Showing papers in "Quarterly Journal of Economics in 1978"

Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations

Abstract: Consider a common stock that pays dividends at a discrete sequence of future times: t = 1,2, Taking all other prices and the random process that determines future dividends as exogenously given, we can ask what will be the price ofthe stock? In a world with a complete set of contingency claims markets, in which every investor can buy and sell without restriction, the answer is given by arbitrage. Let dtixt) denote the dividend that will be paid at time t if contingency Xj prevails, and let Ptixt) denote the current {t = 0) price ofa one dollar claim payable at time t if contingency Xt prevails. Then the current stock price must be 2(2;t,i3t(x«)dt(xf). Furthermore, in such a world it makes no difference whether markets reopen after initial trading. If markets were to reopen, investors would be content to maintain the positions they obtained initially (cf. Arrow, 1968). The situation becomes more complicated if markets are imperfect or incomplete or both. Ownership ofthe stock implies not only ownership of a dividend stream but also the right to sell that dividend stream at a future date. Investors may be unable initially to achieve positions with which they will be forever content, and thus the current stock price may be affected by whether or not markets will reopen in the future. If they do reopen, a speculative phenomenon may appear. An investor may buy the stock now so as to sell it later for more than he thinks it is actually worth, thereby reaping capital gains. This possibility of speculative profits will then be reflected in the current price. Keynes (1931, Ch. 12) attributes primary importance to this phenomenon (and goes on to suggest that it might be better if markets never reopened).

Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model

Abstract: The objective of this paper is to construct a simple dynamic model that hopefully captures some relevant and interesting aspects of the way in which the transfer of technology takes place, including the role of direct foreign investment. The paper is in three parts. The first puts forward the hypothesis that the rate of technological progress in a relatively ''backward'' region is an increasing function of the gap between its own level of technology and that of the ''advanced'' region which improves at a constant rate, and the degree to which it is open to direct foreign investment, measured by the proportion of foreign capital operating in the backward region to domestic capital in that region. The second section considers the determination of the relative growth rates of foreign and domestic capital. The last section combines these elements to form a simple dynamic model that determines the long-run steady-state ratio of technical efficiencies and of foreign to domestic capital and the stability of the path by which they are approached. The effects of changes in various parameters such as the tax rate on foreign profits are also worked out. 6 notes, 19 references.

A Theory of Job Shopping

Abstract: I. Introduction, 261.—II. The basic model—risk neutrality, 262.—III. Mobility cost, 268.—IV. Education, 270.—V. Extensions of the basic model, 272.—VI. Empirical applications, 274.

Egalitarian Equivalent Allocations: A New Concept of Economic Equity

Abstract: Foreword, 671. — I. Introduction, 671. — II. The concept of Pareto-efficient-egalitarian-equivalent-allocations (PEEEA), 674. — III. PEEEA as a fair arbitration scheme for allocations, 676. — IV. Maximin properties of PEEEA, 678. — V. PEEEA in economies with production, 680. — Mathematical appendices, 682.

Optimal Redistributive Taxation When Individual Welfare Depends upon Relative Income

Abstract: I. Introduction, 589. — II. An optimal negative income tax model, 591. — III. The maximin criterion, 594. — IV. A utilitarian social objective, 597. — V. Conclusion, 598. Our theory … depends upon the validity of a single hypothesis, viz.: that the utility index is a function of relative rather than absolute consumption expenditure. — J. Duesenberry Income, Saving and the Theory of Consumer Behavior

Growth and the Family Distribution of Income by Factor Components

Abstract: I. Introduction, 17. — II. Growth and income distribution, 18. — III. Application to Taiwan, 24. — IV. Impact of growth on FID: qualitative and quantitative aspects, 27. — V. Concluding remarks, 36. — Appendix, 38.

Optimal Risk Sharing and the Leasing of Natural Resources, with Application to Oil and Gas Leasing on the OCS

Abstract: Future natural resource discoveries will most likely take place on public lands. Rights to potential oil and gas resources are transferred from the public to private firms through a lease; the lease specifies the nature of the rights granted. Federal offshore leases have specified that firms pay a royalty equivalent to one-sixth of the value of production. This royalty has remained unchanged since offshore leasing began, despite the significant changes in the value of tracts as reflected in winning bids. Leases of other countries specify quite-different payment schedules, with profit rather than production often determining the amount to be paid. Clearly, alternative forms of conditional payments have differing implications on risk sharing and on the exploration, development, and production decisions of firms. This paper develops a general theory of optimal lease payments, paying special attention to royalty and profit-share payments, since they are featured prominently in proposals for new Federal leasing policies.

Liquidity Considerations in the Theory of Consumption

Abstract: I. Introduction, 279.—II. The model and optimality conditions, 281.—III. The optimal consumption plan, 284.—IV. Implications of the portfolio liquidity structure, 288.—V. Conclusions, 293.

Restabilizing Responses, Inertia Supergames, and Oligopolistic Equilibria

Abstract: I. Introduction, 71. — II. Convolutions: Response functions that preserve rationality, 73. — III. Inertia supergames and convolutions, 80. — IV. Conclusion, 89.

An Empirical Note on the Tiebout-Tullock Hypothesis

Abstract: I. Introduction, 705. — II. The model, 707. — III. Empirical results, 708. — IV. Conclusion, 710.

A Stochastic Equilibrium Model of an Open Economy Under Flexible Exchange Rates

Abstract: I. Setup of the model, 149. — II. Determination of the exchange rate and the expected future exchange rate, 154. — III. Effects of exogenous variables, 156. — IV. Incomplete current information, 159. — V. Concluding remarks, 161.

Resource Management in a Trading Economy

Abstract: I. Introduction, 297.—II. The model, 298.—III. Variable return on foreign investment, 303.—IV. Uncertain future demand, 303.—V. Conclusions, 305.

An Approach to the Study of Income, Utility, and Horizontal Equity

Abstract: I. Introduction, 307.—II. Utility functions and differences in tastes, 308.—III. Measuring horizontal equity, 313.—IV. Qualifications, 318.

Transport Costs in International Trade Theory: A Comparison with the Analysis of Nontraded Goods

Abstract: I. Assumptions and notation, 536. — II. The model, 537. — III. The equations of change, 540. — IV. Autonomous price changes, 541. — V. Factor accumulation, 543. — VI. Conclusions, 548.

Cost-Minimizing Number of Firms and Determination of Industry Structure

Abstract: I. Introduction, 439.—II. Least-cost number of firms in a multiproduct industry, 441.—III. Shape of the M locus: economic interpretation, 446.—IV. Regions in which some specified number of firms may be optimal, 450.—V. Scale of demand and cost-minimizing market form, 454.—VI. The single-product case, 455.—VII. Conclusion, 460.—Appendix A: Proof of Theorem Ib, 462.—Appendix B: Proof of Theorem 3, 464.

The Opportunity Cost of Labor and the Returns to Education Under Unemployment and Labor Market Segmentation

Abstract: The adjustments that must be made to the observed wage in the unprotected sector in order to derive the true marginal contribution of labor are investigated. When the employment-unemployment decision-making process is modeled, the ouput of an additional worker in relation to the observed wage in the unprotected sector can be considered. The more elastic the demand for labor, the more complementary the technical relation between the two types of labor; the lower the rate of job openings in the protected sector, the lower the rate of growth of wages; the larger the rate of discount, the smaller the relative size of the protected sector; and the smaller the premium to search, the more likely that the marginal contribution will exceed the observed wage in the unprotected sector. The relative marginal contribution of educated and noneducated labor determines the profitability of investment in schooling. For a wide range of demand elasticity values, the wage in the free entry sector overestimates the true marginal contribution of labor. The factors explaining a worker's refusal to accept an unprotected sector job, either leisure or search for a protected sector job, are crucial in deriving the social price of labor. 37 references.

The Two-Part Tariff and Voluntary Market Participation

Abstract: I. Introduction, 571. — II. The two-part tariff, 573. — III. Disconnection, 575. — IV. Specific functions and simulation, 577. — V. Conclusion, 583. — Appendix A, 584. — Appendix B, 585.

Estimating the Costs of Protection: A General Equilibrium Approach

Abstract: I. Introduction, 209.—II. A Walrasian model of trade and protection, 210.—III. An application of the model: The costs of protection in Colombia, 214.—IV. Conclusions, 222.—Appendix, 223.

A Note on Preferential and Illegal Trade Under Quantitative Restrictions

Abstract: In a recent article Bhagwati and Hansen (1973) modify the traditional international trade model to include the possibility of smuggling. A basic conclusion of their analysis is that smuggling to evade an import tariff need not improve economic welfare. This note has two objectives: first, to show that this result does not carry over to quantitative restrictions, despite their commonly held equivalence (Section I); second, to show that under quantitative trade restrictions, by using the analogy with the theory of preferential trading provided by Bhagwati and Hansen, preferential trade will not be tradediverting 'Section II).

J. S. Mill, Unions, and the Wages Fund Recantation: A Reinterpretation

Abstract: I. Introduction, 603. — II. Infinitely inelastic demand for labor, the Hollander thesis, 605. — III. Thornton's influence, 608. — IV. Thornton on labor, part II, 611. — V. Final considerations, 614.

Intergenerational Wealth Transfers and the Educational Decisions of Male Youth: An Alternative Interpretation

Abstract: Donald 0. Parsons' recent article in this Journal raises several important questions.' Using a statistical model that has been employed by numerous sociologists for over ten years, Parsons illustrates the effects of various measures of family background on male youths' schooling and earnings.2 Parsons' original contribution to this literature is to employ a human-investment model in order to separate the total schooling effect of a given family characteristic into productivity, cost, and consumption components. For example, one of Parsons' most intriguing results is that a mother's educational attainment has its main influence on her son's labor market achievement through its effects on the structure of the child's tastes for schooling and through the productivity effect of schooling on earnings. Father's schooling, on the other hand, has its effect primarily through reducing the cost of schooling arising apparently from the greater subsidies more educated fathers bestow on their children.3 If this is true, exactly what is it that well-educated mothers do in the home that gives their children an earnings advantage in the labor market? Further, if this advantage reflects primarily environmental rather than genetic factors, can some type of social policy be used to replicate in families with low parental levels of education the process (whatever it is) of intergenerational wealth transmission enjoyed by high-status families? Parents can transmit income and wealth to their offspring in a variety of ways. At one extreme, transmittal occurs directly through bequests and gifts of financial assets. On the other hand, biological parents supply the genetic endowments that may affect skills useful in school and the labor market. Finally, parental time devoted to the rearing of children can also augment a child's skills and traits.4 It is these parental investments of time and goods in the children-particularly in the preschool years-which we wish to discuss here. If it could be shown, for example, that there is a consistent relationship between the well-known family background variables (e.g., parental education, occupational status, family size) used by Parsons, investments of parental time in preschool human capital, and the outcomes of the investment (the child's schooling and earnings), we could an-

The Leontief Dynamic Generalized Inverse

Abstract: I. Introduction, 641 — II. Leontief's dynamic multisector economy, 641 — III. A dynamic generalized inverse solution, 642 — IV. Initial conditions, 642 — V. Extremal solutions, 646 — VI. Concluding remarks, 648 — Appendix, 648.

Welfare Aspects of International Trade in Goods and Securities

Abstract: I. Introduction, 489.—II. The model, 490.—III. A diagrammatical exposition of stock market equilibrium and the balance of payments, 495.—IV. Gains from trade, 499.—V. Commodity trade taxes and welfare losses, 501.

Capacity Constrained Peak Load Pricing

Abstract: The traditional theory of peak load pricing focuses on normative rules for pricing a public utility's nonstorable service whose demand is periodic. The analysis of capacity investment is relatively simple in these models because of the following assumptions: (a) capacity is constrained to be greater than or equal to demand; (b) a single equipment type is used to provide service; and (c) demand does not vary within given price periods. Thus, when prices are chosen optimally, optimal capacity is simply equal to demand in the peak period. The optimal capacity investment rules do not appear to be so obvious, however, if assumptions (b) and (c) are generalized somewhat. A very realistic assumption, especially for electricity generation, is that several equipment types are used to produce the public utility's service (output). Moreover, an examination of the empirical data on public utility demands reveals that the traditional assumption of intraperiod time invariant demand is untenable. Indeed, these empirical results show that it is more realistic to assume that public utility demands, in given price periods, depend on both price and time-of-day. The peak-load pricing and capacity decision problem is examined under (b) and (c). Further assumptions are: the traditional capacity constraint ismore » invoked; the various equipment types have different cost characteristics; marginal capital and operating costs are constant for all equipment types; there is no uncertainty on either the demand or supply side; there is no secular growth in demand; the demand in period does not depend on the prices; and there are no price periods.« less

On the Optimal Taxation of Consumption Externalities

Abstract: The conventional theory of the optimal taxation of consumption externalities (see, for instance, Samuelson, 1969) is applicable to a world where lump-sum transfers are available. When externalities affect individual utilities through aggregate consumption only (the aggregation assumption), according to this theory, a social optimum can be attained by a system of lump-sum transfers and uniform taxes-subsidies on the externality-causing goods.1 A tax-subsidy is imposed on each such good; the amount equals the sum across individuals of the marginal rates of substitution (2MRS) between the aggregate consumption of this good and the numeraire good. Diamond (1973), Starrett (1972), and others relaxed the aggregation assumption, while still maintaining the framework of lump-sum transfers. In this paper we derive explicit tax formulae in a more realistic setting, where lump-sum transfers are not available. However, the aggregation assumption is retained. The formal analysis developed here applies to both external economies and diseconomies; in order to avoid needless repetition, the interpretation of the results is confined to the latter case. When lump-sum taxes are not available, we encounter some problems that otherwise do not exist. Fortunately, these problems are similar in nature to those associated with the optimal provision of public goods. In particular, one may conjecture from the treatment of public consumption by Diamond and Mirrlees (1971) in what ways the optimal taxes-subsidies will be different in our case from what is suggested by the conventional theory. First, with no lump-sum transfers available, the marginal social welfare of income is not necessarily equalized across individuals; therefore it is not appropriate to add up the individual "willingness to pay" for a unit decrease in the aggregate consumption of an externality-causing good (the MRS's). Thus, as in Diamond and Mirrlees (1971) the term 2MRS

The Autocorrelation of Earnings, Human Wealth Inequality, and Income Contingent Loans

Abstract: I. Introduction, 551. — II. The autocorrelation of earnings and the variance of human capital, 553. — III. Applications of the variance of present values, 559. — IV. Conclusions, 564.

Investment Neutrality of Business Income Taxes

Abstract: I. Introduction, 245.—II. The model, 247.—III. The model with full investment write-off, 248.—IV. Depreciation deductions depend on the capital stock, 251.—V. Depreciation deductions depend on the time profile of past investments, 256.—VI. Concluding comments, 258.