Showing papers in "Journal of Political Economy in 1989"
TL;DR: The authors show that the data point to liquidity constraints: capital is essential for starting a business, and liquidity constraints tend to exclude those with insufficient funds at their disposal, and a would-be entrepreneur must bear most of the risk inherent in his venture.
Abstract: Is the capital function distinct from the entrepreneurial function in modern economies? Or does a person have to be wealthy before he or she can start a business? Knight and Schumpeter held different views on the answer to this question. Our empirical findings side with Knight: Liquidity constraints bind, and a would-be entrepreneur must bear most of the risk inherent in his venture. The reasoning is roughly this: The data show that wealthier people are more inclined to become entrepreneurs. In principle, this could be so because the wealthy tend to make better entrepreneurs, but the data reject this explanation. Instead, the data point to liquidity constraints: capital is essential for starting a business, and liquidity constraints tend to exclude those with insufficient funds at their disposal.
3,241Â citations
TL;DR: The authors formally developed a model of giving in which altruism is not "pure." In particular, people are assumed to get a "warm glow" from giving, and this model generates identifiable comparative statics results that show that crowding out of charity is incomplete and that government debt will have Keynesian effects.
Abstract: Models of giving have often been based on altruism. Examples include charity and intergenerational transfers. The literatures on both subjects have centered around neutrality hypotheses: charity is subject to complete crowding out, while intergenerational transfers are subject to Ricardian equivalence. This paper formally develops a model of giving in which altruism is not "pure." In particular, people are assumed to get a "warm glow" from giving. Contrary to the previous literature, this model generates identifiable comparative statics results that show that crowding out of charity is incomplete and that government debt will have Keynesian effects.
3,028Â citations
TL;DR: In this paper, a firm's entry and exit decisions when the output price follows a random walk are examined, where an idle firm and an active firm are viewed as assets that are call options on each other.
Abstract: A firm's entry and exit decisions when the output price follows a random walk are examined. An idle firm and an active firm are viewed as assets that are call options on each other. The solution is a pair of trigger prices for entry and exit. The entry trigger exceeds the variable cost plus the interest on the entry cost, and the exit trigger is less than the variable cost minus the interest on the exit cost. These gaps produce "hysteresis." Numerical solutions are obtained for several parameter values; hysteresis is found to be significant even with small sunk costs.
2,276Â citations
TL;DR: In this article, the authors test the permanent income hypothesis against the alternative hypothesis that consumers optimize subject to a well-specified sequence of borrowing constraints, and the results generally support the hypothesis that an inability to borrow against future labor income affects the consumption of a significant portion of the population.
Abstract: Several recent studies have suggested that empirical rejections of the permanent income/life cycle model might be due to the existence of liquidity constraints. This paper tests the permanent income hypothesis against the alternative hypothesis that consumers optimize subject to a well-specified sequence of borrowing constraints. Implications for consumption in the presence of borrowing constraints are derived and then tested using time-series/cross-section data on families from the Panel Study of Income Dynamics. The results generally support the hypothesis that an inability to borrow against future labor income affects the consumption of a significant portion of the population.
1,946Â citations
TL;DR: In this paper, reputation formation and the evolution over time of the incentive effects of reputation to mitigate conflicts of interest between borrowers and lenders are studied. But reputation will not initially provide improved incentives to borrowers with short credit histories.
Abstract: This paper studies reputation formation and the evolution over time of the incentive effects of reputation to mitigate conflicts of interest between borrowers and lenders. Borrowers use the proceeds of their loans to fund projects. In the absence of reputation effects, borrowers have incentives to select excessively risky projects. If there is sufficient adverse selection, reputation will not initially provide improved incentives to borrowers with short credit histories. Over time, if a good reputation is acquired, reputation will provide improved incentives. General characteristics of markets in which reputation takes time to work are identified.
1,613Â citations
TL;DR: This paper investigated whether Hamilton's results continue to hold when the sample is extended to include the recent oil market collapse and the oil price variable is corrected for the effects of price controls, and they found that the correlation persists in periods of price decline.
Abstract: In an important paper, Hamilton (1983) demonstrated a strong correlation between oil price changes and gross national product growth in U.S. data. However, his study pertained to a period in which all the large oil price movements were upward, and thus it left unanswered the question whether the correlation persists in periods of price decline. Moreover, the price variable he used was somewhat distorted by price controls in the 1970s. This note investigates whether Hamilton's results continue to hold when the sample is extended to include the recent oil market collapse and the oil price variable is corrected for the effects of price controls. Particular attention is given to the possibility of asymmetric responses to oil price increases and decreases, as suggested in the structural employment literature (Loungani 1986; Davis 1987; Hamilton 1988). Like Hamilton, I based my investigation on the GNP equation in Sims's (1 980b) six-variable quarterly vector autoregressive model,
1,560Â citations
TL;DR: In this paper, the authors explore Rosenstein-Rodan's idea that simultaneous industrialization of many sectors of the economy can be profitable for them all even when no sector can break even industrializing alone.
Abstract: This paper explores Rosenstein-Rodan's idea that simultaneous industrialization of many sectors of the economy can be profitable for them all even when no sector can break even industrializing alone. We analyze this idea in the context of an imperfectly competitive economy with aggregate demand spillovers and interpret the big push into industrialization as a move from a bad to a good equilibrium. We present three mechanisms for generating a big push and discuss their relevance for less developed countries.
1,388Â citations
TL;DR: In this paper, the authors analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo Nash equilibria in trading strategies are characterized.
Abstract: We analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo Nash equilibria in trading strategies are characterized Certain goods emerge endogenously as media of exchange, or commodity money, depending both on their intrinsic properties and on extrinsic beliefs There are also equilibria with genuine fiat currency circulating as the general medium of exchange We find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare Velocity, acceptability, and liquidity are discussed
1,353Â citations
TL;DR: In this article, the authors show that when workers' rewards are based on relative comparisons, salary compression reduces uncooperative behavior that is detrimental to the firm, and that within the relevant groups, some wage compression is efficient.
Abstract: Personnel managers often argue that equitable pay treatment manifested as wage compression is useful because it reduces disharmony among workers. But it is far from obvious that a compressed salary structure is morale improving since better workers may feel disenchanted by this scheme. However, when workers' rewards are based on relative comparisons, salary compression reduces uncooperative behavior that is detrimental to the firm. Relative comparisons imply that some reference group must be selected. The major result is that within the relevant groups, some wage compression is efficient.
1,185Â citations
TL;DR: In this article, a significant proportion of migration in low-income countries, particularly in rural areas, is composed of moves by women for the purpose of marriage, and the authors seek to explain these mobility patterns by examining marital arrangements among Indian households.
Abstract: A significant proportion of migration in low-income countries, particularly in rural areas, is composed of moves by women for the purpose of marriage. We seek to explain these mobility patterns by examining marital arrangements among Indian households. In particular, we hypothesize that the marriage of daughters to locationally distant, dispersed yet kinship-related households is a manifestation of implicit interhousehold contractual arrangements aimed at mitigating income risks and facilitating consumption smoothing in an environment characterized by information costs and spatially covariant risks. Analysis of longitudinal South Indian village data lends support to the hypothesis. Marriage cum migration contributes significantly to a reduction in the variability of household food consumption. Farm households afflicted with more variable profits tend to engage in longer-distance marriage cum migration. The hypothesized and observed marriage cum migration patterns are in dissonance with standard models of marriage or migration that are concerned primarily with search costs and static income gains.
1,167Â citations
TL;DR: In this article, the authors consider six explanations for the positive relationship between employer size and wages: large employers hire higher-quality workers, offer inferior working conditions, make more use of high wages to forestall unionization, have more ability to pay high wages, face smaller pools of applicants relative to vacancies, and are less able to monitor their workers.
Abstract: We consider six explanations for the positive relationship between employer size and wages: large employers (1) hire higher-quality workers, (2) offer inferior working conditions, (3) make more use of high wages to forestall unionization, (4) have more ability to pay high wages, (5) face smaller pools of applicants relative to vacancies, and (6) are less able to monitor their workers. We find some support for the first of these, but there remains a significant wage premium for those working for large employers.
TL;DR: In this paper, the authors argue that democratic markets work as well as economic markets and show that previous work has greatly exaggerated the existence of principal-agent and informational problems in electoral markets and has drawn incorrect conclusions.
Abstract: By applying the standard tools of microeconomic analysis, I argue that democratic markets work as well as economic markets. In particular, I show that previous work has greatly exaggerated the existence of principal-agent and informational problems in electoral markets and has drawn incorrect conclusions.
TL;DR: In this article, the authors present a dynamic model of international lending in which borrowers cannot commit to future repayments and in which debtors can sometimes successfully negotiate partial defaults or rescheduling agreements.
Abstract: We present a dynamic model of international lending in which borrowers cannot commit to future repayments and in which debtors can sometimes successfully negotiate partial defaults or "rescheduling agreements." All parties in a debt rescheduling negotiation realize that today's rescheduling agreement may itself have to be renegotiated in the future. Our bargaining-theoretic approach allows us to handle the effects of uncertainty on sovereign debt contracts in a much more satisfactory way than in earlier analyses. The framework is readily extended to analyze the conflicting interest of different lenders and of banks and creditor country taxpayers.
TL;DR: In this paper, the curse of knowledge is discussed and compared between individual-level and market experiments, and it is shown that market forces reduce the curse by approximately 50 percent but do not eliminate it.
Abstract: In economic analyses of asymmetric information, better-informed agents are assumed capable of reproducing the judgments of less-informed agents. We discuss a systematic violation of this assumption that we call the "curse of knowledge." Better-informed agents are unable to ignore private information even when it is in their interest to do so; more information is not always better. Comparing judgments made in individual-level and market experiments, we find that market forces reduce the curse by approximately 50 percent but do not eliminate it. Implications for bargaining, strategic behavior by firms, principal-agent problems, and choice under uncertainty are discussed.
TL;DR: In this article, it was shown that the seller's problem in devising an optimal auction is virtually identical to the monopolists' problem in third-degree price discrimination, and that many of the important results and elegant techniques developed in the field of mechanism design can be reinterpreted in the language of standard micro theory.
Abstract: We show that the seller's problem in devising an optimal auction is virtually identical to the monopolist's problem in third-degree price discrimination. More generally, many of the important results and elegant techniques developed in the field of mechanism design can be reinterpreted in the language of standard micro theory. We illustrate this by considering the problem of bilateral exchange with privately known values.
TL;DR: In this article, a method for assessing the relative importance of price increases and strengthened individual incentives due to the introduction of the responsibility system for the post-1978 increase in China's agricultural productivity is presented.
Abstract: This paper presents a method for assessing the relative importance of price increases and strengthened individual incentives due to the introduction of the responsibility system for the post-1978 increase in China's agricultural productivity. Data on post-1978 Chinese agricultural performance suggest that a little over three-quarters of the measured productivity increase is due to payment system changes and the remainder to price increases. We also use our method to calculate incentive indices, giving an estimate of the fraction of their marginal product that peasants received under the pre-1978 regime.
TL;DR: In this article, the authors show that the Rotten Kid theorem is not true without assuming transferable utility, and they find a simple condition on utility functions that is necessary and sufficient for there to be the kind of transferable utilities needed for a Rotten-Kid theorem.
Abstract: Gary Becker's "Rotten Kid theorem" asserts that if all family members receive gifts of money income from a benevolent household member, then even if the household head does not precommit to an incentive plan for family members, it will be in the interest of selfish family members to maximize total family income. I show by examples that the Rotten Kid theorem is not true without assuming transferable utility. I find a simple condition on utility functions that is necessary and sufficient for there to be the kind of transferable utility needed for a Rotten Kid theorem. While restrictive, these conditions still allow one to apply the strong conclusions of the Rotten Kid theorem in an interesting class of examples.
TL;DR: In this paper, simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles, and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy.
Abstract: It is almost universally agreed that individuals face incomplete insurance markets and cannot perfectly insure against the idiosyncratic risk. In this paper simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles. Two versions of incomplete insurance markets are considered, and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy.
TL;DR: This paper found that self-employment rates and incomes differ significantly by race and that these differentials arise in markets with consumer discrimination and incomplete information about the price of the good and the race of the seller.
Abstract: Self-employment rates and incomes differ significantly by race. We show that these differentials arise in markets with consumer discrimination and incomplete information about the price of the good and the race of the seller. Equilibrium income distributions have two properties: mean black incomes are lower than mean white incomes, and the returns to ability are lower for black than for white sellers. Able blacks, therefore, are less likely to self-select into the self-employment sector than able whites. Using the 1980 census data, we find that observed racial differences in the self-employment income distributions are consistent with the theoretical predictions.
TL;DR: This article developed new methodology for the estimation of prewar GNP, tapping previously unused data sources, and developed new estimates for the periods 1869-1908 and 1869 -1928.
Abstract: The paper develops new methodology for the estimation of prewar GNP, taps previously unused data sources, and develops new estimates for the periods 1869-1908 and 1869-1928. Primary among the new data sources are direct measures of output in the transportation, communications, and construction sectors and estimates of the consumer price index. New measures of real GNP, nominal GNP, and the GNP deflator are developed. The new estimates of real GNP are as volatile on average over the business cycle as the traditional Kuznets-Kendrick series but dampen the amplitude of some cycles while raising the amplitude of others. The new estimates of the GNP deflator are distinctly less volatile than the traditional series and in fact no more volatile than those in the postwar period.
TL;DR: In this paper, the authors describe two models of an agency that is collecting and reporting observations on a dynamical linear stochastic economy, i.e., a "classical" model, with the agency reporting data that are the sum of a vector of "true" variables and measurement errors that are orthogonal to the true variables.
Abstract: This paper describes two models of an agency that is collecting and reporting observations on a dynamical linear stochastic economy. The first is a "classical" model, with the agency reporting data that are the sum of a vector of "true" variables and a vector of measurement errors that are orthogonal to the true variables. The second is a model of an agency that uses an optimal filtering method to construct least-squares estimates of the true variables. These two models of the reporting agency imply different likelihood functions. A model of the investment accelerator is used as an example to illustrate the differing implications of the models.
TL;DR: In the past, empirical research on charitable contributions has focused on two issues: estimating the income and price elasticities of contributions and estimating the extent to which government funding crowded out private contributions as discussed by the authors.
Abstract: In the past, empirical research on charitable contributions has focused on two issues: estimating the income and price elasticities of contributions and estimating the extent to which government funding crowded out private contributions. The two fundamental problems in all these studies are the differences in the underlying conceptual models and the use of imperfect data for empirical analysis. This paper addresses both of these problems.
TL;DR: In this paper, the convergence of recursive least-squares learning schemes in economic environments in which there is private information was studied, and conditions under which a system governed by least squares learning will eventually converge to a rational expectations equilibrium were characterized.
Abstract: We study the convergence of recursive least-squares learning schemes in economic environments in which there is private information The presence of private information leads to the presence of hidden state variables from the viewpoint of particular agents By applying theorems of Ljung, we extend some of our earlier results to characterize conditions under which a system governed by leastsquares learning will eventually converge to a rational expectations equilibrium We apply insights from the learning results to formulate and compute the equilibrium of a version of Townsend's model
TL;DR: In this article, the authors put forward a methodology for the measurement of product innovations using a value metric, that is, equating the "magnitude of innovations with the welfare gains they generate".
Abstract: The main goal of this paper is to put forward a methodology for the measurement of product innovations using a value metric, that is, equating the "magnitude" of innovations with the welfare gains they generate. This research design is applied to the case of computed tomography scanners, a revolutionary innovation in medical technology. The econometric procedure centers on the estimation of a discrete choice model (the nested multinominal logit), which yields the parameters of a utility function defined over the changing quality dimensions of the innovative product. The estimated flow of social gains from innovation is used to compute a social rate of return to R & D, to explore the interrelation between innovation and diffusion, and to trace the time profile of benefits and costs, the latter suggesting the possible occurrence of "technological cycles."
TL;DR: This article derived new estimates of GNP for 1869-1908 using an estimate of the actual relationship between GNP and commodity output, which is allowed to be time-varying and is derived from a regression covering the periods 1909-28 and 1947-85.
Abstract: Traditional estimates of prewar GNP exaggerate the size of cycles because they are based on the assumption that GNP moves approximately one for one with commodity output valued in producer prices. This paper derives new estimates of GNP for 1869-1908 using an estimate of the actual relationship between GNP and commodity output. This estimated relationship is allowed to be time-varying and is derived from a regression covering the periods 1909-28 and 1947-85. The new estimates of GNP indicate that there has been much less stabilization between the prewar and postwar eras than is conventionally believed.
TL;DR: This paper presented a model in which endogenous entrepreneurial activity is a key determinant of economic growth, which differs from standard models in that growth is driven by the imitative activities of entrepreneurs.
Abstract: Despite the widespread belief that entrepreneurship is a key factor in economic development, there have been few attempts to develop formal models to analyze the phenomenon. This paper presents a model in which endogenous entrepreneurial activity is a key determinant of economic growth. The theory also differs from standard models in that growth is driven by the imitative activities of entrepreneurs. Previous theories have focused on the direct production of knowledge, underemphasizing the importance of imitation in the growth process. The paper also examines external effects arising from these entrepreneurial activities--effects distinct from those studied by Paul Romer.
TL;DR: This article developed a multicountry, dynamic general equilibrium model of product innovation and international trade to study the creation of comparative advantage through research and development and the evolution of world trade over time.
Abstract: We develop a multicountry, dynamic general equilibrium model of product innovation and international trade to study the creation of comparative advantage through research and development and the evolution of world trade over time. In our model, firms must incur resource costs to introduce new products, and forward-looking potential producers conduct R & D and enter the product market whenever profit opportunities exist. Trade has both intraindustry and interindustry components, and the different incentives that face agents in different countries for investment and savings decisions give rise to intertemporal trade. We derive results on the dynamics of trade patterns and trade volume and on the temporal emergence of multinational corporations.
TL;DR: In this paper, the authors examined an exchange economy with two agents: one risk neutral with a certain endowment and a second risk averse with a random endowment, where the realization of the endowment is public but can be falsified by the second agent at a cost.
Abstract: We examine an exchange economy with two agents: one risk neutral with a certain endowment and a second risk averse with a random endowment. The realization of the endowment is public but can be falsified by the second agent at a cost. For a broad class of falsification cost functions the optimal no-falsification contract is noncontingent on a left-hand interval and strictly increasing with a slope strictly less than one on a right-hand interval. Under a mild further restriction, optimal no-falsification contracts are, in addition, piece-wise linear. Optimal contracts may in general require falsifying the state, but for a set of the highest endowment realizations there is no falsification. We find simple conditions under which the optimal contract is a no-falsification contract. The model has applications that include financial, insurance, and employment contracts and tax policy.
TL;DR: In this paper, a concept of demographic separability is proposed that formalizes the notion that there are groups of goods (adult goods) that have little or no relationship to specific classes of household demographics (the numbers or ages of children).
Abstract: A concept of demographic separability is proposed that formalizes the notion that there are groups of goods (adult goods) that have little or no relationship to specific classes of household demographics (the numbers or ages of children).That there exist adult goods demographically separable from children is a necessary but not sufficient condition for the validity of Rothbarth's method for measuring child costs. We propose two different methods for testing demographic separability and present results from a 1981 survey of Spain. The econometric evidence is in fair agreement with the theoretical presuppositions.
TL;DR: The authors showed that seasonal fluctuations are an important source of variation in all macroeconomic quantity variables but are small or entirely absent in both real and nominal price variables, and that the timing of the seasonal fluctuations consists of increases in the second and fourth quarters, a large decrease in the first quarter, and a mild increase in the third quarter.
Abstract: Almost all recent research on macroeconomic fluctuations has worked with seasonally adjusted or annual data. This paper takes a different approach by treating seasonal fluctuations as worthy of study in their own right. Our results show that seasonal fluctuations are an important source of variation in all macroeconomic quantity variables but are small or entirely absent in both real and nominal price variables. The timing of the seasonal fluctuations consists of increases in the second and fourth quarters, a large decrease in the first quarter, and a mild decrease in the third quarter. The paper demonstrates that, with respect to each of several major stylized facts about business cycles, the seasonal cycle displays the same characteristics as the business cycle, in some cases even more dramatically than the business cycle. That is, we find that at seasonal frequencies as well as at business cycle frequencies, output movements across broadly defined sectors move together, the timing of production and the...