Showing papers in "Quarterly Journal of Economics in 1994"
TL;DR: This paper analyzed the relationship between economics and politics and concluded that inequality is conducive to the adoption of growth-retarding policies, and presented cross-country evidence consistent with it. But their analysis focused on how an economy's initial configuration of resources shapes the political struggle for income and wealth distribution, and how that, in turn, affects long run growth.
Abstract: A crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it. In this paper we analyze the relationship between the two. We focus on how an economy's initial configuration of resources shapes the political struggle for income and wealth distribution, and how that, in turn, affects long-run growth. Our main conclusion is that inequality is conducive to the adoption of growth-retarding policies. We derive this result from a simple political-economy model of growth, and present cross-country evidence consistent with it. The key feature of our model is that individuals differ in their relative factor endowments. We distinguish between two types of factors: an accumulated factor (called "capital") and a nonaccumulated factor (called "labor"). Growth is driven by the expansion of the capital stock, which is in turn determined by individual saving decisions. Long-run growth is endogenous, as the aggregate production function is taken to be linearly homogeneous in capital and (productive) government services taken together. The provision of government services is financed by a tax on capital. Because government services are productive, a "small" tax on
3,217 citations
TL;DR: This article present a model of bargaining between politicians and managers that explains many stylized facts about the behavior of state firms, their commercialization, and privatization, including subsidies to public enterprises and bribes from managers to politicians.
Abstract: We present a model of bargaining between politicians and managers that explains many stylized facts about the behavior of state firms, their commercialization, and privatization. Subsidies to public enterprises and bribes from managers to politicians emerge naturally in the model. We use the model and several extensions to understand why commercialization and privatization might work, and what forces contribute to effective restructuring of public enterprises. We illustrate the model using examples from several countries.
3,143 citations
TL;DR: In this article, the authors present a qualitative and quantitative analysis of the standard growth model modified to include precautionary saving motives and liquidity constraints, and address the impact on the aggregate saving rate, the importance of asset trading to individuals, and the relative inequality of wealth and income distributions.
Abstract: We present a qualitative and quantitative analysis of the standard growth model modified to include precautionary saving motives and liquidity constraints. We address the impact on the aggregate saving rate, the importance of asset trading to individuals, and the relative inequality of wealth and income distributions.
2,738 citations
TL;DR: This article analyzed the response of small versus large manufacturing firms to monetary policy and found that small firms account for a significantly disproportionate share of the manufacturing decline that follows tightening of monetary policy, while large firms initially borrow to accumulate inventories and after a brief period, small firms quickly shed inventories.
Abstract: We analyze the response of small versus large manufacturing firms to monetary policy. The goal is to obtain evidence on the importance of financial propagation mechanisms for aggregate activity. We find that small firms account for a significantly disproportionate share of the manufacturing decline that follows tightening of monetary policy. They play a surprisingly prominent role in the slowdown of inventory demand. Large firms initially borrow to accumulate inventories. After a brief period, small firms quickly shed inventories. We attempt to sort financial from nonfinancial explanations with evidence on asymmetries and on balance sheet effects on inventory demand across size classes.
2,426 citations
TL;DR: This paper investigated the shift in demand away from unskilled and toward skilled labor in U.S. manufacturing over the 1980s and concluded that increased use of nonproduction workers is strongly correlated with investment in computers and in R&D.
Abstract: This paper investigates the shift in demand away from unskilled and toward skilled labor in U. S. manufacturing over the 1980s. Production labor-saving technological change is the chief explanation for this shift. That conclusion is based on three facts: (1) the shift is due mostly to increased use of skilled workers within the 450 industries in U. S. manufacturing rather than to a reallocation of employment between industries, as would be implied by a shift in product demand due to trade or to a defense buildup; (2) trade- and defense-demand are associated with only small employment reallocation effects; (3) increased use of nonproduction workers is strongly correlated with investment in computers and in R&D.
2,010 citations
TL;DR: In this paper, a simple static model of North-South trade is developed to examine linkages between national income, pollution, and international trade, and it is shown that the higher income country chooses stronger environmental protection, and specializes in relatively clean goods.
Abstract: A simple static model of North-South trade is developed to examine linkages between national income, pollution, and international trade. Two countries produce a continuum of goods, each differing in pollution intensity. We show that the higher income country chooses stronger environmental protection, and specializes in relatively clean goods. By isolating the scale, composition, and technique effects of international trade on pollution, we show that free trade increases world pollution; an increase in the rich North's production possibilities increases pollution, while similar growth in the poor South lowers pollution; and unilateral transfers from North to South reduce worldwide pollution.
1,465 citations
TL;DR: In this paper, an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project, is considered, and the possibility of a default or quit puts an upper bound on the total future indebtedness from the entrepreneur to the investor at any date.
Abstract: Consider an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total future indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of long-term debt contracts.
1,220 citations
TL;DR: The authors analyzes the organization of the RD to rationalize commonly observed features in research employment contracts, such as shop rights, trailer clauses, and the "hired for" doctrine, and discusses the robustness of the so-called Schumpeterian hypotheses to endogenizing the RD and provide a rationale for cofinancing arrangements in research activities.
Abstract: The paper analyzes the organization of the RD (b) to rationalize commonly observed features in research employment contracts, such as shop rights, trailer clauses, and the "hired for" doctrine; (c) to discuss the robustness of the so-called Schumpeterian hypotheses to endogenizing the organization of RD and (d) to provide a rationale for cofinancing arrangements in research activities.
1,110 citations
TL;DR: In this article, the authors explored the combined use of subjective and objective performance measures in implicit and explicit incentive contracts, and showed that if objective measures are sufficiently close to perfect then no implicit contracts are feasible.
Abstract: Objective measures of performance are seldom perfect. In response, incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined use of subjective and objective performance measures in (respectively) implicit and explicit incentive contracts. Naturally, objective and subjective measures often are substitutes, sometimes strikingly so: we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible (because the firm’s fallback position after reneging on an implicit contract is too attractive). We also show, however, that objective and subjective measures can reinforce each other: if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures (because the improved objective measures increase the value of the ongoing relationship, and so reduce the firm’s incentive to renege). We also analyze the use of subjective weights on objective performance measures, and provide case-study evidence consistent with our analyses.
953 citations
TL;DR: In this article, the authors show that UQ constraints on households can increase the saving rate, strengthen the effect of growth on saving, and increase the growth rate if productivity growth is endogenous, and may increase welfare.
Abstract: In the context of an overlapping-generations model, we show that Uquidity constraints on households (i) raise the saving rate, (ii) strengthen the effect of growth on saving, (iii) increase the growth rate if productivity growth is endogenous, and (iv) may increase welfare. The first three positions are supported by cross-country regressions of saving and growth rates on indicators of liquidity contraints on households. The results suggest that financial deregulation in the 1980s has contributed to the decline in national saving and growth rates in the OECD countries.
952 citations
TL;DR: In this article, the authors analyze twenty years of personnel data from one firm and find that career movements suggest that the employee's rate of learning and the firm's learning about ability are important.
Abstract: We analyze twenty years of personnel data from one firm. The hierarchical structure is quite simple and stable. Career movements suggest that the employee's rate of learning and the firm's learning about ability are important. There are promotion "fast tracks." Exit rates vary little with tenure or salary. The firm has personnel policies like those described in the internal labor markets literature, although several theoretical preconditions for ILMs, such as ports of entry and exit, are lacking. Job levels are important to compensation, but there is also substantial individual variation in pay within levels. Our companion paper (in this issue) explores the wage policy of this firm.
TL;DR: This paper showed how the optimal financial structure of a firm complements incentive schemes to discipline managers, and how the securities' return streams determine the claim-holders' incentives to intervene in management.
Abstract: This paper shows how the optimal financial structure of a firm complements incentive schemes to discipline managers, and how the securities' return streams determine the claim-holders' incentives to intervene in management. The theory rationalizes (1) the multipUcity of securities, (2) the observed correlation between return streams and control rights of securities, and (3) the partial congruence between managerial and equity-holder preferences over policy choices and monetary rewards as well as the low level of interference of equity in management. The theory also offers new prospects for a reappraisal of the earlier corporate finance literature.
TL;DR: The authors examined micro data on U.S. manufacturing firms' inventory behavior during different macroeconomic episodes and found that the inventory investment of firms without access to public bond markets is significantly liquidity-constrained during this period.
Abstract: This paper examines micro data on U. S. manufacturing firms' inventory behavior during different macroeconomic episodes. Much of the analysis focuses on the 1981–1982 recession, which was apparently caused in large part by tight monetary policy. We find that the inventory investment of firms without access to public bond markets is significantly liquidity-constrained during this period. A similar pattern emerges during the 1974–1975 recession, in which tight money also appears to have played a role. In contrast, such liquidity constraints are largely absent during periods of looser monetary policy in the 1970s and 1980s.
TL;DR: In this article, the authors argue that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions, leading to a theory of low frequency business cycles driven by bank credit policies.
Abstract: In a rational profit-maximizing world, banks should msdntain a credit policy of lending if and only if borrowers have positive net present value projects. Why then are changes in credit policy seemingly correlated with changes in the condition of those demanding credit? This paper argues that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions. This leads to a theory of low frequency business cycles driven by bank credit policies. Evidence from the banking crisis in New England in the early 1990s is consistent with the assumptions and predictions of the theory.
TL;DR: The authors analyzes the origins of this tax haven activity and its implications for the US and foreign governments, showing that American companies report extraordinarily high profit rates on both their real and their financial investments in tax havens.
Abstract: The offshore tax haven affiliates of American corporations account for more than a quarter of US foreign investment, an nearly a third of the foreign profits of US firms. This paper analyzes the origins of this tax haven activity and its implications for the US and foreign governments. Based on the behavior of US fins in 1982, it appears that American companies report extraordinarily high profit rates on both their real and their financial investments in tax havens. We calculate from this behavior that the tax rate that maximizes tax revenue for a typical haven is around 6%. The revenue implications for the US are more complicated, since tax havens may ultimately enhance the ability of the US government to tax the foreign earnings of American companies.
TL;DR: This paper analyzed a single firm's wage data and found that employees are partly shielded against changes in external market conditions; that wage variation within a job level is large both cross-sectionally and for individuals over time, often leading to substantial real wage declines; and that promotions and wage growth are strongly related.
Abstract: Salary data from a single firm are analyzed in an effort to identify the firm's wage policy. We find that employees are partly shielded against changes in external market conditions; that wage variation within a job level is large both cross-sectionally and for individuals over time, often leading to substantial real wage declines; that wage increases are serially correlated even controlling for observable characteristics; and that promotions and wage growth are strongly related, even though promotion premiums are small relative to the large wage differences between job levels. None of the major theories of wage determination can alone explain the evidence.
TL;DR: In this article, a framework for analyzing the costs and benefits of internal versus external capital allocation is presented, focusing pritnarily on comparing an internal capital market with bank lending.
Abstract: This paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation We focus pritnarily on comparing an internal capital market with bank lending While both represent centralized forms of financing, in the former case the financing is owner-provided, while in the latter ceise it is not We argue that the ownership aspect of internal capital allocation has three important consequences: (1) it leads to more monitoring than bank lending; (2) it reduces managers' entrepreneurial incentives; and (3) it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management
TL;DR: When the responsibility for output decisions was shifted from the state to the firm, and when firms were allowed to retain more of their profits, managers of Chinese state-owned enterprises strengthened workers' incentives as mentioned in this paper.
Abstract: When the responsibility for output decisions was shifted from the state to the firm, and when firms were allowed to retain more of their profits, managers of Chinese state-owned enterprises strengthened workers' incentives. The managers paid more in bonuses and hired more workers on fixed-term contracts. The new incentives were effective: productivity increased with increases in bonus payments and in contract workers. The increase in autonomy raised workers' incomes (but not managers' incomes) and investment in the enterprise, but tended not to raise remittances to the state.
TL;DR: In this paper, the authors analyze how organizations can minimize costs of processing and communicating information and show that the number of transits to the top tends to be equalized across individual information items.
Abstract: This paper analyzes how organizations can minimize costs of processing and communicating information. Communication is costly because it takes time for an agent to absorb new information sent by others. Agents can reduce this time by specializing in the processing of particular types of information. When these returns to specialization outweigh costs of communication, it is efficient for several agents to collaborate within a firm. It is shown that efficient networks involve centralization, that individuals delegate tasks to subordinates only if they are overloaded, and that the number of transits to the top tends to be equalized across individual information items.
TL;DR: The authors analyzed the ways in which financially distressed firms try to avoid bankruptcy through public and private debt restructurings, asset sales, mergers, and capital expenditure reductions, and found that the combination of secured private debt and numerous public debt issues seems to impede out-of-court restructures and increases the probability of a Chapter 11 filing.
Abstract: This paper analyzes the ways in which financially distressed firms try to avoid bankruptcy through public and private debt restructurings, asset sales, mergers, and capital expenditure reductions. Our main finding is that a firm's debt structure affects the way financially distressed firms restructure. The combination of secured private debt and numerous public debt issues seems to impede out-of-court restructurings and increases the probability of a Chapter 11 filing. In addition, we find that, while asset sales are a way of avoiding Chapter 11, they are limited by industry factors: firms in distressed and highly leveraged industries are less prone to sell assets.
TL;DR: In this paper, a method for discriminating between alternative theories using data from German credit cooperatives from the nineteenth and early 20th century Germany is presented, and a model of credit cooperators designed to provide monitoring incentives and test this using nineteenth century data.
Abstract: Economists now appreciate that resource allocation in less economically developed economies is profoundly influenced by non-firm economic institutions. However our theories of non-firm institutions often suggest different answers to many questions including those of policy. This paper illustrates a method for discriminating between alternative theories using data from German credit cooperatives from the nineteenth and early twentieth century Germany. We build a model of credit cooperatives designed to provide monitoring incentives and test this using nineteenth century data. (authors)
TL;DR: This article used two-variable autoregressions to characterize transitory components in GNP and stock prices, and found that shocks to GNP holding consumption constant are almost entirely transitory and account for large fractions of the variance of GNP growth.
Abstract: This paper uses two-variable autoregressions to characterize transitory components in GNP and stock prices. Shocks to GNP holding consumption constant are almost entirely transitory, and account for large fractions of the variance of GNP growth. If consumption does not change, consumers must think that any GNP change is transitory. The facts that the consumption/GNP ratio forecasts GNP growth and that consumption is nearly a random walk drive this result. An implication is that consumption provides a good estimate of the "trend" in GNP. Prices and dividends behave similarly: shocks to prices holding dividends constant are almost entirely transitory.
TL;DR: This paper examined the effect of the number and sex composition of a boy or girl's siblings on that child's educational attainment, and found that women's educational choices have been systematically affected by the Sex composition of her siblings, and men's choices have not.
Abstract: This paper documents the impact of siblings on the education of men and women born in the United States between 1920 and 1965. We examine the effect of the number and sex composition of a boy or girl's siblings on that child's educational attainment. We find that throughout the century women's educational choices have been systematically affected by the sex composition of her siblings, and that men's choices have not. Women raised only with brothers have received on average significantly more education than women raised with any sisters, controlling for household size. Since sibling sex composition affects women's educational attainment and plausibly may be unrelated to other determinants of earnings, it may provide a useful instrument for education in earnings functions for women. Our results suggest that standard estimates significantly underestimate the return to schooling for women.
TL;DR: This article showed that the true procyclicality of real wages is obscured in aggregate time series because of a composition bias: the aggregate statistics are constructed in a way that gives more weight to low-skill workers during expansions than during recessions.
Abstract: In the period since the 1960s, as in other periods, aggregate time series on real wages have displayed only modest cyclicality. Macroeconomists therefore have described weak cyclicality of real wages as a salient feature of the business cycle. Contrary to this conventional wisdom, our analysis of longitudinal microdata indicates that real wages have been substantially procyclical since the 1960s. We show that the true procyclicality of real wages is obscured in aggregate time series because of a composition bias: the aggregate statistics are constructed in a way that gives more weight to low-skill workers during expansions than during recessions.
TL;DR: In this paper, the problem of financial contracting and renegotiation between a firm and outside investors when the firm cannot commit to future payouts, but assets can be contracted upon was studied, and it was shown that a capital structure with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim.
Abstract: We study the problem of financial contracting and renegotiation between a firm and outside investors when the firm cannot commit to future payouts, but assets can be contracted upon. We show that a capital structure with multiple investors specializing in short-term and long-term claims is superior to a structure with only one type of claim, because this hardens the incentives for the entrepreneur to renegotiate the contract ex post. Depending on the parameters, the optimal capital structure also differentiates between state-independent and state-dependent longterm claims, which can be interpreted as long-term debt and equity. © 1994 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
TL;DR: This paper found that consumption is closely related to projected current income, but unrelated to predictable changes in income, which is consistent with "buffer-stock" models of consumption like those of Deaton [1991] or Carroll [1992a, 1992b], where precautionary motives greatly reduce the willingness of prudent consumers to consume out of uncertain future income.
Abstract: This paper tests a straightforward implication of the basic Life Cycle model of consumption: that current consumption depends on expected lifetime income. The paper projects future income for a panel of households and finds that consumption is closely related to projected current income, but unrelated to predictable changes in income. However, future income uncertainty has an important effect: consumers facing greater income uncertainty consume less. The results are consistent with "buffer-stock" models of consumption like those of Deaton [1991] or Carroll [1992a, 1992b], where precautionary motives greatly reduce the willingness of prudent consumers to consume out of uncertain future income.
TL;DR: In this article, the authors present a model in which a policymaker maintains a fixed parity in good times, but devalues if the unemployment rate gets too high, and the main conclusion is that observing a tough policy in a given period may lower rather than raise the credibility of a no-devaluation pledge in subsequent periods.
Abstract: Standard models of policy credibility, defined as the expectation that an announced policy will be carried out, emphasize the preferences of the policymaker and the role of tough policies in signaling toughness and raising credibility. Whether a policy is carried out, however, will also reflect the state of the economy. We present a model in which a policymaker maintains a fixed parity in good times, but devalues if the unemployment rate gets too high. Our main conclusion is that if there is persistence in unemployment, observing a tough policy in a given period may lower rather than raise the credibility of a no-devaluation pledge in subsequent periods. We test this implication on EMS interest rates and find support for our hypothesis.
Abstract: This paper examines empirically the effects of multimarket contact on pricing in the U. S. airline industry. The analysis of the time-series and cross-sectional variability of airline fares in the 1000 largest domestic city-pair routes reveals the presence of statistically significant and quantitatively important multimarket effects—fares are higher in city-pair markets served by carriers with extensive interroute contacts. These findings are consistent with the claims of industry experts that airlines live by the "golden rule"; i.e., that they refrain from initiating aggressive pricing actions in a given route for fear of what their competitors might do in other jointly contested routes. During his testimony, Mr. Steven B. Elkins (Senior Director of marketing systems development for Northwest Airlines) cited an example in which Northwest lowered fares on night flights that were flying with empty seats in a number of routes from Minneapolis and Upper Midwest cities to various West Coast cities. He said that Continental Airlines swiftly responded by cutting prices in important Northwest markets … Mr. Elkins's memo advises Northwest pricing analysts: "We Will Live by the Golden Rule!" In his testimony, he explained that, "the Golden Rule in that context was that I did not want my pricing analyst initiating actions in another carrier's market like Chicago for fear of what that other carrier might do to retaliate" [Wall Street Journal, October 9,1990, p. B1].
TL;DR: In this paper, the authors quantify the effect of employer-provided health insurance on the labor market mobility of individuals and find that health insurance may distort job mobility if employees decide to keep jobs they would rather leave for fear of losing coverage for preexisting conditions.
Abstract: The majority of privately insured Americans obtain their health insurance through their own or a family member's employment. The rationale for employers to provide health insurance is straightforward. By pooling the risks of individuals, employers can reduce adverse selection and lower administrative expenses. In addition, they benefit from tax laws allowing businesses to deduct their health insurance costs. These advantages of employer provision, however, must be weighed against the distortions they may generate in individual labor market decisions. In particular, health insurance may distort job mobility if employees decide to keep jobs they would rather leave for fear of losing coverage for preexisting conditions,' a possibility that has been termed "job-lock." This paper attempts to quantify the effect of employer-provided health insurance on the labor market mobility of individuals. The link between employer-provided health insurance and
TL;DR: This paper found no evidence of cultural effects on saving in Canada using data from the Canadian Survey of Family Expenditures (CSFE) and showed that there is no evidence that cultural factors influence saving.
Abstract: Why are there such large differences in saving rates across countries? Conventional economic analyses have not been successful in explaining international saving differences, so economists have sometimes suggested that national saving differences may be explained by cultural differences. This paper tests the hypothesis that cultural factors influence saving by comparing saving patterns of immigrants to Canada from different cultures. Using data from the Canadian Survey of Family Expenditures, we find no evidence of cultural effects on saving.