Showing papers in "Journal of Political Economy in 1994"
TL;DR: The authors showed that Tobin's q and firm diversification are negatively related throughout the 1980s, and that this negative relation holds for different diversification measures and when we control f...
Abstract: In this paper, we show that Tobin's q and firm diversification are negatively related throughout the 1980s. This negative relation holds for different diversification measures and when we control f...
2,766Â citations
TL;DR: In this article, a comparative historical analysis of the relations between culture and institutional structure is presented, showing the theoretical importance of culture in determining institutional structures, in leading to their path dependence, and in forestalling successful intersociety adoption of institutions.
Abstract: Lacking an appropriate theoretical framework, economists and economic historians have paid little attention to the relations between culture and institutional structure. This limits the ability to address a question that seems to be at the heart of developmental failures: Why do societies fail to adopt the institutional structure of more economically successful ones? This paper integrates game-theoretical and sociological concepts to conduct a comparative historical analysis of the relations between culture and institutional structure. It examines cultural factors that have led two premodern societies--one from the Muslim world and the other from the Latin world--to evolve along distinct trajectories of institutional structure. It indicates the theoretical importance of culture in determining institutional structures, in leading to their path dependence, and in forestalling successful intersociety adoption of institutions. Since the distinct institutional structures found in the late medieval period resem...
2,221Â citations
TL;DR: In this paper, a model of social interaction in which individuals care about status as well as "intrinsic" utility (which refers to utility derived directly from consumption) is presented.
Abstract: This paper analyzes a model of social interaction in which individuals care about status as well as "intrinsic" utility (which refers to utility derived directly from consumption). Status is assumed to depend on public perceptions about an individual's predispositions rather than on the individual's actions. However, since predispositions are unobservable, actions signal predispositions and therefore affect status. When status is sufficiently important relative to intrinsic utility, many individuals conform to a single, homogeneous standard of behavior, despite heterogeneous underlying preferences. They are willing to conform because they recognize that even small departures from the social norm will seriously impair their status. The fact that society harshly censures all nonconformists is not simply assumed (indeed, status varies smoothly with perceived type); rather, it is produced endogenously. Despite this penalty, agents with sufficiently extreme preferences refuse to conform. The model provides an ...
1,775Â citations
TL;DR: In this article, the authors propose a theory of economic development in which technology adoption and barriers to such adoptions are the focus, and the size of these barriers differs across countries and time.
Abstract: We propose a theory of economic development in which technology adoption and barriers to such adoptions are the focus. The size of these barriers differs across countries and time. The larger these barriers, the greater the investment a firm must make to adopt a more advanced technology. The model is calibrated to the U.S. balanced growth observations and the postwar Japanese development miracle. For this calibrated structure we find that the disparity in technology adoption barriers needed to account for the huge observed income disparity across countries is not implausibly large.
1,239Â citations
TL;DR: This article developed a method of identifying how "incomes affect outcomes" given conventional family expenditure data and found that the final allocations of expenditures on each partner depend significantly on their relative incomes and ages and on the level of lifetime wealth.
Abstract: There is evidence from several sources that one cannot treat many-person households as a single decision maker. If this is the case, then factors such as the relative incomes of the household members may affect the final allocation decisions made by the household. We develop a method of identifying how ''incomes affect outcomes'' given conventional family expenditure data. The basic assumption we make is that household decision processes lead to efficient outcomes. We apply our method to a sample of Canadian couples with no children. We find that the final allocations of expenditures on each partner depend significantly on their relative incomes and ages and on the level of lifetime wealth.
1,143Â citations
TL;DR: In this paper, the dynamics of state taxes and spending during the late 1980s, when regional economic downturns and increased expenditure demands led to substantial state budget deficits, were explored, and more restrictive state fiscal institutions, such as "no-deficit-carryover" rules and tax and expenditure limitations, are correlated with more rapid fiscal adjustment to unexpected deficits.
Abstract: This paper explores the dynamics of state taxes and spending during the late 1980s, when regional economic downturns and increased expenditure demands led to substantial state budget deficits. More restrictive state fiscal institutions, such as "no-deficit-carryover" rules and tax and expenditure limitations, are correlated with more rapid fiscal adjustment to unexpected deficits. Political factors are also important. When a single party controls the state house and the governorship, deficit adjustment is much faster than when party control is divided. In gubernatorial election years, tax increases and spending cuts are both significantly smaller than at other times.
1,117Â citations
TL;DR: In this paper, the authors interpret historical evidence in light of a repeated-game model to conclude that merchant guilds emerged during the late medieval period to allow rulers of trade centers to commit to the security of alien merchants.
Abstract: We interpret historical evidence in light of a repeated-game model to conclude that merchant guilds emerged during the late medieval period to allow rulers of trade centers to commit to the security of alien merchants. The merchant guild developed the theoretically required attributes, secured merchants' property rights, and evolved in response to crises to extend the range of its effectiveness, contributing to the expansion of trade during the late medieval period. We elaborate on the relations between our theory and the monopoly theory of merchant guilds and contrast it with repeated-game theories that provide no role for formal organization.
1,062Â citations
TL;DR: In this article, a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives.
Abstract: A model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives. I examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics. It is found that volume is positively correlated with absolute changes in prices and dividends. I show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns.
957Â citations
TL;DR: In this article, the authors studied the relationship between turnover and compensation of Japanese executives and stock performance in the largest Japanese and U.S. companies and found that the fortunes of Japanese top executives are positively correlated with stock performance and current cash flows.
Abstract: This paper studies top executive turnover and compensation, and their relation to firm performance in the largest Japanese and U.S. companies. Japanese executive turnover and compensation are related to earnings, stock returns, and, to a lesser extent, sales performance measures. The fortunes of Japanese top executives, therefore, are positively correlated with stock performance and current cash flows (or with factors contributing to such performance). The relations for the Japanese executives are generally economically and statistically similar to those for their U.S. counterparts. There is some evidence, however, that the fortunes of Japanese executives are more sensitive to low income but less sensitive to stock returns than those of U.S. executives.
932Â citations
TL;DR: In this paper, the authors examine why some individuals survive as entrepreneurs and others do not, and analyze the growth of entrepreneurial enterprises, conditional on surviving, using tax returns of individuals who received inheritances.
Abstract: We examine why some individuals survive as entrepreneurs and others do not. In addition, we analyze the growth of entrepreneurial enterprises, conditional on surviving. Our focus is on the role of access to capital: To what extent do liquidity constraints increase the likelihood of entrepreneurial failure? The empirical strategy is based on the following logic: If entrepreneurs cannot borrow to attain their profit-maximizing levels of capital, then those entrepreneurs who have substantial personal financial resources will be more successful than those who do not. The data consist of the 1981 and 1985 federal individual income tax returns of a group of people who received inheritances. These data allow us to identify those individuals who were sole proprietors in 1981 and to determine the extent to which the decision to remain a sole proprietor was influenced by the magnitude of the inheritance-induced increase in liquidity. The results are consistent with the notion that liquidity constraints exert a noti...
905Â citations
TL;DR: In this paper, the authors develop a model in which a large investor has access to a costly monitoring technology affecting securities' expected payoffs, and all allocations of shares are determined through trading among risk-averse investors.
Abstract: We develop a model in which a large investor has access to a costly monitoring technology affecting securities' expected payoffs. Allocations of shares are determined through trading among risk-averse investors. Despite the free-rider problem associated with monitoring, risk-sharing considerations lead to equilibria in which monitoring takes place. Under certain conditions the equilibrium allocation is Pareto efficient and all agents hold the market portfolio of risky assets independent of the specific monitoring technology. Otherwise distortions in risk sharing may occur, and monitoring activities that reduce the expected payoff on the market portfolio may be undertaken.
TL;DR: In this article, the authors investigated the effect of age on consumption and income inequality in the United States, Taiwan, and Great Britain, and found that within-cohort consumption and inequality measures do indeed increase with age in the three economies.
Abstract: The permanent income hypothesis implies that, for any cohort of people born at the same time, inequality in both consumption and income should grow with age. We investigate this prediction using cohort data constructed from 11 years of household survey data from the United States, 22 years from Great Britain, and 14 years from Taiwan. The data show that within-cohort consumption and income inequality measures do indeed increase with age in the three economies and that the rate of increase is similar in all three. According to the permanent income hypothesis, the increase in inequality reflects cumulative differences in the effects of luck on consumption. Other models of intertemporal choice-such as those with strong precautionary motives or liquidity constraints-can limit or even prevent the spread of inequality, as can insurance arrangements that share risk across individuals. The evidence on the spread of inequality can therefore be used to help quantify the extent to which private and social arrangements moderate the impact of risk on the distribution of individual welfare.
TL;DR: In this paper, the authors present data from a time series of cross sections of 18-19-year-old youths from 1973 through 1988 to test the role of family background, direct college costs, local economic conditions, and returns to college in driving these trends.
Abstract: College enrollment of black 18-19-year-old high school graduates declined from 1980 through 1984 and then rebounded after 1984. This paper presents data from a time series of cross sections of 18-19-year-old youths from 1973 through 1988 to test the role of family background, direct college costs, local economic conditions, and returns to college in driving these trends. The evidence suggests that, on the one hand, increases in direct college costs were driving enrollment rates downward throughout the eighties. On the other hand, dramatic increases in average parental education for black youths exerted upward pressure on college enrollment by blacks, particularly in the latter half of the decade. The net effect of these two factors contributed to the pattern of decline and recovery observed during the eighties.
TL;DR: In this paper, a competitive model for the U.S. automobile tire industry is proposed to explain the non-monotonicity in firm numbers, in which innovation opportunities fuel entry and relative failure to innovate prompts exit; equilibrium time paths for price and quantity also share features of the data.
Abstract: Firm numbers first rise, then later fall, as an industry evolves. This nonmonotonicity is explained using a competitive model in which innovation opportunities fuel entry and relative failure to innovate prompts exit; equilibrium time paths for price and quantity also share features of the data. The model is estimated using data from the U.S. automobile tire industry, a particularly dramatic example of the nonmonotonicity in firm numbers.
TL;DR: In this article, the authors used data from seven generations of dynamic random access memory (DRAM) semiconductors and found that learning rates average 20 percent, and firms learn three times more from an additional unit of their own cumulative production than from another unit of another firm's cumulative production.
Abstract: The semiconductor industry is often cited as a "strategic" industry in part because important learning-by-doing spillovers may justify special industrial policies. Documenting the precise nature of these spillovers is crucial for determining the advisability of such policies and is helpful for understanding the contribution of learning to endogenous growth. Yet existing empirical evidence on learning by doing in semiconductor production is scant and evidence on spillovers is nonexistent. Using quarterly, firm-level data on seven generations of dynamic random access memory (DRAM) semiconductors over 1974-92, we find that (a) learning rates average 20 percent, (b) firms learn three times more from an additional unit of their own cumulative production than from an additional unit of another firm's cumulative production, (c) learning spills over just as much between firms in different countries as between firms within a given country, (d) Japanese firms are indistinguishable from others in learning speed, and...
TL;DR: The empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants as discussed by the authors, and this paper analyzes such a model.
Abstract: The empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants. In contrast, this paper analy...
TL;DR: In this article, the authors developed the quantitative implications of optimal fiscal policy in a business cycle model and showed that the tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks; thus there is no presumption that optimal labor tax rates follow a random walk.
Abstract: This paper develops the quantitative implications of optimal fiscal policy in a business cycle model. In a stationary equilibrium, the ex ante tax rate on capital income is approximately zero. There is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation. Within this class, the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk. The tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks; thus there is no presumption that optimal labor tax rates follow a random walk. Most of the welfare gains realized by switching from a tax system like that of the United States to the Ramsey system come from an initial period of high taxation on capital income.
TL;DR: In this article, comparisons between the within-twin correlations of human capital outcomes across identical and non-identical twins can be used to identify the variability in the individual-specific component of endowments and the responsiveness of schooling to individual specific endowsments in the family and in the marriage market even when schooling is measured with error.
Abstract: 03 We show how comparisons between the within-twin correlations of human capital outcomes across identical and nonidentical twins can be used to identify the variability in the individual-specific component of endowments and the responsiveness of schooling to individual-specific endowments in the family and in the marriage market even when schooling is measured with error. Estimates from two twins samples indicate that 27 (42) percent of the variance in log earnings (obesity) is due to variability in individual-specific endowments, allocations of schooling reinforce specific endowments, and individual-specific earnings endowments of men and their wives' schooling are negatively associated.
TL;DR: In this paper, the authors tentatively identify supply and demand shocks in the markets for reserves and M2 for the 1980s and contrast them with results for the 1970s, concluding that the later period of identified monetary policy shocks have dynamic impacts that are fully consistent with traditional analyses.
Abstract: It is currently popular to identify monetary policy shocks with innovations in some measure of reserves or in the federal funds rate. These assumptions about the interest elasticity of the supply of or demand for reserves imply monetary policy shocks that produce dynamic responses of macroeconomic variables that are anomalous relative to traditional monetary analyses. This paper tentatively identifies supply and demand shocks in the markets for reserves and M2 for the 1980s and contrasts them with results for the 1970s. In the later period, identified monetary policy shocks have dynamic impacts that are fully consistent with traditional analyses.
TL;DR: In this paper, the same two candidates face one another on more than one occasion; differencing eliminates the influence of any fixed candidate or district attributes, and estimates of the effects of challenger spending are an order of magnitude below those of previous studies.
Abstract: Previous studies of congressional spending have typically found a large positive effect of challenger spending but little evidence for effects of incumbent spending. Those studies, however, do not adequately control for inherent differences in vote-getting ability across candidates. "High-quality" challengers are likely to receive a high fraction of the vote and have high campaign expenditures, even if campaign spending has no impact on election outcomes. To avoid that bias, this paper examines elections in which the same two candidates face one another on more than one occasion; differencing eliminates the influence of any fixed candidate or district attributes. Estimates of the effects of challenger spending are an order of magnitude below those of previous studies. Campaign spending has an extremely small impact on election outcomes, regardless of who does the spending. Campaign spending limits appear socially desirable, but public financing of campaigns does not.
TL;DR: In this article, numerical solutions to the principal-agent problem were calculated and compared to the stylized facts of CEO compensation, showing that for many parameter values, CEO compensation need increase only by about $10 for every $1,000 of additional shareholder value; for some values, the amount is 0.003 cents.
Abstract: This paper calculates numerical solutions to the principal-agent problem and compares the results to the stylized facts of CEO compensation. The numerical predictions come from parameterizing the models of Grossman and Hart and of Holmstrom and Milgrom. While the correct incentives for a CEO can greatly enhance a firm's performance, providing such incentives need not be expensive. For many parameter values, CEO compensation need increase only by about $10 for every $1,000 of additional shareholder value; for some values, the amount is 0.003 cents.
TL;DR: Using citation analysis, the authors found strong evidence that although journal editors occasionally publish subpar papers authored by colleagues and former graduate students, on balance their use of professional connections enables them to identify and 'capture' high-impact papers for publication.
Abstract: Journal editors who publish papers authored by colleagues and former graduate students have been charged with practicing favoritism, with the implication that the papers in question are of lower quality than those written by scholars with no ties to the editor. Using citation analysis, the authors find strong evidence that although journal editors occasionally publish subpar papers authored by colleagues and former graduate students, on balance their use of professional connections enables them to identify and 'capture' high-impact papers for publication. This implies that a practice interpreted as favoritism by many scholars in fact serves to enhance efficiency in the market for scientific knowledge. Copyright 1994 by University of Chicago Press.
TL;DR: In this article, the configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium-deductible menu and the demand function as a standard hedonic system.
Abstract: The configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium-deductible menu and the demand function as a standard hedonic system. Using contractual data from a representative insurer, we estimate a reduced-form hedonic premium equation and the inverse of the marginal bid equation for insurance coverage. The data reveal an equilibrium with adverse selection and market signaling but lead us to reject the hypothesis that high risks receive contracts subsidized by low risks.
TL;DR: In this article, the effect of state versus private ownership on the rates of firm-specific productivity growth and cost decline was investigated by developing a model of endogenous, firm specific productivity growth, and testing its implications against panel data on 23 international airlines of varying levels of state ownership.
Abstract: We focus on the effect of state versus private ownership on the rates of firm-specific productivity growth and cost decline by developing a model of endogenous, firm-specific productivity growth and testing its implications against panel data on 23 international airlines of varying levels of state ownership over the period 1973-83. Our model and empirical results show that state ownership can lower the long-run annual rate of productivity growth or cost decline, but not necessarily their levels in the short run. Observed level differences in productive efficiency across private and state-owned firms may thus be a function of the age distribution of the firms being compared. These results appear to be independent of whether the firms operate under apparently more or less competitive or regulated markets and whether they differ in production scales. The analysis offers new insights concerning the recent trend toward privatizing state-owned enterprises that has been observed in many countries.
TL;DR: In this paper, the authors test an optimal (S, s) rule in household durable purchases and examine directly the resulting aggregate expenditure dynamics, and find that about half the households purchase according to an optimal rule.
Abstract: This paper tests an optimal (S, s) rule in household durable purchases and examines directly the resulting aggregate expenditure dynamics The observed decision rule responds to income uncertainty and growth as predicted by an (S, s) model resulting from transactions costs Tests against liquidity constraints find that about half the households purchase according to an optimal (S, s) rule Aggregating the (S, s) rule over households produces a cross-section distribution of durables holdings The empirical distribution is similar to that predicted theoretically, as is its response to aggregate shocks Furthermore, simulations of aggregate expenditure based on the household distribution exhibit dynamics consistent with those observed in the 1980s
TL;DR: In this article, the authors add self-reporting to the model of the control of harmful externalities through probabilistic law enforcement, and characterize the optimal scheme, which offers two advantages over schemes without selfreporting: enforcement resources are saved and risk is reduced.
Abstract: Self-reporting--the reporting by parties of their own behavior to an enforcement authority--is a commonly observed aspect of law enforcement, such as in the context of environmental and safety regulation. We add self-reporting to the model of the control of harmful externalities through probabilistic law enforcement, and we characterize the optimal scheme. Self-reporting offers two advantages over schemes without self-reporting: enforcement resources are saved because individuals who report their harmful acts need not be detected, and risk is reduced because individuals who report their behavior bear certain rather than uncertain sanctions.
TL;DR: In this paper, the authors characterize optimal enforcement in a setting in which individuals can select among various levels of some activity, all of which are monitored at the same rate but may be prosecuted and punished at varying rates.
Abstract: We characterize optimal enforcement in a setting in which individuals can select among various levels of some activity, all of which are monitored at the same rate but may be prosecuted and punished at varying rates. For less harmful acts, marginal expected penalties ought to fall short of marginal harms caused. Indeed, some range of very minor acts should be legalized. For more harmful acts, whether marginal expected penalties should fall short of, or exceed, marginal harms depends on the balance between monitoring and prosecution/punishment costs. We also explore how the optimal enforcement policy varies with changes in these costs.
TL;DR: In this paper, the authors investigate the decision whether to purchase insurance against the risk of telephone line trouble in the home and find that risk-aversion varies systematically in the population and varies with the level of income.
Abstract: This study estimates a von Neumann-Morgenstern utility function using market data and micro-econometric methods. We investigate the decision whether to purchase insurance against the risk of telephone line trouble in the home. Using the choices of approximately 10,000 residential customers, we determine the shape of the utility function and the degree of risk-aversion. We find that risk-aversion varies systematically in the population and varies with the level of income and that the observed choice behavior is consistent with expected utility maximization. We are unable to detect the presence of ambiguity effects or over-weighting of low-probability events.
TL;DR: This article showed that household-level income changes, whether measured directly by changes in reported income or proxied by employment change dummies, seemed to have no statistically significant effect on consumption.
Abstract: In a recent issue of this Journal, Mace (1991) presented empirical evidence in support of the hypothesis that U.S. households engage in full risk sharing. The data used were taken from the U.S. Consumer Expenditure Survey (CEX) for the years 1980-84. Full insurance implies that household-level consumption should be perfectly correlated with aggregate consumption but uncorrelated with householdlevel changes in income. Mace's surprising result was that, at least for one functional specification, household-level income changes, whether measured directly by changes in reported income or proxied by employment change dummies, seemed to have no statistically significant effect on consumption. This comment demonstrates that this result was due to measurement error in key variables.
TL;DR: In this paper, the authors examined the role of commitment in insurance markets and showed that fully separating strategies, when renegotiation proofed, offers the same ex ante welfare as a replication of single period equilibria.
Abstract: Under conditions of asymmetric information, commitment to long term contracts may permit markets to approach first best allocations. However, commitment is fragile and may be undermined by opportunistic behaviour, notabley renegotiation. This paper examines the role of commitment in insurance markets. It shows that fully separating strategies, when renegotiation proofed, offers the same ex ante welfare as a replication of single period equilibria. The authors present an alternative model (which extends Laffont and Tirole's 1990 model of procurement to address uncertainty and competition), which involves partial pooling in the first period followed by separation. This, and competing models (e.g. commitment models, single period models and "no commitment" models) have different testable predictions concerning the temporal patterns of insurer profitability. While fairly broad tests using U.S. property liability insurers favor the "no commitment" model, more focussed tests on California data suggest that some automobile insurers do use commitment to attract selective portfolios comprising disproportionate numbers of low risks. (A)