Showing papers in "Journal of Political Economy in 1996"
TL;DR: In this paper, the authors present evidence that competition, as measured by increased numbers of competitors or by lower levels of rents, is associated with a significantly higher rate of total factor productivity growth.
Abstract: Are people right to think that competition improves corporate performance? My investigations indicate first that there are some theoretical reasons for believing this hypothesis to be correct, but they are not overwhelming. Furthermore, the existing empirical evidence on this question is weak. However, the results reported here, based on an analysis of around 670 U.K. companies, do provide some support for this view. Most important, I present evidence that competition, as measured by increased numbers of competitors or by lower levels of rents, is associated with a significantly higher rate of total factor productivity growth.
2,351 citations
TL;DR: In this article, the optimal number of creditors a company borrows from and allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts are analyzed.
Abstract: Within an optimal contracting framework, we analyze the optimal number of creditors a company borrows from. We also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts. The key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default. Debt structures that lead to inefficient renegotiation are beneficial in that they deter default, but they are also costly if default is beyond a manager's control. The optimal debt structure balances these effects. We characterize how the optimal debt structure depends on firm characteristics such as its technology, its credit rating, and the market for its assets.
1,382 citations
TL;DR: The authors used an equilibrium multifactor model to interpret the cross-sectional pattern of postwar U.S. stock and bond returns and found that in the presence of human capital or stock market mean reversion, the coefficient of relative risk aversion is much higher than the price of stock market risk.
Abstract: This paper uses an equilibrium multifactor model to interpret the cross-sectional pattern of postwar U.S. stock and bond returns. Priced factors include the return on a stock index, revisions in forecasts of future stock returns (to capture intertemporal hedging effects), and revisions in forecasts of future labor income growth (proxies for the return on human capital). Aggregate stock market risk is the main factor determining excess returns; but in the presence of human capital or stock market mean reversion, the coefficient of relative risk aversion is much higher than the price of stock market risk.
1,329 citations
TL;DR: In this article, the authors discuss implications of heterogencity for macroeconomic modeling: a one-sector macroeconomic model that ignores heterogeneity may sometimes require firm level parameters, but at other times the model may require the “biased” aggregate parameters.
Abstract: A typical (roughly) two‐digit industry in the United States appears to have constant or slightly decreasing returns to scale. Three puzzles emerge, however. First, estimates often rise at higher levels of aggregation. Second, apparent decreasing returns contradicts evidence of only small economic profits. Third, estimates with value added differ substantially from those with gross output. A representative‐firm paradigm cannot explain these puzzles, but a simple story of aggregation over heterogeneous units can. Theory and evidence on aggregation invalidate the common use of demand‐side instruments. Finally, we discuss implications of heterogencity for macroeconomic modeling: A one‐sector macroeconomic model that ignores heterogeneity may sometimes require firm‐level parameters, but at other times the model may require the “biased” aggregate parameters.
1,298 citations
TL;DR: This article found that plots controlled by women are farmed much less intensively than similar plots within the household controlled by men, implying that about 6 percent of the household's output is lost due to inefficient factor allocation.
Abstract: Virtually all models of the household assume that the allocation of resources is Pareto efficient. Within many African households, agricultural production occurs on many plots controlled by different members of the household. Pareto efficiency implies that factors should be allocated efficiently across these plots. I find, in contrast, that plots controlled by women are farmed much less intensively than similar plots within the household controlled by men. The estimates imply that about 6 percent of output is lost because of inefficient factor allocation within the household. The paper suggests a new approach to modeling intrahousehold allocation consistent with the empirical results.
1,257 citations
TL;DR: In this paper, a joint process of arbitrage-free asset prices, dividends, and aggregate income is shown to be supported in the equilibrium of an economy with judiciously modeled income heterogeneity.
Abstract: Empirical difficulties encountered by representative-consumer models are resolved in an economy with heterogeneity in the form of uninsurable, persistent, and heteroscedastic labor income shocks. Given the joint process of arbitrage-free asset prices, dividends, and aggregate income, satisfying a certain joint restriction, it is shown that this process is supported in the equilibrium of an economy with judiciously modeled income heterogeneity. The Euler equations of consumption in a representative-agent economy are replaced by a set of Euler equations that depend not only on the per capita consumption growth but also on the cross-sectional variance of the individual consumers' consumption growth.
1,166 citations
TL;DR: In this paper, a parsimoniously specified wage equation that controls for skill with the score of a test administered as teenagers prepared to leave high school and embark on work careers or postsecondary education was used to measure the wage effects of current labor market discrimination against minorities.
Abstract: Many attempts to measure the wage effects of current labor market discrimination against minorities include controls for worker productivity that (1) could themselves be affected by market discrimination and (2) are very imprecise measures of worker skill. The resulting estimates of residual wage gaps may be biased. Our approach is a parsimoniously specified wage equation that controls for skill with the score of a test administered as teenagers prepared to leave high school and embark on work careers or postsecondary education. Independent evidence shows that this test score is a racially unbiased measure of the skills and abilities these teenagers were about to bring to the labor market. We find that this one test score explains all of the black-white wage gap for young women and much of the gap for young men. For today's young adults, the black-white wage gap primarily reflects a skill gap, which in turn we can trace, at least in part, to observable differences in the family backgrounds.
1,163 citations
TL;DR: In this article, a factor pricing model for stock returns is presented, where the factors are returns on physical investment, inferred from investment data via a production function, and the model's ability to explain the performance of the model is examined.
Abstract: I examine a factor pricing model for stock returns. The factors are returns on physical investment, inferred from investment data via a production function. I examine the model's ability to explain...
1,116 citations
TL;DR: The authors found strong evidence of mean-reverting real exchange rate behavior, using simple, stationary, autoregressive models estimated on pre-float data, and easily outperformed nonstationary real-exchange rate models in dynamic forecasting exercises over the recent float.
Abstract: Using annual data spanning two centuries for dollar-sterling and franc-sterling real exchange rates, we find strong evidence of mean-reverting real exchange rate behavior. Using simple, stationary, autoregressive models estimated on prefloat data, we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float. Such stationary univariate equations explain 60-80 percent of the in-sample variation in real exchange rates, although the degree of short-run persistence may be high. The econometric estimates imply a half-life of shocks to the real exchange rate of about 6 years for dollar-sterling and a little under 3 years for franc-sterling.
979 citations
TL;DR: A detailed simulation model of each state's Medicaid policy during this era is built and it is suggested that targeted changes in Medicaid eligibility, which were restricted to specific low-income groups, had much larger effects on birth out-comes than broader expansions of eligibility to women with higher income levels.
Abstract: A key question for health care reform in the United States is whether expanded health insurance eligibility will lead to improvements in health outcomes. We address this question in the context of the dramatic changes in Medicaid eligibility for pregnant women that took place between 1979 and 1992. We build a detailed simulation model of each state's Medicaid policy during this era and use this model to estimate (1) the effect of changes in the rules on the fraction of women eligible for Medicaid coverage in the event of pregnancy and (2) the effect of Medicaid eligibility changes on birth outcomes in aggregate Vital Statistics data. We have three main findings. First, the changes did dramatically increase the Medicaid eligibility of pregnant women, but did so at quite differential rates across the states. Second, the changes lowered the incidence of infant mortality and low birth weight; we estimate that the 30-percentage-point increase in eligibility among 15-44-year-old women was associated with a decrease in infant mortality of 8.5 percent. Third, earlier,
676 citations
TL;DR: This article examined individual decision-making when decisions reflect on people's ability to learn and showed that in an effort to appear as a fast learner, the manager will exaggerate his own information; but ultimately, he becomes too conservative, being unwilling to change his investments on the basis of new information.
Abstract: This paper examines individual decision making when decisions reflect on people's ability to learn. We address this problem in the context of a manager making investment decisions on a project over time. We show that in an effort to appear as a fast learner, the manager will exaggerate his own information; but ultimately, he becomes too conservative, being unwilling to change his investments on the basis of new information. Our results arise purely from learning about competence rather than concavity or convexity of the rewards functions. We relate our results to the existing psychology literature concerning cognitive dissonance reduction.
TL;DR: In this article, the elasticity of calorie consumption with respect to total expenditure is estimated to be 0.3-0.5, a range that is in accord with conventional wisdom and is far from the value of zero suggested by a recent revisionist literature.
Abstract: We investigate nutrition and expenditure in rural Maharashtra in India. We estimate that the elasticity of calorie consumption with respect to total expenditure is 0.3-0.5, a range that is in accord with conventional wisdom. The elasticity declines only slowly with levels of living and is far from the value of zero suggested by a recent revisionist literature. In these Indian data, the calories necessary for a day's activity cost less than 5 percent of the daily wage, which makes it implausible that income is constrained by nutrition rather than the other way around.
TL;DR: This paper found that the greater overall U.S. wage dispersion primarily reflects substantially more compression at the bottom of the wage distribution in the other countries, while differences in the distribution of measured characteristics help to explain some aspects of the international differences.
Abstract: This paper studies the considerably higher level of wage inequality in the United States than in nine other OECD countries. We find that the greater overall U.S. wage dispersion primarily reflects substantially more compression at the bottom of the wage distribution in the other countries. While differences in the distribution of measured characteristics help to explain some aspects of the international differences, higher U.S. prices (i.e., rewards to skills and rents) are an important factor. Labor market institutions, chiefly the relatively decentralized wage-setting mechanisms in the United States, provide the most persuasive explanation for these patterns.
TL;DR: This article showed that speculative activity can substantially increase autocorrelation for prices that are weakly auto-correlated in its absence, but not to the high levels that are observed in the data.
Abstract: By buying cheap and selling dear, risk-neutral commodity speculators can smooth commodity prices and induce serial dependence in price even when none would exist under a simple process of supply and demand. Commodity prices are variable and strongly positively correlated from one year to the next. The variability is often explained by supply factors, and the autocorrelation by the activities of speculators. We show that this explanation is not consistent with the evidence. Speculation can substantially increase autocorrelation for prices that are weakly autocorrelated in its absence, but not to the high levels that are observed in the data.
TL;DR: In this paper, the authors analyzed how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare and found that low-frequency movements in the cohort-education structure of pretax hourly wages among men drove large changes in household consumption.
Abstract: We analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare. Our empirical work draws on the best available cross-sectional data sets to construct synthetic panel data on U.S. consumption, labor supply, and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pretax hourly wages among men drove large changes in the distribution of household consumption. The results constitute a spectacular failure of between-group consumption insurance, a failure not explained by existing theories of informationally constrained optimal consumption behavior. A welfare analysis indicates that the cost of between-group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude.
TL;DR: The problem of bringing available evidence to bear on the assessment of different monetary policies was not solved in the 1970s when I began my work on it, and even now this question has not been given anything like a fully satisfactory answer.
Abstract: The work for which I have received the Nobel Prize was part of an effort to understand how changes in the conduct of monetary policy can influence inflation, employment, and production. So much thought has been devoted to this question and so much evidence is available that one might reasonably assume that it had been solved long ago. But this is not the case: It had not been solved in the 1970s when I began my work on it, and even now this question has not been given anything like a fully satisfactory answer. In this lecture I shall try to clarify what it is about the problem of bringing available evidence to bear on the assessment of different monetary policies that makes it so difficult and to review the progress that has been made toward solving it in the last two decades. From the beginnings of modern monetary theory, in David Hume's marvelous essays of 1752, Of Money and Of Interest, conclusions about the effect of changes in money have seemed to depend critically on the way in which the change is effected. In formulating the doctrine that we now call the quantity theory of money, Hume stressed the units-change aspect of changes in the money stock and the irrelevance of such changes to the behavior of rational people.
TL;DR: In this paper, the authors used Indonesian data from 1989-90 on plant-level organic water pollution to test the informal regulation hypothesis and found that the resulting "pollution equilibrium" reflects the relative bargaining power of the community and the plant.
Abstract: When formal regulation is weak or absent, communities often use other channels to induce pollution abatement by local factories in a process of "informal regulation." The resulting "pollution equilibrium" reflects the relative bargaining power of the community and the plant. This note uses Indonesian data from 1989-90 on plant-level organic water pollution to test the informal regulation hypothesis.
TL;DR: In this paper, a dual-provision regime with no restriction on private supplements is shown to be majority preferred to a regime of either only market provision or only government provision under standard assumptions on preferences, and a majority voting equilibrium exists.
Abstract: Government may provide a good that can, if legally permitted, be supplemented by private purchases. Policy is determined by majority rule. Under standard assumptions on preferences, a majority voting equilibrium exists. A regime of positive government provision with no restriction on private supplements is shown to be majority preferred to a regime of either only market provision or only government provision. Combined public and private expenditure on the good is higher under this dual-provision regime than under either of the alternatives. Under some preference configurations, the median-income voter is pivotal; under others, a voter with income below the median is pivotal.
TL;DR: In this article, the authors calculate an upper bound on the value of the "marginal species" under favorable assumptions and show that the incentive for habitat conservation generated by private pharmaceutical research is at best very modest.
Abstract: "Biodiversity prospecting" has been touted as a mechanism for both discovering new pharmaceutical products and saving endangered ecosystems. It is unclear what values may arise from such activities, however. Evidence from transactions is incomplete and existing theoretical models are flawed. We calculate an upper bound on the value of the "marginal species." Even under favorable assumptions this bound is modest. Slightly modified assumptions lead to drastically lower estimates. We extend our findings to the value of the marginal hectare of habitat and find that the incentives for habitat conservation generated by private pharmaceutical research are also, at best, very modest.
TL;DR: In this article, a survey of 452 Russian shops, most of which were privatized between 1992 and 1993, is used to measure the importance of alternative channels through which privatization promotes restructuring.
Abstract: We use a survey of 452 Russian shops, most of which were privatized between 1992 and 1993, to measure the importance of alternative channels through which privatization promotes restructuring. Restructuring is measured as major renovation, a change in suppliers, an increase in hours stores stay open, and layoffs. There is strong evidence that the presence of new owners and new managers raises the likelihood of restructuring. In contrast, there is no evidence that equity incentives of old managers promote restructuring. The evidence points to the critical role new human capital plays in economic transformation.
TL;DR: In this article, the authors studied the political and economic determinants of regional public transfers and how such transfers are shaped by alternative fiscal constitutions, where a constitution is an allocation of fiscal instruments across different levels of governments plus a procedure for the collective choice of these instruments.
Abstract: The paper studies the political and economic determinants of regional public transfers. Specifically, it focuses on how such transfers are shaped by alternative fiscal constitutions, where a constitution is an allocation of fiscal instruments across different levels of governments plus a procedure for the collective choice of these instruments. Realistic restrictions on fiscal instruments introduce a tradeoff between risk sharing and redistribution. Different constitutions produce very different results. In particular, a federal social insurance scheme, chosen by voting, provides overinsurance, whereas an intergovernmental transfer scheme, chosen by bargaining, provides underinsurance.
TL;DR: In this paper, the authors report overwhelming evidence against the hypothesis that the federal funds rate follows a martingale over the 2-week reserve maintenance period, establishing that banks do not regard reserves held on different days of the week to be perfect substitutes.
Abstract: This paper reports overwhelming evidence against the hypothesis that the federal funds rate follows a martingale over the 2-week reserve maintenance period, establishing that banks do not regard reserves held on different days of the week to be perfect substitutes. A theoretical model of the federal funds market is proposed that could account for these empirical regularities as the result of line limits, transaction costs, and weekend accounting conventions. The paper concludes that such transaction costs lie at the heart of the liquidity effect that enables the Federal Reserve to change the interest rate on a daily basis.
TL;DR: In this paper, an empirical analysis of the Swiss search for a nuclear waste repository even reveals decreased acceptance due to the rejection of bribes and the crowding-out of public spirit.
Abstract: Local opposition to many projects makes it increasingly difficult to find sites for socially desirable facilities. As has been widely documented, compensation for local disamenities does not increase the level of support. An empirical analysis of the Swiss search for a nuclear waste repository even reveals decreased acceptance due to the rejection of bribes and the crowding-out of public spirit. However, a "compensation cycle" may be exploited to finally win the support of host communities. As siting issues are decided in the realm of politics, an economic theory of compensation must focus on the interplay between morals and markets.
TL;DR: The authors show that discrimination can occur even when it is common knowledge that underlying group characteristics do not differ and when employers do not prefer same-group candidates, when candidates belong to the same group and hire the best prospect from a large pool of applicants, the top applicant is likely to have the same background as the employer.
Abstract: We show that discrimination can occur even when it is common knowledge that underlying group characteristics do not differ and when employers do not prefer same-group candidates. When employers can judge job applicants' unknown qualities better when candidates belong to the same group and hire the best prospect from a large pool of applicants, the top applicant is likely to have the same background as the employer. The model has policy, empirical, and experimental implications. For example, the model predicts that "screening discrimination" is more likely to occur and persist in sectors in which underlying quality is important but difficult to observe, there are numerous applicants, interviewing (screening) is relatively cheap, and applicants have to acquire job-specific skills.
TL;DR: In this article, the authors analyze the conditions under which favoritism is costly to organizations and the effects of favoritism on compensation, the optimal extent of authority, and the use of bureaucratic rules.
Abstract: Objective measures of employee performance are rarely available. Instead, firms rely on subjective judgments by supervisors. Subjectivity opens the door to favoritism, where evaluators act on personal preferences toward subordinates to favor some employees over others. Firms must balance the costs of favoritism-arbitrary rewards and less productive job assignments-against supervisors' demands for authority over subordinates. We analyze the conditions under which favoritism is costly to organizations and the effects of favoritism on compensation, the optimal extent of authority, and the use of bureaucratic rules. Economists rarely address the fact that firms are social institutions, where personal relations among coworkers, bosses, and subordinates constitute an important component of many workers' daily lives. This paper takes a step toward addressing organizations as social entities by considering how favoritism by superiors, based on personal preferences toward subordinates, affects compensation and the structure of organizations. The underlying premise of the paper is that accurate and objective measures of a worker's performance are typically unavailable. Instead performance is gauged from subjective opinions
TL;DR: The authors found that risk sharing cannot be resolved by either explanation alone, but that a combination of these two effects may be necessary to explain consumption risk sharing across countries, and they also found that when I allow for both nonseparabilities and certain market restrictions, risk sharing among unrestricted countries cannot be rejected.
Abstract: Recent research in international business cycles finds that international consumption comovements do not match the risk-sharing predictions of standard complete markets models. In this paper, I ask whether two different types of explanations can help explain this result: (1) nonseparabilities between tradables and nontradable leisure or goods and (2) the effects of capital market restrictions on consumption risk sharing. I find that risk sharing cannot be resolved by either explanation alone. However, when I allow for both nonseparabilities and certain market restrictions, risk sharing among unrestricted countries cannot be rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries.
TL;DR: In this paper, the authors studied the behavior of the exchange rate in the Kareken-Wallace overlapping generations economy with two currencies in which decision rules are updated using the genetic algorithm.
Abstract: This paper studies the behavior of the exchange rate in the Kareken-Wallace overlapping generations economy with two currencies in which decision rules are updated using the genetic algorithm. The analysis shows that a stationary monetary equilibrium of the Kareken-Wallace model is not stable under the genetic algorithm dynamics. The fluctuations in the genetic algorithm exchange rate are driven by fluctuations in the portfolio fractions, which change over time in response to the inequality between the rates of return on two currencies. Further, both the genetic algorithm simulations and the experiments with human subjects were characterized by continuing fluctuations of the exchange rate, with first-period consumption values close to a stationary value.
TL;DR: In this paper, the implications of social rewards on the allocation of talent in society and consequently on the process of economic growth are investigated, and two sources of heterogeneity among workers are considered: non-wage income and innate ability.
Abstract: This paper investigates the implications of social rewards on the allocation of talent in society and consequently on the process of economic growth. We consider two sources of heterogeneity among workers: nonwage income and innate ability. A greater emphasis on status may induce the "wrong" individuals, that is, those with low ability and high wealth, to acquire schooling, causing workers with high ability and low wealth to leave the growth-enhancing industries. This crowding-out effect, taken alone, discourages growth. Growth may be enhanced by a more egalitarian distribution of wealth, which reduces the demand for status.
TL;DR: This paper developed and estimated a monetary model that offers an explanation of some puzzling features of observed returns on equities and default-free bonds, which is capable of producing a low risk-free rate, a high equity premium, and an average positive relationship between maturity and term premium for default free bonds.
Abstract: This paper develops and estimates a monetary model that offers an explanation of some puzzling features of observed returns on equities and default-free bonds. The key feature of the model is that some assets other than money play a special role in facilitating transactions, which affects the rate of return that they offer. The model is capable of producing a low risk-free rate, a high equity premium, and an average positive relationship between maturity and term premium for default-free bonds. The model's implications for the joint distribution of asset returns, velocity, inflation, money growth, and consumption growth are also compared to the behavior of these variables in the U.S. economy.
TL;DR: The normative criterion for spending on risk reduction is what a rational, albeit uninsured, individual confronting lotteries on future risks to life and wealth would choose for himself, which requires correcting WTP to eliminate the dead-anyway effect but continues to reflect that wealth enhances the utility of living.
Abstract: Willingness to pay (WTP), most economists believe, is an appropriate benefits metric for government expenditure and regulatory policies that reduce risks to human life. It depends, however, on the distribution of risk and wealth. Currently, society's expenditures overemphasize concentrated risks, say after-the-fact treatment as opposed to prevention. A "dead-anyway" effect complements excess attention to intense interests in explaining this. Our normative criterion for spending on risk reduction is what a rational, albeit uninsured, individual confronting lotteries on future risks to life and wealth would choose for himself. This requires correcting WTP to eliminate the dead-anyway effect but continues to reflect that wealth enhances the utility of living.