Showing papers in "Quarterly Journal of Economics in 1982"

Labor Contracts as Partial Gift Exchange

Abstract: This paper explains involuntary unemployment in terms of the response of firms to workers' group behavior. Workers' effort depends upon the norms determining a fair day's work. In order to affect those norms, firms may pay more than the market-clearing wage. Industries that pay consistently more than the market-clearing wage are primary, and those that pay only the market-clearing wage are secondary. Thus, this paper also gives a theory for division of labor markets between primary and secondary. INTRODUCTION In a study of social relations among workers at a utility company in the eastern United States, George Homans [1953, 1954] observed that a small group of young women (doing a job called “cash posting”) exceeded the minimum work standards of the firm by a significant margin (i.e., on average by 15 percent). Most of these women neither desired nor expected promotion in the firm in return for their troubles. Why did they do it? Section II shows that the standard neoclassical model cannot simultaneously explain both the behavior of the firm and the behavior of the cash posters. But, as shown in Section III, application of a standard sociological model does explain the behavior of both the young women and their employer. According to this model, in their interaction workers acquire sentiment for each other and also for the firm.

The Role of Knowledge in R&D Efficiency

Abstract: Past research has recognized that both demand and capability influence the allocation of R&D resources. Scholars have had an easier time getting a grip on demand than on capability. While it has been recognized that knowledge is an important part of capability, to date, formalization of knowledge and its role in R&D activity has been unsatisfactory. This paper models the role of knowledge in R&D. Various sources of such knowledge are considered. The model throws a different light on analyses that employ a “knowledge capital stock,†and also illuminates the dual private and public nature of technological knowledge.

A Model of Imperfect Competition with Keynesian Features

Abstract: The recent literature on “the reappraisal of Keynes†has viewed Keynesian equilibria as arising when prices are fixed and effective demands and supplies are equilibrated through the adjustment of quantities. One problem with this approach is that it lacks a theory of price determinationâ€â€in particular, of why prices are fixed. In the present paper, we show that a number of Keynesian features arise in a model in which prices are fully flexible, but where agents have some monopoly power. One advantage of this approach is that it provides a theory of the determination of both prices and quantities.

Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?

Abstract: This paper investigates the spending and current-account effects of terms-of-trade shifts in a model where households maximize utility over an infinite planning period. In the framework developed here, an economy specialized in production must experience a fall in aggregate spending and a current surplus as a result of an unanticipated, permanent worsening in its terms of trade. The paper's model thus provides a setting in which the current-account deficit predicted by Laursen and Metzier, Harberger, and others fails to materialize.

Charitable Giving and “Excessive” Fundraising

Abstract: Recently, some charities have been attacked for spending an “excessive†portion of their resources on fundraising. This paper shows how competition for donations can push fundraising shares to high levels even when donors dislike charities that spend a large portion of receipts on fundraising. It also considers a case in which donors take account of the productivity of fundraising in generating gifts from others. In the light of the models developed in the paper, a variety of regulatory strategies are assessed from the dissemination of information to the establishment of a federated fund drive.

A General Equilibrium Model of Congressional Voting

Abstract: In this paper we specify a model in which Congressmen, constituents, and campaign contributors simultaneously decide on behavior. Constituents and contributors desire to influence the voting behavior of Congressmen; Congressmen, on the other hand, want to be elected and vote accordingly. We empirically test this model using roll call voting on eight bills dealing with economic regulation and find support for the model. Our results indicate that part of the voting behavior of Congressmen may be explained by noneconomic factors. We also find that unions and businesses as campaign contributors are sometimes influential; unions are more often influential than is business. Ideological factors are also important in explaining voting.

Discrimination, Nepotism, and Long-Run Wage Differentials

Abstract: The wage discrimination model developed by Becker has been criticized for predicting that competitive forces will lead to the disappearance of racial discrimination in the long run. We have reformulated the model in terms of nepotism toward white workers rather than discrimination against black workers. In this new framework, both nepotistic and taste-neutral firms are expected to survive the competitive struggle in the long run. Therefore, the new framework is consistent with long-run as well as short-run racial wage differentials.

What are Corporate Pension Liabilities

Abstract: Analyses of corporate pension plans often make unstated assumptions about an implicit labor contract. An example of the effect of such an assumption is that many mistakenly believe that if a worker's benefits are tied to final salary, he is protected against inflation until retirement. Also, the value of a worker's claims is often considered to be independent of the status of the firm's pension fund. These “implicit contract†assumptions are examined and questioned. The implications of analyzed pension liabilities in a manner consistent with the analysis of other corporate liabilities are explored.

The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing

Abstract: The paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange-rate systems: uniform flexible exchange rates, uniform fixed exchange rates, and two versions of two-tier exchange rates. The analysis makes two general points. First, one cannot assume stability of structure when assessing the consequences of alternative exchange-rate regimes. For example, the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government's choice of exchange-rate regime. Second, exchange-rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare.

Categorizing Risks in the Insurance Industry

Abstract: This paper analyzes the welfare implications of imperfectly categorizing risks in the insurance industry under conditions of asymmetric information. Firms, initially unable to distinguish the risk type of individuals, are provided with imperfect information concerning risk membership. The paper then compares various Wilson-type equilibria to determine the welfare implications of firms imperfectly categorizing risks. It is shown that only in the case where the initial equilibrium is of the Nash no-subsidy type is there a Pareto-type improvement in welfare.

Social Aggregation Rules and Continuity

Abstract: It is shown that any continuous social aggregation rule for smooth preferences cannot simultaneously satisfy the properties of anonymity and respect of unanimity. This is true even when all individual preferences are linear. The relationship between the conditions on the social rule studied here and those of Arrow's paradox is discussed. The first result requires that the normalized gradient of the social choice rule be definable in the interior of the choice space, thus indicating a direction of increase of social preference. A second impossibility result extends the first to cases where the gradient of the social preference may vanish in the interior of the choice space.

Work and Welfare as Determinants of Female Poverty and Household Headship

Abstract: This paper formulates and estimates a model of the determinants of female household headship. Headship responds to variations in the levels of well-being a woman can expect if she marries or if she heads her own household. [The authors] measure the opportunity cost of female headship and the effects of welfare benefits and womens work in the market on female headship and poverty. [They] find that if welfare benefits were reduced there would be small reductions in the proportion of women heading households for whites and nonwhites but a substantial increase in poverty for nonwhites. [They] also find that wives work in the market reduces poverty and female headship for nonwhites and reduces poverty but increases headship for whites. The study is based on 1975 U.S. data. (EXCERPT)

The Relative Impact of Inheritance and Other Factors on Economic Inequality

Abstract: An empirically grounded micro-simulation of saving, with bequests related negatively either in total to average children's income or separately to individual children's incomes, is constructed for a single generation in a steady growth economy. Behavioral parameters are set so that predicted bequests to the next generation are consistent with both the scale and assignment of inheritances (taken from a real-world source) for the simulation generation. The relative impact of inheritance and other factors on different aspects of economic inequality is assessed. While inheritance is a major cause of wealth inequality, its influence on annual income and lifetime resources is small, and in the latter case ambiguous. … Inheritance perpetuates and may intensify inequalities arising originally from other causes. In that sense, it is a secondary cause of inequality; but that is not, of course, to say that it is of secondary importance. The extent of its influence on distribution remains an open question, which cannot be decided merely by theoretical reasoning … but requires in addition something in the nature of a quantitative analysis of the relevant facts. -Wedgwood, 1929, pp. 60–61.

Tariffs, Quotas, and Market Structure

Abstract: This paper examines the effects of tariffs and quotas on the pricing pattern of producers in the case of duopoly by a domestic monopolist and a foreign monopolist. It is pointed out that tariffs and quotas may induce completely different pricing patterns in the two producers. Under a quota, it is always profitable for the home producer to be a price leader and for the foreign producer to be a follower, whereas under a tariff either producer may become a leader. It is also proved that, whatever leader-follower relation is chosen under a tariff, a quota always bring about a higher domestic price than the tariff as long as both permit the same amount of imports.

Permanent versus Transitory Tax Effects and the Realization of Capital Gains

Abstract: Recent empirical work on captial gains implies that realizations are highly sensitive to marginal tax rates. Because they are based on cross-section data, however, these estimates cannot distinguish between permanent responses to tax rate changes and the timing of realizations to take advantage of the normal fluctuations in any individual's tax rates over time. The purpose of this paper is to distinguish transitory from permanent tax effects by analyzing panel data for taxpayers. Controlling for permanent and transitory income and other variables, the estimates suggest both transitory and permanent effects, although the permanent tax rate effect is not significant in all cases.

Underemployment Equilibrium with Rational Expectations

Abstract: In this paper I use some recent work in the microeconomics of imperfect information to construct a macro model. The microeconomic theory suggests that atomistically competitive firms face kinked demand curves. In this model there is a range of aggregate equilibria consistent with correct information. I then show that individual firms can face a free-rider problem in trying to move from one equilibrium to another by changing the price level. Monetary policy is not subject to this problem, even if the policy is fully anticipated.

The Existence of Marginal Cost Pricing Equilibria with Increasing Returns

Abstract: The competitive mechanism fails in economies with nonconvex technologies. Competitive equilibria do not exist in general, and Pareto optima are no longer equilibria. The search for alternative mechanisms in economies with increasing returns was developed and resulted in the principle of marginal cost pricing. Modern economic theory has returned to the foundations of marginal cost pricing theory in a general equilibrium framework. The existence of equilibria with marginal cost pricing in economies with increasing returns and a more general type of nonconvexities is analyzed in this paper. The case of differentiable economies where all production sets are limited by smooth surfaces is developed. The principles of the proof are also extended to the nondifferentiable case.

Rate-of-Return Regulation and Two-Part Tariffs

Abstract: In choosing a two-part tariff, a monopoly subject to rate-of-return regulation will rely more on demand elasticities and less on marginal costs than would a welfare-maximizing firm. The rate-of-return regulated firm also will reduce its access fee or its marginal usage fee more, depending on whether adding consumers or increasing output requires marginally the most capital. In the typical case these effects will favor declining-block rate structures, which helps to explain their widespread use by rate-of-return regulated firms.

Educational Subsidy, Agricultural Development, and Fertility Change

Abstract: In this paper, the effects of continuing agricultural technical change on the allocation of resources by households between increments to family size and to schooling are examined within the context of a model of household decision-making in which education facilitates innovation. An empirical application of the model to data from India indicates, consistent with the theory, that in farm households more intensively exposed to the new technologies associated with the “green revolution,†fertility was significantly reduced, while the level of schooling investment was significantly increased. In contrast, and also consistent with the model, proximity of schools, in the absence of technical change, had only marginal effects on schooling and little impact on family size.

Immiserizing Investment from Abroad: The Singer-Prebisch Thesis Reconsidered

Abstract: The present paper lends new analytical support to the controversial Singer-Prebisch Thesis.' According to this well-known thesis, less developed countries (LDCs) suffer a welfare loss from secular decline in their international terms of trade for primary-product exports. The standard theoretical criticism of the thesis makes two basic arguments, both relating to the impact of economic expansion.2 First, there is no well-established presumption that the terms of trade for primary products will indeed deteriorate in a growing world economy., Second, if domestic economic expansion does happen to worsen the terms of trade for LDCs, economic welfare of these countries still need not deteriorate, except under Bhagwati's [1958] well-known conditions for "immiserizing" growth. Thus, the traditional critique sees the Singer-Prebisch Thesis as an unconvincing allegation about the relationship between growth and welfare via the terms of trade. The following discussion suggests an alternative, more favorable interpretation of the thesis. This reinterpretation focuses upon the process of foreign investment4-rather than economic growth-as the essential reason for adverse changes in the terms of trade and level of welfare for LDCs exporting primary products. Such a focus appears to be fully consistent with the analysis of Singer [19501,5 whose main

Job Search and the Duration of Layoff Unemployment

Abstract: This paper derives an optimal job-searching strategy for workers on layoff, and an optimal recall policy for firms, when each side anticipates the other side's actions correctly. It shows that workers search for an alternative job only if the probability of recall falls below a critical level, and that firms may recall before the recovery of demand, depending on the costs of laying off and hiring workers, and the probability of losing workers on layoff. Through the use of optimal job searching and recall policies, the paper derives expressions for the duration of layoff unemployment and discusses briefly their comparative-static properties.

Risk Aversion, Supply Response, and the Optimality of Random Prices: A Diagrammatic Analysis

Abstract: This paper analyzes the effect of commodity price stabilization on producers and consumers, both in the short run, and in the long run, when producers have adjusted their production decisions to take account of the change in the price distribution. We derive conditions under which (a) both producers and consumers may be better off; and (b) both producers and consumers may be worse off. Moreover, we show that the long-run effects may differ not only quantitatively but also qualitatively from the short-run effects. The anomalous results may occur even with reasonable assumptions concerning production functions and utility functions of producers and consumers.

Favorable Selection with Asymmetric Information

Abstract: In his well-known "lemons" paper, Akerlof [1970] shows that when sellers know more about the quality of their product than the buyers do, adverse selection is likely to result. His argument may be put as follows: Let x be the money-value of the utility that the seller gets from owning (one unit of) a good. The goods all look alike to the buyers, so they all sell at the same price. Let w be this price. But then the sellers for whom x > w will withdraw from the market, leaving behind only those for whom x w represents adverse selection from the point of view of the buyers because the high-quality cars are selected out of the market. Wilson's generalization of Akerlofs model has the same property [Wilson, 1980]. The basic reason is that in the population of used cars, utilities of buyers and of sellers are positively correlated because of the hierarchical nature of automobile quality. Applications of the adverse selection model to the labor market [Greenwald, 1979; Stiglitz, 1976; Weiss, 1980] also assume that labor quality (productivity) is hierarchical: if one worker is better at task X than another, then he is also better at task Y. The consequence is that adverse selection prevails in markets where workers' productivities are not observable. The present paper shows that once one abandons the assumption of hierarchical quality, the presence of uncertainty and asymmetric information may result in favorable selection rather than adverse selection. This point is made within the context of an elaboration of Roy's [1951] model of comparative advantage in the labor market. The model is presented in Section II, and the equilibrium is discussed in Section III. A favorable selection equilibrium is radically different from an

The Effect of Federal Debt-Management Policy on Corporate Bond and Equity Yields

Abstract: In theory, Federal debt-management policy potentially plays an important role in determining Treasury and private security yields. However, empirical studies have been unable to detect any significant effects from Federal debt-management. In large part the insignificance of relative asset supply effects associated with Federal debt-management policy may result from the use of unrestricted reduced-form models of interest rate determination. Using a disaggregated structural model of the markets for corporate bonds, equities, and four distinct maturity classes of Treasury securities, Federal debt-management policy is found to affect Treasury and private security yields significantly. Furthermore, the yields on corporate bonds and equities are influenced disproportionately.

Incentive Compatibility in Bargaining Under Uncertainty

Abstract: The following sections are included:A MODEL OF BARGAINING UNDER UNCERTAINTY AND THE EFFICIENCY PROBLEMINCENTIVE-COMPATIBLE PRICING PROCEDURES: IMPOSSIBILITY AND POSSIBILITY RESULTSCONCLUSIONREFERENCES

Social Opportunity Costs and Immiserizing Growth: Some Observations on the Long Run Versus the Short

Abstract: Social opportunity costs of labor and capital are of importance to planners and loan officers alike, and negative social opportunity costs have been studied by theorists in the guise of immiserizing growth; see, for example, Bhagwati, Srinivasan, and Wan [1978]. In this note we present a unified treatment of such costs in the context of distortions of the Harris-Todaro variety to which increasing emphasis is being given in both trade and development theory. We pay particular attention to the distinction between the long run and the short, i.e., to situations when capital is intersectorally mobile and when it is not. Our results clash with our intuition developed on the basis of both (a) the differential wage setting of which the mobile capital version of our model is an obvious generalization; (b) the HarrisTodaro model with an exogenously given rigid wage in the urban sector and immobile capital. For example, we show that immiserizing growth is impossible with intersectorally mobile capital but possible when capital is nonshiftable. Section II presents the model, and Section III investigates the question of the effect of population growth and capital accumulation on the size of the unemployment pool. The results of Section III, of interest in themselves, are then used to discuss social opportunity costs and the possibility of immiserizing growth. Section V ends the paper with two concluding remarks.

The Optimal Taxation of International Investment Income: A Comment

Abstract: In a recent issue of this Journal, Thomas Horst [1980] presented an elegantly simple set of formulas for optimal taxes on foreign-source capital earnings. Unlike most previous treatments, Horst's incorporates interest-elastic supplies of capital. It also includes domestic taxes on capital. The presence of these taxes assumes special importance when capital supplies vary with the rate of return. To discover the optimal level of tax to impose on foreign-source capital earnings, one needs to know the opportunity cost of removing a unit of capital from the domestic economy. Horst's answer, following Harberger [1976] and others, is to use a weighted sum of gross and net rates of return. The assumption is that when a unit of capital is exported, part is taken from domestic production and part comes from new savings. The opportunity cost of the first part is the gross-of-tax rate of return, and of the second, the net-of-tax return to capital. Thus, we get a weighted sum. This formulation, because it explicitly considers the role of savings (or desired asset stocks) in setting the tax rate, is a big step forward. However, Horst's conclusions apply only under very limited conditions. First, it is necessary to recognize that capital is not a good, but rather constitutes expenditures on future goods. Tax policies toward capital affect welfare by altering relative prices of present and future goods, thereby altering the distribution of consumption over the life cycle (see Feldstein [1978]). Tax effects on capital supplies come about through this alteration in life cycle consumption patterns. Therefore, the best way to assess welfare effects of altering the capital supply is with a utility function that can be used to compare different consumption patterns, i.e., an intertemporal utility function. Section I below demonstrates that such a function can be used to obtain a general measure of the opportunity cost of exported capital