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Showing papers in "Journal of Political Economy in 1999"


Journal ArticleDOI
TL;DR: This paper presented a consumption-based model that explains a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variations of stock market volatility.
Abstract: We present a consumption-based model that explains a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility The model captures much of the history of stock prices from consumption data It explains the short- and long-run equity premium puzzles despite a low and constant risk-free rate The results are essentially the same whether we model stocks as a claim to the consumption stream or as a claim to volatile dividends poorly correlated with consumption The model is driven by an independently and identically distributed consumption growth process and adds a slow-moving external habit to the standard power utility function These features generate slow countercyclical variation in risk premia The model posits a fundamentally novel description of risk premia: Investors fear stocks primarily because they do poorly in recessions unrelated to the risks of long-run average consumption growth

3,623 citations


Journal ArticleDOI
TL;DR: The authors found that the propensity for democracy rises with per capita GDP, primary schooling, and a smaller gap between male and female primary attainment, while negative effects from Muslim and non-religious affiliations remain intact.
Abstract: A panel study of over 100 countries from 1960 to 1995 finds that improvements in the standard of living predict increase in democracy, as measured by a subjective indicator of electoral rights. The propensity for democracy rises with per capita GDP, primary schooling, and a smaller gap between male and female primary attainment. For a given standard of living, democaracy tends to fall with urbnization and with a greater reliance on natrual resources. Democracy has little relation to country size but rises with the middle‐class share of income. The apparently strong relation of democracy to colonial heritage mostly disappears when the economic variables are held constant. Similarly, the allowance for these economic variables weakens the interplay between democracy and religious affiliation. However, negative effects from Muslim and non‐religious affiliations remain intact.

1,632 citations


Journal ArticleDOI
TL;DR: In the human capital model with perfect labor markets, firms never invest in general skills and all cost of general training are borne by workers as mentioned in this paper. But when lobor market frictions compress the structure of the labor market, the costs of general skills are increased.
Abstract: In the human capital model with perfect labor markets, firms never invest in general skills and all cost of general training are borne by workers. When lobor market frictions compress the structure...

1,021 citations


Journal ArticleDOI
TL;DR: The principal-agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance, yet the exiting empirical evidence supporting it is quite weak.
Abstract: The principal‐agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance, yet the exiting empirical evidence supporting it is quite wea...

923 citations


Journal ArticleDOI
TL;DR: The authors examined segregation in American cities from 1890 to 1990 and found that there is a strong positive relation between urban population or density and segregation, and that the legal barriers enforcing segregation had been replaced by decentralized racism, where whites pay more than blacks to live in predominantly white areas.
Abstract: This paper examines segregation in American cities from 1890 to 1990. From 1890 to 1940, ghettos were born as blacks migrated to urban areas and cities developed vast expanses filled with almost entirely black housing. From 1940 to 1970, black migration continued and the physical areas of the ghettos expanded. Since 1970, there has been a decline in segregation as blacks have moved into previously all‐white areas of cities and suburbs. Across all these time periods there is a strong positive relation between urban population or density and segregation. Data on house prices and attitudes toward integration suggest that in the mid‐twentieth century, segregation was a product of collective actions taken by whites to exclude blacks from their neighborhoods. By 1990, the legal barriers enforcing segregation had been replaced by decentralized racism, where whites pay more than blacks to live in predominantly white areas.

767 citations


Journal ArticleDOI
TL;DR: In this article, the authors explore how urbanization affects efficiency of the growth process and how growth affects patterns of urbanization in an economy experiencing endogenous economic growth and exogenous population growth.
Abstract: In an economy experiencing endogenous economic growth and exogenous population growth, we explore two main themes: how urbanization affects efficiency of the growth process and how growth affects patterns of urbanization. Localized information spillovers promote agglomeration and human capital accumulation fosters endogenous growth. Individual city sizes grow with local human capital accumulation and knowledge spillovers; and city numbers generally increase, which we demonstrate is consistent with empirical evidence. We analyze whether local governments can successfully internalize local dynamic externalities. In addition, we explore how growth involves real income differences across city types and how urbanization can foster income inequality. Most nonagricultural production in developed countries occurs in metropolitan areas. The underlying reasons why economic activity agglomerates into cities—localized information and knowledge spillover—also make cities the engines of economic growth in an We gratefully acknowledge support of the National Science Foundation (grants SBR 9422440 and SBR9730142) for this research. The work has benefited from conversations with Harl Ryder on the dynamics of the model and from comments by Gilles Duranton and participants in seminars at Brown, Colorado, and Texas, Austin and a presentation at an ISIT Seminar sponsored by the Centre for Economic Policy Research and the National Bureau of Economic Research.

722 citations


Journal ArticleDOI
TL;DR: In this paper, a Schumpeterian endogenous growth model is presented, in which a steady state exists with a constant growth rate even though population and the inputs to R. & D. are growing.
Abstract: This paper presents a Schumpeterian endogenous growth model in which a steady state exists with a constant growth rate even though population and the inputs to R. & D. are growing. The scale effect of rising population is nullified by product proliferation that fragments the growing demand for intermediate prodcuts, thus preventing the reward to any specific innovation from rising with population. All the ususal comparitive statics results of Schumpeterian growth theory are valid, including the positive effect of R. & D. subsidies on growth.

698 citations


ReportDOI
TL;DR: This article found that the value of assimilation is larger to an individual from a small minority than to one from a large minority group, when a society has a very large majority of individuals from one culture, individuals from minority groups will be assimilated more quickly.
Abstract: Common culture and common language facilitate trade between individuals. Individuals have incentives to learn the other languages and cultures so that they have a larger pool of potential trading partners. The value of assimilation is larger to an individual from a small minority than to one from a large minority group. When a society has a very large majority of individuals from one culture, individuals from minority groups will be assimilated more quickly. Assimilation is less likely when an immigrant's native culture and language are broadly represented in his or her new country. Also, when governments protect minority interests directly, incentives to be assimilated into the majority culture are reduced. In a pluralistic society, a government policy that encourages diverse cultural immigration over concentrated immigration is likely to increase the welfare of the native population. Sometimes, policies that subsidize assimilation and the acquisition of majority language skills can be socially beneficia...

636 citations


Journal ArticleDOI
TL;DR: In this article, the authors review the uses of economic theory in the initial design and later improvement of the simultaneous ascending auction, which was developed initially for the sale of radio spectrum licenses in the United States.
Abstract: I review the uses of economic theory in the initial design and later improvement of the “simultaneous ascending auction,” which was developed initially for the sale of radio spectrum licenses in the United States. I analyze some capabilities and limitations of the auction, the roles of various detailed rules, the possibilities for introducing combinatorial bidding, and some considerations in adapting the auction for sales in which revenue, rather than efficiency, is the primary goal.

585 citations


Journal ArticleDOI
TL;DR: The authors examined the growth of government during this century as a result of giving women the right to vote using cross-sectional time-series data for 1870-1940 and examined state government expenditures and revenue as well as voting by U.S. House and Senate state delegations.
Abstract: This paper examines the growth of government during this century as a result of giving women the right to vote. Using cross‐sectional time‐series data for 1870–1940, we examine state government expenditures and revenue as well as voting by U.S. House and Senate state delegations and the passage of a wide range of different state laws. Suffrage coincided with immediate increases in state government expenditures and revenue and more liberal voting patterns for federal representatives, and these effects continued growing over time as more women took advantage of the franchise. Contrary to many recent suggestions, the gender gap is not something that has arisen since the 1970s, and it helps explain why American government started growing when it did.

506 citations


ReportDOI
TL;DR: In this article, the authors used victimization data, evidence from the NLSY on criminal behavior, and the Uniform Crime Reports to explain the connection between city size and crime rates.
Abstract: Crime rates are much higher in big cities than in either small cities or rural areas. This paper explains this connection by using victimization data, evidence from the NLSY on criminal behavior, and the Uniform Crime Reports. Higher pecuniary benefits for crime in large cities can explain at most one-quarter of the connection between city size and crime rates. Lower probabilities of arrest and a lower probability of recognition are features of urban life, but these factors seem to explain at most one-fifth of the urban crime effect. Between one-third and one-half of the urban effect on crime can be explained by the presence of more female-headed households in cities.

Journal ArticleDOI
TL;DR: In this paper, a research tournament model with heterogeneous contestants is presented, and the optimal number of competitors is two for a large class of contests, regardless of the form of contestants heterogeneity.
Abstract: A research tournament model with heterogeneous contestants is presented. For a large class of contests the optimal number of competitors is two. This insight makes designing the tournament easier and highlights the importance of selecting highly qualified contestants. While customary uniform‐price and discriminatory‐price auctions are intuitively appealing mechanisms for solving this adverse selection problem, in practice they generally will not be efficient mechanism for selecting contestants. Instead, we propose an alternative auction format that is equally simple to implement and efficiently selects the most qualified contestants to compete, regardless of the form of contestant heterogeneity.

ReportDOI
TL;DR: In this paper, the authors measure the proportion of U.S. real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods, at all possible h...
Abstract: This study measures the proportion of U.S. real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods. The decomposition is done at all possible h...

Journal ArticleDOI
TL;DR: In this article, the authors proposed a model of endogenous growth based on a balance act between accumulating human capital, which engenders growth, and accumulating political capital which mainly assures bureaucratic power.
Abstract: There Appears to be significant diversity in the incidence of bureaucratic corruption across countries at different stages of economic development and under different political and economic regimes. Little theoretical or empirical analysis has been offered, however, on the link between corruption, government, and growth. The paper attempts to fill the void through equilibrium models of endogenous growth. “balanced growth” is derived as a balancing act between accumulating human capital, which engenders growth, and accumulating political capital, which mainly assures bureaucratic power. The analysis focuses on the interplay between investment in these two types of capital and its implications for long‐term growth under alternative political regimes. Some propositions are tested and confirmed empirically.

Journal ArticleDOI
TL;DR: In this paper, the authors hypothesize that under conditions of incomplete labor contracts, wage levels may positively affect workers' propensity to cooperate, which in turn may prevent firms from underbidding or accepting the under bidding of workers.
Abstract: Do employers and workers underbid prevailing wages if there si unemployment? Do employers take advantage of workers' underbidding by lowering wages? Do employers take advantage of workers underbidding by lowering wages? We hypothesize that under conditions of incomplete labor contracts, wage levels may positively affect workers' propensity to cooperate. This, in turn, may prevent firms from underbidding or accepting the underbidding of workers. Experimental double auctions conducted for the purpose of examinating these hypotheses yield the following results: (i) Workers' underbidding is very frequent, but employers refuse to accept workers' low wage offers in markets with complete labor contracts, employes accept and actively enforce wages close to the competitive level. (ii) Workers' effort is positively related to the wage level. Therefore over their effort level. This holds true even in the presence of explicit performance incentives.

ReportDOI
TL;DR: In this article, a tractable general equilibrium model of search with risk aversion is constructed, and the authors show that moderate unemployment insurance not only improves risk sharing but also increases output.
Abstract: This paper constructs a tractable general equilibrium model of search with risk aversion. An increase in risk aversion reduces wages, unemployment, and investment. Unemployment insurance has the opposite effect: insured workers seek high‐wage jobs with high unemployment risk. An economy with risk‐neutral workers achieves maximal output without any unemployment insurance, but an economy with risk‐averse workers requires a positive level of unemployment insurance to maximize output. Therefore, moderate unemployment insurance not only improves risk sharing but also increases output.

ReportDOI
TL;DR: In this article, the authors provide an integrated approach for testing predictions from a class of models characterizing equilibrium in a system of local jurisdictions and test the models' predictions about the relationships among loclational equilibrium conditions, housing markets, and housing prices.
Abstract: Research over the past several years has led to the development of models characterizing equilibrium in a system of local jurisdictions. An important insight from these models is that plausible single‐crossing assumptions about preferences generate strong predictions about the equilibrium distribution of households across communities. To date, these predictions have not subjected to formal empirical tests. The purpose of this paper is to provide an integrated approach for testing predictions from this class of models. We first test conditions for locational equilibrium implied by these models. In particular, we test predictions about the distribution of households by income across communities. We then test the models' predictions about the relationships among loclational equilibrium conditions, housing markets, and housing prices. By drawing inferences from a structural general equilibrium model, the paper offers a unified treatment of theory and empirical testing.

Journal ArticleDOI
TL;DR: The hypothesis that increases in the schooling of women enhance the human capital of the next generation and thus make a unique contribution to economic growth is assessed on the basis of data describing green revolution India as discussed by the authors.
Abstract: The hypothesis that increases in the schooling of women enhance the human capital of the next generation and thus make a unique contribution to economic growth is assessed on the basis of data describing green revolution India. Estimates are obtained that indicate that a component of the significant and positive relationship between maternal literacy and child schooling in the Indian setting reflects the productivity effect of home teaching and that the existence of this effect, combined with the increase in returns to schooling for men, importantly underlies the expansion of female literary following the onset of the green revolution.

Journal ArticleDOI
TL;DR: In this paper, the authors derive nine implicatiions of the human capital approach that are distinct from Galton's Evidence from the PIS, SCF, and NLSY micro data sets as well as results reported in previous literatures suggest that four of the unique implications are refuted two implications are verified, and mixed results are obtained for three others.
Abstract: A century ago, Francis Galton proposed a simple yet powerful model of inheritance Gary Backer's human capital model is often used to analyze important empirical and policy questions, but does it dominate Galton's from a positive point of view? I derive nine implicatiions of the human capital approach that are distinct from Galton's Evidence from the PIS, SCF, and NLSY micro data sets as well as results reported in previous literatures suggest that four of the unique implications are refuted two implications are verified, and mixed results are obtained for three others Some extensions of economics recently developed by Becker and others, when applied to inheritance, may improve economics' predictions

Journal ArticleDOI
TL;DR: In this paper, the first-come-first-served rule and information externalities are used to cause contagious bank runs and the feasibility of reforming the FDIC to impose market discipline is investigated.
Abstract: This paper proposes that both the first‐come, first‐served rule and information externalities are important in causing contagious bank runs. The first‐come, first‐served rule creates a negative payoff externality among depositors. This payoff externality forces depositors to respond to early noisy information such as failures of other banks. Therefore, failures of a few banks may trigger runs on other banks. Contagious runs may occur even if (i) depositors choose the Pareto‐dominant equilibrium when there are multiple equilibria and (ii) the deposit contract is chosen to maximize depositor welfare. The feasibility of reforming the FDIC to impose market discipline is also investigated.

Journal ArticleDOI
TL;DR: In this article, a GMM-based estimate of the speed of learning was proposed for the pre-opening of the Paris Bourse, and the GMM was used to test the hypothesis that preopening prices reflect learning.
Abstract: Before the opening of the Paris Bourse, traders place orders and indicative prices are set. This offers a laboratory to study empirically the tâtonnement process through which markets discover equilibrium prices. Since preopening orders can be revised or canceled before the opening, indicative prices could be noise. We test this against the hypothesis that preopening prices reflect learning. Early in the preopening the noise hypothesis is not rejected. As the opening gets closer, the informational content and efficiency of prices increase and the learning hypothesis is not rejected. We also propose a GMM‐based estimate of the speed of learning.

Journal ArticleDOI
TL;DR: In this paper, the authors show that a toehold helps a buyer win an auction, sometimes very cheaply, and that a controlling minority shareholder may therefore be effectively immune to outside offers.
Abstract: Toeholds have an enormous impact in “common‐value” takeover battles, such as those between two financial bidders. This contrasts with the small impact of a toehold, in a “private‐value” auction, Our results are consistent with empirical findings that a toehold helps a buyer win an auction, sometimes very cheaply. A controlling minority shareholder may therefore be effectively immune to outside offers. A target may benefit by requiring “best and final” scaled‐bid offers or by selling a cheap toehold or options to a “white knight,” Our analysis extends to regulators selling “stranded assets,” creditors bidding in bankruptcy auctions, and so forth.

Journal ArticleDOI
TL;DR: The authors argue that a principal cause of the 1997 Asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems, and that the expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in Asia.
Abstract: This paper argues that a principal cause of the 1997 Asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems. The expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in Asia. We articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises. We present empirical evidence in support of the key assumptions underlying our interpretation of the crisis.

Journal ArticleDOI
TL;DR: In this article, a general equilibrium model was constructed in which a pay-as-you-go social security system can be adopted and sustained as a political and economic equilibrium, and the welfare implictions of this system were analyzed.
Abstract: We Construct a general equilibrium model in which a pay‐as‐you‐go social security system can be adopted and sustained as a political and economic equilibrium. We alalyze the welfare implictions of this system and compare general equilibrium welfare measure to the commonly used notion of actuarial fairness.

Journal ArticleDOI
TL;DR: This article showed that unbalanced sex ratios are but one of several possible consequences of a preference for sons over daughters in Asian countries, and discussed possible links between son preference and marriage patterns such as spousal age gaps, hypergamy (women marrying up), caste endogamy, and cousin marriages.
Abstract: Preference for sons over daughters is widespread in many Asian countries, for example, India, China, and South Korea. This paper models endogenous sex choice and shows that unbalanced sex ratios are but one of several possible consequences of a preference for sons. In particular, if parents want children who reproduce, nonrandom mating may cause women to be consistently born into low‐status families and thus relegated to a permanent underclass. The paper also discusses possible links between son preference and marriage patterns such as spousal age gaps, hypergamy (women marrying up), caste endogamy, and cousin marriages.

ReportDOI
TL;DR: In this paper, the authors provide the first systematic evidence on how franchisors adjust their royalty rates and franchise fees as they gain fran-chising experience, and they conclude that variation in contract terms is mostly determined by differences across firms, not by within firms changes over time.
Abstract: This paper provides the first systematic evidence on how franchi‐sors adjust their royalty rates and franchise fees as they gain fran‐chising experience. This evidence comes from a unique panel data set that we assembled on these monetary contract terms for about 1,000 franchisors each year for the 1980–92 period. We find that there is much persistence, over time, in franchise contract terms within firms. We find this despite sizable across‐firm differences in royalty rates and franchise fees. In addition, franchisors do not systematically increase or decrease their royalty rates or franchise fees as they become better established, contrary to predictions from some specific theoretical models. We conclude that variation in contract terms is mostly determined by differences across firms, not by within‐firm changes over time. Finally, we find no negative relationship, within firms, between up‐front franchise fees and royalty rates.

Journal ArticleDOI
TL;DR: In this article, a model that integrates economic theories of fertility and marriage to understand the growth of out-of-wedlock childbearing is presented, in which fathers can shift the costs of child rearing to single mothers and a marriage market equilibrium may exist in which children are born within marriage to high-income parents, whereas in low-income groups men father children by multiple partners outside of marriage.
Abstract: In 1960, marriage was a virtual precondition for childbearing. By 1997, out‐of‐wedlock births accounted for 26 percent of fertility among whites and 69 percent among blacks. This paper presents a model that integrates economic theories of fertility and marriage to help understand the growth of out‐of‐wedlock childbearing. In the theory, fathers can shift the costs of child rearing to single mothers. If females are in excess supply and have sufficiently high incomes, a marriage market equilibrium may exist in which children are born within marriage to high‐income parents, whereas in low‐income groups men father children by multiple partners outside of marriage.

ReportDOI
TL;DR: In this article, the effect of means-and asset-tested social insurance programs, such as Medicaid, on the savings behavior of households was assessed using data on both asset holdings and consumption, matched to information on the eligibility of families for health insurance coverage under this program.
Abstract: We assess the effect of a means‐ and asset‐tested social insurance program, Medicaid, on the savings behavior of households. We do so using data on both asset holdings and consumption, matched to information on the eligibility of families for health insurance coverage under this program. Exogenous variation in Medicaid eligibility is provided by the dramatic expansion of this program over the 1984–93 period. We document that Medicaid eligibility has a sizable and significant negative effect on wealth holdings, and we confirm this finding by showing a strong positive association between Medicaid eligibility and consumption expenditures. We also exploit the fact that asset testing was phased out by the Medicaid program over this period to document that these Medicaid effects are much stronger in the presence of an asset test.

ReportDOI
TL;DR: In this paper, a variety of industry-level measures of technological change to a panel of young workers, observed between 1979 and 1993 (NLSY), and examine the role played by observed and unoserved haterogeneity in explaining the positive relationships between technological change and wages.
Abstract: Previous research has shown that wages in industries characterized by higher rates of technological change are higher. In addition, there is evidence that skill‐baised technological change is reponsible for the dramatic increase in the earnings of more educated workers relative to less educated workers that took place during the 1980s. In this paper, we math a variety of industry‐level measures of technological change to a panel of young workers, observed between 1979 and 1993 (NLSY), and examine the role played by observed and unoserved haterogeneity in explaining the positive relationships between technological change and wages and between technolocigal change and the education premium. We find that the wage premium associated with technologicl change is premarily due to the sorting of more able workers into based on gender or race. in addition, the education premium associated with technolocial change is the result of a greatere demand for the innate ability or other unobserved characteristics of more ...

Journal ArticleDOI
TL;DR: This article found that the probability that a child is born in the last week of December, rather than the first week of January, is positively correlated with tax benefits, and they estimate that increasing the tax benefit of having a child by $500 raises the probability of having the child in the next week by 26.9 percent.
Abstract: Because the tax savings of having a child are a realized only if the birth takes place before midnight, January 1, the incentives for the “marginal” birth are substantial. Using a sample of children from the National Longitudinal Survey of Youth, we find that the probability that a child is born in the last week of December, rather than the first week of January, is positively correlated with tax benefits. We estimate that increasing the tax benefit of having a child by $500 raises the probability of having the child in the last week of December by 26.9 percent.