations model are relatively accurate. Prices adjusted immediately to near rational-expectations prices; profits of insiders were virtually indistinguishable from non-insiders; and efficiency levels converged to near 100 percent.
556 citations
TL;DR: This paper developed a general preference model for analyzing parental allocations of resources among their progeny, and the implications of this model for the distribution of educational resources and their allocation among their children.
Abstract: This paper develops a general preference model for analyzing parental allocations of resources among their progeny. The implications fro this model for the distribution of educational resources and...
555 citations
TL;DR: In this paper, the permanent income hypothesis with rational expectation is restated, estimated, and tested by an instrumental variables technique on the postwar U.S. aggregate time-series data.
Abstract: The permanent income hypothesis with rational expectation is restated, estimated, and tested by an instrumental variables technique on the postwar U.S. aggregate time-series data. The hypothesis is accepted on a consumption series which includes service flows from consumer durables. If the consumption series is the one in the National Income and Product Accounts, the hypothesis is decisively rejected. An explanation is suggested to reconcile the conflicting test results.
379 citations
TL;DR: In this article, the authors analyzed the costs and benefits of using a local currency, with emphasis on the seigniorage foregone by using a foreign money, and proposed alternative methods of imposing discipline.
Abstract: In countries with high rates of inflation there is typically movement away from the use of the local currency. The paper analyzes the costs and benefits of using a local currency, with emphasis on the seigniorage foregone by using a foreign money. Even if it should be desirable for a country to fix its exchange rate, it still loses seigniorage if it does not use its own money. The case for using a foreign money then turns largely on the superior discipline imposed on domestic policymakers by removing their control over the money supply. Alternative methods of imposing discipline are discussed. Estimates of the amount of seigniorage raised by different governments are presented; seigniorage amounts in some cases to about 10 percent of government revenue. Estimates are also presented of both the annual flow and one-time stock costs of giving up use of domestic currencies and instead using the dollar. The flow cost is typically about 1 percent of GNP and the stock cost is around 10 percent of GNP.
367 citations
TL;DR: This article treat the exchange rate as an "asset price" that depends on expectations concerning exogenous real and monetary factors that will affect relative prices and absolute price levels in future periods.
Abstract: This model treats the exchange rate as an "asset price" that depends on expectations concerning exogenous real and monetary factors that will affect relative prices and absolute price levels in future periods. Changes in exchange rates reflect both expected changes in these exogenous factors and changes in expectations occasioned by new information. The model explains the random component in exchange rate behavior, the source of divergences from purchasing power parity, the anticipatory response of exchange rates to future expected disturbances, and the causes of exchange rate overshooting.
TL;DR: In this article, the authors develop a methodology for empirically analyzing rational-expectations models displaying this neutrality result and then apply it to the important question of whether anticipated monetary policy matters to the business cycle.
Abstract: A heated debate has arisen over the policy ineffectiveness proposition associate with the work of Lucas, Sargent, and Wallace. It postulates that anticipated aggregate demand policy will have no effect on business-cycle fluctuations, so that one deterministic, feedback policy rule is as good as any other from the point of view of stabilizing the economy. This paper develops a methodology for empirically analyzing rational-expectations models displaying this neutrality result and then applies it to the important question of whether anticipated monetary policy matters to the business cycle.
TL;DR: In this paper, responses to questions given to a random sample of Michigan households are used to estimate public spending demand functions, and positive income elasticities appear to arise because public services are distributed in a prorich manner.
Abstract: Responses to questions given to a random sample of Michigan households are used to estimate public spending demand functions. While income and price elasticities are similar to those obtained from aggregate data, positive income elasticities appear to arise because public services are distributed in a prorich manner. A relatively small variance in spending demands among urban and suburban communities in metropolitan areas with substantial public service variety suggests that the Tiebout mechanism works. This interpretation is supported by the fact that actual spending conforms substantially to desired levels in urban areas, but less so in rural areas with little public sector choice.
TL;DR: In this article, two competing monetary policy prescriptions are analyzed within the context of overlapping generations models, and the models imply that the quantity-theory prescription is not Pareto optimal and the real-bills prescription is.
Abstract: Two competing monetary policy prescriptions are analyzed within the context of overlapping generations models. The real-bills prescription is for unfettered private intermediation or central bank operations designed to produce the effects of such intermediation. The quantity-theory prescription, in contrast, is for restrictions on private intermediation designed to separate "money" from credit. Although our models are consistent with quantity-theory predictions about money supply and price-level behavior under these two policy prescriptions, the models imply that the quantity-theory prescription is not Pareto optimal and the real-bills prescription is.
TL;DR: In this article, the existence and nature of multi-period contracts are discussed and partially characterized, and contracts which are Pareto optimal relative to the environment and the information structure are defined.
Abstract: Informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts. In an illustrative risk-sharing model even relatively short (two-period) contracts can be mutually beneficial if there is private information, though one-period contracts suffice otherwise. Further, contracts which are Pareto optimal relative to the environment and the information structure are defined and partially characterized. An example illustrates how otherwise inefficient intertemporal tie-ins can be used optimally to mitigate incentive problems. The obvious borrowing-lending schemes are not private-information Pareto optimal; in these, period-by-period actions are not sufficiently constrained. Discounting affects the form of the optimal contract but none of these qualitative conclusions.
TL;DR: In this paper, the authors argue that the Tiebout literature is incomplete, because it has not fully accounted for the capitalization of local fiscal variables into house values, and explain why capitalization arises, why it persists in long-run equilibrium, how it affects both residential location and the outcome of local voting, and why it interferes with the efficiency of a system of local governments.
Abstract: The Tiebout literature is incomplete, this paper argues, because it has not fully accounted for the capitalization of local fiscal variables into house values. The paper explains why capitalization arises, why it persists in long-run equilibrium, how it affects both residential location and the outcome of local voting, and why it interferes with the efficiency of a system of local governments. The analysis, which is based on the main Tiebout assumptions plus a property tax, combines a model of household bids in a housing market with a median-voter model of local public service determination.
TL;DR: The authors showed that the social security wealth variable used by Martin Feldstein was seriously flawed as a result of a computer-programming error and that correcting this error substantially changes the estimated effect of social security on saving.
Abstract: In an important article in the Journal of Political Economy, Martin Feldstein (1974) estimated that the introduction of the social security system had reduced personal saving by 50 percent, with serious consequences for capital formation and output. His conclusion was based on a consumer-expenditure function estimated with U.S. time-series data and incorporating a social security wealth variable of his construction. This paper presents new evidence that casts considerable doubt on Feldstein's conclusion. First, the social security wealth variable used by Feldstein was seriously flawed as a result of a computer-programming error. Simply correcting this error substantially changes the estimated effect of social security on saving. Second, the statistical evidence depends upon assumptions which are embedded in the construction of the social security wealth variable-assumptions that are not demonstrably preferable, and are in some cases inferior, to alternative assumptions. These assumptions relate, first, to how individuals form their expectations about the social security benefits they expect to receive and the social security taxes they expect to pay and, second, to estimates of the number of workers, dependent wives, and surviving
TL;DR: In this paper, the authors construct and empirically test a theory of the agricultural firm which explains the long-term growth in farm size in the United States and apply it to U.S. data.
Abstract: In this paper we construct and empirically test a theory of the agricultural firm which explains the long-term growth in farm size in the United States. Typically the U.S. farm unit is a family enterprise. Consequently the ratio of the opportunity cost of farm labor to the price of machinery services determines the size of the farm operation by influencing the machine-labor ratio. Applying the model to U.S. data, we explain virtually all of the growth in the machine-labor ratio and in farm size over the 1930-70 period by changes in relative factor prices without reference to "technological change" or "economies of scale."
TL;DR: Barro and Grossman as discussed by the authors argued that the observed relationship between employment and real wages could be accounted for in an oligopolistic model of firm behavior, thus both the competitive and equilibrium assumptions of the classical model were diagnosed as the sources of its apparent empirical refutation.
Abstract: The neoclassical and Keynesian theories of employment both predict an inverse relationship between employment and real wages in the short run. The observed correlation between employment and real wages, however, has usually failed to conform to this prediction. Dunlop (1938) and Tarshis (1939) reported a positive correlation between real and money wages which, given procyclical movement of money wages, was interpreted as evidence against the theoretical prediction; the statistical significance of these results was, however, challenged by Ruggles (1940) and Tobin (1948). More recent studies by Kuh (1966) and Bodkin (1969) failed to detect a significant relationship between real wages and employment. These findings stimulated a series of contributions by Solow and Stiglitz (1968), Barro and Grossman (1971, 1976), and others, developing alternative models not apparently refuted by the evidence. Barro and Grossman recast macro theory under the assumption that markets did not clear; Modigliani (1977) argued that the observed relationship between employment and real wages could be accounted for in an oligopolistic model of firm behavior. Thus both the competitive and equilibrium assumptions of the classical model were diagnosed as the sources of its apparent empirical refutation.
TL;DR: In this article, the authors examined the use of compulsory lincensing as a policy to combat the monopoly problem associated with the patent system and introduced the notion of an optimal patent, one where the patent life and the licensing royalty rate are both determined optimally.
Abstract: This paper examines the use of compulsory lincensing as a policy to combat the monopoly problem associated with the patent system. It introduces the notion of an optimal patent--one where the patent life and the licensing royalty rate are both determined optimally. Under certain simplifying assumptions it is shown that the optimal patent will have an indefinite life, for both process and product innovations. Some preliminary calculations suggest that the use of compulsory licensing may lead to substantial welfare improvements, even if the patent life is left unchanged at 17 years.
TL;DR: This is the famous quotation from the Wealth of Nations according to which workers employed in undesirable jobs in competitive labor markets should be paid extra to compensate them for taking such jobs.
Abstract: This is the famous quotation from the Wealth of Nations according to which workers employed in undesirable jobs in competitive labor markets should be paid extra to compensate them for taking such jobs. One obvious nonpecuniary disadvantage of some jobs is that they carry an above-average risk of death or serious injury, and the theory predicts that earnings should be higher than in otherwise comparable jobs with lower risks.1 The main counterargument to this theory is that nowadays, noncompetitive forces dominate labor markets, so that one would be
TL;DR: The authors introduced a new approach to the empirical testing of the Lucas-Sargent-Wallace (LSW) "policy ineffectiveness proposition", which compares the LSW hypothesis with an alternative that states that prices respond fully in the long run, but only gradually in the short run, to nominal aggregate demand disturbances.
Abstract: This paper introduces a new approach to the empirical testing of the Lucas-Sargent-Wallace (LSW) "policy ineffectiveness proposition," which compares the LSW hypothesis with an alternative that states that prices respond fully in the long run, but only gradually in the short run, to nominal aggregate demand disturbances. The empirical equations, estimated for a new set of quarterly data extending back to 1890, exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal GNP. The paper compares and tests three alternative methods of introducing "persistence effects" into the LSW framework.
TL;DR: In a follow-up article, Lesnoy and Leimer as discussed by the authors pointed out that the time-series evidence does not support the hypothesis that the introduction of social security has substantially reduced personal saving in the United States.
Abstract: I am embarrassed by the programming error that Dean Leimer and Selig Lesnoy uncovered but grateful to them for the care with which they repeated my original study (Feldstein 1974) They set an admirable example of the tradition of replication on which all scientific work ultimately rests As economic research increasingly involves large and complex computer programs to analyze macroeconomic data sets or to simulate models that cannot be solved analytically, replication studies like that of Leimer and Lesnoy ("Social Security and Private Saving: New Time-Series Evidence," in this issue) should become increasingly important In their comment, Leimer and Lesnoy also suggest a variety of modifications to the social security wealth variable to incorporate alternative employee perceptions and actuarial assumptions As I explain below, I have strong doubts about the appropriateness of these modifications I therefore do not agree with their conclusion that "the time-series evidence does not support the hypothesis that the introduction of social security has substantially reduced personal saving in the United States" More specifically, as I show in this reply, correcting the computerprogramming error and reestimating the original equation for the original sample period produces results that are not substantially different from the results that were originally published in 1974 The point estimate of the coefficient of social security wealth implies that the level of social security wealth in the final year of the sample (1971) depressed personal saving by an amount equal to 44 percent of the actual personal saving in that year Although the estimated coefficient of the social security wealth variable is smaller than in the original version and its standard error larger, the conventional statistical test
TL;DR: In this paper, the authors present an alternative formulation of the model proposed by Ashenfelter and Smith, which accounts for the fact that the penalty that the non-compliant employer receives is exogenously given.
Abstract: Economic analyses of the effects of minimum wage laws usually assume implicitly that employers fully comply with such laws. However, in a recent article in this Journal, Ashenfelter and Smith (1979; hereafter AS) have shown that this is not the case. Using data collected from employees, AS estimate that, for the United States in 1973, only 64 percent of the workers who would otherwise have earned less than the federal minimum wage actually received the minimum wage. Similar data collected from employers indicated a compliance rate of 77 percent. The magnitude of these numbers clearly indicates the need for a better understanding of the factors influencing noncompliance with the federal minimum wage law. Ashenfelter and Smith present a model which explains employers' compliance behavior. They conclude that "the incentive to comply is lower: (a) the lower is the market wage below the minimum wage, and (b) the larger is the elasticity of demand for labor (in absolute value)" (p. 336). They also argue that "the requirement that a violating employer merely pay to employees a fraction of the difference between the minimum and the actual wage received does not constitute a penalty for noncompliance at all" (p. 337). However, by assuming that the amount of the penalty that employers pay if they do not comply is exogenously given, AS do not consider the employment effects of the minimum wage, that is, that noncomplying employers will have hired, in general, more workers than they would have if they had complied. Consequently, the requirement that a noncomplying employer pay a fraction of the difference between the two wages to his employees constitutes a real penalty. This note presents an alternative formulation of the model proposed by AS which accounts for the fact that the penalty that the
TL;DR: In this paper, the expected inflation and welfare in steady-state equilibrium were studied, where the demand for money is an inventory demand with an endogenous payment period, and the Clower constraint was not imposed.
Abstract: This is a paper on expected inflation and welfare in steady-state equilibrium. The demand for money is an inventory demand with an endogenous payment period--the Clower constraint is not imposed. Higher inflation reduces welfare by reducing consumption, as people devote more of their real income to maintaining lower average money holdings. High inflation does not necessarily promote an increase in the capital stock--the Mundell-Tobin effect is absent. The policy conclusion is standard: deflate at the rate of time preference. Because capital is held, socially optimal consumption falls short of its golden-rule level. If inside money is allowed, it drives out fiat money, and welfare is again at a maximum.
TL;DR: In this article, the authors evaluate official foreign exchange intervention during the 1970s using Friedman's profit criterion and show that central banks have failed to stabilize the exchange markets and have lost billions of dollars.
Abstract: Evaluating official foreign exchange intervention during the 1970s using Friedman's profit criterion shows that central banks have failed to stabilize the exchange markets and have lost billions of dollars. The monetary authorities have resisted rate movements, which results in a misallocation of resources when there is a shift in the equilibrium exchange rate. Counterspeculation by exchange traders reduces the destabilizing effect of central-bank intervention and the consequent loss in economic welfare.
TL;DR: Women spend about 50 percent more on average on medical care than men, although men who are hospitalized stay 50 percent longer than women, and this study empirically tests several hypotheses that may account for these differences.
Abstract: Women spend about 50 percent more on average on medical care than men, although men who are hospitalized stay 50 percent longer than women. This study empirically tests several hypotheses that may account for these differences. Results show that these differences are explained by the fact that men may be more able to substitute home for market medical care. Men may also have a lower return to the prior use of medical care because men are more likely to suffer from causes against which medical care is not effective. Potential differences in the value of time do not account for the differences in utilization of medical care.
TL;DR: In this article, a two-period model of extraction and exploration reveals that rent is equal to this cost when discovery is certain, and that exploration uncertainty affects the competitive firm's extraction decision.
Abstract: Noting that a suggested measure of natural resource scarcity, resource rent, is unobservable, we show that rent is linked to (observable) marginal exploration cost. A two-period model of extraction and exploration reveals that rent is equal to this cost when discovery is certain. Under risky exploration, cost data can be used to bound rent. The model also indicates how exploration uncertainty affects the competitive firm's extraction and exploration decisions. Finally, the behavior of U.S. oil and gas exploration costs suggests that these costs were rising in the postwar era, which has different implications for scarcity than indicated by other measures of scarcity.
TL;DR: In this article, exchange rate rules in their role as macroeconomic instruments are discussed and discussed throughout from the trend part of exchange rate behaviour, a crawling peg necessitated by differences in trend inflation.
Abstract: This paper discusses exchange rate rules in their role as macroeconomic instruments. We abstract throughout from the trend part of exchange rate behaviour — a crawling peg necessitated by differences in trend inflation — and emphasise instead the implications of exchange rate rules in providing flexibility of real wages or in affecting the stability of output or prices.
TL;DR: In this article, the authors defend Adam Smith's theory of the firm from the standpoint of positive economics, arguing that his evaluation of the joint-stock firm was not moralistic but instead based on available empirical evidence.
Abstract: We defend Adam Smith's theory of the firm from the standpoint of positive economics. We argue that his evaluation of the joint-stock firm was not moralistic but instead based on available empirical evidence. The record showed that joint-stock companies had a poor survivorship record, even when granted legal monopoly status. His analysis contained an explanation of the role of agency costs within the firm. Finally, he did not discuss the East India Company as an ordinary joint-stock firm but rather as an aberrant form created by government.