scispace - formally typeset
Search or ask a question

Showing papers in "Quarterly Journal of Economics in 1983"


Journal ArticleDOI
TL;DR: In this article, the authors present a theory of competition among pressure groups for political influence, based on the efficiency of each group in producing pressure, the effect of additional pressure on their influence, the number of persons in different groups, and the deadweight cost of taxes and subsidies.
Abstract: This paper presents a theory of competition among pressure groups for political influence. Political equilibrium depends on the efficiency of each group in producing pressure, the effect of additional pressure on their influence, the number of persons in different groups, and the deadweight cost of taxes and subsidies. An increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers. This analysis unifies the view that governments correct market failures with the view that they favor the politically powerful: both are produced by the competition for political favors.

3,965 citations


Journal ArticleDOI
TL;DR: In this article, an equilibrium price-quality schedule for markets in which buyers cannot observe product quality prior to purchase is derived, and the effects of improved consumer information and of a minimum quality standard on the equilibrium price quality schedule are studied.
Abstract: This paper derives an equilibrium price-quality schedule for markets in which buyers cannot observe product quality prior to purchase. In such markets there is an incentive for sellers to reduce quality and take short-run gains before buyers catch on. In order to forestall such quality cutting, the price-quality schedule involves high quality items selling at a premium above their cost. This premium also serves the function of compensating sellers for their investment in reputation. The effects of improved consumer information and of a minimum quality standard on the equilibrium price-quality schedule are studied. In general, optimal quality standards exclude from the market items some consumers would like to buy.

2,412 citations


Journal ArticleDOI
TL;DR: In this article, the authors build on the theory of irreversible choice under uncertainty to explain cyclical investment fluctuations and show that when individual projects are irreversible, agents must make investment timing decisions that trade off the extra returns from early commitment against the benefits of increased information gained by waiting.
Abstract: This paper builds on the theory of irreversible choice under uncertainty to give an explanation of cyclical investment fluctuations. The key observation is that, when individual projects are irreversible, agents must make investment timing decisions that trade off the extra returns from early commitment against the benefits of increased information gained by waiting. In an environment in which the underlying stochastic structure is itself subject to random change, events whose long-run implications are uncertain can create an investment cycle by temporarily increasing the returns to waiting for information.

2,352 citations


Journal ArticleDOI
TL;DR: In this paper, the authors evaluate an unnoticed comparative-static implication of this approach: some exogenous mergers may reduce the endogenous joint profits of the firms that are assumed to collude.
Abstract: The consequences of a horizontal merger are typically studied by treating the merger as an exogenous change in market structure that displaces the initial Cournot equilibrium. In the new equilibrium the merged firm is assumed to behave like a multiplant Cournot player engaged in a noncooperative game against other sellers. The purpose of this article is to evaluate an unnoticed comparative-static implication of this approach: some exogenous mergers may reduce the endogenous joint profits of the firms that are assumed to collude. Cournot's original example is used to illustrate this and other bizarre results that can occur in the Cournot framework if the market structure is treated as exogenous.

1,455 citations


Journal ArticleDOI
Roger H. Gordon1
TL;DR: In this article, the authors describe the types of externalities that one unit of government can create for non-residents through both its public goods decisions and its taxation decisions, and explore briefly what the central government might do to lessen the costs of decentralized decision-making.
Abstract: In a Federal system of government, each unit of government decides independently how much of each type of public good to provide, and what types of taxes, and which tax rates, to use in funding the public goods. In this paper we explore what types of problems can arise from this decentralized form of decision-making. In particular, we describe systematically the types of externalities that one unit of government can create for nonresidents, through both its public goods decisions and its taxation decisions. The paper also explores briefly what the central government might do to lessen the costs of decentralized decision-making.

460 citations


Journal ArticleDOI
TL;DR: A seller encountering risk-neutral buyers one at a time should, if commitments are feasible, quote a single take-it-or-leave-it price to each buyer as discussed by the authors.
Abstract: A seller encountering risk-neutral buyers one at a time should, if commitments are feasible, quote a single take-it-or-leave-it price to each. This strategy is superior to any other for finite or infinite buyer populations, whether there is learning or the distribution of buyer prices is known at the outset, with one object for sale or many. Although haggling may offer advantages in terms of price discrimination, these gains are more than offset by the losses it generates by encouraging buyers to refuse purchases at high prices.

416 citations


Journal ArticleDOI
John Bryant1

297 citations


Journal ArticleDOI
TL;DR: The authors discusses the issues involved in assigning inequality contributions to various components of income and highlights the problems that follow from having a number of possible decomposition rules, and warn against the indiscriminate use of decomposition formulae without first investigating their properties.
Abstract: Attempts have recently been made to assign inequality contributions to various components of income. This paper discusses the issues involved in such assignments and highlights the problems that follow from having a number of possible decomposition rules. U. S. data on the distribution of family incomes are used to examine the relative influence of these income components and to evaluate empirically the performance of different decomposition rules. A wide range of inequality contributions can be obtained, even when restricted to only “naturally†derived decomposition rules. Some of the results are plainly absurd and serve to warn against the indiscriminate use of decomposition formulae without first investigating their properties.

269 citations


Journal ArticleDOI
TL;DR: In this paper, the authors show how fluctuations of an erratic and unstable nature can emerge from the classical, deterministic economic growth process and explain why behavioral patterns change and why it may be so difficult to anticipate future events from the profile of past experience.
Abstract: This paper shows how fluctuations of an erratic and unstable nature can emerge from the classical, deterministic economic growth process. Implications of the analysis would appear to be at least two. First, pronounced changes in the way an economy behaves need not cause us to reject our understanding of how it works. Second, we need not seek in exogenous forces an explanation as to why behavioral patterns change and why it may be so difficult to anticipate future events from the profile of past experience.

223 citations



Journal ArticleDOI
TL;DR: In this paper, the authors describe two separate data sets within which they find just the opposite results and conclude that improving legitimate employment opportunities may be as effective, if not more effective, in reducing crime as is an increase in punishment, while increases in the certainty of punishment are positively related to participation in crime.
Abstract: Ann Dryden Witte [1980] has recently argued in this Journal that new support is found for the deterrent hypothesis (or the "economic model of crime") when individual data are employed to estimate the determinants of rearrest rates. Witte estimates a conventional economic model of crime using a rich and carefully constructed microdata set of released prisoners in North Carolina. Her principal findings are that (1) increases in the certainty and severity of punishment tend to reduce participation in crime (measured by number of arrests or convictions per month free), and (2) higher legal wages have an extremely weak deterrent effect on crime. In this comment I describe two separate data sets within which I find just the opposite results. Using a sample of offenders released from federal prisons in 1972, I find that increases in the severity of punishment are weakly related to participation in crime, while increases in the certainty of punishment are positively related to participation in crime. In addition, using a sample of male repeat property offenders released from Maryland prisons, I find that higher wages have a strong and consistent deterrent effect on crime. The conclusion is reached, at least from these data sets, that improving legitimate employment opportunities may be as effective, if not more effective, in reducing crime as is an increase in punishment.

Journal ArticleDOI
TL;DR: The model of the black market for dollars focuses on the interaction of portfolio decisions relevant to the holding of asset stocks and the determinants of net flows of dollars associated with tourism and smuggling as mentioned in this paper.
Abstract: The model of the black market for dollars focuses on the interaction of portfolio decisions relevant to the holding of asset stocks and the determinants of net flows of dollars associated with tourism and smuggling. A partial-equilibrium model of the black market shows that the level of the premium is determined by the official real exchange rate and the official, depreciation-adjusted interest differential, as well as seasonal factors associated with tourism. Expectations of future exchange rate changes, under rational expectations, are shown to affect the current level of the black market premium. The empirical evidence provides ample support for the role of the key determinants of the premium as well as for an important seasonal pattern. The magnitude of the seasonal variation is evidence of the imperfect substitutability between black dollars and cruzeiro assets in portfolios.


Journal ArticleDOI
TL;DR: In this article, the authors explore the portfolio behavior of investors differing with respect to both tax rates and risk aversion, emphasizing the role of constraints on individual and firm behavior in ensuring the existence of and characterizing portfolio equilibrium.
Abstract: This paper explores the portfolio behavior of investors differing with respect to both tax rates and risk aversion, emphasizing the role of constraints on individual and firm behavior in ensuring the existence of and characterizing portfolio equilibrium. Under certain conditions on the securities available in the market, which also are necessary for shareholders to be unanimous in supporting firm value maximization, investors will be segmented by tax rate into two groups, one specialized in equity and the other in debt. Though the relative wealths of the two groups determine the aggregate debt-equity ratio, each firm will be indifferent to its financial policy.

Journal ArticleDOI
TL;DR: In this paper, the authors studied the efficient agreements about the dependence of workers' earnings on employment, when the employment level is controlled by firms and showed that such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk.
Abstract: This paper studies the efficient agreements about the dependence of workers' earnings on employment, when the employment level is controlled by firms. The firms' superior information about profitability conditions is responsible for this form of contract governance. Under plausible assumptions, such agreements will cause employment to diverge from efficiency as a byproduct of their attempt to mitigate risk. It is shown that, if leisure is a normal good and firms are risk-neutral, employment is always above the efficient level. Such a one-period implicit contracting model cannot, therefore, be used to "explain" unemployment as a rational byproduct of risk sharing between workers and a risk-neutral firm under conditions of asymmetric information.

Journal ArticleDOI
TL;DR: In this paper, a simple two-period theoretical model of a two-tiered labor market was constructed to show how the proportional importance of voluntary labor-tying contracts may increase with yield-increasing improvements and with a tightening of the labor market.
Abstract: In this paper we show how tied labor, contrary to its common characterization as a feudal relic and as a symptom of economic stagnation, may actually be strengthened by capitalist agricultural development. We construct a simple two-period theoretical model of a two-tiered labor market to show how the proportional importance of voluntary labor-tying contracts may increase with yield-increasing improvements and with a tightening of the labor market. We then provide in support of these hypotheses some general historical as well as more detailed econometric evidence from a variety of cross-sectional data in rural India.

Journal ArticleDOI
TL;DR: In this article, a two-period, single-good model is used to propose consistent notions of labor market equilibrium for long-term employment contracts both when labor is specialized and cannot move in the second period and when there is free mobility without costs.
Abstract: The paper presents a labor market equilibrium analysis of implicit contract theory. A two-period, single-good model is used to propose consistent notions of labor market equilibrium for long-term employment contracts both when labor is specialized and cannot move in the second period and when there is free mobility without costs. The result that long-term contracts emerge in equilibrium even without mobility costs is novel and contrary to common beliefs. The main features of equilibrium are that (risk-neutral) firms will insure (risk-averse) workers against downside risk, yielding downward rigid wages. Wages are not fully rigid (as in earlier work on contract theory) because workers may quit and wages have to be bid up to retain them. The firm gets its return of the insurance deal by paying less than marginal product in the first period. The resulting equilibrium is second best and lies between productive efficiency and full insurance. Workers gain from long-term contracts in comparison to spot markets; whereas owners may not. In the model with specialized skills there exist transfer payments such that both parties are better off within an equilibrium with long-term contracts.

Journal ArticleDOI
TL;DR: In an economy without informational and other distortions, entrepreneurs and workers can write labor contracts that support a Pareto optimal allocation of resources as discussed by the authors, in which consumers and workers are better informed about the state of nature than are their workers.
Abstract: In an economy without informational and other distortions, entrepreneurs and workers can write labor contracts that support a Pareto optimal allocation of resources. This paper is an attempt to characterize contracts when enterpreneurs are better informed about the state of nature than are their workers. Asymmetric information generally results in a suboptimal allocation of both risk and worker effort; in particular, if consumption and leisure are perfect substitutes, employment will be less than fully Pareto optimal in all but the most favorable states of nature.

ReportDOI
TL;DR: In this paper, a two-period model of temporary equilibrium with rationing is presented, paying particular attention to agents' expectations of future constraints, and it is shown that with arbitrary constraint expectations many different types of current equilibria may be consistent with the same set of (current and expected future) wages and prices, and that constraint expectations tend to be self-fulfilling.
Abstract: A two-period model of temporary equilibrium with rationing is presented, paying particular attention to agents' expectations of future constraints. it is shown that with arbitrary constraint expectations many different types of current equilibria may be consistent with the same set of (current and expected future) wages and prices, and that constraint expectations tend to be self-fulfilling (e.g., a higher expectation of Keynesian unemployment tomorrow increases the probability that it will prevail today). In addition, rational constraint expectations (i.e., perfect foresight of future constraint levels) are shown to enhance rather than reduce the effectiveness of government policy.

Journal ArticleDOI
TL;DR: In this article, an explanation of involuntary umemployment arising as a consequence of asymmetric information between firms and workers is provided, defined as a situation where ex post gains to trade exist.
Abstract: This paper provides an explanation of involuntary umemployment arising as a consequence of asymmetric information between firms and workers. Involuntary unemployment is defined as a situation where ex post gains to trade exist. A model of labor contracts is developed where the allocations are not ex post optimal. It is shown that inferiority of leisure is a necessary and sufficient condition for the existence of involuntary unemployment.

Journal ArticleDOI
TL;DR: In this paper, the authors explore how international trade affects plant size, the degree of product diversity, and excess capacity in the open economy and compare the model to the traditional Hecksher-Ohlin model.
Abstract: The paper develops new testable implications for monopolistic competition in the open economy. Within a two-sector model we explore how international trade affects plant size, the degree of product diversity, and excess capacity. The analysis then focuses on how trade affects the degree of domestic and international concentration, intersectoral capital mobility, and output in the competitive sector. Finally, we compare the model to the traditional Hecksher-Ohlin model and find that many of the central propositions still hold.

Journal ArticleDOI
TL;DR: Corporate average fuel economy (CAFE) as discussed by the authors has been proposed as an alternative to uniform vehicle standards for automotive emissions standards as well as a tax on gas guzzler vehicles.
Abstract: The search for more efficient, market-oriented regulatory techniques has produced significant recent advances in several areas. Among these would appear to be the corporate average fuel economy (CAFE) approach to reducing gasoline consumption by the domestic automobile fleet. The 1975 Energy Policy and Conservation Act required manufacturers to sell fleets with a sales-weighted average of 18 miles per gallon in the 1978 model year, 19 mpg in 1979, 20 mpg in 1980, and 27.5 mpg in 1985.1 The standards for the four intervening years were subsequently set by the National Highway Traffic Safety Administration at 22, 24, 26, and 27 miles per gallon. The advantages of the averaging approach over uniform vehicle standards or a "gas guzzler" tax are two-fold. First, CAFE permits each firm to increase its overall fuel efficiency in the cheapest manner, since the costs of mileage improvements for different vehicles may be rather different.2 And second, it permits the continuation of a diverse product mix to the consumer, since a uniform standard would probably result in the demise of certain models. These arguments for averaging are now so widely accepted that the principle is being proposed, inter alia, for automotive emissions standards as well. That is, instead of maximum allowable emissions for each and every model, manufacturers could produce models with various levels of pollutants

Journal ArticleDOI
TL;DR: In this article, the authors examined the effect of the presence of a commodity futures market upon the price formation process in a stochastic rational expectations framework and proposed an optimizing model with price uncertainty and risk aversion to solve equilibrium distributions of prices for nonstorable commodities.
Abstract: The paper examines the effect of the presence of a commodity futures market upon the price formation process in a stochastic rational expectations framework. An optimizing model with price uncertainty and risk aversion is used in order to solve equilibrium distributions of prices for nonstorable commodities. The existence of futures trading does not affect the degree of short-term spot price fluctuations. However, if the commodity market disturbance that originates from stochastic consumption demand is serially dependent, then the long-term price variation is smaller with a futures market than without it. Futures prices fluctuate less variably over time than spot and expected prices. Finally, there exists a futures intervention rule whereby the authority can stabilize spot prices and raise the overall welfare of society.

Journal ArticleDOI
TL;DR: This article examined the market for the sale of slaves in pre-Civil War New Orleans and found that slaves brought to market may on average have been of 20 percent to 40 percent lower quality than the slave population in general.
Abstract: This paper seeks to cast some light on the importance of adverse selection in competitive markets by examining the market for the sale of slaves in pre-Civil War New Orleans. Estimates of the degree of adverse selection in the New Orleans market are obtained by examining the relative prices of slaves from different regions of origin. These estimates indicate that slaves brought to market may on average have been of 20 percent to 40 percent lower quality than the slave population in general, and that good slaves were perhaps three times less likely to be sold than low quality ones.


Journal ArticleDOI
TL;DR: In this article, the authors consider pricing and depletion of an exhaustible nonrenewable resource in an economy wherein domestic consumption is provided for by supplementing extraction from the economy's own resource stock with imports, the future supply of which is not assured.
Abstract: This paper considers pricing and depletion of an exhaustible nonrenewable resource in an economy wherein domestic consumption is provided for by supplementing extraction from the economy's own resource stock with imports, the future supply of which is not assured. The socially optimal response to threat of trade disruption is a more-conservationist depletion program for the domestic resource stock than would be called for, if import supplies were assured to persist. Competitive domestic firms adopt the socially optimal conversationist program. However, firms anticipating domestic market power after the disruption of import supplies are revealed to overextract the domestic resource stock. 33 references, 2 figures.

Journal ArticleDOI
TL;DR: The authors analyzes the problems that arise in estimating the efficiency loss from misallocation of resources in Soviet industry, as revealed by the inequality of marginal rates of substitution among factors in the eight branches of Soviet industry.
Abstract: The paper analyzes the problems that arise in estimating the efficiency loss from misallocation of resources in Soviet industry, as revealed by the inequality of marginal rates of substitution among factors in the eight branches of Soviet industry. Econometric estimates of production functions in these branches are utilized to reach estimates of the loss arising from interbranch misallocation of capital and labor deployed in Soviet industry. This loss appears to be nonnegligible, ranging from a low of about 3 to 4 percent to a high of 10 percent of efficient factor use, and to be rising over time. Thus, an added reason for the current deceleration in Soviet industrial (and overall) growth is suggested.

Journal ArticleDOI
TL;DR: In this paper, the authors restrict each industry's capital reduction to its rate of depreciation, which represents an industry-specific type of capital that may earn a lower equilibrium return and suggest that previous estimates of efficiency gains from integration of U. S. personal and corporate income taxes are overstated by $5 billion.
Abstract: In estimating the economic effects of public policy, comparative static models typically assume homogenous factors that are either mobile or immobile. For changes designed to improve factor allocations, the former assumption would overstate welfare gains, while the latter would understate them. The model in this paper restricts each industry's capital reduction to its rate of depreciation. The stock of depreciated capital represents an industry-specific type of capital that may earn a lower equilibrium return. This model suggests that previous estimates of efficiency gains from integration of U. S. personal and corporate income taxes are overstated by $5 billion.

Journal ArticleDOI
TL;DR: In this paper, a share parameter is introduced to describe the manner in which profits are divided among rivals when one firm is successful in its search for a valuable resource stock, and a unique value of A is defined that maximizes expected industry profits, by guiding noncooperative oligopolists to choose the profit-maximizing exploration rate.
Abstract: Earlier models of innovation under oligopolistic rivalry are modified to include a “share parameter†Aƒ, describing the manner in which profits are divided among rivals when one firm is successful in its search for a valuable resource stock. There is a unique value of Aƒ that maximizes expected industry profits, by “guiding†noncooperative oligopolists to choose the profit-maximizing exploration rate. Moreover, setting Aƒ at this maximizing valueâ€â€which always allocates some share of industry profits to the “losers†in the exploration raceâ€â€leads to an exploration rate identical to what would be chosen by a jointly managed cartel.

Journal ArticleDOI
TL;DR: This article examined the shadow prices for project evaluation under alternative assumptions about how equilibrium is restored by adjusting domestic expenditures or tariff rates, except insofar as the relative shadow prices of tradeables remain their relative border prices.
Abstract: For purposes of social cost-benefit analysis, a project may be viewed as a disturbance to the economy, displacing it from some initial equilibrium to a new one. But the new configuration will depend on which particular variables adjust to restore equilibrium. This paper examines the shadow prices for project evaluation under alternative assumptions about how equilibrium is restored. When the government reacts by altering its foreign exchange reserves, the shadow prices coincide with those advocated in the manuals on social cost-benefit analysis. However, if the government adjusts its domestic expenditures or tariff rates, the shadow prices will differ from those of the manuals, except insofar as the relative shadow prices of tradeables remain their relative border prices. The paper first presents the model, followed by two cases in which domestic prices and wage rates do not vary because ad valorem tariffs are fixed and one case in which they are endogenous.