Showing papers in "Journal of Political Economy in 1988"
TL;DR: The authors developed a theory of rational addiction in which rationality means a consistent plan to maximize utility over time, and showed that even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention.
Abstract: We develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time. Strong addiction to a good requires a big effect of past consumption of the good on current consumption. Such powerful complementarities cause some steady states to be unstable. They are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention. Our theory also implies that "cold turkey" is used to end strong addictions, that addicts often go on binges, that addicts respond more to permanent than to temporary changes in prices of addictive goods, and that anxiety and tensions can precipitate an addiction.
3,281 citations
TL;DR: In this paper, a multivariate generalized autoregressive conditional heteroscedastic process is estimated for returns to bills, bonds, and stock where the expected return is proportional to the conditional convariance of each return with that of a fully diversified or market portfolio.
Abstract: The capital asset pricing model provides a theoretical structure for the pricing of assets with uncertain returns. The premium to induce risk-averse investors to bear risk is proportional to the nondiversifiable risk, which is measured by the covariance of the asset return with the market portfolio return. In this paper a multivariate generalized autoregressive conditional heteroscedastic process is estimated for returns to bills, bonds, and stock where the expected return is proportional to the conditional convariance of each return with that of a fully diversified or market portfolio. It is found that the conditional covariances are quite variable over time and are a significant determinant of time-varying risk premia. The implied betas are also time-varying and forecastable. However, there is evidence that other variables including innovations in consumption should also be considered in the investor's information set when estimating the conditional distribution of returns.
3,257 citations
TL;DR: This article found that a slowly mean-reverting component of stock prices tends to induce negative autocorrelation in returns, which is weak for the daily and weekly holding periods common in market efficiency tests but stronger for long-horizon returns.
Abstract: A slowly mean-reverting component of stock prices tends to induce negative autocorrelation in returns. The autocorrelation is weak for the daily and weekly holding periods common in market efficiency tests but stronger for long-horizon returns. In tests for the 1926-85 period, large negative autocorrelations for return horizons beyond a year suggest that predictable price variation due to mean reversion accounts for large fractions of 3-5-year return variances. Predictable variation is estimated to be about 40 percent of 3-5-year return variances for portfolios of small firms. The percentage falls to around 25 percent for portfolios of large firms.
3,015 citations
TL;DR: In this paper, the authors examine the familiar argument that takeover pressure can be damaging because it leads managers to sacrifice long-term interests in order to boost current profits, and they show that temporarily low earnings may cause the stock to become undervalued, increasing the likelihood of a takeover at an unfavorable price; hence the managerial concern with current bottom line.
Abstract: This paper examines the familiar argument that takeover pressure can be damaging because it leads managers to sacrifice long-term interests in order to boost current profits. If stockholders are imperfectly informed, temporarily low earnings may cause the stock to become undervalued, increasing the likelihood of a takeover at an unfavorable price; hence the managerial concern with current bottom line. The magnitude of the problem depends on a variety of factors, including the attitudes and beliefs of shareholders, the extent to which corporate raiders have inside information, and the degree to which managers are concerned with retaining control of their firms.
1,549 citations
TL;DR: A detailed study of data for the twentieth-century United States showed no strong evidence that the elasticity of intertemporal substitution is positive as mentioned in this paper, and this finding was later reversed when appropriate estimation methods were used.
Abstract: One of the important determinants of the response of saving and consumption to the real interest rate is the elasticity of intertemporal substitution. That elasticity can be measured by the response of the rate of change of consumption to changes in the expected real interest rated. A detailed study of data for the twentieth-century United States shows no strong evidence that the elasticity of intertemporal substitution is positive. Earlier findings of substantially positive elasticities are reversed when appropriate estimation methods are used.
1,524 citations
TL;DR: In this article, the authors present a measure of the persistence of fluctuations in GNP based on the variance of its long differences, and show that conventional criteria for time series model building can produce misleading estimates of persistence.
Abstract: This paper presents a measure of the persistence of fluctuations in GNP based on the variance of its long differences. That measure finds little long-term persistence in GNP. Previous research on this question found a great deal of persistence in GNP, suggesting models such as a random walk. A reconciliation of this paper's results with previous research shows that conventional criteria for time-series model building can produce misleading estimates of persistence.
1,363 citations
TL;DR: In this article, the authors provide a theory of legislative institutions that parallels the theory of the firm and contract theory of contractual institutions, and explain why, given the peculiar form of bargaining problems found in legislatures, specific forms of nonmarket exchange prove superior to market exchange.
Abstract: This paper provides a theory of legislative institutions that parallels the theory of the firm and the theory of contractual institutions. Like market institutions, legislative institutions reflect two key components: the goals or preferences of individuals (here, representatives seeking reelection) and the relevant transactions costs. We present three conclusions. First, we show how the legislative institutions enforce bargains among legislators. Second, we explain why, given the peculiar form of bargaining problems found in legislatures, specific forms of nonmarket exchange prove superior to market exchange. Third, our approach shows how the committee system limits the types of coalitions that may form on a particular issue.
1,316 citations
TL;DR: The authors found that cyclical variations in labor input are small compared with variations in output, and that firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs.
Abstract: An examination of data on output and labor input reveals that some U.S. industries have marginal cost well below price. The conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output. In booms, firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs. The paper documents the disparity between price and marginal cost, where marginal cost is estimated from annual variations in cost. It considers a variety of explanations of the findings that are consistent with competition, but none is found to be completely plausible.
1,187 citations
TL;DR: In this article, the authors compared the performance of 115 market economies over the period 1960-80 with measures of political, civil, and economic liberty, and found that the institutional framework has significant and large effects on the efficiency and growth rate of economies.
Abstract: The compound growth rates of per capita output and Farrell-type efficiency measures for 115 market economies over the period 1960-80 were compared with measures of political, civil, and economic liberty. It was found that the institutional framework has significant and large effects on the efficiency and growth rate of economies. Politically open societies, which subscribe to the rule of law, to private property, and to the market allocation of resources, grow at three times the rate and are two and one-half times as efficient as societies in which these freedoms are abridged.
740 citations
TL;DR: In this paper, the authors contrast panics and information-based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered by two-sided asymmetric information: the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality.
Abstract: In this paper we contrast panics and information-based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered. The model of information-based runs is characterized by two-sided asymmetric information: the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality. We also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts. We show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns.
695 citations
TL;DR: In this article, the authors argue that when changing jobs is costly, efficient employment contracts usually fail to compensate workers for the effects of posthiring events and decisions, and when there are executives and managers with authority to make discretionary decisions, affected employees will be led to waste valuable time trying to influence their decisions.
Abstract: When changing jobs is costly, efficient employment contracts usually fail to compensate workers for the effects of posthiring events and decisions. Then, when there are executives and managers with authority to make discretionary decisions, affected employees will be led to waste valuable time trying to influence their decisions. Efficient organization design counters this tendency by limiting the discretion of decisions makers, especially for those decisions that have large distributional consequences but that are otherwise of little consequence to the organization.
TL;DR: In this article, a general equilibrium model of unemployment and the business cycle is investigated, in which specialization of labor plays a key role, and a rational expectations equilibrium with fully flexible wages and prices can exhibit unemployment in which the marginal product of employed workers exceeds the reservation wage of those without jobs.
Abstract: This paper investigates a general equilibrium model of unemployment and the business cycle in which specialization of labor plays a key role. A rational expectations equilibrium with fully flexible wages and prices can exhibit unemployment in which the marginal product of employed workers exceeds the reservation wage of those who are without jobs. Workers are unemployed either because they are in the process of relocating for a better job or because they are waiting for conditions in the depressed sector to improve. Moreover, seemingly small disruptions in the supplies of primary commodities such as energy could be the source of fluctuations in aggregate employment and can exert surprisingly large effects on real output.
TL;DR: In this paper, a dynamic general equilibrium model is developed in which goods are valued according to the characteristics they contain, the set of goods produced in any period is endogenously determined, and learning by doing is the force behind sustained growth.
Abstract: A dynamic general equilibrium model is developed in which goods are valued according to the characteristics they contain, the set of goods produced in any period is endogenously determined, and learning by doing is the force behind sustained growth. It is shown that the set of produced goods changes in a systematic way over time, with goods of higher quality entering each period and those of lower quality dropping out. The model is then used to study the effect of introducing a "traditional" sector in which there is no learning.
TL;DR: In this paper, a supply-determined model of housing investment is estimated from quarterly data over the 1963-83 period, and the model is built on dynamic marginal cost pricing considerations and allows short and long-run supply elasticities to differ.
Abstract: A supply-determined model of housing investment is estimated from quarterly data over the 1963-83 period. The model is built on dynamic marginal cost pricing considerations and allows short- and long-run supply elasticities to differ. These are estimated as 1.0 and 3.0, respectively, but most of the long-run response occurs within 1 year. Rapid adjustment speed and the sizable long-run elasticity of supply are important factors in understanding the volatility of housing investment. The data also suggest some anomalies in the expected present value theory of asset pricing for housing capital.
TL;DR: In this article, a procedure for estimating a general index of technical change within the context of a quite general production technology is presented, when panel data are available for firms in an industry, time-specific dummies can be combined in a nonlinear estimation procedure.
Abstract: This paper outlines a procedure for estimating a general index of technical change within the context of a quite general production technology. Specifically, when panel data are available for firms in an industry, time-specific dummies can be combined in a nonlinear estimation procedure to yield a general index of technical change that may be both nonneutral and scale augmenting. This approach offers numerous advantages over the traditional time trend representation of technical change. For example, the general index can serve as the basis for analysis of the determinants of technical change. Results for a sample of 30 electric utilities over the period 1951-78 show that the productivity decline of the 1970s can be attributed primarily to sulphur oxide restrictions and secularly declining capacity utilization due to rapidly increasing peak-load demands.
TL;DR: In this article, the authors studied whether individuals receive differential returns to publishing articles of varying quality and to coauthored versus single-authored articles, and found that substantial returns to quality exist and that an individual's return from a coauthored paper with n authors is approximately 1/n times that of a singleauthored paper.
Abstract: Salaries of academic economists are studied to determine if individuals receive differential returns to publishing articles of varying quality and to coauthored versus single-authored articles. Estimates based on detailed data and a flexible nonlinear least-squares procedure indicate that substantial returns to quality exist and that an individual's return from a coauthored paper with n authors is approximately 1/n times that of a single-authored paper.
TL;DR: In this paper, an academic department is modeled as an internal labor market and the major problem facing the university administration is to ensure that members of its departments are willing to hire the best possible candidates.
Abstract: This paper models ancademic department as an internal labor market. The major problem facing the university administration is to ensure that members of its departments are willing to hire the best possible candidates. Academic tenure is seen to be a necessary condition for this. The analysis is also consistent with other aspects of the academic environment including "tenure-track" appointments, contract buy-outs, early retirement plans, and, when a budget crunch hits, the elimination of entire departments. The results extend in a simple way to other organizations in which members have an input into overall decisions.
TL;DR: The authors analyzes the strategic and intertemporal interaction between two economic agents who have "overlapping" concerns, such as altruistic concerns for each other's welfare, and shows how the presence of such common concerns may lead to socially inefficient outcomes, in which one economic agent "free rides" on the other's concern.
Abstract: This paper analyzes the strategic and intertemporal interaction between two economic agents who have "overlapping" concerns, such as altruistic concerns for each other's welfare. The agents may be two individuals, a social bureau and a client, or two units in an organization. We show how the presence of such common concerns may lead to socially inefficient outcomes, in which one economic agent "free rides" on the other's concern. We also briefly how this inefficiency and free-riding, in the context of interaction between individuals, might be mitigated by compulsory social security systems. As another example we interpret the inefficiency in terms of Kornai's "soft budget constraints" within organizations.
TL;DR: The extension of economic analysis to problems beyond the domain of formal markets and explicit prices represents a major recent intellectual development as mentioned in this paper. But "economic imperialism" is not new and was not invented in Chicago.
Abstract: The extension of economic analysis to problems beyond the domain of formal markets and explicit prices represents a major recent intellectual development. But "economic imperialism" is not new and was not invented in Chicago. Adam Smith, in his Wealth of Nations, extended economic reasoning to a variety of nonmarket exchange problems. One example is his analysis of religious behavior. Smith viewed participation in religion as a rational device by which individual enhanced the value of their human capital. He also explained the behavior of the clergy and other suppliers of religious services from an economic perspective.
TL;DR: In this article, Hamilton argued that the monocentric urban model has little predictive value concerning commuting behavior and that actual commuting behavior could be predicted just as well using an assumption that commuting is random.
Abstract: Do urban workers commute too much? Bruce Hamilton (1982) was the first to raise the question whether urban workers' commuting journeys are too long or, in his terms, "wasteful." He argued that the monocentric urban model predicts that workers' commuting journeys will be minimized. To test the model, he calculated the minimum commuting journey length for the average worker in a group of U.S. cities and compared the results to the actual average commuting journey length for those workers. He assumed that any difference between the two figures was "wasteful commuting." He found that the average minimum commuting distance was only 1.1 miles, but the average distance actually commuted by workers in those cities was 8.7 miles, or nearly eight times as great. Hamilton therefore concluded that the monocentric urban model has little predictive value concerning commuting behavior and that actual commuting behavior could be predicted just as well using an assumption that commuting is random. Commuting behavior is a central feature of any model that purports to explain urban residential and job location choice. Hamilton's assertion that the monocentric urban model has little predictive value concerning commuting behavior therefore strikes at the heart of
TL;DR: In this paper, the employment relationship with employees' ability and their actions both private information (thus combining adverse selection with moral hazard) is modeled as a repeated game with self-enforcing contracts being perfect Bayesian Nash equilibria.
Abstract: The employment relationship with employees' ability and their actions both private information (thus combining adverse selection with moral hazard) is modeled as a repeated game with self-enforcing contracts being perfect Bayesian Nash equilibria. Under termination contracts, the equilibrium contract structure consists of a hierarchy of ranks, finite in number even though ability is continuous. Reputation acts as an effective device for worker discipline without the need for involuntary unemployment. Selection by bonding is not, in general, incentive compatible, but selection by promotion of employees through the ranks is. Many other features correspond to observed employment structures.
TL;DR: Using nonparametric demand analysis, it is found that meat consumption patterns in the United States and Australia can be explained using only relative prices and expenditures, suggesting that specification errors in econometric demand studies can account for findings of taste changes.
Abstract: Health concerns are thought by many to have shifted consumption away from red meats, though econometric evidence is mixed. Testing for structural change is difficult, especially when one time series is used for both estimating demand equations and testing their stability. Specification errors may suggest a shift where none has occurred. Using nonparametric demand analysis, we find that meat consumption patterns in the United States and Australia can be explained using only relative prices and expenditures. Only imposing particular functional forms can reverse the conclusion, suggesting that specification errors in econometric demand studies can account for findings of taste changes.
TL;DR: In this paper, the authors examined the possible bias that arises when workers have unobserved characteristics that affect their wages and those workers who move in and out of the work force over the cycle.
Abstract: One of the oldest questions in macroeconomics concerns the correlation between the business cycle and the real wage. We provide new evidence on this question by examining the possible bias that arises when (1) workers have unobserved characteristics that affect their wages and (2) those workers who move in and out of the work force over the cycle have unobserved characteristics systematically different from those who stay in. We distinguish as well between the bias that arises from those unobserved characteristics that are permanent components of wages and those that are transitory. We utilize micro, panel data, and maximum likelihood selectivity bias techniques to estimate both the extent of this selectivity-cum-aggregation bias and the true effect of the cycle on real wages. We find that selectivity bias is present: workers are more likely to lose employment during a recession if they have high wages, especially if they have a high transitory wage component. Overall, the effect of selectivity is to bias...
TL;DR: In this paper, the authors argue that the notion of a "dynastic family" is not a suitable abstraction in contexts in which the objective is to analyze the effects of public policies, and they point out that family linkages form complex networks, in which each individual may belong to many dynastic groupings.
Abstract: In his well-known analysis of the national debt, Robert Barro introduced the notion of a "dynastic family." This notion has since become a standard research tool, particularly in the areas of public finance and macroeconomics. In this paper, we critique the assumptions on which the dynastic model is predicated and argue that this framework is not a suitable abstraction in contexts in which the objective is to analyze the effects of public policies. We reach this conclusion by formally considering a world in which each generation consists of a large number of distinct individuals as opposed to one representative individual. We point out that family linkages form complex networks, in which each individual may belong to many dynastic groupings. The resulting proliferation of linkages between families gives rise to a host of neutrality results, including the irrelevance of all public redistributions, distortionary taxes, and prices. Since these results are not at all descriptive of the real world, we conclude...
TL;DR: The Jarrell-Peltzman study as mentioned in this paper investigated the effect of product recall campaigns on the shareholders of firms within these industries and found that for manufacturers of automobiles and ethical drugs, capital markets penalized shareholders far more than the direct costs of the recall campaign.
Abstract: In a recent article in this Journal, Jarrell and Peltzman (1985) opened an important new area to event study research when they analyzed the effect of automobile and drug product recalls on the shareholders of firms within these industries. Earlier, Crafton, Hoffer, and Reilly (1981) and Reilly and Hoffer (1983) found that severe automobile recalls have a significant short-term impact on demand, but neither study investigated the effect of recalls on industry shareholders. In their work, Jarrell and Peltzman found that for manufacturers of automobiles and ethical drugs, capital markets penalized shareholders far more than the direct costs of the recall campaign. Further, they concluded that in both industries, shareholders of competitor firms to the firm with the recalled product(s) also suffered wealth losses. Interestingly, they concluded that over the 1975-81 period shareholders of General Motors bore greater wealth losses from the recall of a Ford or Chrysler product than they did from the recall of a GM product. This paper presents several modifications to the Jarrell-Peltzman study, as it applies to the automobile industry, for the purpose of
TL;DR: In this article, the authors examine the interactions between markets and state commercial planning in the context of China's agricultural sector and present a theoretical model that analyzes the way that a mixed commercial system of the sort observed in China functions.
Abstract: This article examines interactions between markets and state commercial planning in the context of China's agricultural sector. It begins with a discussion of recent trends in agricultural planning and commerce in China and then presents a theoretical model that analyzes the way that a mixed commercial system of the sort observed in China functions. The theoretical analysis suggests that a mixed system is sustainable and can have desirable efficiency and distributional effects. Markets, however, limit the range of sustainable plans, and in the presence of markets, state planning may no longer directly influence production and consumption behavior.
TL;DR: The extent to which deviations from covered interest parity can be attributed to transactions costs has been exaggerated in the economic literature because the swap market in foreign exchange has been ignored as discussed by the authors, but the empirical results have no direct bearing on the conventional market efficiency hypothesis.
Abstract: The extent to which deviations from covered interest parity can be attributed to transactions costs has been exaggerated in the economic literature because the swap market in foreign exchange has been ignored. It is shown that such deviations should be no greater than the lowest of the transactions costs in one of three markets: the swap market or either of the two relevant securities markets. This reconciles the theory with the data, which show spreads of no more than a few basis points. However, the empirical results have no direct bearing on the conventional market efficiency hypothesis.
TL;DR: In this paper, the authors consider the question whether observed price differentials reflect perceived differences in quality, service agreements, or location or whether information imperfections can explain this phenomenon and show that price dispersion is positively related to the rate of market price inflation.
Abstract: The paper considers the question whether observed price differentials reflect perceived differences in quality, service agreements, or location or whether information imperfections can explain this phenomenon. It sets out theoretical arguments linking inflation to reductions in the information stock held by agents and thus to greater price dispersion. The hypothesis is tested using monthly price data for 13 uniquely defined goods sold in Israel between 1971 and 1984. Price dispersion is shown to be positively related to the rate of market price inflation. Since inflation is an unlikely proxy for changes in perceived characteristics, the findings support price dispersion theories based on "optimally imperfect" decision making
TL;DR: In this paper, it is shown that an increase in the probability of detection is more likely to deter crime than a comparable increase in penalties, irrespective of the criminal's attitude toward risk.
Abstract: If an increase in the rate at which a criminal commits crimes lowers the expected time until detection, the income from crime (net of expected fines) must be discounted at a rate that varies with the crime rate This paper models the criminal's choice of the optimal crime rate under such conditions It is shown that, irrespective of the criminal's attitude toward risk, an increase in the probability of detection is more likely to deter crime than a comparable increase in penalties Other implications of the model for the optimal enforcement of laws are also explored
TL;DR: In this paper, the authors derive three empirical implications of a well-specified model of consumer behavior, a model that nests both Ricardian equivalence and an alternative, non-Ricardian theory.
Abstract: This paper derives three empirical implications of a well-specified model of consumer behavior, a model that nests both Ricardian equivalence and an alternative, non-Ricardian theory. Ricardian equivalence is then tested against this alternative. The tests reveal that Ricardian equivalence cannot be rejected.