Showing papers in "Journal of Political Economy in 1997"
TL;DR: In this article, the authors developed a theory of the allocation of formal authority and real authority within organizations, and illustrated how a formally integrated structure can accommodate various degrees of "real" integration.
Abstract: This paper develops a theory of the allocation of formal authority (the right to decide) and real authority (the effective control over decisions) within organizations, and it illustrates how a formally integrated structure can accommodate various degrees of "real" integration. Real authority is determined by the structure of information, which in turn depends on the allocation of formal authority. An increase in an agent's real authority promotes initiative but results in a loss of control for the principal. After spelling out (some of) the main determinants of the delegation of formal authority within organizations, the paper examines a number of factors that increase the subordinates' real authority in a formally integrated structure: overload, lenient rules, urgency of decision, reputation, performance measurement, and multiplicity of superiors. Finally, the amount of communication in an organization is shown to depend on the allocation of formal authority.
2,959 citations
TL;DR: In this paper, the authors examine a potential agency conflict between mutual fund investors and mutual fund companies, where investors would like the fund company to use its judgment to maximize risk-adjusted fund retraction.
Abstract: This paper examines a potential agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize risk‐adjusted fund ret...
1,752 citations
TL;DR: In this article, the authors discuss the prevalence of Silicon Valley-style localizations of individual manufacturing industries in the United States and explore the nature of agglomerative forces in describing patterns of concentration.
Abstract: This paper discusses the prevalence of Silicon Valley‐style localizations of individual manufacturing industries in the United States. A model in which localized industry-specific spillovers, natural advantages, and pure random chance all contribute to geographic concentration is used to develop a test for whether observed levels of concentration are greater than would be expected to arise randomly and to motivate new indices of geographic concentration and of coagglomeration. The proposed indices control for differences in the size distribution of plants and for differences in the size of the geographic areas for which data are available. As a consequence, comparisons of the degree of geographic concentration across industries can be made with more confidence. Our empirical results provide a strong reaffirmation of the previous wisdom in that we find almost all industries to be somewhat localized. In many industries, however, the degree of localization is slight. We explore the nature of agglomerative forces in describing patterns of concentration, the geographic scope of localization, and the coagglomeration of related industries and of industries with strong upstream-downstream ties.
1,488 citations
TL;DR: In this article, the authors propose a theory of development that links the degree of market incompleteness to capital accumulation and growth, and show that the decentralized equilibrium is inefficient because individuals do not take into account their impact on others' diversification opportunities, and that the typical development pattern will consist of a lengthy period of primitive accumulation with highly variable output, followed by takeoff and financial deepening and, finally, steady growth.
Abstract: This paper offers a theory of development that links the degree of market incompleteness to capital accumulation and growth. At early stages of development, the presence projects limits the degree of risk spreading (diversification) that the economy can achieve. The desire to avoid highly risky investments slows down capital accumulation, and the inability to diversify idiosyncratic risk introduces a large amount of uncertainty in the growth process. The typical development pattern will consist of a lengthy period of “primitive accumulation” with highly variable output, followed by takeoff and financial deepening and, finally, steady growth. “Lucky” countries will spend relatively less time in the primitive accumulation stage and develop faster. Although all agents are price takers and there are no technological spillovers, the decentralized equilibrium is inefficient because individuals do not take into account their impact on others' diversification opportunities. We also show that our results generalize to economies with international capital flows.
1,438 citations
TL;DR: The authors provided structural estimates of a dynamic model of schooling, work, and occupational choice decisions based on 11 years of observations on a sample of young men from the 1979 youth cohort of the National Longitudinal Surveys of Labor Market Experience (NLSY).
Abstract: This paper provides structural estimates of a dynamic model of schooling, work, and occupational choice decisions based on 11 years of observations on a sample of young men from the 1979 youth cohort of the National Longitudinal Surveys of Labor Market Experience (NLSY). The structural estimation framework that we adopt fully imposes the restrictions of the theory and permits an investigation of whether such a theoretically restricted model can succeed in quantitatively fitting the observed data patterns. We find that a suitably extended human capital investment model can in fact do an excellent job of fitting observed data on school attendance, work, occupational choices, and wages in the NLSY data on young men and also produces reasonable forecasts of future work decisions and wage patterns.
1,372 citations
TL;DR: In this paper, the authors used both monthly data for the interwar period and annual data spanning two centuries to show that the linear model of real exchange rate determination in the presence of transactions costs may be biased against the long-run PPP hypothesis.
Abstract: Eolquilibrium models of real exchange rate determination in the presence of transactions costs imply a nonlinear adjustment process toward purchasing power parity (PPP). Conventional cointegration tests, Which ignore the effect of transactions costs, may be biased against the long‐run PPP hypothesis. Our results, using both monthly data for the interwar period and annual data spanning two centuries, clearly reject the linear framework in favor of an exponential smooth transition autoregressive process. The systematic pattern in the estimates of the nonlinear models provides strong evidence of mean‐reverting behavior for PPP deviations and helps explain the mixed results of previous studies
854 citations
TL;DR: In this article, the authors construct an equilibrium for markets with frictions, which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters.
Abstract: In this paper, I construct an equilibrium for markets with frictions, which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters. I show that the equilibrium allocation is socially optimal. I also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay.
708 citations
TL;DR: In this article, the authors develop a model of common agency with complete information and general preferences with nontransferable utility, and prove that the principals' Nash equilibrium in truthful strategies implements an efficient action.
Abstract: We develop a model of common agency with complete information and general preferences with nontransferable utility, and we prove that the principals' Nash equilibrium in truthful strategies implements an efficient action. We apply this theory to the construction of a positive model of public finance, where organized special interests can lobby the government for consumer and producer taxes or subsidies and targeted lump‐sum taxes or transfers. The lobbies use only the nondistorting transfers in their noncooperative equilibrium, but their intergroup competition for transfers turns into a prisoners' dilemma in which the government captures all the gain that is potentially available to the parties.
686 citations
TL;DR: In this paper, the authors used PSID data on the extended family to test whether inter vivos transfers from parents to children are motivated by altruism, and the results strongly reject the altruism hypothesis.
Abstract: This paper uses PSID data on the extended family to test whether inter vivos transfers from parents to children are motivated by altruism. Specifically, the paper tests whether an increase by one dollar in the income of parents actively making transfers to a child coupled with a one dollar reduction in that child's income results in the parents' increasing their transfer to the child by one dollar. This restriction on parental and child transfer‐income derivatives is derived for the standard altruism model augmented to include uncertainty and liquidity constraints. These additional elements pin down the timing of inter vivos transfers. The method used to estimate income‐transfer derivatives takes into account unobserved heterogeneity across families in the degree of altruism. The findings strongly reject the altruism hypothesis. Redistributing one dollar from a recipient child to donor parents leads to less than a 13‐cent increase in the parents' transfer to the child, far less than the one‐dollar increas...
582 citations
TL;DR: In this article, an optimal long-term contract subject to the associated incentive constraints is characterized, which involves a replacement ratio that decreases throughout the unemployment spell and a wage tax after reemployment that, under some mild regularity conditions, increases with the lenght of the unemployed spell.
Abstract: This paper considers the design of an optimal unemployment insurance system. The problem is modeled as a repeated principalagent problem involving a risk‐averse agent‐the unemployed worker‐and a risk‐neutral principal, which cannot monitor the agent's search effort. The optimal long‐term contract subject to the associated incentive constraints is characterized. This contract involves a replacement ratio that decreases throughout the unemployment spell and a wage tax after reemployment that, under some mild regularity conditions, increases with the lenght of the unemployment spell. Some numerical results are presented that suggest that the gains from switching to this optimal unemployment insurance scheme could be quite large. The performance of this optimal contract is also compared to alternative liquidity provision mechanisms.
558 citations
TL;DR: In an overlapping generations economy with (incomplete) financial markets but no intermediaries, there is underinvestment in safe assets as mentioned in this paper, and the allocation of safe assets in an economy with no financial markets allows returns to be smoothed, nondiversifiable risk to be eliminated, and an ex ante Pareto improvement compared to the allocation in the market equilibrium to be achieved.
Abstract: In an overlapping generations economy with (incomplete) financial markets but no intermediaries, there is underinvestment in safe assets. In an economy with intermediaries and no financial markets, accumulating reserves of safe assets allows returns to be smoothed, nondiversifiable risk to be eliminated, and an ex ante Pareto improvement compared to the allocation in the market equilibrium to be achieved. In a mixed financial system, however, competition from financial markets constrains intermediaries so that they perform no better than markets alone.
TL;DR: The model in this article explains why a rational corrupt agent may extinguish the source of his bribe income by causing a firm to exit, but it does not necessarily reduce social welfare.
Abstract: Corrupt agents (officials or gangsters) exact money from firms. Corruption affects the number of firms in a free‐entry equilibrium. The degree of deep competition in the economy increases with lower overhead costs relative to profits and with a tendency toward similar cost structures. Increases in competition may not lower corruption. The model explains why a rational corrupt agent may extinguish the source of his bribe income by causing a firm to exit. Assessing the welfare effect of corruption is complicated by the fact that exit caused by corruption does not necessarily reduce social welfare.
TL;DR: Chiappori as discussed by the authors proposed a model of labor supply based on a "collective" representation of household behavior, where each household member is characterized by his or her own utility function, and decisions are only assumed to result in Pareto-efficient outcomes.
Abstract: In a recent paper (Chiappori 1992), I proposed a model of labor supply based on a "collective" representation of household behavior. In this framework, each household member is characterized by his or her own utility function, and decisions are only assumed to result in Pareto-efficient outcomes. I showed that these simple assumptions were sufficient to (i) generate testable restrictions on labor supply functions and (ii) recover individual preferences and the outcome of the decision process from observed behavior. For the sake of simplicity, the results were derived in the simplest possible case, namely, a static labor supply model with private consumptions. Such a framework was appropriate only for the purpose of the paper, that is, a preliminary exploration of the properties of collective models of labor supply. The next step is to evaluate the robustness of the results to various extensions of the basic model. This opens a general research program and generates a wide range of particular problems that it is hoped will be considered in the future. Among the most serious shortcomings of the 1992 model is the absence of household production: as in most labor supply models, agents were assumed to divide their time between market activities and leisure. As Apps and Rees (1997, in this issue) very rightly point out in their comment, the absence of domestic production is far from innocuous as soon as welfare issues are considered. For instance, a low level of market labor supply will automatically be interpreted as a large consumption of leisure, whereas it may in fact reflect the specialization of one of the members in domestic
TL;DR: In this paper, the authors show that the dynamic effects of comparative performance information on implicit incentives can either reinforce or oppose the familiar (static) insurance effect and in either case can be more important for efficiency.
Abstract: It is well known that comparative performance information (CPI) can enhance efficiency in static principal‐agent relationships by improving the trade‐off between insurance and incentives in the design of explicit contracts. In dynamic settings, however, there may be implicit as well as explicit incentives, for example, managerial career concerns and the ratchet effect in regulation. We show that the dynamic effects of CPI on implicit incentives can either reinforce or oppose the familiar (static) insurance effect and in either case can be more important for efficiency. The overall welfare effects of CPI are thus ambiguous and can be characterized in terms of the underlying information structure.
TL;DR: In this paper, the authors emphasise the importance of incorporating household production into the 'collective model' of the household, and consider how and to what extent the results of Chiappori (1992) can be extended to this case.
Abstract: This paper emphasises the importance of incorporating household production into the 'collective model' of the household, and considers how and to what extent the results of Chiappori (1992) can be extended to this case. (This abstract was borrowed from another version of this item.)
TL;DR: In this paper, the effectiveness of China's incremental industrial reform between 1980 and 1980 is investigated using a panel data set of 272 state enterprises using a method that measures marginal products of factors and changes in total factor productivity.
Abstract: The effectiveness of China's incremental industrial reform between 1980 and 1980 is investigated using a panel data set of 272 state enterprises. This paper applies a method that measures marginal products of factors and changes in total factor productivity (TFP) by comparing actual changes in output to actual changes in inputs and in the institutional environment. This paper finds that there were marked improvements in the marginal productivity of factors and in TFP between 1980 and 1989. More important, the evidence shows that over 87 percent of the TFP growth was attributable to improved incentives, intensified product market competitioni, and improved factor allocation.
TL;DR: This paper examined the claim that expansion of the voting franchise has been an important factor in the growth of government and found that eliminating of poll taxes and literacy tests led to higher turnout, particularly among the poor, and a poorer pivotal voter.
Abstract: This paper examines the claim that expansion of the voting franchise has been an important factor in the growth of government. State government spending and state and local spending are explained using a panel of 46 states for 1950-88. Elimination of poll taxes and literacy tests led to higher turnout, particularly among the poor, and a poorer pivotal voter. As predicted, we find that these changes, a fall in the income of voters relative to state income, and the ouster of Republicans from state government led to a sharp rise in welfare spending but no change in other spending.
TL;DR: In this article, the authors provide a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measures of income that include allocations for investment expenditures.
Abstract: This paper provides a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measures of income that include allocations for investment expenditures. The main result is that there exists a unique allocation rule that always induces the manager to choose the efficient investment level. The income measure created by this allocation rule is usually referred to as residual income or economic value added.
TL;DR: In this article, the authors employ experimental methods to test the hypothesis that such referenda are indeed incentive compatible, and their results lead them to reject that hypothesis. But they do not consider the use of referenda as an incentive compatible mechanism that can be used to obtain social valuations of environmental resources.
Abstract: Hypothetical referenda have been proposed as an incentive‐compatible mechanism that can be used to obtain social valuations of environmental resources. We employ experimental methods to test the hypothesis that such referenda are indeed incentive compatible. Our results lead us to reject that hypothesis.
TL;DR: In this paper, the authors show that a balanced budget rule can make expectations of higher tax rates self-fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short run fiscal imbalances.
Abstract: A traditional argument against a balanced‐budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction This paper suggests an additional source of instability that may arise from this type of fiscal policy rule It shows that, within the standard neoclassical growth model, a balanced‐budget rule can make expectations of higher tax rates self‐fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short‐run fiscal imbalances Calibrated versions of the model show that indeterminacy occurs for income tax rates that are empirically plausible for the US economy and other Group of Seven countries
TL;DR: This paper found that large firms hold less cash as a percentage of sales than small ones, consistent with the idea that time can substitute for mony in the provision of transactions services, which is consistent with both scale economies in the holding of money and secular declines in velocity.
Abstract: COMPUSTAT data on 12,000 firms for the years 1961–92 indicate that large firms hold less cash as a percentage of sale than small ones Whether comparisons are made within or across industries, the clasticity of cash balance with respect to sales is about 08 Firms headquartered in counties with high wages hold more money for a given level of sales, a finding consistent with the idea that time can substitute for mony in the provision of transactions services The estimates are consistent with both scale economies in the holding of money and secular declines in velocity
TL;DR: In this paper, an empirical model that allows for both bidder collusion and supply effects and in which they control for demand conditions is presented. But collusion is still dominant in determining the winning bids in the market.
Abstract: Allegations of Bidder collusion at Forest Service timber sales in the Pacific Northwest were common in the 1970s. Of course, prices may be low for reasons other than collusion. We formulate an empirical model that allows for both bidder collusion and supply effects and in which we control for demand conditions. Noncooperative behavior in which a single unit is sold (the standard auction model) is a special case: it is found to be definitively outperformed by a model of collusion. We also find that supply effects are dominated by collusion in determining the winning bids in the market.
TL;DR: This article used instrumental variables to estimate the expected relationship between federal spending and election outcomes, finding that incumbents who expect to have difficulty being reelected are likely to exert greater effort in obtaining federal outlays.
Abstract: While it is widely believed by academics, politicians, and the popular press that incumbent members of Congress are rewarded by the electorate for bringing federal dollars to their district, the empirical evidence supporting that claim is extremely weak. One explanation for the failure to uncover the expected relationship between federal spending and election outcomes is that incumbents who expect to have difficulty being reelected are likely to exert greater effort in obtaining federal outlays. Since it is generally impossible to adequately measure this effort, the estimated impact of spending is biased downward because of an omitted variable bias. We address this estimation problem using instrumental variables. For each House district, we use spending outside the district but inside the state containing the district as an instrument for spending in the district. Federal spending is affected by a large number of actors (e.g., governors, senators, mayors, and other House members in the state delegation), ...
TL;DR: In this paper, the authors examine the roles of markets and banks when both are active, characterizing the effects of financial market development on the structure and market share of banks, and show that increased participation in markets causes the banking sector to shrink, primarily through reduced holdings of long-term assets.
Abstract: This paper examines the roles of markets and banks when both are active, characterizing the effects of financial market development on the structure and market share of banks. Banks lower the cost of giving investors rapid access to their capital and improve the liquidity of markets by diverting demand for liquidity from markets. Increased participation in markets causes the banking sector to shrink, primarily through reduced holdings of long‐term assets. In addition, increased participation leads to longer‐maturity real and financial assets and a smaller gap between the maturity of financial and real assets.
TL;DR: In this article, the authors developed a model with multiple resources and grades and multiple demands for the world economy and showed that if historical rates of cost reduction in the production of solar energy are maintained, more than 90 percent of the world's coal will never be used.
Abstract: The theory of resource extraction has focused primarily on extraction when there is a single, homogeneous demand for the resource. In reality, however, we observe the simultaneous extraction of different resources such as oil, coal, and natural gas and multiple demands such as trasportation, residential and commercial heating, and electricity generation. This paper develops a model with multiple resources and grades and multiple demands. The model is simulated with extraction cost, estimated reserves, and energy demand data for the world economy. It is shown that if historical rates of cost reduction in the production of solar energy are maintained, more than 90 percent of the world's coal will never be used. The world will move from oil and natural gas use to solar energy. Global temperatures will rise by only about 1.5–2 degrees centigrade by the middle of the next century and then decline steadily to preindustrial levels, even without carbon taxes. These results are significantly lower than those predi...
TL;DR: Using Current Population Survey data from November 1979 and 1989, this article found that Mexican Americans earn low wages primarily because they possess less human capital than other workers, not because they are lazy.
Abstract: Using Current Population Survey data from November 1979 and 1989, I find that Mexican Americans earn low wages primarily because they possess less human capital than other workers, not because they...
TL;DR: In this paper, the authors extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost-reducing effort.
Abstract: We extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost‐reducing effort. Concer...
TL;DR: In this paper, the authors consider a model of the stock market with delegated portfolio management and show that some portfolio managers trade even though they have no reason to prefer one asset to another (noise trade).
Abstract: We consider a model of the stock market with delegated portfolio management. Managers try, but sometimes fail, to discover profitable trading opportunities. Although it is best not to trade in this case, their clients cannot distinguish “actively doing nothing,” in this sense, from “simply doing nothing.” Because of this problem, (i) some portfolio managers trade even though they have no reason to prefer one asset to another (noise trade). We also show that (ii) the amount of such noise trade can be large compared to the amount of hedging volume. Perhaps surprisingly, (iii) noise trade may be Pareto‐improving. Noise trade may be viewed as a public good. Results i and ii are compatible with observed high levels of turnover in securities markets. Result iii illustrates some of the possible subtcties of the welfare economics of financial markets. In our model, all agents are rational: some trade for hedging reasons, investors optimally contract with portfolio managers who may have stock‐picking abilities, an...
TL;DR: In this article, the authors consider the potential transactions that have to be evaluated before equilibrium transactions can be identified in the context of entry-level labor markets, and they show that these potential transactions involve offers that are rejected.
Abstract: In the context of entry‐level labor markets, we consider the potential transactions that have to be evaluated before equilibrium transactions can be identified. These potential transactions involve offers that are rejected. After an initial phase in which many offers can be proffered in parallel, subsequent potential transactions must be processed serially, since a new offer cannot be made until an outstanding offer is rejected. In many, perhaps most, decentralized labor markets, this means that transactions have to be finalized before there is time for the market to clear, that is, before all the potential transactions that would need to be evaluated in order to reach a stable outcome can in fact be evaluated. This has implications for the strategic behavior of firms and workers. In particular, in deciding to whom to offer a position, a firm may have strong incentives to consider not only its preferences over workers but also the likelihood that its offer will be accepted, since if its offer is rejected ...
TL;DR: In this paper, a stochastic bargaining model of government formation in a multiparty parliamentary democracy is presented, and the authors conduct policy experiments to evaluate the effects of changes in the bargaining procedure.
Abstract: In this paper, I structurally estimate a stochastic bargaining model of government formation in a multiparty parliamentary democracy, and I conduct policy experiments to evaluate the effects of changes in the bargaining procedure. I show that the model fits well data on the duration of negotiations and government durations in postwar Italy. Also, I show that changes in the proposer selection process would not affect either the duration of negotiations or government durations, whereas the imposition of a strict deadline would in general reduce the incentives to delay agreement as well as government durations.