Showing papers in "Quarterly Journal of Economics in 1990"
TL;DR: In this article, the authors propose an elaboration of the Diamond model that permits multiple, locally stable stationary states, and this multiplicity is due to increasing social returns to scale in the accumulation of human capital.
Abstract: Standard one-sector growth models often have the counterfactual implication that economies with access to similar technologies will converge to a common balanced growth path. We propose an elaboration of the Diamond model that permits multiple, locally stable stationary states. This multiplicity is due to increasing social returns to scale in the accumulation of human capital.
2,070 citations
TL;DR: In this paper, the fair wage-effort hypothesis is introduced, which states that workers proportionately withdraw effort as their actual wage falls short of their fair wage, and that such behavior causes unemployment.
Abstract: This paper introduces the fair wage-effort hypothesis and explores its implications. This hypothesis is motivated by equity theory in social psychology and social exchange theory in sociology. According to the fair wage-effort hypothesis, workers proportionately withdraw effort as their actual wage falls short of their fair wage. Such behavior causes unemployment and is also consistent with observed cross-section wage differentials and unemployment patterns.
2,018 citations
TL;DR: This article examined the effects of job security provisions on employment in European countries and found that the severance pay requirements reduce employment, and that new workers are less likely to be hired in a perfectly functioning market.
Abstract: European countries have enacted various job security provisions over the last 30 years. Employers are required to pay workers on separation or to give advance notice of termination. In anything less than a perfectly functioning market, there are effects of the provisions on employment. Incumbents are more likely to retain their jobs, but new workers are less likely to be hired. An examination of the European data suggests that severance pay requirements reduce employment.
1,361 citations
TL;DR: This article examined returns over short time intervals since systematic changes in fundamental valuation over intervals like a week should not occur in efficient markets and found that the "winners" and "losers" one week experience sizeable return reversals the next week in a way that reflects apparent arbitrage profits which persist after corrections for bid-ask spreads and plausible transactions costs.
Abstract: Predictable variation in equity returns might reflect either (1) predictable changes in expected returns or (2) market inefficiency and stock price "overreaction." These explanations can be distinguished by examining returns over short time intervals since systematic changes in fundamental valuation over intervals like a week should not occur in efficient markets. The evidence suggests that the "winners" and "losers" one week experience sizeable return reversals the next week in a way that reflects apparent arbitrage profits which persist after corrections for bid-ask spreads and plausible transactions costs. This probably reflects inefficiency in the market for liquidity around large price changes.
1,155 citations
TL;DR: The authors argue that financial instability occurs when entrepreneurs who want to undertake investment projects have low net worth; the heavy reliance on external finance that this implies causes the agency costs of investment to be high.
Abstract: Financial stability is an important goal of policy, but the relation of financial stability to economic performance and even the meaning of the term itself are poorly understood. This paper explores these issues in a theoretical model. We argue that financial instability, or fragility, occurs when entrepreneurs who want to undertake investment projects have low net worth; the heavy reliance on external finance that this implies causes the agency costs of investment to be high. High agency costs in turn lead to low and inefficient investment. Standard policies for fighting financial fragility can be interpreted as transfers that maintain or increase the net worth of potential borrowers.
928 citations
TL;DR: In this article, the authors introduce a parametric class of Kreps-Porteus nonexpected utility preferences (generalized isoelastic utility) which distinguishes attitudes toward risk from behavior toward intertemporal substitution, and some theoretical and empirical implications for macroeconomics of these state and time-nonseparable preferences are examined.
Abstract: This paper introduces, within the context of an infinite optimal consumption problem, a parametric class of Kreps-Porteus nonexpected utility preferences--generalized isoelastic utility--which distinguishes attitudes toward risk from behavior toward intertemporal substitution. Some of the theoretical and empirical implications for macroeconomics of these state- and time-nonseparable preferences are examined. Copyright 1990, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
924 citations
TL;DR: In this article, a model is developed in which consumers' and lenders' behavior jointly determines the probability that a consumer is rationed in the credit market, and this probability is then used to identify the characteristics of the consumers who are likely to be credit constrained.
Abstract: An important assumption of the life-cycle model of consumption is the postulate of perfect capital markets. This hypothesis has recently been challenged by substantial empirical evidence. Hall and Mishkin [1982], using the Panel Study of Income Dynamics, estimate that 20 percent of United States families are liquidity constrained. Mariger [1986] derives a life-cycle model with endogenous liquidity constraints and, using a cross section, estimates this fraction to be 19.4 percent. Hubbard and Judd [1986] simulate a model with a constraint on net worth which shows that with reasonable assumptions about preferences, 19.0 percent of United States consumers are liquidity constrained. The emerging consensus points therefore to a fraction of approximately 20 percent of the population behaving in a manner that is inconsistent with the pure life-cycle model. In addition, Hayashi [1985] and Zeldes [1989] investigate the correlation among consumption, wealth, and income for various population groups and infer that liquidity constraints are more important for younger families with low levels of wealth and saving. The main limitation of these studies is that, in their data sets, constrained consumers are not observable and have to be identified via indirect evidence. Thus, there is as yet little firm evidence about the characteristics of the consumers who are likely to be credit constrained. This paper adopts an approach that differs from previous tests for liquidity constraints because it makes use of data where constrained consumers are observable, and explicitly links their existence to credit market imperfections and personal characteristics. The data, drawn from the 1983 Survey of Consumer Finances (SCF) and described in Section II, provide information on individuals whose request for credit has been rejected by financial intermediaries. In Section III a model is developed in which consumers' and lenders' behavior jointly determines the probability that a consumer is rationed in the credit market. This probability is then
790 citations
TL;DR: This article argued that the collapse of stock prices in October 1929 generated temporary uncertainty about future income which led consumers to forgo purchases of durable goods, and that this uncertainty affected consumer behavior is shown by the fact that spending on consumer durables declined drastically in late 1929, while spending on perishable goods rose slightly.
Abstract: This paper argues that the collapse of stock prices in October 1929 generated temporary uncertainty about future income which led consumers to forgo purchases of durable goods. That the Great Crash generated uncertainty is evidenced by the decline in surety expressed by contemporary forecasters. That this uncertainty affected consumer behavior is shown by the fact that spending on consumer durables declined drastically in late 1929, while spending on perishable goods rose slightly. This effect is confirmed by the fact that there is a significant negative relationship between stock market variability and the production of consumer durables in the prewar era.
437 citations
TL;DR: The authors found that managers believe that perceptions of fairness play a major motivational role in labor markets and that a "fair" wage policy is a good deal more complicated than simply not cutting wages.
Abstract: A small interview survey was undertaken to see how actual wage-setters would react to the central ideas of several economic theories of wage stickiness. Wage cuts were surprisingly prevalent in recent years, despite the booming economy. The strongest finding was that managers believe that perceptions of fairness play a major motivational role in labor markets and that a "fair" wage policy is a good deal more complicated than simply not cutting wages. We also found substantial evidence for money illusion and against the adverse-selection version of the efficiency wage model. Why are wages sticky, especially in the downward direction? Does the stickiness apply to nominal, real, or relative wages? Although these questions are central to at least some macroeconomic theories, satisfactory answers have eluded economists for decades-though not for lack of theoretical effort. Almost a decade ago, Arthur Okun [1981, p. 9] opined that "the Keynesian wage floor has been subjected to more Talmudic exegesis than any other passage in the history of economics." In the intervening years the theoretical literature on wage rigidity has exploded. By now economists have more theories than they know what to do with. Empirical research is supposed to discriminate among competing theories; and econometric evidence may eventually eliminate some theories from contention. Currently, though, it seems to us that new theories are sprouting up faster than old ones are being rejected. Part of the problem is that many theories of wage rigidity rely on unobservable variables and hence are difficult to reject with the kinds of data that econometricians usually have. With this problem in mind, we turn in this study to an unconventional type of data, the sort that economists (alone among social scientists) rarely use: we actually asked a small sample of wage-setters about the nature and sources of wage rigidity in their own companies.1
415 citations
TL;DR: The authors analyzes the trade-off between the policies that maximize their chances of reelection and their most preferred policies (or the policies most preferred by the constituency which they represent) in a dynamic electoral model in which the voters are not fully informed about the preferences of the incumbent.
Abstract: Politicians face a trade-off between the policies that maximize their chances of reelection and their most preferred policies (or the policies most preferred by the constituency which they represent). This paper analyzes this trade-off in a dynamic electoral model in which the voters are not fully informed about the preferences of the incumbent. First, we show that the incumbent follows a policy which is intermediate between the other party's ideal policy and his own ideal policy. Second, we show that, often, the incumbent has an incentive to choose procedures which make it difficult for voters to pinpoint his preferences with absolute precision. Thus, politicians may prefer to be "ambiguous."
371 citations
TL;DR: In this paper, the question of whether competitive acquisition of firms by their rivals can result in complete or partial monopolization of a homogeneous product industry is modeled in terms of two distinct three-stage non-coopera-tive games.
Abstract: We address the question of whether competitive acquisition of firms by their rivals can result in complete or partial monopolization of a homogeneous product industry. This question is modeled in terms of two distinct three-stage noncoopera-tive games. Analysis of subgame perfect pure strategy Nash equilibria of these games discloses that, under simplifying assumptions, monopolization of an industry through acquisition is limited to industries with relatively few firms. Partial monopolization is either limited in scope or can be completely eliminated by prohibiting any owner from acquiring over 50 percent of the firms in the industry.
TL;DR: This article found that on average, young black families hold 18 percent of the wealth of young white families, and hold their wealth in proportionately different forms, even after controlling for racial differences in income and other demographic factors.
Abstract: Using data from the 1976 and 1978 National Longitudinal Surveys of young men and young women, this study examines racial differences in the magnitude and composition of wealth and the reasons for them. On average, young black families hold 18 percent of the wealth of young white families, and hold their wealth in proportionately different forms. Even after controlling for racial differences in income and other demographic factors, as much as three quarters of the wealth gap remains unexplained. We speculate on the causes for this, concluding that racial differences in intergenerational transfers and to a lesser extent barriers to the accumulation of business and home equity most likely play a role.
TL;DR: The authors empirically examined the importance of explicitly accounting for the layoff-rehire process in the analysis of unemployment outcomes in the United States and found that the spells of individuals' who initially expect to be recalled account for much more of the unemployment of unemployment insurance (UI) recipients than do spells actually ending in recall.
Abstract: This paper empirically examines the importance of explicitly accounting for the layoff-rehire process in the analysis of unemployment outcomes in the United States. We find that the spells of individuals' who initially expect to be recalled account for much more of the unemployment of unemployment insurance (UI) recipients than do spells actually ending in recall. Our results indicate that the recall and new job escape rates from unemployment have quite different time patterns and are often affected in opposite ways by explanatory variables. We also find that the probability of leaving unemployment both through recalls and new job finding increases greatly around the time that UI benefits lapse. Over the past fifteen years many studies have empirically analyzed the determinants of individual unemployment spell durations in the United States.' Much of this literature has used a job search framework in which the unemployed are viewed as permanently displaced workers who are unattached to jobs. The possibility of recall to a former job, a process not requiring search, has been omitted from explicit consideration in the majority of these studies.2 An explicit treatment of the layoff-rehire process is necessary for a proper understanding of the determinants of unemployment durations and of the impacts of unemployment policies in the United States for at least three reasons. First, temporary layoffs in which workers are often rehired by their original employers are a quantitatively quite important feature of the U. S. labor market.3 Second, expectations concerning the likelihood of recall are likely to affect the responses of employers and unemployed workers to labor market interventions such as reemployment bonuses and subsidies
TL;DR: The fact that most elderly U S individuals maintain a flat age-wealth profile, rather than buy individual life annuities, contradicts the standard life-cycle consumption model as discussed by the authors.
Abstract: The fact that most elderly U S individuals maintain a flat age-wealth profile, rather than buy individual life annuities, contradicts the standard life-cycle consumption model Average expected yields on individual life annuities in the United States during 1968–1983 were lower by 421–613 percent, or 243–435 percent after allowing for adverse selection, than yields on plausible alternative investments Simulations of a model of saving and portfolio allocation show that during the early retirement years such yield differentials can account for the absence of annuity purchases even without a bequest motive At older ages the combination of such yield differentials and a bequest motive can do so It is common experience that as we grow older and nearer to eternity we become more, not less, anxious about money [Derek Brewer, Chaucer and His World, p 213]
TL;DR: In this paper, the authors provided empirical evidence on the information in the term structure for longer maturities about both future inflation and real interest rates, showing that the slope of the term-structured nominal interest rate has a great deal of predictive power for future changes in inflation.
Abstract: This paper provides empirical evidence on the information in the term structure for longer maturities about both future inflation and the term structure of real interest rates. The evidence indicates that there is substantial information in the longer maturity term structure about future inflation: the slope of the term structure does have a great deal of predictive power for future changes in inflation. On the other hand, at the longer maturities, the term structure of nominal interest rates contains very little information about the term structure of real interest rates. These results are strikingly different from those found for very short-term maturities, six months or less, in previous work. For maturities of six months or less, the term structure contains no information about the future path of inflation, but it does contain a great deal of information about the term structure of real interest rates. The evidence in this paper does indicate that, at longer maturities, the term structure of interest rates can be used to help assess future inflationary pressures: when the slope of the term structure steepens, it is an indication that the inflation rate will rise in the future and when the slope falls, it is an indication that the inflation rate will fall. However, we must still remain cautious about using the evidence presented here to advocate that the Federal Reserve should target on the term structure in conducting monetary policy. A change in Federal Reserve operating procedures which focuses on the term structure may well cause the relationship between the term structure and future inflation to shift, with the result that the term structure no longer remains an accurate guide to the path of future inflation. If this were to occur, Federal Reserve monetary policy could go far astray by focusing on the term structure of interest rates.
TL;DR: In this article, the relationship between inter vivos intergenerational transfers and liquidity constraints was investigated and empirical transfer patterns matched those predicted from a model in which transfers are allocated to liquidity-constrained consumers.
Abstract: A growing body of evidence indicates that liquidity constraints could affect a substantial proportion of U. S. consumers, but little is known about why these constraints might exist. An important, but little-explored, issue is the relationship between inter vivos intergenerational transfers and liquidity constraints. These transfers can ease borrowing constraints. Empirical transfer patterns match those predicted from a model in which transfers are allocated to liquidity-constrained consumers. In particular, the distinction between current and permanent incomes of potential recipients is a key aspect of private-transfer behavior. The findings have important implications for our understanding of consumer behavior.
TL;DR: In this article, the Samaritan's dilemma is studied in the context of the family and the Ricardian equivalence theorem is shown to imply that altruism by a family member will lead other selfish members to act efficiently from the family viewpoint.
Abstract: A familiar result in the economic theory of the family is Becker's rotten-kid theorem. This theorem states that altruism by a family member will lead other selfish members to act efficiently from the family viewpoint. We extend Becker's one-period model to two periods and show that parental altruism can result in an inefficiency known in other contexts as the Samaritan's dilemma. Implications of this for transfer arrangements within the family and for the Ricardian equivalence theorem are drawn.
TL;DR: The analysis of rational insurance purchasing and hedging strategies has been conducted on the assumption that insurance policies are free of insolvency (default) risk, which stands in sharp contrast to the actuarial literature.
Abstract: Much of the analysis of rational insurance purchasing and hedging strategies has been undertaken on the basis of the expected utility hypothesis. This decision framework has been used to reformulate the Bernoulli principle that a risk averter rationally would fully insure at a fair premium. Other applications include the analysis of insurance at unfair premiums (Mossin [1968 ] and Smith [1968]), the effects of state-dependent utility on the rational insurance purchase (Cook and Graham [1977]), the effects of risky background wealth (Doherty and Schlesinger [1983] and Mayers and Smith [1983]), and the design of the optimal insurance policy (Raviv [1979] ). Such analyses have been conducted on the assumption that insurance policies are free of insolvency (default) risk. This assumption stands in sharp contrast to the actuarial literature in which the insolvency risk, or probability of ruin, is a central focus of attention.
TL;DR: This paper examined whether race directly affects the value of a player in the market for baseball cards and found that consumer discrimination can reduce productivity, but it is often impossible to tell whether differential productivity is the effect of discrimination or of differential ability.
Abstract: Because consumer discrimination can reduce productivity, it is often impossible to tell whether differential productivity is the effect of discrimination or of differential ability. Detailed data for the sports labor market make it possible to separate consumer discrimination from ability. We use a unique approach to determine whether the entertainment value of baseball players is related to their race: we examine whether race directly affects the value of a player in the market for baseball cards. In contrast to studies that use salaries, there is no room for owner or coworker discrimination. Our evidence supports the hypothesis of consumer discrimination.
TL;DR: In this article, the authors show that the largest firms exit first and shrink to the size of their smaller rivals in a subgame-perfect equilibrium, where production is all or nothing.
Abstract: In declining industries capacity must be reduced in order to restore profitability. Who bears this burden? Where production is all or nothing, there is a unique subgame-perfect equilibrium: the largest firms exit first [Ghemawat and Nalebuff, 1985]. In this paper firms continuously adjust capacity. Again, there is a unique subgame-perfect equilibrium. All else equal, large firms reduce capacity first, and continue to do so until they shrink to the size of their formerly smaller rivals. Intuitively, bigger firms have lower marginal revenue and correspondingly greater incentives to reduce capacity. This prediction is supported by empirical findings.
TL;DR: The existence of dual equilibria is a result of the government's operating rules as discussed by the authors, and the existence of a unique equilibrium is attained when the government sets a nominal anchor for the economy.
Abstract: There may be both a high and a low inflation equilibrium when the government finances the deficit through seigniorage. Under rational expectations the high inflation equilibrium is stable, and the low inflation equilibrium unstable; under adaptive expectations or lagged adjustment of money balances with rational expectations, the low inflation equilibrium may be stable. Adding bond financing, dual equilibria remain if the government fixes the real interest rate, but a unique equilibrium is attained when the government sets a nominal anchor for the economy. The existence of dual equilibria is thus a result of the government's operating rules.
TL;DR: In this article, the authors argue that there would be more employment if unions bargained over employment, and not only over wages, and most economists seem to answer No. 1.
Abstract: Would there be more employment if unions bargained over employment, and not only over wages? Most economists seem to answer Yes.1
TL;DR: It is demonstrated that under certain circumstances, rules that limit discretion increase the informativeness of disclosures and thus improve economic decisions.
Abstract: In this paper a party with private information can verifiably disclose some, but not all, of his information. The optimal amount of discretion to allow the informed party is studied. That is, should the informed party be allowed unlimited discretion in choosing which elements of his information set to disclose, or should restrictions be imposed that limit this discretion? The model is formulated in the spirit of a "persuasion game." It is demonstrated that under certain circumstances, rules that limit discretion increase the informativeness of disclosures and thus improve economic decisions.
Abstract: This paper derives systems of demand equations for distinguishing between Nash-Cournot and Lindahl behavior in a group that either shares a pure public good or an activity that provides a private and a pure public joint product. Systems of simultaneous equations are estimated based upon Nash-Cournot and Lindahl behavior for a sample of ten NATO allies for the 1956–1987 period. Nonnested hypothesis tests support the Nash-Cournot specification for five of the ten sample allies. No evidence of Lindahl behavior is found. The Nash-Cournot joint-product specification outperforms the pure public model for all sample allies.
TL;DR: This paper used tax return data for U.S. nonfinancial corporations for the period 1971-1982 to estimate the importance of restrictions on the ability of firms to use tax credits and to obtain refunds for tax losses.
Abstract: This study uses tax return data for U. S. nonfinancial corporations for the period 1971–1982 to estimate the importance of restrictions on the ability of firms to use tax credits and to obtain refunds for tax losses. Our results suggest that the incidence of such unused tax benefits increased substantially during the early 1980s, though we do not find these increases attributable to increased investment incentives during that period. We present estimates of the marginal tax rate on interest payments which take into account unused tax benefits and emphasize the importance of distinguishing current tax payments from marginal tax rates in estimating the incentive to invest.
TL;DR: This paper examined the relationship between citations of published papers and comments provided by reviewers and editors and found that reviewers' comments demonstrate a positive impact on subsequent citation of papers, while comments made by editors show no such impact.
Abstract: Do referees employed by journals merely screen acceptable from unacceptable manuscripts or are they charged with an additional value-adding responsibility vis-a-vis the papers they review? Drawing from editorial correspondence provided by survey respondents, I address this question by examining the relationship between citations of published papers and comments provided by reviewers and editors. Referees' comments demonstrate a positive impact on subsequent citation of papers, while comments made by editors show no such impact. Value-adding by editors appears to derive principally from efficient matching of papers with reviewers.
TL;DR: In this paper, a simple model of labor disputes based on the hypothesis that unions use strikes to infer the profitability of the firm is proposed, and the model posits the existence of a negatively sloped resistance curve between wages and strike duration.
Abstract: This paper describes a simple model of labor disputes based on the hypothesis that unions use strikes to infer the profitability of the firm. The model posits the existence of a negatively sloped resistance curve between wages and strike duration. In addition, it offer a series of predictions relating wage and strike outcomes to changes in the expected profitability of the firm and changes in the alternative opportunities of striking workers. These implications are tested using data on wage outcomes, strike probabilities, and strike durations for a large sample of collective bargaining agreements.
TL;DR: In this paper, the authors study costless information transmission from a job applicant to an employer who must decide whether to hire him and, if so, which position to give him.
Abstract: We study (costless) information transmission from a job applicant to an employer who must decide whether to hire him and, if so, which position to give him. We construct equilibrium payoffs requiring at least two signaling steps, or even that no deadline be imposed on the (plain) conversation. The set of communication equilibrium payoffs (achieved with the help of a communication device) is larger than the set of equilibrium payoffs of the plain conversation game but coincides with the set of correlated equilibrium payoffs.
TL;DR: This article found that the vast majority of Individual Retirement Account contributions represent net new saving, based on evidence from the quarterly Consumer Expenditure Surveys (CES) based on analysis of the relationship between IRA contributions and other financial asset saving.
Abstract: The vast majority of Individual Retirement Account contributions represent net new saving, based on evidence from the quarterly Consumer Expenditure Surveys (CES). The results are based on analysis of the relationship between IRA contributions and other financial asset saving. The data show almost no substitution of IRAs for other saving. Estimates are based on a flexible constrained optimization model, with the IRA limit the principal constraint. The implications of this model for saving in the absence of the IRA option match very closely the actual non-IRA financial asset saving behavior prior to 1982. IRA saving does not show up as other financial asset saving in the pre-IRA period.
TL;DR: In this paper, it was shown that if firms producing a homogeneous good under constant returns must pick their prices before demand is known, both measures of productivity become procyclical.
Abstract: Hall has shown that, with perfect competition and price flexibility, total factor productivity measured using labor's share either in revenues or in costs will be acyclical regardless of the level of labor hoarding. We show that if firms producing a homogeneous good under constant returns must pick their prices before demand is known, both measures of productivity become procyclical. The model implies that productivity should be more procyclical the more important is labor hoarding. Empirically, productivity is more procyclical in industries and in nations where labor hoarding appears more important.