Showing papers in "Journal of Political Economy in 1992"
TL;DR: In this paper, the authors argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades, where an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information.
Abstract: An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.
4,731 citations
[...]
TL;DR: In this paper, the authors used a new data set on the growth of large industries in 170 U.S. cities between 1956 and 1987 and found that local competition and urban variety, but not regional specialization, encourage employment growth in industries.
Abstract: Recent theories of economic growth, including those of Romer, Porter, and Jacobs, have stressed the role of technological spillovers in generating growth. Because such knowledge spillovers are particularly effective in cities, where communication between people is more extensive, data on the growth of industries in different cities allow us to test some of these theories. Using a new data set on the growth of large industries in 170 U.S. cities between 1956 and 1987, we find that local competition and urban variety, but not regional specialization, encourage employment growth in industries. The evidence suggests that important knowledge spillovers might occur between rather than within industries, consistent with the theories of Jacobs.
3,774 citations
TL;DR: In this article, the authors developed a general, "collective" model of household labor supply in which agents are characterized by their own (possibly altruistic) preferences, and household decisions are only assumed to be Pareto efficient.
Abstract: The paper develops a general, "collective" model of household labor supply in which agents are characterized by their own (possibly altruistic) preferences, and household decisions are only assumed to be Pareto efficient. An alternative interpretation is that there are two stages in the internal decision process: agents first share nonlabor income, according to some given sharing rule; then each one optimally chooses his or her own labor supply and consumption. This setting is shown to generate testable restrictions on labor supplies. Moreover, the observation of labor supply behavior is sufficient for recovering individual preferences and the sharing rule (up to a constant). Finally, the traditional tools of welfare analysis can be adapted to the new setting.
1,807 citations
TL;DR: The free-rider effects would seem to choke off the free-riders in organizations of any significant size as mentioned in this paper, which is why cooperation and profit sharing are often claimed to motivate workers by giving them a share of the pie.
Abstract: Partnerships and profit sharing are often claimed to motivate workers by giving them a share of the pie. But in organizations of any significant size, the free-rider effects would seem to choke off...
1,805 citations
TL;DR: The authors found that men who were educated in states with higher-quality schools have a higher return to additional years of schooling and higher rates of return are also higher for individuals from states with better-educated teachers and with a higher fraction of female teachers.
Abstract: This paper estimates the effects of school quality--measured by the pupil/teacher ratio, average term length, and relative teacher pay--on the rate of return to education for men born between 1920 and 1949. Using earnings data from the 1980 census, we find that men who were educated in states with higher-quality schools have a higher return to additional years of schooling. Rates of return are also higher for individuals from states with better-educated teachers and with a higher fraction of female teachers. Holding constant school quality measures, however, we find no evidence that parental income or education affects average state-level rates of return.
1,505 citations
TL;DR: In this paper, a two-country real business cycle model can account simultaneously for domestic and international aspects of business cycles, and the most striking discrepancy concerns the correlations of consumption and output across countries.
Abstract: We ask whether a two-country real business cycle model can account simultaneously for domestic and international aspects of business cycles. With this question in mind, we document a number of discrepancies between theory and data. The most striking discrepancy concerns the correlations of consumption and output across countries. In the data, outputs are generally more highly correlated across countries than consumptions. In the model we see the opposite.
1,484 citations
TL;DR: In this paper, the authors show that the Nash equilibrium in supply schedules implies a high markup on marginal cost and substantial deadweight losses, and that subdividing the generators into five firms would produce better results.
Abstract: Most of the British electricity supply industry has been privatized. Two dominant generators supply bulk electricity to an unregulated "pool." They submit a supply schedule of prices for generation and receive the market-clearing price, which varies with demand. Despite claims that this should be highly competitive, we show that the Nash equilibrium in supply schedules implies a high markup on marginal cost and substantial deadweight losses. Further simulations, to show the effect of entry by 1994, produce somewhat lower prices, at the cost of excessive entry; subdividing the generators into five firms would produce better results.
1,407 citations
TL;DR: An empirical investigation of trade-offs between number of children and their scholastic performance confirms that family size directly affects children's achievement as mentioned in this paper, though parents show no favori...
Abstract: An empirical investigation of trade-offs between number of children and their scholastic performance confirms that family size directly affects children's achievement. Though parents show no favori...
1,239 citations
TL;DR: In this paper, the authors study optimal incentive contracts when workers have career concerns and find empirical support for this prediction in the relation between chief executive compensation and stock market performance, showing that the optimal compensation contract optimizes total incentives: the combination of the implicit incentives from career concern and the explicit incentives from the compensation contract.
Abstract: This paper studies optimal incentive contracts when workers have career concerns--concerns about the effects of current performance on future compensation. We show that the optimal compensation contract optimizes total incentives: the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers. We find empirical support for this prediction in the relation between chief executive compensation and stock market performance.
1,195 citations
TL;DR: In this paper, the authors present an overlapping generations model with heterogeneous agents in which human capital investment through formal schooling is the engine of growth and use simple functional forms for preferences, technologies, and income distribution to highlight the distinction between economies with public education and those with private education.
Abstract: In this paper, we present an overlapping generations model with heterogeneous agents in which human capital investment through formal schooling is the engine of growth We use simple functional forms for preferences, technologies, and income distribution to highlight the distinction between economies with public education and those with private education We find that income inequality declines more quickly under public education On the other hand, private education yields greater per capita incomes unless the initial income inequality is sufficiently high We also find that societies will choose public education if a majority of agents have incomes below average
1,132 citations
TL;DR: In this paper, the authors examine the characteristics of incentive contracts in which the agent's payoff is not based on the principal's objective, and show that contracts based on such performance measures will not in general provide first-best incentives, even when the agent is risk neutral.
Abstract: This paper examines the characteristics of incentive contracts in which the agent's payoff is not based on the principal's objective. I show that contracts based on such performance measures will not in general provide first-best incentives, even when the agent is risk neutral. The form of the optimal contract and the efficiency of this contract depend on the relationship between the performance measure used and the principal's objective. The model provides a simple and intuitive statistical measure that serves as a metric for the efficiency of a performance measure. Applications to various incentive contracting situations, including the "gaming" of performance measures, the use of revenue-based sales commissions, and relative performance evaluation, are presented.
TL;DR: In this article, the authors present an economic analysis of religious behavior that accounts for the continuing success of groups with strange requirements and seemingly inefficient prohibitions and demonstrate that efficient religions with perfectly rational members may benefit from stigma, self-sacrifice, and bizarre behavioral restrictions.
Abstract: This paper presents an economic analysis of religious behavior that accounts for the continuing success of groups with strange requirements and seemingly inefficient prohibitions. The analysis does not presuppose any special motives for religious activity. Rather, religion is modeled as a club good that displays positive returns to "participatory crowding." The analysis demonstrates that efficient religions with perfectly rational members may benefit from stigma, self-sacrifice, and bizarre behavioral restrictions. The model also addresses sacrifice in nonreligious "social clubs": fraternities, communes, political parties, work groups, and families.
TL;DR: In this paper, the authors explored teenage pregnancy and school dropout behavior and found that the estimation of a straight-forward single-equation model yields statistically significant peer group effects; however, these effects disappear under simultaneous equation estimation.
Abstract: Individuals or households often have some scope for choice of peer groups, whether through the selection of neighborhood of residence, school, or friends. This study addresses the estimation of peer group effects in cases in which measures of peer group influence are potentially endogenous variables. Using a rich data set on individual behavior, the paper explores teenage pregnancy and school dropout behavior. For both cases, the estimation of a straight-forward single-equation model yields statistically significant peer group effects; however, these effects disappear under simultaneous equation estimation. The results are robust and suggest the need for careful modeling of the choice of peer groups.
TL;DR: The authors argue that many goods and decisions are not allocated or made through markets and interpret an agent's status as a ranking device that determines how well he or she fares in the non-market sector.
Abstract: We argue that many goods and decisions are not allocated or made through markets. We interpret an agent's status as a ranking device that determines how well he or she fares in the nonmarket sector. The existence of a nonmarket sector can endogenously generate a concern for relative position in, for example, the income distribution so that higher income implies higher status. Moreover, it can naturally yield multiple equilibria. It is thus possible to explain differences in growth rates across countries without recourse to differences in underlying preferences, technologies, or endowments. Different social organizations lead to different reduced-form preferences, which lead to different growth rates.
TL;DR: In this paper, a rational expectations model with endogenous investment level is used to show that insider trading improves information and stock prices better reflect information and will be higher on average, expected real investment will rise, markets are less liquid, owners of investment projects and insiders will benefit, and outside investors and liquidity traders will be hurt.
Abstract: Insider trading moves forward the resolution of uncertainty. Using a rational expectations model with endogenous investment level, I show that, when insider trading is permitted, (i) stock prices better reflect information and will be higher on average, (ii) expected real investment will rise, (iii) markets are less liquid, (iv) owners of investment projects and insiders will benefit, and (v) outside investors and liquidity traders will be hurt. Total welfare may increase or decrease depending on the economic environment. Factors that favor the prohibition of insider trading are identified.
TL;DR: The authors examined the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 and concluded that equilibrium rationing is not a significant macroeconomic phenomenon, despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing.
Abstract: This paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988. While commercial loan rates are "sticky," consistent with rationing, this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory. In addition, the proportion of new loans issued under commitment does not increase significantly when credit markets are tight, despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing. Overall, the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon.
TL;DR: The authors construct a dynamic general equilibrium model in which the typical industry colludes by threatening to punish deviations from an implicitly agreed-on pricing path, and use methods similar to those of Kydland and Prescott to calibrate linearized versions of both their model and an analogous perfectly competitive model.
Abstract: We construct a dynamic general equilibrium model in which the typical industry colludes by threatening to punish deviations from an implicitly agreed-on pricing path. We use methods similar to those of Kydland and Prescott to calibrate linearized versions of both our model and an analogous perfectly competitive model. We then compute the two models' predictions concerning the economy's responses to a change in military spending. The responses predicted by the oligopolistic model are closer to the empirical responses estimated with postwar U.S. data than the corresponding predictions of the competitive model.
TL;DR: In this article, the potential welfare benefits of unemployment insurance, along with the optimal replacement ratio, were studied using a quantitative dynamic general equilibrium model, where agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets. But if there is moral hazard and the replacement ratio is not set optimally, but is instead set to an empirically plausible value, the economy can be much worse off than it would be without unemployment insurance.
Abstract: The potential welfare benefits of unemployment insurance, along with the optimal replacement ratio, are studied using a quantitative dynamic general equilibrium model. To provide a role for unemployment insurance, agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets. In the absence of moral hazard, replacement ratios as high as .65 are optimal and the welfare benefits of unemployment insurance are quite large. However, if there is moral hazard and the replacement ratio is not set optimally, but is instead set to an empirically plausible value, the economy can be much worse off than it would be without unemployment insurance.
TL;DR: In this article, the authors analyze a differential game in which all interest groups have access to a common capital stock and show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons.
Abstract: We analyze a differential game in which all interest groups have access to a common capital stock. We show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons. We use this model to analyze capital flight: in many poor countries, property rights are not well defined; since "safe" bank accounts in rich countries (the inferior technology) are available to citizens of these countries, they engage in capital flight. We show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare.
TL;DR: In this article, the authors analyzed the effects of inflation on the dispersion of prices, as well as other aspects of price behavior, using disaggregated data on prices of foodstuffs in Israel during 1978-84.
Abstract: This paper analyzes the effects of inflation on the dispersion of prices, as well as other aspects of price behavior, using disaggregated data on prices of foodstuffs in Israel during 1978-84. We find that the effect of expected inflation on intramarket price variability is stronger than the effect of unexpected inflation. We show that even in times of high inflation, price quotations are not trivially short and price changes are not synchronized across firms. These facts, taken together, confirm that there is some staggering in the setting of prices. We find that the distribution of real prices is far from being uniform, as many menu cost-based models assume or conclude. In fact, as inflation increases to very high levels, this distribution is not even symmetric. When the annual inflation rate reaches 130 percent, there are equal chances of finding real prices above or below the market average, but upward deviations in the real price are further away from zero than downward ones. Furthermore, as the annu...
TL;DR: In this paper, a stochastic framework of workers' tastes over job attributes and models their equilibrium wage-job attribute choices is adopted to determine how serious this bias is likely to be.
Abstract: It is well known that the inability to observe workers' full labor market productivity can bias estimates of compensating wage differentials. This paper attempts to determine how serious this bias is likely to be. It adopts a stochastic framework of workers' tastes over job attributes and models their equilibrium wage-job attribute choices. Workers' productivity is assumed to consist of observed and unobserved components. Applying the standard estimation methodology, we find that the degree of bias can be surprisingly large. On the basis of our analysis, we conclude that contemporary labor market studies are likely to severely underestimate workers' willingness to pay for job attributes. This has implications for a number of applications of compensating wage differentials, including value of life studies.
Abstract: We develop an estimator that allows us to calculate an upper bound to the fraction of unrejected null hypotheses tested in economics journal articles that are in fact true. Our point estimate is that none of the unrejected nulls in our sample is true. We reject the hypothesis that more than one-third are true. We consider three explanations for this finding: that all null hypotheses are mere approximations, that data-mining biases reported standard errors downward, and that journals tend to publish papers that fail to reject their null hypotheses only when the null hypotheses are likely to be false. While all these explanations are important, the last seems best able to explain our findings.
TL;DR: This paper examined the EPA's decision to cancel or continue the registrations of cancer-causing pesticides that went through the special review process between 1975 and 1989, and found that the EPA indeed balanced risks against benefits in regulating pesticides: risks to human health or the environment increased the likelihood that a particular pesticide use was canceled by the EPA; at the same time, the larger the benefits associated with a particular use, the lower was the likelihood of cancellation.
Abstract: This paper examines the EPA's decision to cancel or continue the registrations of cancer-causing pesticides that went through the special review process between 1975 and 1989. Despite claims to the contrary, our analysis indicates that the EPA indeed balanced risks against benefits in regulating pesticides: Risks to human health or the environment increased the likelihood that a particular pesticide use was canceled by the EPA; at the same time, the larger the benefits associated with a particular use, the lower was the likelihood of cancellation. Intervention by special-interest groups was also important in the regulatory process. Comments by grower organizations significantly reduced the probability of cancellation, whereas comments by environmental advocacy groups increased the probability of cancellation. Our analysis suggests that the EPA is fully capable of weighing benefits and costs when regulating environmental hazards; however, the implicit value placed on health risks--$35 million per applicato...
TL;DR: In this article, the authors show that trade liberalization has dynamic effects on output and welfare as the economy moves to its new steady state, and the size of this dynamic gain from trade depends on the wedge between social and private returns to capital.
Abstract: Productive factors, such as human and physical capital, accumulate, and trade policy can affect their steady-state levels. Consequently, in addition to the usual static effects, trade liberalization has dynamic effects on output and welfare as the economy moves to its new steady state. The output impact of this dynamic effect is measurable and appears to be quite large. The welfare impact of this dynamic effect is also measurable. The size of this dynamic gain from trade depends on the wedge between social and private returns to capital. Rough numerical estimates of the output and welfare effects are provided.
TL;DR: In this paper, Small et al. show that a commonly used monocentric model, in which employment and population densities decline exponentially from a center, greatly underpredicts actual commuting distances in typical U.S. and Japanese metropolitan areas.
Abstract: Author(s): Small, Kenneth A.; Song, Shunfeng | Abstract: A debate over the empirical underpinnings of urban economic models is emerging under the unlikely rubric of "wasteful commuting." Hamilton (1982) shows that a commonly used monocentric model, in which employment and population densities decline exponentially from a center, greatly underpredicts actual commuting distances in typical U.S. and Japanese metropolitan areas. He concludes that the monocentric model is fundamentally flawed. This conclusion is challenged by White (1988b), who examines the cost-minimizing assignment of households to residential locations, taking density patterns as they are and measuring cost by travel time. White finds that for a sample of U.S. metropolitan areas, only 11 percent of actual commuting cost is in excess of the cost-minimizing amount, rather than the 87 percent found by Hamilton. Hamilton (1989) and Cropper and Gordon (1991), using variations of White's technique, obtain results intermediate between these extremes.
TL;DR: In this paper, the authors examined the impact of internal finance on investment in the U.S. agricultural sector and provided support for a class of "internal funds" models of investment under asymmetric information.
Abstract: Recent models of firm investment decisions stressing informational imperfections in capital markets provide a foundation for interpreting evidence that movements in internal finance can predict investment spending, even after one controls for measures of firms' investment opportunities. While such evidence is suggestive, it is often open to other interpretations. We examine these models using data on equipment investment in the U.S. agricultural sector. This sector is particularly interesting because it has experienced large fluctuations in net worth and the profitability of investment, and reasonable measures of net worth can be constructed. Our findings provide support for a class of "internal funds" models of investment under asymmetric information.
TL;DR: In this paper, the authors show that in a perfectly competitive economy, private decisions to enforce rights may result in either more or less enforcement than is socially efficient, and that an equilibrium may be locally, but not globally, efficient.
Abstract: Costs must be incurred if an owner is to enforce private property rights effectively. We show that, in a perfectly competitive economy, private decisions to enforce rights may result in either more or less enforcement than is socially efficient. Cases of multiple stable equilibria occur, and an equilibrium may be locally, but not globally, efficient. Resources may not be employed in their socially most valuable uses, and enforcement may be accompanied by inefficient investment in resource productivity.
TL;DR: In this paper, a switching regression model is estimated that allows for strategies of PACs to vary for different contribution recipients, and the authors find that contributor behavior is not inconsistent with rational behavior.
Abstract: Empirical public choice literature and casual observation suggest that the behavior of political action committees is remarkably unsophisticated, meaning that PACs give to those legislators who would support their interests anyway. Thus it is suggested that contributor behavior deviates from rational behavior, which is a cornerstone of economic analysis. In this paper, a switching regression model is estimated that allows for strategies of PACs to vary for different contribution recipients. I analyze the behavior of farm PACs over three election cycles. In contrast to previous findings, I find that contributor behavior is not inconsistent with rational behavior. Contributors who attempt to influence the voting behavior of members of Congress give the most money to legislators whose constituency interest suggests that they are likely to be undecided on how to vote and PACs give less money to legislators who represent districts with larger farm populations because those legislators are likely to vote in con...
TL;DR: In this paper, the authors developed a simple method for identifying and estimating cost functions in the presence of endogenous and unobserved quality, and used the parameter estimates to evaluate the cost-quality trade-off in nursing home regulatory policy.
Abstract: Proper evaluation of cost-quality trade-offs inherent in regulatory policy requires identifying the structure of production from the behavioral response of quality to the policy change. However, estimating the structure of production with endogenous quality is difficult because of both measurement problems and data availability. We develop a simple method for identifying and estimating cost functions in the presence of endogenous and unobserved quality. Using this method, we estimate that a quality-adjusted cost function for nursing homes treating quality as exogenous yields seriously misleading estimates of marginal cost and economies of scale. We then used the parameter estimates to evaluate the cost-quality trade-off in nursing home regulatory policy.
TL;DR: In this article, the authors investigated the feasibility of a monetary policy aimed at pegging the nominal rate of interest and showed that under general conditions such a policy would produce the well-known cumulative process, despite the fact that there exists a well-behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate.
Abstract: This paper investigates the feasibility of a monetary policy aimed at pegging the nominal rate of interest. It shows that under general conditions such a policy would produce the well-known cumulative process, despite the fact that there exists a well-behaved rational expectations equilibrium with no tendency for inflation to accelerate or decelerate. The cumulative process shows up as the failure of learning to converge to rational expectations. Specifically, the paper shows, first in a conventional IS-LM model with an expectations-augmented Phillips curve and then in a micro-based finance constraint model, that if people follow any learning rule based on experience that satisfies a weak condition, then the sequence of temporary equilibria under a policy of interest pegging cannot converge. The nonconvergent path that will be observed accords with the familiar cumulative process, in that inflation accelerates if the market rate of interest has been pegged below the natural rate.