Showing papers in "Journal of Political Economy in 1993"
TL;DR: In this paper, the authors model economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth, and demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long-run effects.
Abstract: This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Because of capital market imperfections, poor agents choose working for a wage over self-employment, and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will there be employment contracts; otherwise, there is either subsistence or self-employment. Thus, in static equilibrium, the occupational structure depends on distribution. Since the latter is itself endogenous, we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long-run effects. In one case the economy develops either widespread cottage industry (self-employment) or factory production (employment contracts), depending on the initial distribution; in the other example, it develops into prosperity or stagnation.
2,906 citations
TL;DR: This paper found that the trend toward increased wage inequality is apparent within narrowly defined education and labor market experience groups, and that much of the increase in wage inequality for males over the last 20 years is due to increased returns to the components of skill other than years of schooling and years of labor market experiences.
Abstract: Using data from the March Current Population Survey, we document an increase over the past 30 years in wage inequality for males. Between 1963 and 1989, real average weekly wages for the least skilled workers (as measured by the tenth percentile of the wage distribution) declined by about 5 percent, whereas wages for the most skilled workers (as measured by the ninetieth percentile of the wage distribution) rose by about 40 percent. We find that the trend toward increased wage inequality is apparent within narrowly defined education and labor market experience groups. Our interpretation is that much of the increase in wage inequality for males over the last 20 years is due to increased returns to the components of skill other than years of schooling and years of labor market experience. Our primary explanation for the general rise in returns to skill is that the demand for skill rose in the United States over this period.
2,552 citations
TL;DR: In this article, the authors study the value of the stock market as a monitor of managerial performance and show that the stock price incorporates performance information that cannot be extracted from the firm's current or future profit data.
Abstract: This paper studies the value of the stock market as a monitor of managerial performance. It shows that the stock price incorporates performance information that cannot be extracted from the firm's current or future profit data. The additional information is useful for structuring managerial incentives. The amount of information contained in the stock price depends on the liquidity of the market. Concentrated ownership, by reducing market liquidity, reduces the benefits of market monitoring. Integration is associated with weakened managerial incentives and less market monitoring. This may explain why shares of divisions of a firm are rarely traded. The model offers a reason why market liquidity and monitoring have both a private and a social value, a feature missing in standard finance models. This is used to study the equilibrium size of the stock market as a function of investor preferences and the available amounts of long- and short-term capital.
1,713 citations
TL;DR: In this paper, the authors report market experiments in which human traders are replaced by "zero-intelligence" programs that submit random bids and offers, and show that a budget constraint (i.e., not permitting traders to sell below their costs or buy above their values) is sufficient to raise the allocative efficiency of these auctions close to 100 percent.
Abstract: We report market experiments in which human traders are replaced by "zero-intelligence" programs that submit random bids and offers. Imposing a budget constraint (i.e., not permitting traders to sell below their costs or buy above their values) is sufficient to raise the allocative efficiency of these auctions close to 100 percent. Allocative efficiency of a double auction derives largely from its structure, independent of traders' motivation, intelligence, or learning. Adam Smith's invisible hand may be more powerful than some may have thought; it can generate aggregate rationality not only from individual rationality but also from individual irrationality.
1,634 citations
TL;DR: In this paper, the authors introduce the separate spheres bargaining model, a new model of distribution within marriage, which differs from divorce threat bargaining models (e.g., Manser-Brown, McElroy-Horney) in that the threat point is not divorce but a non-cooperative equilibrium within marriage.
Abstract: This paper introduces the "separate spheres" bargaining model, a new model of distribution within marriage. It differs from divorce threat bargaining models (e.g., Manser-Brown, McElroy-Horney) in that the threat point is not divorce but a noncooperative equilibrium within marriage; this noncooperative equilibrium reflects traditional gender roles. The predictions of our model thus differ from those of divorce threat bargaining models; in the separate spheres model, cash transfer payments to the mother and payments to the father can--but need not--imply different equilibrium distributions in existing marriages. In the long run, the distributional effects of transfer policies may be substantially altered by changes in the marriage market equilibrium.
1,559 citations
TL;DR: This article extended the traditional theory of individual rational choice to analyze social issues beyond those usually considered by economists and incorporated into the theory a much richer class of attitudes, preferences, and calculations.
Abstract: An important step in extending the traditional theory of individual rational choice to analyze social issues beyond those usually considered by economists is to incorporate into the theory a much richer class of attitudes, preferences, and calculations. While this approach to behavior builds on an expanded theory of individual choice, it is not mainly concerned with individuals. It uses theory at the micro level as a powerful tool to derive implications at the group or macro level. The lecture describes the approach and illustrates it with examples drawn from my past and current work.
1,407 citations
TL;DR: In this paper, the authors formulate and estimate a finite-horizon, structural dynamic model of agricultural investment behavior that incorporates the major features of low-income agricultural environments: income uncertainty, constraints on borrowing and rental markets, and the use of investment assets to generate income and smooth consumption.
Abstract: In this paper we formulate and estimate a finite-horizon, structural dynamic model of agricultural investment behavior that incorporates the major features of low-income agricultural environments: income uncertainty, constraints on borrowing and rental markets, and the use of investment assets to generate income and smooth consumption. The model is fit to longitudinal Indian household data on farm profits, bullock stocks, and pump sets. The estimated structural parameters are used to assess the effects on the life cycle accumulation of bullocks, agricultural profits, and welfare associated with complete markets and bullock liquidity and with second-best policies that provide assured sources of income to farmers and weather insurance.
1,304 citations
TL;DR: The authors found that a tax on job destruction at the firm level has a sizable negative impact on total employment: a tax equal to 1 year's wages reduces employment by roughly 2.5 percent.
Abstract: Recent empirical work indicates that job creation and destruction rates are large, implying significant amounts of job reallocation across firms. This paper builds a general equilibrium model of this reallocation process, calibrates it using data on firm-level dynamics, and evaluates the aggregate implications of policies that interfere with this process. We find that a tax on job destruction at the firm level has a sizable negative impact on total employment: a tax equal to 1 year's wages reduces employment by roughly 2.5 percent. More striking, however, are the welfare consequences: the cost in terms of consumption of this same tax is greater than 2 percent. The mechanism through which this welfare loss arises is apparently a decrease in average productivity, since this policy results in a decrease in average productivity of over 2 percent.
1,270 citations
TL;DR: In this paper, the authors study agents who consider the experiences of their neighbors in deciding which of two technologies to use, and analyze two learning environments, one in which the same technology is optimal for all players and another in which each technology is better for some of them.
Abstract: This paper studies agents who consider the experiences of their neighbors in deciding which of two technologies to use. We analyze two learning environments, one in which the same technology is optimal for all players and another in which each technology is better for some of them. In both environments, players use exogenously specified rules of thumb that ignore historical data but may incorporate a tendency to use the more popular technology. In some cases these naive rules can lead to fairly efficient decisions in the long run, but adjustment can be slow when a superior technology is first introduced.
797 citations
TL;DR: This paper found that when trade protection is modeled endogenously, its restrictive impact on imports is large, 10 times the size obtained from treating protection exogenously. But the level of trade protection was not exogenous.
Abstract: Trade theorists continue to puzzle over their surprisingly small estimates of the impact of trade liberalization on imports. All explanations of the puzzle treat trade liberalization as a given. But the level of trade protection is not exogenous. The theory of endogenous protection predicts that higher levels of import penetration will lead to greater protection. This paper finds that when trade protection is modeled endogenously, its restrictive impact on imports is large, 10 times the size obtained from treating protection exogenously.
756 citations
TL;DR: In this paper, a model of the audit market relating auditors' liability to auditing standards is presented, and equilibrium audit fees depend on both the informational value of audit and the option value of the claim financial statement users have on the auditor's wealth in the event the audit is determined to have been substandard.
Abstract: There has been an enormous increase in auditing and accounting standards and in litigation against auditors. This paper examines some of the consequences of these changes by developing a model of the audit market relating auditors' liability to auditing standards. The paper demonstrates how equilibrium audit fees depend on both the informational value of the audit and the option value of the claim financial statement users have on the auditor's wealth in the event the audit is determined to have been substandard. Auditors' attitudes toward and responses to auditing standards are studied, and characteristics of optimal liability rules are evaluated.
TL;DR: In this paper, the problem of optimal taxation in three infinite-horizon, representative-agent endogenous growth models is studied, and it is shown that the limiting tax rate on capital is no longer zero.
Abstract: We study the problem of optimal taxation in three infinite-horizon, representative-agent endogenous growth models. The first model is a convex model in which physical and human capital are perfectly symmetric. Our second model incorporates elastic labor supply through a Lucas-style technology. Analysis of these two models points out the danger of assuming that government expenditures are exogenous. In our third model, we include government expenditures as a productive input in capital formation, showing that the limiting tax rate on capital is no longer zero. In numerical simulations, we find similar effects on growth and welfare in all three models.
TL;DR: In this paper, a modification of the HOV model that allows for factor-augmenting international productivity differences is used to explain much of the factor content of trade and the cross-country variation in factor prices.
Abstract: The factor price equalization hypothesis is widely at odds with the large variation in factor prices across countries. Similarly, the Heckscher-Ohlin-Vanek (HOV) theorem constitutes an incomplete description of trade in factor services: its predictions are always rejected empirically. These two issues are examined using a modification of the HOV model that allows for factor-augmenting international productivity differences. The empirical results are stark: this simple modification of the HOV theorem explains much of the factor content of trade and the cross-country variation in factor prices.
TL;DR: In this paper, the authors examine learning by doing in the context of a production function in which the other arguments are labor, human capital, physical capital, and vintage as a proxy for embodied technical knowledge.
Abstract: The paper examines learning by doing in the context of a production function in which the other arguments are labor, human capital, physical capital, and vintage as a proxy for embodied technical c...
TL;DR: In this article, the authors present a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive, the coefficient of relative prudence.
Abstract: Using data from the Consumer Expenditure Survey, this paper presents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive, the coefficient of relative prudence. The test yields a fairly precise estimate of a small precautionary motive; in fact, the estimate is too small to be consistent with widely accepted beliefs about risk aversion. The presence of liquidity-constrained households does not appear to explain this finding, and there is some evidence that self-selection of households into risky environments also cannot explain the results.
TL;DR: The authors investigate whether omitted family background variables are responsible for high returns to schooling estimated in Brazil and conclude that the "family background bias" in return to schooling is modest and need not imply returns to family connections.
Abstract: We investigate whether omitted family background variables are responsible for high returns to schooling estimated in Brazil. Returns to schooling fall by about one-third when parental schooling is added to wage equations. Surprisingly, the schooling of fathers-in-law has larger effects on wages than the schooling of fathers. On the basis of a model of assortative mating, we interpret this as evidence that parental characteristics represent unobservable worker attributes rather than nepotism in the labor market. We conclude that the "family background bias" in returns to schooling is modest and need not imply returns to family connections.
TL;DR: In this paper, the authors present a class of models in which agents may devote part of their non-isure activities to going to school so as to increase the efficiency units of labor they supply to the firms and the wages they receive.
Abstract: This paper presents a class of models in which agents may devote part of their nonleisure activities to going to school so as to increase the efficiency units of labor they supply to the firms and the wages they receive. The interaction among the technology of human capital accumulation and agents' preferences will determine endogenously the economy's rate of growth. Given a constant returns to scale technology for physical capital accumulation, we characterize the set of steady states as a ray from the origin and show the global convergence of every off-balanced path to some point on this ray. Further properties concerning the dynamic evolution of the state and control variables around the ray of steady states are also established. Our analysis is useful to understand the role played by the technologies of physical and human capital in the process of accumulation and to evaluate the impact of policies geared toward attaining higher levels of capital. Our results highlight the importance of human capital ...
TL;DR: In this article, the authors examined bidding in auctions for state highway construction contracts, in order to determine whether bid rigging occurred, and found that collusion did not take the form of a bid rotation scheme.
Abstract: This paper examines bidding in auctions for state highway construction contracts, in order to determine whether bid rigging occurred. Detection of collusion is possible because of limited participation in the collusive scheme. Collusion did not take the form of a bid rotation scheme. Instead, several ring members bid on most jobs. One was a serious bidder, and the others submitted phony higher bids. The bids of noncartel firms, as well as their rank distribution, were related to cost measures. In contrast, the rank distribution of higher cartel bids was unrelated to similar cost measures and differed from that of the low cartel bid.
TL;DR: This article investigated the sensitivity of Solow residual based measures of technology shocks to labor hoarding behavior and found that a significant proportion of movements in the residual are artifacts of labor hoarders behavior and that the variance of innovations to technology is roughly 50 percent less than that implied by standard real business cycle models.
Abstract: This paper investigates the sensitivity of Solow residual based measures of technology shocks to labor hoarding behavior. Using a structural model of labor hoarding and the identifying restriction that innovations to technology shocks are orthogonal to innovations in government consumption, we estimate the fraction of the variability of the Solow residual that is due to technology shocks. Our results support the view that a significant proportion of movements in the Solow residual are artifacts of labor hoarding behavior. Specifically, we estimate that the variance of innovations to technology is roughly 50 percent less than that implied by standard real business cycle models. In addition, our results suggest that existing real business cycle studies substantially overstate the extent to which technology shocks account for the variability of postwar aggregate U.S. output.
TL;DR: In this article, the authors investigated the reasons behind the rise in dowries in South Asia and found that a "marriage squeeze" caused by population growth, resulting in larger younger cohorts and hence a surplus of women in the marriage market, has played a significant role in the rise of dowries.
Abstract: Dowries in South Asia have steadily risen over the last 40 years and now often amount to over 50 percent of a household's assets. This paper attempts to investigate the reasons behind this increase. It adapts Rosen's implicit market model to the Indian marriage market and tests predictions from the model with data from six villages in South Central India and from the Indian census. It is found that a "marriage squeeze" caused by population growth, resulting in larger younger cohorts and hence a surplus of women in the marriage market, has played a significant role in the rise in dowries.
TL;DR: This paper showed that productivity shocks are correlated with aggregate demand variables, implying that the former are not exogenous impulses and that firms persistently charge prices above marginal costs, making inappropriate the constant returns to scale competitive production function, assumed in many theoretical frameworks.
Abstract: In a recent article in this Journal, Hall (1988) examined productivity shocks at the industry level, derived from constant returns to scale production functions in which firms were assumed to be competitive. Hall had two important conclusions. First, he showed that productivity shocks (i.e., Solow residuals) were correlated with aggregate demand variables, implying that the former are not exogenous impulses. Second, his results implied that firms persistently charge prices above marginal costs, making inappropriate the constant returns to scale competitive production function, assumed in many theoretical frameworks. Because of the importance of Hall's findings, the article has led to many extensions. Evans (1992) confirms the empirical finding of significant correlations between productivity shocks and aggregate demand variables; Burnside, Eichenbaum, and Rebelo (1993) show that this correlation can be explained by introducing labor hoarding into a theoretical model with competitive firms and constant returns to scale production functions. The markups above marginal cost are explained by Eden and Griliches (1991) and Galeotti and Schiantarelli (1991) by modifying the theoretical production function. Caballero and Lyons (1992), using the Hall data and methodology, examine the possibility of external economies in the aggregate manufacturing production. Finally, Waldmann (199 1) argues in this Journal that the
TL;DR: In this article, the negative effect of proportional income taxation on human capital has been shown to be a significant negative effect on investment in human capital, and a model that is more general in several respects than the models used previously.
Abstract: This study finds a significant negative effect of proportional income taxation on human capital. Of the few earlier studies to address this issue, most suggested a negligible effect of taxation on investment in human capital. This earlier conclusion is shown to be incorrect by using a model that is more general in several respects than the models used previously.
TL;DR: In this paper, the authors evaluate the level of poverty using expenditure data from the Consumer Expenditure Survey and find that consumption-based poverty rates are much lower than those based on income, and that the trend in the poverty rate in the United States is sensitive to the price index and equivalence scales used to adjust the poverty thresholds.
Abstract: Official measures of poverty in the United States are compiled by the Bureau of the Census by comparing a household's income level to a prespecified threshold. From a theoretical perspective it is more appropriate to evaluate the level of poverty using a consumption-based measure of household welfare. In this paper I evaluate the level of poverty using expenditure data from the Consumer Expenditure Survey. I find that consumption-based poverty rates are much lower than those based on income. The trend in the poverty rate in the United States is sensitive to the price index and equivalence scales used to adjust the poverty thresholds.
TL;DR: In this paper, the authors integrate traditional models of learning by doing and research activity in the laboratory and production experience on the factory floor, and develop a model that emphasizes the interdependence between research activity and the production experience.
Abstract: This paper attempts to integrate traditional models of invention and learning by doing, developing a model that emphasizes the interdependence between research activity in the laboratory and production experience on the factory floor. Learning depends on invention in that learning by doing is viewed as the exploration of the finite and bounded productive potential of invented technologies. At the same time, the profitability of costly invention is dependent on learning in that costs of production depend on cumulative learning experience. The model is a true hybrid, allowing for circumstances in which either the incentives to engage in research and/or the incentives to produce different goods are the binding constraints on growth.
TL;DR: In this article, the authors propose a new procedure for evaluating the fit of a dynamic structural economic model, which is based on augmenting the variables in the model with just enough stochastic error so that the model can exactly match the second moments of the actual data.
Abstract: This paper suggests a new procedure for evaluating the fit of a dynamic structural economic model. The procedure begins by augmenting the variables in the model with just enough stochastic error so that the model can exactly match the second moments of the actual data. Measures of fit for the model can then be constructed on the basis of the size of this error. The procedure is applied to a standard real business cycle model. Over the business cycle frequencies, the model must be augmented with a substantial error to match data for the postwar U.S. economy. Lower bounds on the variance of the error range from 40 percent to 60 percent of the variance in the actual data.
TL;DR: In this article, the authors investigate whether household consumption expenditure tracks income across seasons and find little evidence that consumption tracks income over the course of the year, rather than being the result of seasonal variations in preferences or prices, common to all households.
Abstract: Many households in developing countries rely on seasonal agriculture for their incomes. This paper investigates whether household consumption expenditure tracks income across seasons. Using data from Thailand, I contrast the seasonal consumption patterns of households with different seasonal income patterns and estimate the responsiveness of seasonal consumption to seasonal income. I find little evidence that consumption tracks income over the course of the year. The findings suggest that observed seasonal consumption patterns are the result of seasonal variations in preferences or prices, common to all households, rather than an inability of households to use savings behavior to smooth consumption.
Abstract: This paper presents an empirical investigation of adverse selection in the wholesale used car market. New car dealers (who sell both new and used cars) differ from used car dealers (who sell only used cars) in the propensity to sell trade-ins on the wholesale market. Models of adverse selection suggest that the dealer type that sells a higher proportion of its trade-ins on the wholesale market will sell, on average, cars of higher quality and receive in return a higher price. A survey of dealers' wholesale behavior and prices collected at a wholesale auction are used to test this prediction. I find weak evidence for adverse selection.
TL;DR: In this article, the authors study an equilibrium model in which the males who regard their prospects as unusually good choose to wait until their economic success is revealed before choosing a bride, and show the existence of equilibrium for models of this type and explore the properties of equilibrium.
Abstract: In most times and places, women on average marry older men. We propose a partial explanation for this difference and for why it is diminishing. In a society in which the economic roles of males are more varied than the roles of females, the relative desirability of females as marriage partners may become evident at an earlier age than is the case for males. We study an equilibrium model in which the males who regard their prospects as unusually good choose to wait until their economic success is revealed before choosing a bride. In equilibrium, the most desirable young females choose successful older males. Young males who believe that time will not treat them kindly will offer to marry at a young age. Although they are aware that young males available for marriage are no bargain, the less desirable young females will be offered no better option than the lottery presented by marrying a young male. We show the existence of equilibrium for models of this type and explore the properties of equilibrium.
TL;DR: In this paper, the authors present evidence on the nature of productivity growth for five major industries in six countries and find that short-run productivity growth is similar across industries in a nation but less similar across countries in any specific industry.
Abstract: This paper presents evidence on the nature of productivity growth for five major industries in six countries. Output growth is found to be more correlated across countries than productivity growth. In addition, productivity growth is more correlated across industries within one country than across countries within one industry. Using an error-components model, I find that a substantial fraction of changes in annual productivity can be attributed to nation-specific factors that are common across industries. The evidence suggests that short-run productivity growth is similar across industries in a nation but less similar across countries in any specific industry.
TL;DR: In this paper, a single seller of an indivisible good operates in a market with many consumers who differ in their ability to process information, and the heterogeneity of consumer's abilities can be used by the seller to profitably discriminate among them.
Abstract: A single seller of an indivisible good operates in a market with many consumers who differ in their ability to process information. The consumers' constraints are modeled in two submodels: the first in terms of the limits on the number of sets in the partition of the price space, and the second in terms of the limits on the complexity of the operation he can use to process a price offer. For the construction of the second submodel, the tool of a "perceptron" is borrowed from the parallel computation literature. Assuming a negative correlation between the seller's cost of supply of the good and the consumer's ability to process information, I demonstrate that the heterogeneity of consumer's abilities can be used by the seller to profitably discriminate among them.