Showing papers in "Quarterly Journal of Economics in 1998"
TL;DR: The authors suggests that the rapid increase in the proportion of college graduates in the United States labor force in 1970s may have been a causal factor in both the decline in the college premium during the 1970s and the large increase in inequality during the 1980s.
Abstract: A high proportion of skilled workers in the labor force implies a large market size for skill-complementary technologies, and encourages faster upgrading of the productivity of skilled workers. As a result, an increase in the supply of skills reduces the skill premium in the short run, but then it induces skill-biased technical change and increases the skill premium, possibly even above its initial value. This theory suggests that the rapid increase in the proportion of college graduates in the United States labor force in the 1970s may have been a causal factor in both the decline in the college premium during the 1970s and the large increase in inequality during the 1980s.
2,000 citations
TL;DR: This paper examined the effect of skill-biased technological change as measured by computerization on the recent widening of U.S. educational wage differentials and found that the rate of skill upgrading has been greater in more computer-intensive industries.
Abstract: This paper examines the effect of skill-biased technological change as measured by computerization on the recent widening of U. S. educational wage differentials. An analysis of aggregate changes in the relative supplies and wages of workers by education from 1940 to 1996 indicates strong and persistent growth in relative demand favoring college graduates. Rapid skill upgrading within detailed industries accounts for most of the growth in the relative demand for college workers, particularly since 1970. Analyses of four data sets indicate that the rate of skill upgrading has been greater in more computer-intensive industries.
1,624 citations
TL;DR: In this article, a new fifteen-year panel data set of CEOs in the largest publicly traded U. S. companies was used to find a strong relationship between firm performance and CEO compensation.
Abstract: A common view is that there is little correlation between firm performance and CEO pay. Using a new fifteen-year panel data set of CEOs in the largest, publicly traded U. S. companies, we document a strong relationship between firm performance and CEO compensation. This relationship is generated almost entirely by changes in the value of CEO holdings of stock and stock options. In addition, we show that both the level of CEO compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980, largely because of increases in stock option grants.
1,421 citations
TL;DR: This article showed that the U.S. primary surplus is an increasing function of the debt-GDP ratio and that U. S. fiscal policy is satisfying an intertemporal budget constraint.
Abstract: How do governments react to the accumulation of debt? Do they take corrective measures, or do they let the debt grow? Whereas standard time series tests cannot reject a unit root in the U. S. debt-GDP ratio, this paper provides evidence of corrective action: the U. S. primary surplus is an increasing function of the debt-GDP ratio. The debt-GDP ratio displays mean-reversion if one controls for war-time spending and for cyclical fluctuations. The positive response of the primary surplus to changes in debt also shows that U. S. fiscal policy is satisfying an intertemporal budget constraint.
1,410 citations
TL;DR: The authors developed a semi-structural VAR approach to measure the stance of monetary policy, which extracts information about monetary policy from data on bank reserves and the federal funds rate but leaves the relationships among the macroeconomic variables in the system unrestricted.
Abstract: Extending the approach of Bernanke and Blinder (1992), Strongin (1992), and Christiano, Eichenbaum, and Evans (1994a, 1994b), we develop and apply a VAR-based methodology for measuring the stance of monetary policy. More specifically, we develop a "semi-structural" VAR approach, which extracts information about monetary policy from data on bank reserves and the federal funds rate but leaves the relationships among the macroeconomic variables in the system unrestricted. The methodologynests earlier VAR-based measures and can be used to compare and evaluate these indicators. It can also be used to construct measures of the stance of policy that optimally incorporate estimates of the Fed's operating procedure for any given period. Among existing approaches, we find that innovations to the federal funds rate (Bernanke-Blinder) are a good measure of policy innovations during the periods 1965-79 and 1988-94; for the period 1979-94 as a whole, innovations to the component of nonborrowed reserves that is orthogonal to total reserves (Strongin) seems to be the best choice. We develop a new measure of policy stance that conforms well to qualitative indicators of policy such as the Boschen-Mills (1991) index. Innovations to our measure lead to reasonable and precisely estimated dynamic responses by variables such as real GDP and the GDP deflator.;
1,306 citations
TL;DR: In this paper, the authors investigate whether a directly observed measure of technical change (R&D intensity) is closely linked to the growth in the importance of more highly skilled workers which has occurred in all countries.
Abstract: This paper compares the changing skill structure of wage bills and employment in the United States with six other OECD countries (Denmark, France, Germany, Japan, Sweden, and the United Kingdom). We investigate whether a directly observed measure of technical change (R&D intensity) is closely linked to the growth in the importance of more highly skilled workers which has occurred in all countries. Evidence of a significant association between skill upgrading and R&D intensity is uncovered in all seven countries. These results provide evidence that skill-biased technical change is an international phenomenon that has had a clear effect of increasing the relative demand for skilled workers.
1,274 citations
TL;DR: The authors found that the investment by a segment of a diversified firm depends on the cash flow of the firm's other segments, but significantly less than it depends on its own cash flow.
Abstract: Using segment information from Compustat, we find that the investment by a segment of a diversified firm depends on the cash flow of the firm's other segments, but significantly less than it depends on its own cash flow. The investment by segments of highly diversified firms is less sensitive to their cash flow than the investment of comparable single-segment firms. The sensitivity of a segment's investment to the cash flow of other segments does not depend on whether its investment opportunities are better than those of the firm's other segments.
1,094 citations
TL;DR: This paper found that the more countries experiencing a skill-biased technological change, the greater its potential to decrease the relative wages of less-skilled labor by increasing the world supply of unskill-intensive goods.
Abstract: Demand for less-skilled workers plummeted in developed countries in the 1980s. In open economies, pervasive skill-biased technological change (SBTC) can explain this decline. SBTC tends to increase the domestic supply of unskill-intensive goods by releasing less-skilled labor. The more countries experiencing a SBTC, the greater its potential to decrease the relative wages of less-skilled labor by increasing the world supply of unskill-intensive goods. We find strong evidence for pervasive SBTC in developed countries. Most industries increased the proportion of skilled workers despite generally rising or stable relative wages. Moreover, the same manufacturing industries simultaneously increased demand for skills in different countries. Many developing countries also show increased skill premiums, a pattern consistent with SBTC.
1,050 citations
TL;DR: In this article, the authors consider a company's controlling shareholders and show that the optimal ownership structure generally involves some measure of dispersion, to avoid excessive monitoring by other shareholders, and that the incentive to go public is stronger, the larger the amount of external funding required.
Abstract: From the viewpoint of a company’s controlling shareholder, the optimal ownership structure generally involves some measure of dispersion, to avoid excessive monitoring by other shareholders. The optimal dispersion of share ownership can be achieved by going public, but this choice also entails some costs (the cost of listing and the loss of control over the shareholder register). If the controlling shareholder sells shares privately instead, he avoids the costs of going public but must tolerate large external shareholders who may monitor him too closely. Thus, the owner faces a trade-off between the cost of providing a liquid market and overmonitoring. The incentive to go public is stronger, the larger the amount of external funding required. The listing decision is also affected by the strictness of disclosure rules for public relative to private erms, and the legal limits on bribes aimed at dissuading monitoring by shareholders.
886 citations
TL;DR: In this paper, the economic consequences of rights to paid parental leave in nine European countries over the 1969 through 1993 period were investigated, and most of the analysis examined how changes in paid leave affect the gap between female and male labor market outcomes.
Abstract: This study investigates the economic consequences of rights to paid parental leave in nine European countries over the 1969 through 1993 period. Since women use virtually all parental leave in most nations, men constitute a reasonable comparison group, and most of the analysis examines how changes in paid leave affect the gap between female and male labor market outcomes. The employment-to-populations ratios of women in their prime childbearing years are also compared with those of corresponding aged men and older females. Parental leave is associated with increases in women's employment, but with reductions in their relative wages at extended durations.
815 citations
TL;DR: In this article, a theory of training whereby workers do not pay for the general training they receive is proposed, where the superior information of the current employer regarding its employees' abilities relative to other firms creates ex post monopsony power, and encourages this employer to provide and pay for training, even if these skills are general.
Abstract: This paper offers a theory of training whereby workers do not pay for the general training they receive. The superior information of the current employer regarding its employees' abilities relative to other firms creates ex post monopsony power, and encourages this employer to provide and pay for training, even if these skills are general. The model can lead to multiple equlibria. In one equilibrium quits are endogenously high, and as a result employers have limited monopsony power and provide little training, while in another equilibrium quits are low and training is high. Using microdata on German apprentices, we show that the predictions of our model receive some support from the data.
TL;DR: In this article, the role of debt in persuading an entrepreneur to pay out cash e ows, rather than to divertthem, was analyzed. And the optimal debt contract was derived under the assumption that some debt contract is optimal.
Abstract: We analyze the role of debt in persuading an entrepreneur to pay out cash e ows, rather than to divertthem. In the e rstpartof the paper we study the optimal debt contract— specie cally, the trade-off between the size of the loan and the repayment— under the assumption that some debt contract is optimal. In the second part we consider a more general class of (nondebt) contracts, and derive sufficient conditions for debt to be optimal among these.
TL;DR: In this article, the authors identify a potentially superior mechanism, the regulation of access to critical resources, in which the power agents get from access is more contingent on their making the right investment and ownership has adverse effects on the incentive to specialize.
Abstract: Transactions take place in the firm rather than in the market because the firm offers power to agents who make specific investments. Past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this. Within the contractibility assumptions of this literature, we identify a potentially superior mechanism, the regulation of access to critical resources. Access can be better than ownership because (i) the power agents get from access is more contingent on their making the right investment and (ii) ownership has adverse effects on the incentive to specialize. The theory explains the importance of internal organization and third-party ownership.
TL;DR: In this article, the authors find evidence that technology-skill and capital-skill complementarities existed in manufacturing early in this century and were related to the adoption of electric motors and particular production methods.
Abstract: Current concern with the impact of new technologies on the wage structure motivates this study. We offer evidence that technology-skill and capital-skill (relative) complementarities existed in manufacturing early in this century and were related to the adoption of electric motors and particular production methods. Industries, from 1909 to 1929, with more capital per worker and a greater proportion of motive energy coming from purchased electricity employed relatively more educated blue-collar workers in 1940 and paid their production workers substantially more. We also find a strong positive association between changes in capital intensity and the nonproduction worker wage bill from 1909–1919 implying capital-skill complementarity as large as in recent years.
TL;DR: In this article, the authors show that indexes of social development constructed in the early 1960s have considerable predictive power and that one of the indexes may be a useful proxy for social capital in developing countries.
Abstract: The conventional wisdom is that postwar economic growth has been unpredictable. In the 1960s few observers accurately forecast which countries would grow quickly. In this paper we show that indexes of social development constructed in the early 1960s have considerable predictive power. These results indicate the importance of "social capability" for economic growth. We emphasize that social arrangements matter for reasons beyond those discussed in recent work on trust and social capital. However, we are also able to show that one of the indexes may be a useful proxy for social capital in developing countries.
TL;DR: In this article, the dark side of liquid assets is discussed: greater asset liquidity reduces the firm's ability to commit to a specific course of action, and as a result, the firm may find it easier to raise external finance against more liquid assets.
Abstract: The more liquid a firm's assets, the greater their value in a short-notice liquidation. It is generally thought that a firm should find it easier to raise external finance against more liquid assets. This paper focuses on the dark side of liquidity: greater asset liquidity reduces the firm's ability to commit to a specific course of action. As a result, greater asset liquidity can, in some circumstances, reduce the firm's capacity to raise external finance. Firms with "excessively" liquid assets are in the best position to finance illiquid projects. This leads us to a theory of financial intermediation and disintermediation based on the liquidity of assets.
TL;DR: The authors compared test scores of students selected to attend a participating private school with those of unsuccessful applicants and other students from the Milwaukee public schools and found that students in the Milwaukee Parental Choice Program had faster math score gains than, but similar reading score gains to, the comparison groups.
Abstract: In 1990 Wisconsin began providing vouchers to a small number of low-income students to attend nonsectarian private schools. Controlling for individual fixed-effects, I compare the test scores of students selected to attend a participating private school with those of unsuccessful applicants and other students from the Milwaukee public schools. I find that students in the Milwaukee Parental Choice Program had faster math score gains than, but similar reading score gains to, the comparison groups. The results appear robust to data imputations and sample attrition, although these deficiencies of the data should be kept in mind when interpreting the results.
TL;DR: In this article, preferential trading arrangements are analyzed from the viewpoint of the "new political economy" that views trade policy as being determined by lobbying of concentrated interest groups, and two conclusions are reached: first, trade-diverting preferential arrangements are more likely to be supported politically; and second, such preferential arrangements could critically change domestic incentives so multilateral liberalization that is initially politically feasible could be rendered infeasible by a preferential arrangement.
Abstract: Preferential trading arrangements are analyzed from the viewpoint of the "new political economy" that views trade policy as being determined by lobbying of concentrated interest groups. Two conclusions are reached: first, that trade-diverting preferential arrangements are more likely to be supported politically; and second, that such preferential arrangements could critically change domestic incentives so multilateral liberalization that is initially politically feasible could be rendered infeasible by a preferential arrangement. The larger the trade diversion resulting from the preferential arrangement, the more likely this will be the case.
TL;DR: This article developed a model of optimal schooling investments and estimate it using new data on approximately 700 identical twins, and estimated an average return to schooling of 9 percent for identical twins but estimated returns appear to be slightly higher for less able individuals, implying that abler individuals attain more schooling because they face lower marginal costs of schooling, not because of higher marginal benefits.
Abstract: We develop a model of optimal schooling investments and estimate it using new data on approximately 700 identical twins. We estimate an average return to schooling of 9 percent for identical twins, but estimated returns appear to be slightly higher for less able individuals. Simple cross-section estimates are marginally upward biased. These empirical results imply that abler individuals attain more schooling because they face lower marginal costs of schooling, not because of higher marginal benefits.
TL;DR: In this article, the authors model growth and technology transfer in a world where technologies are specific to particular combinations of inputs and do not imply that an improvement in one technique for producing a given good improves all other techniques for producing that good.
Abstract: We model growth and technology transfer in a world where technologies are specific to particular combinations of inputs. Unlike the usual specification, our model does not imply that an improvement in one technique for producing a given good improves all other techniques for producing that good. Technology improvements diffuse slowly across countries, although knowledge spreads instantaneously and there are no technology adoption costs. However, even with "Ak" production, our model implies conditional convergence. This model, with appropriate technology and technology diffusion, has more realistic predictions for convergence and growth than either the standard neoclassical model or simple endogenous-growth models.
TL;DR: In this article, the authors compare the benefits of insurance competition with the costs of adverse selection, showing that increased competition reduced Harvard's premiums by 5 to 8 percent, while the net effect for society was only the adverse selection loss.
Abstract: We use data on health plan choices by employees of Harvard University to compare the benefits of insurance competition with the costs of adverse selection. Moving to a voucher-type system induced significant adverse selection, with a welfare loss of 2 to 4 percent of baseline spending. But increased competition reduced Harvard's premiums by 5 to 8 percent. The premium reductions came from insurer profits, so while Harvard was better off, the net effect for society was only the adverse selection loss. Adverse selection can be minimized by adjusting voucher amounts for individual risk. We discuss how such a system would work. Governments are increasingly turning to market forces as a way to limit the cost of social insurance. Traditionally, social insurance programs were operated as nonmarket goods; governments mandated participation in a central program, collected revenues to finance the program, and ran the insurance system. There was no role for competition among suppliers in providing the basic benefit. As the costs of social insurance have increased, however, the centralized model of social insurance is coming under increasing strain. In the United States, for example, recent proposals have called for replacing the Medicare program with a health care voucher for the elderly [Aaron and Reischauer 1995; Cutler 1996]. The voucher would guarantee people a basic insurance plan, but the plans would be privately run. Competition among plans would generate plan premiums and enrollments. Similarly, longstanding proposals for Social Security reform have called for replacing the current system with a system of individual accounts, where people would make saving, investment, and annuitization decisions on their own [Advisory Council on Social Security 1996; Feldstein 1996]. The trend is not just domestic. In the United Kingdom the National Health Service has moved to encourage more competition in recent years, with the establishment of hospital "trusts" that bid for patients and partially fixed payments to physicians,
TL;DR: In this article, the French government purchased the Daguerreotype patent and placed it in the public domain, and the patent buyout could potentially eliminate the monopoly price distortions and incentives for rent-stealing duplicative research created by patents, while increasing incentives for original research.
Abstract: In 1839 the French government purchased the Daguerreotype patent and placed it in the public domain. Such patent buyouts could potentially eliminate the monopoly price distortions and incentives for rent-stealing duplicative research created by patents, while increasing incentives for original research. Governments could offer to purchase patents at their estimated private value, as determined in an auction, times a markup equal to the typical ratio of inventions' social and private value. Most patents purchased would be placed in the public domain, but to induce bidders to reveal their valuations, a few would be sold to the highest bidder.
TL;DR: The authors models technology adoption as replacing workers by machines, which perform the same job in the production process, and shows that such modelling of technology adoption affects significantly the analysis of economic growth.
Abstract: This paper models technology adoption as replacing workers by machines, which perform the same job in the production process. The paper shows that such modelling of technology adoption affects significantly the analysis of economic growth. This model can explain large and persistent international differences in output levels and growth rates, caused by small differences in underlying parameters.
TL;DR: The authors empirically established results consistent with agents' focusing on performance over the fiscal year, and found that manufacturing firms' sales are higher at the end of the year and lower at the beginning than they are in the middle.
Abstract: Salesperson and executive compensation contracts typically specify a nonlinear relationship between firm revenues and pay. These agents therefore have incentive to manipulate prices, influence the timing of customer purchases, and vary effort over their firms' fiscal years. This paper empirically establishes results consistent with agents' focusing on performance over the fiscal year. Most notably, in addition to varying with the calendar business cycle, manufacturing firms' sales are higher at the end of the fiscal year, and lower at the beginning, than they are in the middle. Further evidence is found in fiscal-year price movements and patterns in the industry variation of fiscal-year effects.
TL;DR: Li et al. as mentioned in this paper developed a theory of the ownership of firms in an environment without secure property rights against state encroachment, and used this theory to interpret the relative success of local government-owned firms during China's transition to a market economy.
Abstract: We develop a theory of the ownership of firms in an environment without secure property rights against state encroachment. "Private ownership" leads to excessive revenue hiding and "state ownership" (i.e., national government ownership) fails to provide incentives for managers and local governments in a credible way. Because "local government ownership" integrates local government activities and business activities, local government may better serve the interests of the national government, and thus local government ownership may credibly limit state predation, increase local public goods provision, and reduce costly revenue hiding. We use our theory to interpret the relative success of local government-owned firms during China's transition to a market economy.
TL;DR: In this article, the authors model the electoral politics of redistribution when voters and parties care about inequality in addition to their private concerns for consumption and votes, respectively, and show that redistributive politics favors middle classes at the expense of both rich and poor.
Abstract: We model the electoral politics of redistribution when voters and parties care about inequality in addition to their private concerns for consumption and votes, respectively. Ideological concerns about income redistribution lead each party to adopt a general proportional income tax, adjusted to appeal to the ideological leanings of high “clout” groups, with disproportionately many “swing” voters, which the parties also ply with pork-barrel projects. Our results relate to “Director's Law,” which says that redistributive politics favors middle classes at the expense of both rich and poor.
TL;DR: In this article, the authors found that the availability of Lojack is associated with a sharp fall in auto theft and that the marginal social benefit of an additional Lojack unit has been fifteen times greater than the marginal cost in high crime areas.
Abstract: Lojack is a hidden radio-transmitter device used for retrieving stolen vehicles. Because there is no external indication that Lojack has been installed, it does not directly affect the likelihood that a protected car will be stolen. There may, however, be positive externalities due to general deterrence. We find that the availability of Lojack is associated with a sharp fall in auto theft. Rates of other crime do not change appreciably. At least historically, the marginal social benefit of an additional unit of Lojack has been fifteen times greater than the marginal social cost in high crime areas. Those who install Lojack, however, obtain less than 10 percent of the total social benefits, leading to underprovision by the market.
TL;DR: In this article, the authors used data on the prices of capital goods to show that much of the benefit of investment tax incentives does not go to investing firms but rather to capital suppliers through higher prices.
Abstract: Using data on the prices of capital goods, this paper shows that much of the benefit of" investment tax incentives does not go to investing firms but rather to capital suppliers through" higher prices. The reduction in the cost of capital from a 10 percent investment tax credit" increases equipment prices 3.5-7.0 percent. This lasts several years and is largest for assets with" large order backlogs, low import competition, or with a large fraction of buyers able to use" investment subsidies. Capital goods workers' wages rise, too. Instrumental variables estimates" of the short-run supply elasticity are around 1 and can explain the traditionally small estimates of" investment demand elasticities. In absolute value, the demand elasticity implied here exceeds 1."
TL;DR: This work addresses long-standing problems in measuring medical inflation by estimating two types of price indices, a Service Price Index and a Cost of Living Index, which measure a quality-adjusted cost of treating a health problem.
Abstract: We address long-standing problems in measuring medical inflation by estimating two types of price indices. The first, a Service Price Index, prices specific medical services, as does the current CPI. The second, a Cost of Living Index, measures a quality-adjusted cost of treating a health problem. We apply these indices to heart attack treatment between 1983 and 1994. More frequent reweighting and accounting for price discounts lowers the measured price change for heart attacks by three percentage points annually. Accounting for quality change lowers it further; we estimate that the real Cost of Living Index fell about 1 percent annually.
TL;DR: In this article, the authors studied the property rights of the firm under alternating-offers bargaining and showed that when managers can pursue other occupations while negotiating over the division of the gains from cooperation, the results obtained.
Abstract: This paper studies the Grossman-Hart-Moore (GHM) "property rights" approach to the theory of the firm under alternating-offers bargaining. When managers can pursue other occupations while negotiating over the division of the gains from cooperation, the GHM results obtain. If taking the best alternative job terminates bargaining, outcomes are very different. Sometimes an agent with an important investment decision should not own the assets he works with; sometimes independent assets should be owned together; sometimes strictly complementary assets should be owned separately.