Showing papers in "Journal of Political Economy in 1995"
TL;DR: In this article, a modified version of the Romer model that is consistent with this evidence is proposed, but the extended model alters a key implication usually found in endogenous growth theory.
Abstract: This paper argues that the "scale effects" prediction of many recent R & D-based models of growth is inconsistent with the time-series evidence from industrialized economies. A modified version of the Romer model that is consistent with this evidence is proposed, but the extended model alters a key implication usually found in endogenous growth theory. Although growth in the extended model is generated endogenously through R & D, the long-run growth rate depends only on parameters that are usually taken to be exogenous, including the rate of population growth.
3,222Â citations
TL;DR: This article used household-level panel data from a nationally representative sample of rural Indian households describing the adoption and profitability of high-yielding seed varieties associated with the Green Revolution to test the implications of a model incorporating learning by doing and learning spillovers.
Abstract: Household-level panel data from a nationally representative sample of rural Indian households describing the adoption and profitability of high-yielding seed varieties (HYVs) associated with the Green Revolution are used to test the implications of a model incorporating learning by doing and learning spillovers. The estimates indicate that (i) imperfect knowledge about the management of the new seeds was a significant barrier to adoption; (ii) this barrier diminished as farmer experience with the new technologies increased; (iii) own experience and neighbors' experience with HYVs significantly increased HYV profitability; and (iv) farmers do not fully incorporate the village returns to learning in making adoption decisions.
1,932Â citations
TL;DR: In this article, the link between property rights and investment incentives was examined, and three theoretical arguments based on security of tenure, using land as collateral and obtaining gains from trade were developed.
Abstract: This paper examines the link between property rights and investment incentives. I develop three theoretical arguments based on security of tenure, using land as collateral and obtaining gains from trade. The paper then presents empirical evidence from two regions in Ghana. I investigate the possibility that rights are endogenous, with farmers making improvements to enhance their land rights. Finally, I suggest tests for which of the theories might explain the results.
1,893Â citations
TL;DR: This article used data for eight manufacturing industries in 1970 and 1987 to test for and characterize dynamic production externalities in cities, finding evidence of both MAR externalities, which are associated with past own industry employment concentration, and Jacobs externalities associated with the past diversity of local total employment.
Abstract: This paper uses data for eight manufacturing industries in 1970 and 1987 to test for and characterize dynamic production externalities in cities. We find evidence of both MAR externalities, which are associated with past own industry employment concentration, and Jacobs externalities, which are associated with past diversity of local total employment. More specifically, for mature capital goods industries, there is evidence of MAR externalities but none of Jacobs externalities. For new high-tech industries, there is evidence of Jacobs and MAR externalities. These findings are consistent with notions of urban specialization and product cycles: new industries prosper in large, diverse metropolitan areas, but with maturity, production decentralizes to smaller, more specialized cities. For mature industries, there is also a high degree of persistence in individual employment patterns across cities, fostered by both MAR externalities and persistence in regional comparative advantage.
1,302Â citations
TL;DR: In this paper, the authors provide empirical evidence on the relation between the volume of trade and stock returns around public announcements, and they argue that the evidence is inconsistent with this assumption and develop a model of trade around public announcement that incorporates differential interpretations and is consistent with the observed volume-return relation.
Abstract: Most models of trade in speculative markets assume that agents interpret public information identically. We provide empirical evidence on the relation between the volume of trade and stock returns around public announcements, and we argue that the evidence is inconsistent with this assumption. We then develop a model of trade around public announcements that incorporates differential interpretations and is consistent with the observed volume-return relation. Then we test the standard model of belief revision underlying most models of trade using stock brokerage research analysts' earnings forecasts. The hypthesis of identical interpretations seems inconsistent with the forecast revisions in these data.
1,194Â citations
TL;DR: In this article, the authors argue that a life cycle model can replicate observed patterns in household wealth accumulation after accounting explicitly for precautionary saving and asset-based, means-tested social insurance and demonstrate theoretically that social insurance programs with means tests based on assets discourage saving by households with low expected lifetime income.
Abstract: Micro data studies of household saving often find a significant group in the population with virtually no wealth, raising concerns about heterogeneity in motives for saving. In particular, this heterogeneity has been interpreted as evidence against the life cycle model of saving. This paper argues that a life cycle model can replicate observed patterns in household wealth accumulation after accounting explicitly for precautionary saving and asset-based, means-tested social insurance. We demonstrate theoretically that social insurance programs with means tests based on assets discourage saving by households with low expected lifetime income. In addition, we evaluate the model using a dynamic programming model with four state variables. Assuming common preference parameters across lifetime income groups, we are able to replicate the empirical pattern that low-income households are more likely than high-income households to hold virtually no wealth. Low wealth accumulation can be explained as a utility-maxim...
946Â citations
TL;DR: In this article, the authors build a theory of income smoothing based on the managers' concern about keeping their position or avoiding interference, and on the idea that current performance receives more weight than past performance when one is assessing the future.
Abstract: "Income smoothing" is the process of manipulating the time profile of earnings or earnings reports to make the reported income stream less variable. This paper builds a theory of income smoothing based on the managers' concern about keeping their position or avoiding interference, and on the idea that current performance receives more weight than past performance when one is assessing the future. When investment is added to the model, so that income reports and dividends can be set independently, we find that both dividends and income reports may be smoothed and that dividends may convey information not present in the income report.
762Â citations
TL;DR: Anarchy, defined as a system in which participants can seize and defend resources without regulation from above, is not chaos but rather a spontaneous order as discussed by the authors, but anarchy is fragile and may dissolve either into formless "amorphy" or into a more organized system such as hierarchy.
Abstract: Anarchy, defined as a system in which participants can seize and defend resources without regulation from above, is not chaos but rather a spontaneous order. However, anarchy is fragile and may dissolve either into formless "amorphy" or into a more organized system such as hierarchy. Under anarchy, each contestant balances between productive exploitation of the current resource base and fighting to acquire or defend resources. Anarchy is sustainable only when there are strongly diminishing returns to fighting effort (the "decisiveness parameter" is sufficiently low) and incomes exceed the viability minimum. These considerations explain many features of animal and human conflict.
744Â citations
TL;DR: In this article, the authors report the results of a statistical summary of estimates of the marginal willingness to pay (MWTP) for reducing particulate matter from hedonic property value models developed between 1967 and 1988.
Abstract: This paper reports the results of a statistical summary of estimates of the marginal willingness to pay (MWTP) for reducing particulate matter from hedonic property value models developed between 1967 and 1988. Results using both ordinary least squares and minimum absolute deviation estimators suggest that market conditions and the procedures used to implement the hedonic models were important to the resulting MWTP estimates. The interquartile range for these estimated marginal values (measured as a change in asset prices) lies between zero and $98.52 (in 1982-84 dollars) for a one-unit reduction in total suspended particulates (in micrograms per cubic meter). The mean MWTP is nearly five times the median ($109.90 vs. $22.40), suggesting that outliers are important influences to any summary statistics for these estimates.
732Â citations
TL;DR: In this article, a general equilibrium model of the allocation of resources among appropriative and productive activities is developed, which emphasizes the distinction between offensive weapons and fortifications, which provide defense against predation.
Abstract: This paper develops a general equilibrium model of the allocation of resources among appropriative and productive activities. The model emphasizes the distinction between offensive weapons, which are the instruments of predation, and fortifications, which provide defense against predation. The analysis of this model shows how the equilibrium security of claims to property is determined. The analysis focuses on the possibility of a nonaggressive equilibrium, in which no resources are allocated to offensive weapons and claims to property are fully secure. We also analyze the complex relation between economic welfare and the security of claims to property. We find, for example, that a relatively poor agent could be better off in an equilibrium with less secure claims to property.
651Â citations
TL;DR: In this paper, the authors used a Treasury Department panel of more than 4,000 taxpayers to estimate the sensitivity of taxable income to changes in tax rates on the basis of a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform.
Abstract: This paper uses a Treasury Department panel of more than 4,000 taxpayers to estimate the sensitivity of taxable income to changes in tax rates on the basis of a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform. The analysis emphasizes that the response of taxable income involves much more than a change in the traditional measures of labor supply. The evidence shows an elasticity of taxable income with respect to the marginal net-of-tax rate that is at least one and could be substantially higher. The implications for recent tax rate changes are discussed.
TL;DR: This article extended existing search-theoretic models of fiat money, which until now have assumed that the price level is exogenous, by explicitly incorporating bilateral bargaining, and showed that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner's problem.
Abstract: The goal of this paper is to extend existing search-theoretic models of fiat money, which until now have assumed that the price level is exogenous, by explicitly incorporating bilateral bargaining. This allows us to determine the price level endogenously and leads to additional insights concerning the role of money. For example, we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner's problem, although the difference can become small as the discount rate or search friction vanishes. We also find that there exist nonstationary inflationary equilibria.
TL;DR: In this paper, the authors introduce domestic politics into the analysis of international economic relations and study the interactions between national leaders who are concerned both with providing a high standard of living to the general electorate and collecting campaign contributions from special interest groups.
Abstract: When governments meet in the international arena, their actions reflect the political situations at home. Previous studies of trade relations have focused on governments that are immune from political pressures and that act as benevolent servants of the public interest. Here we introduce domestic politics into the analysis of international economic relations. We study the interactions between national leaders who are concerned both with providing a high standard of living to the general electorate and collecting campaign contributions from special interest groups. Our analysis sheds light on the determinants of the structure of protection in non-cooperative and cooperative policy equilibria.
TL;DR: In this paper, the authors relax the assumption of perfect competition and demonstrate that primal and dual productivity measures are highly correlated for U.S. manufacturing, by controlling for the presence of a markup component.
Abstract: It is well known that under the assumptions of constant returns to scale, perfect competition, and the absence of factor hoarding, primal and dual productivity measures should be highly correlated. The apparent lack of correlation is usually attributed to fixed factors of production. In this paper I propose an alternative explanation by relaxing the assumption of perfect competition. By controlling for the presence of a markup component, I demonstrate that both productivity measures are in fact highly correlated for U.S. manufacturing. The analysis also provides an alternative method of estimating a markup of prices over marginal cost that avoids certain difficulties inherent in some existing methods of estimation.
TL;DR: The authors analyzes the form of transfers in a model of political competition in which politicians have incentives to make transfers to special interests and shows that when voters have imperfect information about both the effects of policy and the predispositions of politicians, inefficient methods of redistribution may be employed.
Abstract: An important question in political economy concerns the form of transfers to special interests. The Chicago view is that political competition leads politicians to make such transfers efficiently. The Virginia position is that lack of information on the part of voters leads politicians to favor inefficient "sneaky" methods of redistribution. This paper analyzes the form of transfers in a model of political competition in which politicians have incentives to make transfers to special interests. It shows that when voters have imperfect information about both the effects of policy and the predispositions of politicians, inefficient methods of redistribution may be employed.
TL;DR: In this article, the authors show that managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those who innovate, and that very high and very low ability managers are more likely to undertake superior innovations than those of average ability.
Abstract: This paper demonstrates that in a simple setting with managerial concern for reputation and asymmetric information on ability, most managers may refrain from undertaking innovations that stochastically dominate an industry standard. Common components of uncertainty lead to market inferences of managerial ability based on relative performance. Managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating. Discontinuities in compensation when performance is low (because of firings) lead managers to have differing valuations of an accurate benchmark, depending on type. In particular, very high and very low ability managers are more likely to undertake superior innovations than those of average ability.
TL;DR: The authors assess which model features and parameter values are important for determining the quantitative impact of tax reform and find that the critical parameters are factor shares, depreciation rates, the elasticity of intertemporal substitution, and labor supply.
Abstract: Recent estimates of the potential growth effects of tax reform vary wildly, ranging from zero to eight percentage points Using an endogenous growth model, we assess which model features and parameter values are important for determining the quantitative impact of tax reform We find that the critical parameters are factor shares, depreciation rates, the elasticity of intertemporal substitution, and the elasticity of labor supply The elasticities of substitution in production, on the other hand, are relatively unimportant The quantitative estimates in several recent papers are compared with each other and with some of the evidence from US experience We find that Robert Lucas's conclusion, that tax reform would have little or no effect on the US growth rate, is theoretically robust and consistent with the evidence
TL;DR: This article showed that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of non-durable expenditure observed in U.S. household-level data.
Abstract: In this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. We propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. We estimate preference parameters using the only U.S. micro data set with complete consumption information. We show that previous rejections can be explained by the simplifying assumptions made in previous studies. We also show that results obtained using good consumption or aggregate data can be misleading.
TL;DR: For a wide class of infinitely lived agent models, Chamley has shown that the optimal capital income tax rate is zero in the long run for the Bewley class of models with incomplete insurance markets and borrowing constraints.
Abstract: For a wide class of infinitely lived agent models, Chamley has shown that the optimal capital income tax rate is zero in the long run. Lucas has argued that for the U.S. economy, there is a significant welfare gain from switching to this policy. This paper shows that for the Bewley class of models with incomplete insurance markets and borrowing constraints, the optimal tax rate on capital income is positive, even in the long run. Therefore, cutting the capital income tax to zero may well lead to welfare losses.
TL;DR: In 23 American states, citizens can initiate and approve laws by popular vote; in the other 27 states, laws can be proposed only by elected representatives as discussed by the authors, and the main finding is that spending is significantly lower, on the order of 4 percent, in states with voter initiatives than in pure representative states.
Abstract: In 23 American states, citizens can initiate and approve laws by popular vote; in the other 27 states, laws can be proposed only by elected representatives. This paper compares the fiscal behavior of state and local governments over the last 30 years under these two institutional arrangements. The main finding is that spending is significantly lower, on the order of 4 percent, in states with voter initiatives than in pure representative states. It is also found that local spending is higher and state spending is lower in initiative states. On the revenue side, initiative states rely less on broad-based taxes and more on charges tied to services. Taken together, the evidence indicates that the initiative leads to a reduction in the overall size of the government sector and suggests that it causes a decline in the level of redistributional activity.
TL;DR: In this article, the authors provide a simple model that addresses the questions of competitive pricing and allocative efficiency for these types of services, and they show that prices that charge customers for what they get on net (output minus input) from the firm both are competitive and support efficient allocations; these prices internalize the apparent external effects of customers on each other.
Abstract: Many services provide outputs that depend partially on the customers as inputs; the presence of other customers often contributes to the output experienced by each purchaser. Higher education is the premier example; others are legion. We provide a simple model that addresses the questions of competitive pricing and allocative efficiency for these types of services. Prices that charge customers for what they get on net (output minus input) from the firm both are competitive and support efficient allocations; these prices internalize the apparent external effects of customers on each other. Few examples of such prices exist in the real world.
TL;DR: In this article, the economic reforms of Chinese state-owned enterprises strengthened a nascent managerial labor market by incorporating incentives suggestive of competitive Western labor markets, and developed an improved system of managerial resource allocation responsive to market forces.
Abstract: Recent reforms of Chinese state-owned enterprises strengthened a nascent managerial labor market by incorporating incentives suggestive of competitive Western labor markets. Poorly performing firms were more likely to have a new manager selected by auction, to be required to post a higher security deposit, and to be subject to more frequent review of the manager's contract. Managers could, be, and were, fired for poor performance. Managerial pay was linked to the firm's sales and profits, and reform strengthened the profit link and weakened the sales link. Thus the economic reforms helped develop an improved system of managerial resource allocation responsive to market forces.
TL;DR: This article presented a theory of rational behavior in which individuals maximize a set of stable preferences over goods with unknown addictive power, based on three fundamental postulates: that consumption of the addictive good is not equally harmful to all, that individuals possess subjective beliefs concerning this harm, and that beliefs are optimally undated with information gained through consumption.
Abstract: We present a theory of rational behavior in which individuals maximize a set of stable preferences over goods with unknown addictive power The theory is based on three fundamental postulates: that consumption of the addictive good is not equally harmful to all, that individuals possess subjective beliefs concerning this harm, and that beliefs are optimally undated with information gained through consumption Although individual actions are optimal and dynamically consistent, addicts regret their past consumption decisions and regret their initial assessment of the potential harm of the good Addict-prone individuals who believe "it could not happen to them" are most likely to be drawn into a harmful addiction
TL;DR: This article found that people smooth their giving when transitory income changes but also time their giving to exploit transitory changes in tax prices, suggesting that the tax incentives permanently influence the level, rather than just the timing, of charitable giving by individuals.
Abstract: Using an econometric model of charitable giving and a 10-year panel of tax return data, I find that previous studies have underestimated the effects of permanent income and overestimated the effects of permanent changes in tax prices. The significant statutory tax changes that occurred during the 1980s, especially in 1986, serve to identify the key model parameters. My results imply that people smooth their giving when transitory income changes but also time their giving to exploit transitory changes in tax prices. The results also raise questions about how effectively the tax incentives permanently influence the level, rather than just the timing, of charitable giving by individuals.
TL;DR: The authors examined the argument presented in The Bell Curve and concluded that other factors besides g contribute to social performance, and they can be manipulated, and that more than g is required to explain either.
Abstract: This paper examines the argument presented in The Bell Curve. A central argument is that one factor--g--accounts for correlation across test scores and performance in society. Another central argument is that g cannot be manipulated. These arguments are combined to claim that social policies designed to improve social performance cannot be effective. A reanalysis of the evidence contradicts this story. The factors that explain wages receive different weights than the factors that explain test scores. More than g is required to explain either. Other factors besides g contribute to social performance, and they can be manipulated.
TL;DR: In this article, a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations may not be inconsistent with market equilibrium.
Abstract: A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research, however, has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, we examine whether market frictions can explain previous findings. Our results suggest that a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations may not be inconsistent with market equilibrium.
TL;DR: A model in which agents choose an action and a time at which to take the action is presented, showing that when agents choose when to act, their decisions become clustered together, giving the appearance of an information cascade even though information is actually being used efficiently.
Abstract: This paper presents a model in which agents choose an action and a time at which to take the action We show that when agents choose when to act, their decisions become clustered together, giving the appearance of an information cascade, even though information is actually being used efficiently This occurs because the passage of time allows the first acting agent to anticipate something about the second agent's information, and for a large class of delay cost functions, the equilibrium orders agents in such a way that the most extreme information is revealed first
TL;DR: Insurance contracts that solve the problem of sick people who are diagnosed with a long-term illness and whose premiums are increased receives a lump sum equal to the increased present value of premiums, which allows them to pay the higher premiums required by any insurer.
Abstract: Currently available health insurance contracts often fail to insure long-term illnesses: sick people can suffer large increases in premiums or denial of coverage. I describe insurance contracts that solve this problem. Their key feature is a severance payment. A person who is diagnosed with a long-term illness and whose premiums are increased receives a lump sum equal to the increased present value of premiums. This lump sum allows him or her to pay the higher premiums required by any insurer. People are not tied to a particular insurer or a group, and the improvement is free: insurance companies can operate at zero economic profits, and consumers can pay exactly the same premium they do with standard contracts.
TL;DR: The effect of alternative interest rates on the demand for card debits can explain why credit card interest rates only partially reflect changes in the cost of funds as discussed by the authors, which is not inconsistent with a competitive equilibrium that yields zero profits for the marginal entrant.
Abstract: Borrowing on credit cards at high interest rates might appear irrational. However, even low transactions costs can make credit cards attractive relative to bank loans. Credit cards also provide liquidity services by allowing consumers to avoid some of the opportunity costs of holding money. The effect of alternative interest rates on the demand for card debits can explain why credit card interest rates only partially reflect changes in the cost of funds. Credit card interest rates that are inflexible relative to the cost of funds are not inconsistent with a competitive equilibrium that yields zero profits for the marginal entrant.
TL;DR: In this paper, the authors examine the principal journals of economics, with particular attention to the communication between journals, as reflected by the network of interjournal citations during 1987-90, and the changes over the past century in the characteristics of the authors and the techniques they have used.
Abstract: We examine the principal journals of economics, with particular attention to the communication between journals, as reflected by the network of interjournal citations during 1987-90, and the changes over the past century in the characteristics of the authors and the techniques they have used. The numerical results, and those of the statistical modeling of these results, reinforce the importance of economic theory as an exporter of intellectual influence to applied economics. The study includes an examination of the degree of specialization among different subfields of economics. A statistical model is presented for measuring the flow of intellectual influence (as measured by citations) in terms of simple univariate scores.