Showing papers in "Quarterly Journal of Economics in 1980"
TL;DR: The authors examined adherence to social customs and found that social customs which are disadvantageous to the individual may still persist without erosion, if individuals are sanctioned by loss of reputation for disobedience of the custom.
Abstract: This paper examines adherence to social customs. Models of social customs are found to be inherently multi-equilibrial. It is found that social customs which are disadvantageous to the individual may nevertheless persist without erosion, if individuals are sanctioned by loss of reputation for disobedience of the custom. One example of such a social custom is the persistence of a fair (rather than a market-clearing) wage. In this fashion, involuntary unemployment is explained.
1,485 citations
737 citations
TL;DR: In this article, the authors report results of experiments designed to test the claim of psychologists that expected utility theory does not provide a good descriptive model and the deviation from tested theory is that, in revising beliefs, individuals ignore prior or base-rate information contrary to Bayes rule.
Abstract: Results of experiments designed to test the claim of psychologists that expected utility theory does not provide a good descriptive model are reported. The deviation from tested theory is that, in revising beliefs, individuals ignore prior or base-rate information contrary to Bayes rule. Flaws in the evidence in the psychological literature are noted, an experiment avoiding these difficulties is designed and carried out, and the psychologists' predictions are stated in terms of a more general model. The psychologists' predictions are confirmed for inexperienced or financially unmotivated subjects, but for others the evidence is less clear.
703 citations
TL;DR: The theory of equalizing differences as discussed by the authors asserts that workers receive compensating wage premiums when they accept jobs with undesirable non-wage characteristics, holding the worker's characteristics constant, and longitudinal data are used to test this conjecture.
Abstract: The theory of equalizing differences asserts that workers receive compensating wage premiums when they accept jobs with undesirable nonwage characteristics, holding the worker's characteristics constant. Previous research provides only inconsistent support for the theory, with wrong-signed or insignificant estimates of these wage premiums fairly common. An oft-cited reason for these anomalies is that important characteristics of the worker remain unmeasured, biasing the estimates. In this paper, longitudinal data are used to test this conjecture. Although such data improve the control for worker characteristics, the plausibility of the estimates is not markedly improved. Alternative explanations for these results are considered. "It's indoor work and no heavy lifting." —Senator Robert Dole, explaining why he wanted to be Vice President.
580 citations
TL;DR: In this article, the relationship between experience and performance among managerial and professional employees doing similar work in two major U. S. corporations was investigated. And the results indicated that the human capital on-the-job training model cannot explain a substantial part of the observed return to labor market experience.
Abstract: This study provides direct evidence concerning the relationship between experience and performance among managerial and professional employees doing similar work in two major U. S. corporations. The facts presented indicate that while, within grade levels, there is a strong positive association between experience and relative earnings, there is either no association or a negative association between experience and relative rated performance. If we are correct that the performance ratings given to managerial and professional employees in any grade level adequately reflect those employees' relative productivity in the year of assessment, the results imply that the human capital on-the-job training model cannot explain a substantial part of the observed return to labor market experience.
573 citations
TL;DR: In this article, the authors studied the extent to which the technology that is being transferred to non-US competitors is leaked out to nonUS competitors, and the size of the benefits it confers on the host (and other nonUS) countries.
Abstract: Although economists and policymakers have devoted considerable attention to the transfer of technology by US-based multinational firms to their overseas subsidiaries, very little is known about the nature of the technology that is being transferred overseas in this way, the extent to which it leaks out to non-US competitors, the size of the benefits it confers on the host (and other non-US) countries, and the sorts of non-US firms that receive the largest benefits of this sort. The findings presented shed new light on each of these topics, but are only a beginning. 18 references, 5 tables.
561 citations
TL;DR: This article examined the effect of trade unionism on the exit behavior of workers in the context of Hirschman's exit-voice dichotomy and found that the grievance system plays a major role in the reduction in exit and that the reduction lowers cost and raises productivity.
Abstract: This paper examines the effect of trade unionism on the exit behavior of workers in the context of Hirschman's exit-voice dichotomy. Unionism is expected to reduce quits and permanent separations and raise job tenure by providing a "voice" alternative to exit when workers are dissatisfied with conditions. Empirical evidence supports this contention, showing significantly lower exit for unionists in several large data tapes. It is argued that the grievance system plays a major role in the reduction in exit and that the reduction lowers cost and raises productivity.
501 citations
TL;DR: In this article, the authors examined the long-run behavior of a one-good model of dynamic equilibrium with heterogeneous households and showed that the dominant consumer has the lowest pure rate of time preference in the economy.
Abstract: This paper examines the long-run behavior of a one-good model of dynamic equilibrium with heterogeneous households.1 The main result is a characterization of the long-run steady state that verifies a conjecture of Ramsey [1928].2 If an agent's lifetime utility function over an infinite horizon is represented by a stationary, additive, discounted function with a constant pure rate of time preference, then the income distribution is shown in the long-run steady state to be determined by the lowest discount rate. The household with the lowest rate of discount owns all the capital and earns a wage income; all other households receive a wage income. If discount rates are equal between households, than the steady state distribution of income is indeterminate. Rader [1979] shows the emergence of a dominant consumer in the long run for a model without an explicit capital accumulation structure. The dominant consumer has the lowest pure rate of time preference in the economy. Advantages of our work over Rader's presentation are that the analysis is related to the theory of economic growth and the mathematics is elementary. One difference from the Rader result is that nondominant consumers have positive steady state consumption. Normally, those with high discount rates would want to contract to trade future labor for present consumption. These agents would then incur a debt equal to the discounted value of their wage income. Rader's result admits intertemporal trades of future labor for current consumption in a loan market extending into the indefinite future. Each consumer's budget constraint requires total assets to be
458 citations
TL;DR: In this paper, the authors focus on the problems which arise when available data are restricted to the distribution of factor incomes between groups of families defined by their total income level, and the results obtained required exploration of the alternative concepts and measurements which are possible when individual family data are available.
Abstract: This paper furthers the discussion of income inequality decomposition by focusing attention on the problems which arise in this context when available data are restricted to the distribution of factor incomes between groups of families defined by their total income level. First, it sets out the Rao (1969) decomposition of the Gini coefficient for total income in terms of factor shares and factor concentration ratios. Further decomposition of concentration ratios into rank correlation ratios and factor Ginis is recommended when individual data are available. Second, interpretation of concentration ratios as Gini coefficients is shown to be misleading. An analogue in economic theory is required. The results obtained required exploration of the alternative concepts and measurements which are possible when individual family data are available. In turn, these had to be related to the more limited set of concepts which can be calibrated when available data are taken from a secondary source. Caution is advised in interpreting results based on secondary sources of income inequality by factor components.
403 citations
TL;DR: In this paper, a variant of the economic model of crime was developed using information on the post-release activities of a sample of men released from the North Carolina prison system, and both the expected certainty and severity of punishment were found to deter criminal activity in a number of instances and a 1 percent increase in certainty is generally found to have a greater effect than a similar increase in severity.
Abstract: The paper develops a variant of the economic model of crime. The model developed is estimated using information on the post-release activities of a sample of men released from the North Carolina prison system. Both the expected certainty and severity of punishment are found to deter criminal activity in a number of instances and a 1 percent increase in certainty is generally found to have a greater effect than a similar increase in severity. Certainty of punishment is found to have a greater effect for relatively minor offenders and severity for persons offenders. While higher legal wages are found to deter, their effect is quite weak.
352 citations
TL;DR: In this paper, the impact of takeovers on shareholders' returns and management benefits is analyzed, and some implications for the theory of the firm are drawn from the results, and the results are consistent with takeovers being motivated more by maximization of management utility reasons, than by the maximisation of shareholder wealth.
Abstract: The paper examines recent merger and takeover activity in the United Kingdom. Specifically, the impact of takeovers on shareholder returns and management benefits is analyzed, and some implications for the theory of the firm are drawn from the results. The research showed that mergers and takeovers resulted in benefits to the acquired firms' shareholders and to the acquiring companies' managers, but that losses were suffered by the acquiring companies' shareholders. The results are consistent with takeovers being motivated more by maximization of management utility reasons, than by the maximization of shareholder wealth.
TL;DR: In this article, the authors examined the behavior of a competitive firm under price uncertainty where a futures market exists for the commodity produced by the firm and found that production decisions depend only on the futures market price and input costs; the subjective distribution of future spot price affects only the firm's involvement in futures trading.
Abstract: This paper examines the behavior of a competitive firm under price uncertainty where a futures market exists for the commodity produced by the firm. Working with the Sandmo approach, we found that production decisions depend only on the futures market price and input costs; the subjective distribution of future spot price affects only the firm's involvement in futures trading. Conditions are then determined under which a firm will either hedge, speculate by buying futures contracts, or speculate by selling futures contracts. The results indicate that an important social benefit derived from the existence of a futures market is to eliminate output fluctuations due to variation in producers' subjective distributions of future spot price.
TL;DR: In this article, the authors derived refutable predictions from a neoclassical multi-person household model based on competitive assumptions modified to take into account differences in landholding status for male and female agricultural workers from farm and nonfarm households.
Abstract: Few attempts have been made to test empirically the multitude of models formulated to describe household labor supply behavior in the context of rural labor markets in developing countries. In this paper refutable predictions are derived from a neoclassical multi-person household model based on competitive assumptions modified to take into account differences in landholding status. A national sample survey of rural households from India is used to estimate the parameters of the model for male and female agricultural workers from farm and nonfarm households. The estimates generally conform to the implications of the neoclassical-competitive framework.
TL;DR: In this paper, the existence conditions for signaling equilibria in which the signal is not exogenously costly are derived for the continuum of classes case. But the authors focus on intertemporal consistency requirements and the role of insider trading observations.
Abstract: Existence conditions for signaling equilibria in which the signal is not exogenously costly are derived for the continuum of classes case. Applications to labor market models based on productivity quotas and time-profiles of wages, and an exploratory model of the "information content" of corporate dividends are discussed. The last application focuses on intertemporal consistency requirements and the role of insider trading observations.
TL;DR: In this paper, trade theory for the case of a continuum of goods, two factors, two countries, and Cobb-Douglas demand functions is studied, and the effects of changes in endowments on the range of goods produced in each country and on prices of goods and factors are analyzed for this case.
Abstract: This paper studies trade theory for the case of a continuum of goods, two factors, two countries, and Cobb-Douglas demand functions. If factor endowments are similar, factor price equalization obtains and geographic patterns of production are indeterminate; nonetheless the effects of changes in factor endowments on prices and welfare in each country are well defined. Factor price equalization does not obtain if factor endowments are far apart, and the geographic pattern of specialization is then determinate. The effects of changes in endowments on the range of goods produced in each country and on prices of goods and factors are analyzed for this case, and the elasticity of substitution in production is shown to play an important role in determining comparative static outcomes.
TL;DR: In this article, the authors present evidence on estate division among children by sex, birth order, family size, estate size, and asset composition, showing that equal sharing among children is the rule, a result that casts doubt upon the altruist model of inheritance as advanced by Becker and Tomes.
Abstract: Bequest patterns to children are important in intergenerational models of the distribution of income and wealth. Economies that feature primogeniture will have a greater degree of inequality than those featuring equal division. This paper presents evidence on estate division among children by sex, birth order, family size, estate size, and asset composition. The results presented here are preference-generated not tax-induced due to the tax characteristics within the sampling region. It is shown that equal sharing among children is the rule, a result that casts doubt upon the "altruist" model of inheritance as advanced by Becker and Tomes.
TL;DR: Several inequalities relating the imputed willingness to pay in various paradigm decision contexts are derived from the model with the addition of few additional behavioral assumptions.
Abstract: Properties of individual willingness to pay for changes in mortality probabilities are examined using a decision-theoretic model. There is no unique value per life saved. The willingness to pay for a mortality reduction depends not only on the amount of reduction but also on the initial probability level and on whether the valuation is ex ante (e.g. decisions regarding health insurance preventive medicine or environmental health) or ex post (e.g. acute medical care). Several inequalities relating the imputed willingness to pay in various paradigm decision contexts are derived from the model with the addition of few additional behavioral assumptions. (authors)
TL;DR: In an open economy with a floaLing exchange rate, the efficacy of both monetary and fiscal policies depends fundamentally on the wage-setting pnxiess as discussed by the authors, and the effect of monetary expansion and fiscal expansion depends on the nature of the wage determination process.
Abstract: In an open economy with a floaLing exchange rate, the efficacy of fiscal and monetary policy depends fundamentally on the wage-setting pnxiess. In the canonical models of Mundell and Fleming, monetary expansion raises output via an exchange rate depreciation, while fiscal expansion has no output effect. These results hold only when real wages can be altered by exchange rate movements; if the real wage is fixed, the Mundell-Fleming ranking of policy is reversed. This paper explores the interaction of wages and policy in short- and long-run models, under the assumptions of perfect foresight and world capital mobility. After seven years of floating exchange rates, the implications of Hexible rates for countercyclical macroeconomic policy remain in douht. The traditional view, following the pioneering work of Mundell 1196;?) and Fleming [1962] (henceforth M-F), is that expansionary monetary policy, hy inducing depreciation ofthe real exchange rate, is effective in raising output in a small, underemployed economy. Fiscal policy, on the other hand, is seen as less effective. In the standard analysis, a rise in government spending leads to appreciation and crowding-out of net exports. An alternative view of flexihle rates, set forth in the full-employment models of glohal monetarism, maintains that a money supply expansion can change only the exchange rate and price level, but not output and employment. While an increase in money causes depreciation ofthe nominal exchange rate, the domestic price level rises to offset the competitive gain envisaged in the M-F model. The alternative view has had less to say on the effects of fiscal policy and on the general question of prolonged unemployment. Both views of monetary policy have adherents, and there is evidence, in different countries and at different times, to support each. Their appropriateness, I shall argue here, depends crucially on the nature of the wage-determination process. The M-F model (in an extended form) requires that nominal exchange-rate changes alter the real wage.^ Implicit is an underlying view, going hack to Keynes,
TL;DR: In this paper, the basic facts of public goods theory are presented in the primitive set-up of a collection of projects devoid of any linear structure, and characterizations of Pareto optimal and core states in terms of valuation functions are obtained.
Abstract: Some basic facts of public goods theory are presented in the primitive set-up of a collection of projects devoid of any linear structure. There is a single private good. Characterizations of Pareto optimal and core states in terms of valuation functions (i.e. supporting "prices") are obtained. Voluntary financing schemes are discussed.
TL;DR: Despite well-known differences, the respective visions of capitalism's future by Marx and Schumpeter show striking and neglected similarities as discussed by the authors, which is illustrated by their strong focus upon capitalism's progressive and creative properties.
Abstract: Despite well-known differences, the respective visions of capitalism's future by Marx and Schumpeter show striking and neglected similarities. This is illustrated, first, by their strong focus upon capitalism's progressive and creative properties; second, by their analyses of capitalism's dysfunctional properties; and third, by their respective analyses of the creatively destructive character of institutional and attitudinal change in advanced capitalism.
TL;DR: This article developed a model of the firm under uncertainty and derived the relationship between systematic risk and such firm variables such as monopoly power, demand elasticity, and the labor-capital ratio.
Abstract: The mean-variance capital-asset-pricing model forms the basis for much of the theoretical and empirical work in modern financial economics. While this model defines the relevant measure of the risk of a security β in a general equilibrium context, the relationship between this measure and the microeconomic variables of a firm has not been studied in the literature. This paper develops a model of the firm under uncertainty and derives the relationship between systematic risk and such firm variables as monopoly power, demand elasticity, and the labor-capital ratio. The general conclusions are surprisingly robust and point to several interesting empirically testable hypotheses.
TL;DR: In this paper, the authors analyze Schumpeterian entrepreneurship within a general equilibrium model of a competitive economy patterned after Lucas and find that the individuals who acquire sufficient knowledge become entrepreneurs.
Abstract: We analyze Schumpeterian entrepreneurship within a general equilibrium model of a competitive economy patterned after Lucas. All individuals have access to exogenously growing knowledge. Those who acquire sufficient knowledge become entrepreneurs. If learning is only a function of ability, the faster the progress, the fewer the entrepreneurs, and the higher their pay relative to workers' wages. If knowledge is only a function of lifetime, the faster the progress is, the earlier the entry will be into the entrepreneurial group. When age and ability are considered together, the individuals (if any) who become entrepreneurs with faster progress are younger and more able than those (if any) who drop out of the group.
TL;DR: In this paper, the effects of differences in tax rates and technology are determined in a model where the price of housing is endogenous, and the market distribution of households is found to be suboptimal in cases where utility is derived directly from the consumption of climate.
Abstract: Regional migration is analyzed utilizing a model that develops a system of urban areas. The areas differ in their endowment of a site-specific factor--climate is used as the example. The effects of differences in tax rates and technology are determined in a model where the price of housing is endogenous. Compensation for an inferior climate occurs through regional differences in income levels or the price of housing dependent on the manner in which climate affects production or consumption. The market distribution of households is found to be suboptimal in cases where utility is derived directly from the consumption of climate. (EXCERPT)
TL;DR: In this paper, the authors present a simple formula that shows how the optimal sharing ratio depends on such features as uncertainty, risk aversion, and the contractor's ability to control costs.
Abstract: SUMMARY This paper analyzes the widely used "incentive contract"-a linear payment schedule where the buyer pays a fixed fee plus some proportion of project cost. The remaining proportion of project cost borne by the seller is usually called the "sharing ratio." A higher sharing ratio creates more incentive to reduce costs. But it also makes the contractor bear more risk, requiring a greater fixed fee as compensation. The basic contribution of the present paper is a simple formula showing explicitly how the optimal sharing ratio depends on such features as uncertainty, risk aversion, and the contractor's ability to control costs. The formula is applied to some numericalexamples drawn from the area of defense contracting. Designing an efficient contract is an example of the so-called "principal-agent problem." While the basic theoretical issues are fairly well understood,1 results are at a rather high level of abstraction, somewhat removed from the realm of practical application. At the other extreme is a rich body of descriptive material about an already institutionalized linear contract2 (the "incentive contract"). In this paper I want to strike a middle position. Because a linear payment schedule has a simple structure, explicit formulae for an efficient contract can be derived that show clearly the tradeoff between risksharing and incentives.3 This has immediate applications, since the "incentive contract" is used in practice.
TL;DR: In this article, the authors explore empirically how export-competing performance is related to domestic and foreign market structure and find that fostering large domestic sales of a firm and domestic concentration or discouraging direct investment abroad will put a brake on export rates.
Abstract: This paper explores empirically how export-competing performance is related to domestic and foreign market structure. Recent theoretical propositions that link elements of international and industrial economics are successfully tested on a vast sample of micro data. By means of nonparametric statistics as well as of regression analysis, firm size, industrial concentration, product differentiation, location, information, and foreign subsidiaries are shown to be important elements in explaining Belgian exports behavior. Among the suggestions for economic policy that emerge, it appears that fostering large domestic sales of a firm and domestic concentration or discouraging direct investment abroad will put a brake on export rates.
TL;DR: In this article, it is argued that advertising can contribute to entry barriers by augmenting the extent to which profitability increases with firm size, and that there are threshold effects in advertising, creating regions of increasing returns to scale.
Abstract: The paper discusses how advertising and economies of scale in production interact to produce economies of scale. The latter are defined to occur when costs per dollar of revenues decline with revenues. It is argued that, in an industry with differentiated products and advertising, it is the declining costs per collar of revenues rather than declining production costs per unit of output that directly affects entry barriers and the profitability of established firms. In the industrial organization literature, advertising is claimed to be an entry barrier or to reflect some aspect of structure that creates an entry barrier. There is considerable empirical literature exploring the relationship between advertising and profitability.' In it, several observations of a theoretical kind are made in defense of the view that advertising has an entry-deterring effect. It is sometimes said that advertising has the character of a fixed cost, and therefore, if advertising is required to sell the good, it has the effect of creating economies of scale. It is also asserted that there are threshold effects in advertising, creating regions of increasing returns to scale. In addition, the technology and markets for producing and distributing advertising "messages" may exhibit declining average costs. And finally, if a certain amount of advertising is "needed," and if it is expensive, then it may contribute to risk or to absolute capital requirements barriers. As the reader will see, I agree that advertising can contribute to entry barriers by augmenting the extent to which profitability increases with firm size. The problem with the propositions above is not that they are untrue, but rather that they are incomplete. They are clearly relevant to the issue of the relation of advertising to entry barriers. While advertising may have something of the character of fixed costs, it also influences demand by making it possible to sell a higher volume at a fixed price, or the same volume at a higher price, or some combination of these. Thus, the fact that costs per unit of physical volume
TL;DR: In this paper, the authors show that spanning does not imply stockholder unanimity if there is trading in the shares of firms, and that there is a strong relationship between the Modigliani-Miller theorem, spanning, and the existence of a complete set of markets.
Abstract: We show that "spanning" does not imply stockholder unanimity if there is trading in the shares of firms. Each basis vector of the space spanned by all firms' output vectors can be treated like a composite commodity. If, in addition to spanning, firms act as price takers with respect to prices of composite commodities, then there is unanimity. We analyze the spanning assumption for the vector space of contingent claims generated by firms' choices of debt-equity ratios. We show that there is a strong relationship between the Modigliani-Miller theorem, spanning, and the existence of a complete set of markets.