Showing papers in "Journal of Political Economy in 1990"
TL;DR: In this paper, the authors show that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.
Abstract: Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.
12,469Â citations
TL;DR: In this article, the authors present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns.
Abstract: We present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns. The unpredictability of noise traders' beliefs creates a risk in the price of the asset that deters rational arbitrageurs from aggressively betting against them. As a result, prices can diverge significantly from fundamental values even in the absence of fundamental risk. Moreover, bearing a disproportionate amount of risk that they themselves create enables noise traders to earn a higher expected return than rational investors do. The model sheds light on a number of financial anomalies, including the excess volatility of asset prices, the mean reversion of stock returns, the underpricing of closed-end mutual funds, and the Mehra-Prescott equity premium puzzle.
5,703Â citations
TL;DR: In this article, the authors provide a framework for addressing the question of when transactions should be carried out within a firm and when through the market, by identifying a firm with the assets that its owners control.
Abstract: This paper provides a framework for addressing the question of when transactions should be carried out within a firm and when through the market. Following Grossman and Hart, we identify a firm with the assets that its owners control. We argue that the crucial difference for party 1 between owning a firm (integration) and contracting for a service from another party 2 who owns this firm (nonintegration) is that, under integration, party 1 can selectively fire the workers of the firm (including party 2), whereas under nonintegration he can "fire" (i.e., stop dealing with) only the entire firm: the combination of party 2, the workers, and the firm's assets. We use this idea to study how changes in ownership affect the incentives of employees as well as those of owner-managers. Our framework is broad enough to encompass more general control structures than simple ownership: for example, partnerships and worker and consumer cooperatives all emerge as special cases.
5,057Â citations
TL;DR: In this article, tax-financed government services that affect production or utility are extended to include tax-supported government services, and the two rates rise initially with productive government expenditures but subsequently decline with an increase in utility-type expenditures.
Abstract: One strand of endogenous-growth models assumes constant returns to a broad concept of capital. I extend these models to include tax-financed government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures but subsequently decline. With an income tax, the decentralized choices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth.
4,959Â citations
TL;DR: In this paper, the Coase theorem predicts that about half the mugs will trade, but observed volume is always significantly less than the predicted volume, suggesting that transactions costs cannot explain the undertrading for consumption goods.
Abstract: Contrary to theoretical expectations, measures of willingness to accept greatly exceed measures of willingness to pay. This paper reports several experiments that demonstrate that this "endowment effect" persists even in market settings with opportunities to learn. Consumption objects (e.g., coffee mugs) are randomly given to half the subjects in an experiment. Markets for the mugs are then conducted. The Coase theorem predicts that about half the mugs will trade, but observed volume is always significantly less. When markets for "induced-value" tokens are conducted, the predicted volume is observed, suggesting that transactions costs cannot explain the undertrading for consumption goods.
3,625Â citations
TL;DR: In this paper, a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined, and the model also generates a development cycle reminiscent of the Kuznet hypothesis.
Abstract: A paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined. Financial intermediation promotes growth because it allows a higher rate of return to be earned on capital, and growth in turn provides the means to implement costly financial structures. Thus financial intermediation and economic growth are inextricably linked in accord with the Goldsmith-McKinnon-Shaw view on economic development. The model also generates a development cycle reminiscent of the Kuznet hypothesis. In particular, in the transition from a primitive slow-growing economy to a developed fast-growing one, a nation passes through a stage in which the distribution of wealth across the rich and poor widens.
2,570Â citations
TL;DR: In the context of an economy with rational expectations, Mehra and Prescott as discussed by the authors showed that the problem of the equity premium puzzle can be solved by relaxing the time separability of von Neumann-Morgenstern preferences to allow for adjacent complementarity in consumption.
Abstract: The equity premium puzzle, identified by Mehra and Prescott, states that, for plausible values of the risk aversion coefficient, the difference of the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance of the growth rate in per capita consumption. The puzzle is resolved in the context of an economy with rational expectations once the time separability of von Neumann-Morgenstern preferences is relaxed to allow for adjacent complementarity in consumption, a property known as habit persistence. Essentially habit persistence drives a wedge between the relative risk aversion of the representative agent and the intertemporal elasticity of substitution in consumption.
1,895Â citations
TL;DR: In this paper, the authors assume endogenous fertility and a rising rate of return on human capital as the stock of human capital increases, and they show that when human capital is abundant, rates of return for human capital on human ca...
Abstract: Our analysis of growth assumes endogenous fertility and a rising rate of return on human capital as the stock of human capital increases. When human capital is abundant, rates of return on human ca...
1,642Â citations
TL;DR: The authors analyzes the role and significance of occupational mobility in the labor market focusing on individuals' careers and provides additional dimensions to the analysis of investment in human capital, wage differences across individuals, and the relationships among promotions, quits, and interfirm occupational mobility.
Abstract: This paper analyzes theoretically and empirically the role and significance of occupational mobility in the labor market focusing on individuals' careers. It provides additional dimensions to the analysis of investment in human capital, wage differences across individuals, and the relationships among promotions, quits, and interfirm occupational mobility. It is shown that part of the returns to education is in the form of higher probabilities of occupational upgrading, within or across firms. Given an origin occupation, schooling increases the likelihood of occupational upgrading. Furthermore, workers who are not promoted despite a high probability of promotion are more likely to quit.
780Â citations
TL;DR: In this paper, the authors exposit a convex model of equilibrium growth and show that the long-run growth rate in per capita consumption depends on the parameters describing tastes, technology, and policies.
Abstract: Our aim in this paper is to exposit a convex model of equilibrium growth. The model has two features that distinguish it from most other work on the subject: first, that the model is convex on the technological side, and second, that fixed factors are explicitly included. Existence and characterization results are provided along with some preliminary analyses of taxation and international trade policies. It is shown that the long-run growth rate in per capita consumption depends, in the natural way, on the parameters describing tastes, technology, and policies. It is demonstrated that in a free-trade equilibrium with taxation, national growth rates of consumption and output need not converge.
776Â citations
TL;DR: In this paper, the authors developed new indicators of accumulated academic science and tested their explanatory power on productivity data from manufacturing industries and found that knowledge is a major contributor to productivity growth.
Abstract: This paper develops new indicators of accumulated academic science and tests their explanatory power on productivity data from manufacturing industries. Knowledge is found to be a major contributor to productivity growth. Furthermore, a lag in effect of roughly 20 years is found between the appearance of research in the academic community and its effect on productivity in the form of knowledge absorbed by an industry. Academic technology and academic science filtered through interindustry spillovers exhibit lags of roughly 10 and 30 years each. Thus implied search and gestation times far exceed developmental periods in studies of R & D. A clear implication is that basic research declines relative to development in the face of an exogenous rise in the real of interest.
TL;DR: In this paper, the authors examine the hypothesis that the answer lies in differences in national public policies that affect the incentives that individuals have to accumulate capital in both its physical and human forms, and show that these incentive effects can induce large differences in long-run growth rates.
Abstract: Why do the countries of the world display considerable disparity in long-term growth rates? This paper examines the hypothesis that the answer lies in differences in national public policies that affect the incentives that individuals have to accumulate capital in both its physical and human forms. Our analysis shows that these incentive effects can induce large differences in long-run growth rates. Since many of the key tax rates are difficult to measure, our procedure is an indirect one. We work within a calibrated, two-sector endogenous growth model, which has its origins in the microeconomic literature on human capital formation. We show that national taxation can substantially affect long-run growth rates. In particular, for small open economies with substantial capital mobility, national taxation can readily lead to "development traps" (in which countries stagnate or regress) or to "growth miracles" (in which countries shift from little growth to rapid expansion). This influence of taxation on the r...
TL;DR: In this article, a model of the single-family housing market is proposed in which households that move are both buyers and sellers, and the model yields a strong theoretical relationship (inverse) between vacancy and prices, which with competitive supply explains the existence of longer-run "structural" vacancy.
Abstract: A model of the single-family housing market is proposed in which households that move are both buyers and sellers. Households move when a stochastic process leaves them dissatisfied with their current unit. Household buyers expend costly search effort to find a better house, while sellers hold two units until a buyer is found. The vacancy rate, fixed in the short run, determines the expected length of sale and search, which play a central role in the reservation prices of buyer and seller. Market prices, the result of bargaining, lie between these two. The model yields a strong theoretical relationship (inverse) between vacancy and prices, which with competitive supply explains the existence of longer-run "structural" vacancy.
TL;DR: The authors used a national survey of 3,119 individuals to examine the effect of lung cancer risk perceptions on smoking activity and found that both smokers and nonsmokers greatly overestimate the lung cancer risks of cigarette smoking.
Abstract: This paper uses a national survey of 3,119 individuals to examine the effect of lung cancer risk perceptions on smoking activity. Both smokers and nonsmokers greatly overestimate the lung cancer risk of cigarette smoking, and the extent of the overestimation is much greater than the extent of underestimation. These risk perceptions in turn significantly reduce the probability of smoking, as suggested by an economic model of risky consumption decisions. Cigarette excise taxes in effect endow individuals with additional risk perceptions comparable to their current assessed lung cancer risks.
TL;DR: The authors found strong support for the proposition that the level and structure of prizes in PGA tournaments influence players' performance, and they used nonexperimental data to test whether tournaments actually elicit effort responses.
Abstract: Much attention has been devoted to studying models of tournaments or situations in which an individual's payment depends only on his or her output or rank relative to that of other competitors. Academic interest derives from the fact that under certain sets of assumptions, tournaments have desirable normative properties because of the incentive structures they provide. Our paper uses nonexperimental data to test whether tournaments actually elicit effort responses. We focus on professional golf tournaments because information on the incentive structure (prize distribution) and measures of individual output (players' scores) are both available. We find strong support for the proposition that the level and structure of prizes in PGA tournaments influence players' performance.
TL;DR: The authors empirically examined one motive for takeovers: to change control of firms that make acquisitions that diminish the value of their equity, and found that the acquisitions that reduce equity value the most are those that are later divested either in bust-up takeovers or restructuring programs to thwart the takeover.
Abstract: This paper empirically examines one motive for takeovers: to change control of firms that make acquisitions that diminish the value of their equity. Firms that subsequently become takeover targets make acquisitions that significantly reduce their equity value, and firms that do not become takeover targets make acquisitions that raise their equity value. Within the sample of acquisition by targets, the acquisitions that reduce equity value the most are those that are later divested either in bust-up takeovers or restructuring programs to thwart the takeover. This evidence is consistent with theories advanced by Marris, Manne, and Jensen concerning the disciplinary role played by takeovers.
TL;DR: In this article, the authors argue that fear of cheating and especially disincentives for bidders to follow truth-revealing strategies are important explanations for sealed second-price auctions seldom occur.
Abstract: In 1961, Vickrey showed that, in an independent private-values context with symmetric risk-neutral bidders, sealed second-price auctions have dominant truth-revealing equilibrium strategies, that they are perfectly efficient economically, and that they produce the same expected revenue for bid takers as equilibrium strategies in oral progressive auctions, Dutch auctions, or standard, first-price sealed bidding. Yet sealed second-price auctions seldom occur. We argue that fear of cheating and especially disincentives for bidders to follow truth-revealing strategies are important explanations. We model auctions in which third parties capture a fraction of the economic rent revealed by the second-price procedure.
TL;DR: In this paper, the authors examined how four components of the job search process (the choice of search methods, the choice of how many firms to contact, the rate at which offers are received, and the acceptance or rejection of an offer) influence the job-finding rate.
Abstract: This paper examines how four components of the job search process--the choice of search methods, the choice of how many firms to contact, the rate at which offers are received, and the acceptance or rejection of an offer--influence the job-finding rate. A reduced-form model of job search is estimated that takes account of the fact that users of a particular method of job search are not a random subset of all searchers. The empirical analysis focuses on differences in search behavior between the employed and unemployed. A key finding of the analysis is that the offer rate per contact is greater for employed searchers than for unemployed searchers. This may be due to differences in the effectiveness of search while employed versus unemployed or to unobserved differences in search effort. Further research on this issue is needed because many models of job search behavior are based on the assumption that job search is more effective when one is unemployed.
TL;DR: In this article, the authors formalize a view of entrepreneurship in the spirit of Theodore W. Schultz and define entrepreneurs as those individuals who respond to the opportunities for creating new products (and the like) that arise because of technological progress.
Abstract: We formalize a view of entrepreneurship in the spirit of Theodore W. Schultz. In this view, entrepreneurs are those individuals who respond to the opportunities for creating new products (and the like) that arise because of technological progress, for example. The theory has implications for entry and exit, specialization of labor, and business transfers. These business transfers correspond to, among other things, individuals changing jobs an sales of firms. Transfers are seen as a mechanism facilitating division of labor. We also discuss evidence on business transfers that occur through sales of firms.
TL;DR: In this paper, the authors estimate the social cost of environmental quality regulations mandated by the Clean Air and Clean Water acts and construct an econometric general equilibrium model of the United States to demonstrate that social cost estimates diverge sharply from private cost estimates.
Abstract: The use of cost-benefit analysis by federal regulatory agencies has expanded greatly in scope and sophistication. Unfortunately, agencies continue to employ private cost rather than social cost to evaluate environmental quality regulations. Furthermore, general equilibrium impacts and intertemporal effects of regulations are typically not included in the evaluation. In this paper we estimate the social cost of environmental quality regulations mandated by the Clean Air and Clean Water acts. We construct an econometric general equilibrium model of the United States to demonstrate that social cost estimates diverge sharply from private cost estimates. We also demonstrate that general equilibrium impacts are significant and pervasive and that intertemporal effects of the regulations, heretofore ignored, are significant.
TL;DR: This work explores alternative reasons for failure to purchase coverage by well-informed, expected utility-maximizing risk-averse individuals for whom LTC is associated with a large increase in mortality and for whom family members represent an alternative source of care.
Abstract: Only a tiny fraction of the nonpoor population currently purchases private insurance coverage against long-term-care (LTC) costs. Studies generally attribute the failure to purchase private coverage to "unawareness" by potential purchasers of the benefits of coverage and a misperception that Medicare currently covers long-term care. I explore alternative reasons for failure to purchase coverage by well-informed, expected utility-maximizing risk-averse individuals for whom LTC is associated with a large increase in mortality and for whom family members represent an alternative source of care. There may be no demand for LTC insurance even if it is made available at actuarially fair premiums because the main consequence of coverage is to enhance the expected value of one's estate.
TL;DR: In this article, the authors specify a demand function for longevity, or "quantity of life," along with corresponding demand functions for indicators of "quality of life" and a value-of-health and life extension function, and use this model to analyze empirical variations in levels and trends of life expectancy and in exposure to health risks across different population groups.
Abstract: We specify a demand function for longevity, or "quantity of life," along with corresponding demand functions for indicators of "quality of life" and a value-of-health and life extension function. We show that the demand for health must be derived in conjunction with that for longevity and the related consumption plan, and that all choices depend on initial individual endowments and terminal conditions. Our comparative dynamics predictions indicate that optimal health and longevity are increasing functions of endowed wealth rather than, necessarily, current income; that improvements in opportunities to produce health can accentuate the differences between endowed health and attained longevity levels; and that the value individuals ascribe to their health may be increasing over a good portion of their life cycle. We use this model to analyze observed empirical variations in levels and trends of life expectancy and in exposure to health risks across different population groups.
TL;DR: In this article, the authors treat the market for special-interest campaign contributions and political "favors" as a simple asset market, which yields a simple equilibrium relationship among three variables: the total amount of investor contributions a candidate receives, the monetary value of the favors he has promised, and his probability of winning.
Abstract: This paper treats the market for special-interest campaign contributions and political "favors" as a simple asset market. The model yields a simple equilibrium relationship among three variables: the total amount of investor contributions a candidate receives, the monetary value of the favors he has promised, and his probability of winning. Using data on open-seat races for the U.S. House of Representatives, I confront the model with a series of tests. Despite the starkness of the model, the results of these tests are highly supportive.
TL;DR: In this paper, the authors present a model of tender offers in which the bid perfectly reveals the bidder's private information about the size of the value improvement that can be generated by a takeover.
Abstract: This paper presents a model of tender offers in which the bid perfectly reveals the bidder's private information about the size of the value improvement that can be generated by a takeover. We argue that bidders with greater improvements will offer higher premia to ensure that sufficient shares are tendered to obtain control. The model relates announcement date returns and takeover success or failure to the amount bid, the initial shareholdings of the bidder, the number of shares the bidder attempts to purchase, the dilution of minority shareholders, and managerial opposition. We show that managerial defensive measures will sometimes increase the probability of the offer's success, either by raising the incentive to bid high or by decreasing the asymmetry of information about the improvement.
TL;DR: In this paper, the termination probability of a business expansion or contraction increases with age, and the authors investigate the nature of duration dependence in aggregate economic activity and find no duration dependence.
Abstract: Does the termination probability of a business expansion or contraction increase with age? This question may be formally addressed by analyzing the nature of duration dependence in aggregate economic activity. Our null hypothesis is that there is no duration dependence, which we test via intentionally nonparametric procedures. We also argue that common notion of business cycle periodicity can be usefully interpreted in terms of whole-cycle duration dependence. We find some evidence for duration dependence in whole cycles and in prewar expansions, but little evidence elsewhere.
TL;DR: In this paper, a game theory hypothesis was proposed to explain the agricultural crisis in China in 1959-61, which resulted in 30 million extra deaths and the main cause of this catastrophe.
Abstract: The agricultural crisis in China in 1959-61, after the initial success of the collectivization movement, resulted in 30 million extra deaths. In this paper, a game theory hypothesis proposes the main cause of this catastrophe. I argue that, because of the difficulty in supervising agricultural work, the success of an agricultural collective depends on a self-enforcing contract, in which each one promises to discipline oneself. A self-enforcing contract, however, can be sustained only in a repeated game. In the fall of 1958, the right to withdraw from a collective was deprived. The nature of the collectivization was thus changed from a repeated game to a one-time game. As a result, the self-enforcing contract could not be sustained and agricultural productivity collapsed. The empirical evidence is consistent with this hypothesis.
TL;DR: The authors showed that increases in time in the labor market reduce sleep and increase non-market time by an equal amount among men and women, while the wage effect on sleep is negative but very small.
Abstract: Using aggregated data for 12 countries, a cross section of microeconomic data, and a panel of households, we demonstrate that increases in time in the labor market reduce sleep. Our theory of the demand for sleep differs from standard models of time use by assuming that sleep affects wages by affecting labor market productivity. Estimates of a system of demand equations demonstrate that higher wage rates reduce sleep time among men but increase their waking nonmarket time by an equal amount. Among women the wage effect on sleep is negative but very small.
TL;DR: In this paper, the authors argue that although decentralization has advantages in finding low-cost solutions, these advantages are accompanied by coordination problems, which lead to delay or duplication of effort or both.
Abstract: We argue that although decentralization has advantages in finding low-cost solutions, these advantages are accompanied by coordination problems, which lead to delay or duplication of effort or both. Consequently, decentralization is desirable when there is little urgency or a great deal of private information, but it is strictly undesirable in urgent problems when private information is less important. We also examine the effect of large numbers and find that coordination problems disappear in the limit if distributions are common knowledge.
TL;DR: In this paper, the authors examine the limiting behavior of cooperative and non-cooperative fiscal policies as countries' market power goes to zero and show that these policies converge if countries raise revenues through lump-sum taxation.
Abstract: We examine the limiting behavior of cooperative and noncooperative fiscal policies as countries' market power goes to zero. We show that these policies converge if countries raise revenues through lump-sum taxation. However, if there are unremovable domestic distortions, such as distorting taxes, there can be gains to coordination even when a single country's policy cannot affect world prices. These results differ from the received wisdom in the optimal tariff literature. The key distinction is that, contrary to the tariff literature, the spending decisions of governments are explicitly modeled.
TL;DR: In this paper, the authors present the first infant health production functions that simultaneously control for self-selection in the resolution of pregnancies as live births or induced abortions and in the use of prenatal medical care services.
Abstract: This paper makes contributions to the estimation of health production functions and the economics of fertility control. We present the first infant health production functions that simultaneously control for self-selection in the resolution of pregnancies as live births or induced abortions and in the use of prenatal medical care services. We also incorporate the decision of a pregnant woman to give birth.