Showing papers in "Journal of Political Economy in 1986"
TL;DR: In this paper, the authors present a fully specified model of long-run growth in which knowledge is assumed to be an input in production that has increasing marginal productivity, which is essentially a competitive equilibrium model with endogenous technological change.
Abstract: This paper presents a fully specified model of long-run growth in which knowledge is assumed to be an input in production that has increasing marginal productivity. It is essentially a competitive equilibrium model with endogenous technological change. In contrast to models based on diminishing returns, growth rates can be increasing over time, the effects of small disturbances can be amplified by the actions of private agents, and large countries may always grow faster than small countries. Long-run evidence is offered in support of the empirical relevance of these possibilities.
18,200Â citations
TL;DR: In this paper, a theory of costly contracts is presented, which emphasizes the contractual rights can by of two types: specific rights and residual rights, and when it is costly to list all specific rights over assets, it may be optimal to let one party purchase all residual rights.
Abstract: Our theory of costly contracts emphasizes the contractual rights can by of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1's control increases the productivity of its management more than the loss of control decreases the productivity of firm 2's management.
8,850Â citations
TL;DR: In this article, the authors explore a model in which the presence of a large minority shareholder provides a partial solution to the free-rider problem in a corporation with many small owners, where the corporation may not pay any one of them to monitor the performance of the management.
Abstract: In a corporation with many small owners, it may not pay any one of them to monitor the performance of the management We explore a model in which the presence of a large minority shareholder provides a partial solution to this free-rider problem The model sheds light on the following questions: Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up? How strong are the forces pushing toward increasing concentration of ownership of a diffusely held firm? Why do corporate and personal investors commonly hold stock in the same firm, despite their disparate tax preferences?
7,929Â citations
TL;DR: In this article, the authors analyze the adoption pattern of technologies in industries where network externalities are significant and find that the pattern of adoption depends on whether technologies are sponsored by an entity that has property rights to the technology and is willing to make investments to promote it.
Abstract: We analyze technology adoption in industries where network externalities are significant. The pattern of adoption depends on whether technologies are sponsored. A sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it. Key findings include the following: (1) compatibility tends to be undersupplied by the market, but excessive standardization can occur; (2) in the absence of sponsors, the technology superior today has a strategic advantage and is likely to dominate the market; (3) when one of two rival technologies is sponsored, that technology has a strategic advantage and may be adopted even if it is inferior; (4) when two competing technologies both are sponsored, the technology that will be superior tomorrow has a strategic advantage.
2,644Â citations
TL;DR: This paper presented a signaling model based on the ideas of Phillip Nelson, in which both the introductory price and the level of directly "uninformative" advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in their model.
Abstract: We present a signaling model, based on ideas of Phillip Nelson, in which both the introductory price and the level of directly "uninformative" advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good Repeat purchases play a crucial role in our model A second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals
2,268Â citations
TL;DR: In this article, the authors emphasize the use of accounting data in regulatory or procurement contracts when the supplier has superior information about the cost of the project and invests in cost reduction, and the main result states that, under risk neutrality, the supplier announces an expected cost and is given an incentive contract linear in cost overruns.
Abstract: The paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier (1) has superior information about the cost of the project and (2) invests in cost reduction. The main result states that, under risk neutrality, the supplier announces an expected cost and is given an incentive contract linear in cost overruns. This (optimal) contract moves toward a fixed-price contract as the announced cost decreases. An investment choice is then introduced and the use of a rate-of-return regulation is studied.
1,278Â citations
TL;DR: In this article, a two-asset, intertemporal portfolio selection model incorporating proportional transaction costs is formulated, and the demand for assets is shown to be sensitive to these costs.
Abstract: A two-asset, intertemporal portfolio selection model is formulated incorporating proportional transaction costs. The demand for assets is shown to be sensitive to these costs. However, transaction ...
968Â citations
TL;DR: In this paper, the sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics, the analysis of social security and pensions, and the study of life-cycle patterns of work.
Abstract: The sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics, the analysis of social security and pensions, and the study of life-cycle patterns of work. This paper explores two approaches to the measurement of intertemporal substitution that have appeared in the literature. The first approach is to use consumption to control for wealth and unobserved expectations about future wages in the labor supply equation. The second approach is to estimate a first-difference equation for hours in which labor supply from the previous period serves as a control for wealth and wage expectations. The results indicate that the intertemporal substitution elasticity for married men is positive but small.
602Â citations
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TL;DR: In this paper, a collection of items is to be distributed among several bidders, and each bidder is to receive at most one item, and it has been shown that there is a unique vector of equilibrium prices that is optimal, in a suitable sense, for the bidderers.
Abstract: A collection of items is to be distributed among several bidders, and each bidder is to receive at most one item. Assuming that the bidders place some monetary value on each of the items, it has been shown that there is a unique vector of equilibrium prices that is optimal, in a suitable sense, for the bidders. In this paper we describe two dynamic auction mechanisms: one achieves this equilibrium and the other approximates it to any desired degree of accuracy.
580Â citations
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TL;DR: This article studied the processes of wage and employment dynamics within local labor markets and found that wages are sensitive to interarea differences in market conditions, and that they are more flexible in response to transitory changes in local market conditions than to permanent ones.
Abstract: This paper studies the processes of wage and employment dynamics within local labor markets. The theoretical context is a dynamic spatial equilibrium among locales that is supported by incentives to migrate to markets offering the greatest present value of future earnings. Thus costly migration arbitrages geographic wage differences. Using a time series of cross-sectional files from the Current Population Surveys of 1977-79, I find that wages are sensitive to interarea differences in market conditions. A positive relative shock to local labor demand increases relative wages within a locale, but expectations of future demand actually reduce current wages because of increased current migration. Thus wages are more flexible in response to transitory changes in local market conditions than to permanent ones. Consistent with theory, wages are most flexible among the least mobile demographic groups, who are inelastically supplied across geographic areas.
561Â citations
TL;DR: In this article, household-level data from Sierra Leone are used to test whether higher caloric intake enhances family farm labor productivity, which is the notion behind the efficiency wages hypothesis, which has found only weak empirical support.
Abstract: Household-level data from Sierra Leone are used to test whether higher caloric intake enhances family farm labor productivity. This is the notion behind the efficiency wages hypothesis, which has found only weak empirical support. A farm production function is estimated, accounting for the simultaneity in input and calorie choice. Instruments include prices, household demographic characteristics, and farm assets. The latter two sets of instruments are later dropped to explore the robustness of the results to different specifications of exogeneity. The exercise shows a highly significant effect of caloric intake on labor productivity, providing solid support for the nutrition-productivity hypothesis. The marginal effect on productivity falls drastically as calorie consumption rises but remains positive at moderately high levels of intake. One result is a fall in the effective price of food, a decline that is larger for households that consumer fewer calories.
TL;DR: The authors showed that stock prices appear nonstationary, which is consistent with changes in expectations of future cash flows causing changes in future cash flow, and thus changes in stock prices, which can explain the previously reported gross violations of variance bounds.
Abstract: Previous use of plots of stock prices and "perfect-foresight" prices p*"t as evidence of either "excess volatility" or nonconstant discount rates is invalid since by construction p*"t will differ form and be much smoother than rational prices if discount rates are constant Further, prices appear nonstationary, which can account for the previously reported gross violations of variance bounds Conditional variance bounds that are valid under nonstationarity are not violated for Standard and Poor's data The results are consistent with changes in expectations of future cash flows causing changes in expectations future cash flows causing changes in stock prices
TL;DR: The theoretical basis for measuring child costs is discussed, and detailed consideration is given to two straightforward procedures for calculation, Engel's food share method and Rothbarth's adult good method as discussed by the authors.
Abstract: The theoretical basis for measuring child costs is discussed, and detailed consideration is given to two straightforward procedures for calculation, Engel's food share method and Rothbarth's adult good method. Each of these methods embodies different definitions of child costs so that the same empirical evidence can generate quite different estimates depending on the method used. It is shown that true costs are generally overstated by Engel's method and understated by Rothbarth's procedure, although the latter, unlike the former, can provide a sensible starting point for cost measurement. Our estimates from Sri Lankan and Indonesian data suggest that children cost their parents about 30-40 percent of what they spend on themselves.
TL;DR: In this article, the issue of the parties' investment in the relationship before renegotiation is analyzed in a simple two-period procurement model, and it is shown that if investment is observable by the sponsor andthus may become a joint decision variable, the two parties may choose to under or over invest.
Abstract: Parties bound by an incomplete contract have an incentive to renegotiate after acquiring new information. The issue of the parties' investment in the relationship before renegotiation is analyzed in a simple two-period procurement model. The firm invests in the first period. It then learns its production cost, and the sponsor learns its value for the project. Williamson's underinvestment presumption is shown to hold under very general assumptions about bargaining and about the ex post asymmetry of information as long as the firm's investment is not observable by the sponsor. The introduction of a cancellation fee may well lead to even less investment contrary to what is sometimes argued. The role of ex ante price fixing as an alternative way to reintroduce some form of commitment and the problem of cost overruns are discussed. Last, it is shown that if investment is observable by the sponsor andthus may become a joint decision variable, the two parties may choose to under- or overinvest.
TL;DR: In this paper, an empirical procedure that discriminates between the two models of wage and employment determination in unionized markets is presented and applied to the particular case of the newspaper industry and the International Typographical Union.
Abstract: Two models of wage and employment determination in unionized markets are routinely exposited. According to one, wage and employment outcomes are on the firm's labor demand curve; according to the other, wages and employment are on the partie' contract curve. This paper spells out an empirical procedure that discriminates between these two models and applies this procedure to the particular case of the newspaper industry and the International Typographical Union. The labor demand curve model is inconsistent with our data, while the contract curve model comes closer to describing our observations.
TL;DR: This paper showed that the stabilization of the unemployment rate between the pre-1930 and post-1948 eras is an artifact of improvements in data collection procedures and used Prewar methods to construct postwar unemployment data that are consistent with the historical data.
Abstract: This paper shows that the stabilization of the unemployment rate between the pre-1930 and post-1948 eras is an artifact of improvements in data collection procedures. Prewar methods are used to construct postwar unemployment data that are consistent with the historical data. The constructed postwar series is nearly as volatile as the pre-1930 unemployment data. The constructed postwar data are systematically more volatile than the actual postwar data because the cyclical behavior of the labor force and productivity are misspecified in the construction procedures. The relationship between the actual and constructed postwar unemployment series is used to construct new historical data.
TL;DR: In this article, the authors investigated the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles and found that the bubble findings must be interpreted with care.
Abstract: This paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles. When a new econometric methodology for detecting asset market bubbles is used, the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar/deutsche mark and dollar/pound ratesusing monthly data over the period 1973-82. Additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care.
TL;DR: In this paper, the authors introduce income distribution and sociopolitical instability as arguments in the savings function and present some empirical evidence in relation to their quantitative effects on savings, showing that the bulk of savings are produced by the middle income class.
Abstract: The purpose of this cross-national study is twofold. First, it introduces income distribution and sociopolitical instability as arguments in the savings function. Second, it presents some empirical evidence in relation to their quantitative effects on savings. It is shown that sociopolitical instability has profound effects on the savings ratio. It is also shown that the bulk of savings is produced by the middle income class. As a result a redistribution of income at the expense of the upper income class yields a constant or an increased savings ratio developing on whether such a redistribution includes the lower income class or not.
TL;DR: In this paper, the authors analyzed the impact of a stabilization policy based on a temporary reduction in the rate of devaluation in a one-good, cash-in-advance model, with perfect capital mobility and Ramsey-type consumers.
Abstract: The paper analyzes the impact of a stabilization policy based on a temporary reduction in the rate of devaluation. Against a background in which a constant rate of devaluation has no real effects, it is shown that the temporary policy does and, furthermore, that the real effects tend to become bigger (in absolute value) as the horizon of the temporary policy is shortened. The central discussion is carried out in terms of a one-good, cash-in-advance model, with perfect capital mobility and Ramsey-type consumers. Results are extended to account for home goods and variable velocity; the roles of capital mobility and banking liberalization are briefly discussed.
TL;DR: A rich variety of theoretical models have been developed to describe labour contracts in the presence of bilateral monopoly as mentioned in this paper, but little empirical work based on these models has appeared, and it seems an appropriate time to begin the process of laying out the methods by which these models might be tested and their empirical relevance assessed.
Abstract: In recent years there has been a rebirth of interest in the idiosyncratic nature of employment and wage bargains. The belated recognition of the importance of specific human capital has emphasized that the parties to these bargains enter them with skills or resources whose values either are, or will afterward become, unique to a particular bargaining partnership. This raises the old problem of determining the wage and employment bargain that will be struck under bilateral monopoly. A rich variety of theoretical models have now been developed to describe labour contracts in the presence of bilateral monopoly. As yet, however, little empirical work based on these models has appeared. It seems an appropriate time, therefore, to begin the process of laying out the methods by which these models might be tested and their empirical relevance assessed.
TL;DR: In this paper, the authors found that the price dispersion in automobile insurance in Alberta is based on costly consumer search and that the variance of real premiums decreases with the numberof firms in the market and increases with the real loss cost per car insured and the number of cars insured.
Abstract: From automobile insurance data for Alberta over the period 1974-81, we find thatpremiums are highly correlated across driver classes in a given year, but that premiums for a given driver class are not correlated over a period of more than 5 years. Firms' relative market shares among drivers over age 25 and married males under 25 are inversely related to their deviations from the mean premiums.In these driver classes, the variance of real premiums decreases with the numberof firms in the market and increases with the real loss cost per car insured and the number of cars insured. From these results we conclude that the price dispersion in automobile insurance in Alberta is based on costly consumer search.
TL;DR: This article used a two-country general equilibrium model of the world economy to analyze the effects of budget deficits and government spending on world rates of interest, consumption, and international indebtedness.
Abstract: This paper uses a two-country general equilibrium model of the world economy in order to analyze the effects of budget deficits and government spending on world rates of interest, consumption, and international indebtedness. It demonstrates the difference between the effects of fiscal expenditures and tax cuts as well as between the effects of current policies and expected future policies. It is shown that the qualitative effects of fiscal policies depend on whether the country introducing the policies runs a surplus or a deficit in its current account. Following the positive analysis of the short-run and the steady-state effects, the paper concludes with a normative analysis of the welfare implications of budget deficits.
TL;DR: In this article, it is shown that when applied to analyze the behavior of real gross national product, investment, and productivity in the United States or when they are used to analyze industrial production abroad, the asymmetry hypothesis seems to be less compelling.
Abstract: Evidence has recently been presented by Salih Neftci to support the hypothesis that recessions in economic activity tend to be steeper and more short-lived than recoveries in economic activity. That evidence, however, was confined to the behavior of the unemployment rate in the United States. In this paper it is shown that when Neftci's methods are applied to analyze the behavior of real gross national product, investment, and productivity in the United States or when they are used to analyze industrial production abroad, the asymmetry hypothesis seems to be less compelling.
TL;DR: In this article, the authors reported the results of tests of the major implications of the two-parameter capital asset pricing model and found that the relationship between stock returns and systematic risk contains important nonlinearities during 1935-82.
Abstract: This paper reports the results of tests of the major implications of the two-parameter capital asset pricing model. The findings indicate that the relationship between stock returns and systematic risk contains important nonlinearities during 1935-82. These nonlinearities cannot be ascribed to previously documented anomalies related to firm size or January seasonality. Moreover, the test results appear to be sensitive to the choice of the proxy for the market portfolio.
TL;DR: In this paper, the efficiency effects of categorical discrimination based on sex, age, or race in insurance and similar markets are investigated, and it is shown that a market equilibrium with costless categorization is potentially Pareto superior to one without it.
Abstract: Recent public policy debate has focused concern on the equity dimensions of categorical discrimination based on sex, age, or race in insurance and similar markets. We consider the efficiency effects of such discrimination and establish that costless imperfect categorization always enhances efficiency. When categorization entails a nonnegligible resource cost, however, no unambiguous efficiency ranking of informational regimes is possible. When categorization is costless, we demonstrate that government, having no better information than market participants, can effect redistribution without assuming dictatorial control of the market, implying that a market equilibrium with costless categorization is potentially Pareto superior to one without it. When categorization is costly, however, the market may categorize when Pareto improvements are not possible.
TL;DR: This paper studied the distribution of English wealth from 1911 to 1670 and found that there were widening gaps in mean wealth between the top landed-plus-merchant classes and the middle classes across the Industrial Revolution century.
Abstract: New data on probated wealth, landownership, debts, and occupations extend our view of the distribution of English wealth back from 1911 to 1670. There were widening gaps in mean wealth between the top landed-plus-merchant classes and the middle classes across the Industrial Revolution century. Size distributions for individual assets also widened. So did those for income or total wealth (including human). But nonhuman net worth did not become more unequal because of important shifts in the land share. All inequality measures before 1914 exceeded all those since 1950. The estimates illuminate classical theories of distribution.
TL;DR: In the most frequently used microdata sets, over a quarter of all respondents now refuse to answer some questions about their incomes as discussed by the authors, which has been increasing in severity over time, by imputing incomes of non-respondents.
Abstract: In the most frequently used microdata sets, over a quarter of all respondents now refuse to answer some questions about their incomes. The Census Bureau has dealt with this problem, which has been increasing in severity over time, by imputing incomes of non-respondents. Their imputation procedure, called the "hot deck," essentially matches nonrespondents with demographically similar donors. In this paper we evaluate the census imputation methodology and raise some questions. First, the census procedure is tied to commonality of events in the population rather than the more appropriate informational content of regressors. Clearly, the census procedure severely understates income in certain occupations. Because it is based on the apparently invalid assumption that income does not affect reporting propensities, it most likely understates average incomes as well.
TL;DR: In this paper, a discrete-time version of Jovanovic's model of worker-firm matching is presented, and the matching structure on intertemporal covariances of wages is not rejected.
Abstract: This paper presents a discrete-time version of Jovanovic's model of worker-firm matching. Descriptive evidence is presented that supports the notion that unobserved worker-firm heterogeneity is an important component in the intertemporal structure of wages for young workers. A structural econometric model of wage dynamics under worker-firm sorting is developed and estimated. Finally, a formal test of the matching model is carried out, and the matching structure on intertemporal covariances of wages is not rejected. My results indicate the necessity of jointly considering processes of turnover and wage growth when analyzing the labor market experiences of young workers.
TL;DR: In this paper, it is shown that a central property of the model is that a certain weighted sum of variances and covariances of production, sales, and inventories must be nonnegative.
Abstract: This paper develops and applies a novel test of the Holt et al. linear quadratic inventory model. It is shown that a central property of the model is that a certain weighted sum of variances and covariances of production, sales, and inventories must be nonnegative. The weights are the basic structural parametersof the model. The model may be tested by seeing whether this sum is in fact nonnegative. When the test is applied to some nondurables data aggregated to the two-digit SIC code level, it almost always rejects the model, even though the model does well by traditional criteria.
TL;DR: In this article, the authors investigated the earnings of artists and found that artists do not appear to earn less than other workers of similar training and personal characteristics, contrary to widely held beliefs.
Abstract: With data from the 1980 census, earnings of artists are investigated. It is found that, contrary to widely held beliefs, artists do not appear to earn less than other workers of similar training and personal characteristics. Artists in 1980 are significantly younger than the general work force, probably because of the rapid growth of the artistic professions in recent years.