Showing papers in "Research Papers in Economics in 1981"

Moral Hazard in Teams

Abstract: This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.(This abstract was borrowed from another version of this item.)

A Positive Theory of Monetary Policy in a Natural-Rate Model

Abstract: Natural-rate models suggest that the systematic parts of monetary policy will not have important consequences for the business cycle. Nevertheless, we often observe high and variable rates of monetary growth, and a tendency for monetary authorities to pursue countercyclical policies. This behavior is shown to be consistent with a rational expectations equilibrium in a discretionary environment where the policymaker pursues a "reasonable" objective, but where precommitments on monetary growth are precluded. At each point in time, the policymaker optimizes subject to given inflationary expectations, which determine a Phillips Curve-type tradeoff between monetary growth/inflation and unemployment. Inflationary expectations are formed with the knowledge that policymakers will be in this situation. Accordingly, equilibrium excludes systematic deviations between actual and expected inflation, which means that the equilibrium unemployment rate ends up independent of "policy" in our model. However, the equilibrium rates of monetary growth/inflation depend on various parameters, including the slope of the Phillips Curve, the costs attached to unemployment versus inflation, and the level of the natural unemployment rate. The monetary authority determines an average inflation rate that is "excessive," and also tends to behave countercyclically. Outcomes are shown to improve if a costlessly operating rule is implemented in order to precomrnit future policy choices in the appropriate manner. The value of these precommitments -- that is, of long-term agreements between the government and the private sector -- underlies the argument for rules over discretion. Discretion is the sub-set of rules that provides no guarantees about the government's future behavior.

Productivity and R and D at the Firm Level

Abstract: This paper analyzes the relationship between output, employment, and physical and R&D capital, for a sample of 133 large US firms covering the years 1966 through 197 In the cross sectional dimension, there is a strong relationship between firm productivity and the level of its R&D invespments In the time dimension, using deviations from fire means as obserrations and unconstrained estimation, this relationship bomes closa to vanishing This may be due, in part, to the increase in collinearity between trend, physical capital, and R&D cap)tal in the within dimension, leaving little ildependent variability there When the coefficients of the first two variables are constrained to reasonable values, the R&D coefficient is both sizeable and significant The possibility of simultaneity between output and employment decisions in the short run is also investigated Allowing for this via the use of a semi-reduced form equations system yields rather high estimates of the importance of R&D capital relative to physical capital Our data do not allow us, however, to answer any detailed questions about the lag structure of the effects of R&D on productivity These effects are apparently highly variable, both in timing and magnitude

Post-War U.S. Business Cycles: An Empirical Investigation

Abstract: The authors propose a procedure for representing a time series of a smoothly varying trend component and a cyclical component. They document the nature of the comovements of the cyclical components of a variety of macroeconomic time series. The authors find that comovements are very different than the corresponding comovements of the slowly varying trend components. Copyright 1997 by Ohio State University Press.(This abstract was borrowed from another version of this item.)

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

Abstract: This paper investigates the spending and current-account effects of permanent terms-of-trade shifts in a model where households maximize utility over an infinite planning period. In the framework we adopt, an economy specialized in production must experience a fall in aggregate spending and a current surplus when the terms of trade permanently deteriorate The model thus provides a counter-example to the argument of Laursen and Idetzler (1950) and Harberger (1950) that a permanent worsening in the terms of trade must produce a current-account deficit.

Barriers to Entry

Abstract: Although the notion of "barriers to entry" plays an important role in economic theory and antitrust litigation, the substantial problems inherent in it are not fully appreciated. Much existing discussion of barriers hardly pauses to recognize the difficulties, and even more careful treatments of the subject proceed as if the definition of barriers can be tied quite easily to some purely objective measure of the cost of doing business.' The burden of this paper is to demonstrate that this is not so. The origin of the barriers concept is in the research custom of industrial organization economists during the post-World War II period. That custom was to seek monopoly explanations for data not obviously or directly implied by the perfect competition model. The perceived persistence of higher rates of return in some industries than in others was suggestive of barriers to entry, especially for industries exhibiting high levels of structural concentration. The equalization of profit rates through competition, however, is a proposition logically valid only with respect to investment on the margin of alternative economic activities. Only if all inputs are available in perfectly elastic supply does this imply equality between average profit rates. In addition, accounting profits are likely to be biased by the presence of uncapitalized assets, especially assets associated with advertising, research, and goodwill2 (see Lester Telser; Leonard Weiss; my earlier article). But my purpose here is not to probe these measurement problems nor to compare the merits of these explanations, but to examine the usefulness of the concept of barriers. Accordingly, I will ignore the possibility that factors other than barriers may partly or wholly explain the phenomena that the barriers notion seeks to explain.

Real Interest Rates, Home Goods, and Optimal External Borrowing

Abstract: The paper investigates the optimal tire path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rates. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home gods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in interest rates.

Labor Mobility and Wages

Abstract: In this essay we explore the implications of human capital and search behavior for both the interpersonal and life-cycle structure of inter-firm labor mobility. The economic hypothesis which motivates the analysis is that individual differences in firm-specific complementarities and related skill acquisitions produce differences in mobility behavior and in the relation between job tenure, wages and mobility. Both "job duration dependence" and "heterogeneity bias" are implied by this theory. Exploration of longitudinal data sets (NLS and MID) which contain mobility, job and wage histories of men in the 1966-76 decade yield several findings, among others: 1. The initially steep and later decelerating declines of labor mobility with working age are in large part due to the similar but more steeply declining relation between mobility and length of job tenure. 2. Given tenure levels, the probability of moving is predicted positively by the frequency of prior moves and negatively by education. The inclusion of prior moves in the regression reduces the estimated tenure slope because it helps to remove the "heterogeneity bias" in that slope. 3. The popular "mover-stayer model" is rejected by the existence of tenure effects on mobility. 4. Differences in mobility during the first decade of working life do not predict long-run differences in earnings. However, persistent movers at later stages of working life have lower wage levels and flatter life-cycle wage growth. 5. The analysis calls for a reformulation of earnings (wage) functions. Inclusion of tenure terms in the function permits separate estimates of returns to general and specific human capital after correction for heterogeneity bias. A rough estimate is that 50 percent of life-time wage growth is due to general (transferable) experience and 25 percent each to firm-specific experience and inter-firm mobility.

Price Inertia and Policy Ineffectiveness in the United States, 1890-1980

Abstract: This paper introduces a new approach to the empirical testing of the Lucas- Sargent-Wallace (LSW) "policy ineffectiveness proposition." Instead of testing that hypothesis in isolation from any plausible alternative, the paper develops a single empirical equation explaining price change that includes as special cases both the LSW proposition and an alternative hypothesis. The alternative, dubbed "NRH-GAP," states that prices respond fully in the long run, but only gradually in the short run, to nominal aggregate demand disturbances. A second innovation is the development of a quarterly data file for the period 1890-1980, thus opening up more than 200 new quarterly observations for analysis. A third innovation is the testing of three different methods of introducing "persistence effects" into the LSW analytical framework. In conflict with the predictions of the LSW approach, the results here exhibit uniformly high coefficients of real output and low coefficients of price changes in response to anticipated nominal GNP changes. Further, price changes respond positively and output responds negatively to lagged changes in prices, reflecting the short-run inertia in price-setting that forms the basis for the alter- native NRH-GAP approach. Evidence is also provided that velocity tends to respond negatively to anticipated changes in money, in contrast to the usual assumption in this literature of random serially independent velocity changes. Two shifts in the structure of the price-setting process are noted--a much higher degree of price responsiveness during World War I and its aftermath, and a longer mean lag in the influence of past price changes after 1953. Of independent interest, beyond its treatment of the policy ineffectiveness debate, is the treatment in the paper of changes in monetary regimes, and of the impact of programs of government intervention. The money creation process exhibits a highly significant change in structure before and after World War I, and a marginally significant change in 1967. The results identify five episodes of government intervention that significantly displaced the time path of prices -- the National Recovery Act of 1933-35, and price controls during the two world wars, Korea, and the Nixon era.

Union Wage Practices and Wage Dispersion within Establishments

Abstract: This study uses establishment level data to examine the effect of unionism on the wage structure within establishments The major finding is that unionism substantively reduces within-establishment dispersion of wages, in part through explicit wage practices, such as single rate or automatic progression modes of wage payment as opposed to merit reviews and individual determination Dispersion of wages between organized plants is reduced compared to dispersion of wages between unorganized plants, but by more modest amounts Overall, the evidence suggests a major role for explicit union wage policies on dispersion of wages within firms and in the economy as a whole

The Real Interest Rate: An Empirical Investigation

Abstract: This paper is an empirical exploration of real interest rate movements in the United States over the last fifty years. It focuses on several questions which have repeatedly arisen in the literature. How valid is the hypothesis associated with Fama (1975) that the real rate of interest is constant? Does the real rate decline with increases in expected inflation? Are cyclical movements in real variables correlated with real rate movements? How reliable is the Fishei (1930) effect where nominal interest rates reflect changes in expected inflation? What kind of variation in real interest rates have we experienced in the last fifty years? Have real rates turned negative in the 1970s, as is commonly believed, and were they unusually high in the initial stages of the Great Depression? In pursuing these questions, this paper first outlines in section II the methodology and theory used in the empirical analysis. The empirical results then follow in section III, and a final section contains the concluding remarks.

Women, Children, and Industrialization in the Early Republic: Evidence from the Manufacturing Censuses

Abstract: Manufacturing firm data for 1820 to 1850 are employed to investigate the role of women and children in the industrialization of the American Northeast. The principal findings include: (1) Women and children composed a major share of the entire manufacturing labor force; (2) their employment was closely associated with production processes used by large establishments, both mechanized and non-mechanized; (3) the wage of females (and boys) increased relative to that of men with industrial development; and (4) female labor force participation in industrial counties was substantial. These findings bear on the nature of technical change during early industrialization and why American industrial development was initially concentrated in the Northeast.

The Effective Tax Rate and the Pretax Rate of Return

Abstract: This paper presents new estimates of the taxes paid on nonfinancial corporate capital, on the pretax rate of return to capital, and on the effective tax rate. The basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century. An explicit analysis indicates that, after adjusting for different aspects of the business cycle, pretax profitability was between one and 1.5 percentage points lower in the 1970's than in the 1960's. The rate of profitability in the 1960's was also about one-half of a percentage point greater than the profitability in the 7 years of the 1950's after the Korean war. Changes in productivity growth, in inflation, in relative unit labor costs, and in other variables are all associated with changes in profitability. None of these variables, however, can explain the differences in profitability between the 1950Ts, 1960's and 1970's. Looking at broad decade averages, the effective tax rate and the pretax rate of return move in opposite directions, higher pretax profits occurring when the tax rate is high. There thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates.

Dividend Taxes, Corporate Investment, and "Q"

Abstract: Taxes on corporate distributions have traditionally been regarded as a "double tax" on corporate income. This view implies that while the total effective tax rate on corporate source income affects real economic decisions, the distribution of this tax burden between the shareholders and the corporation is irrelevant. Recent research has suggested an alter- native to this traditional view. One explanation of why firms in the U.S. pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions. This capitalization leaves investors indifferent at the margin between corporations paying our dividends and retaining earnings. This alternative view holds that while changes in the dividend tax rate will affect shareholder wealth, they will have no impact on corporate investment decisions. This paper develops econometric tests which distinguish between these two views of dividend taxation. By extending Tobin's "q" theory of investment to incorporate taxes at both the corporate and personal levels, the implications of each view for corporate investment decisions can be derived. The competing views may be tested by comparing the performance of investment equations estimates under each theory's predict ions. British time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions. The econometric results suggest that dividend taxes have important effects on investment decisions.

Wage Growth and Job Turnover: An Empirical Analysis

Abstract: This paper demonstrates that labor turnover is a significant factor in understanding wage growth since it affects both wage growth across jobs and wage growth within the job. Our analysis shows that young men who quit experience significant wage gains compared to stayers and compared to their own wage growth prior to the job change. Among older men, a quit increases wage growth only if the individual said he changed jobs because he found a better job. Yet in both age groups, individuals who expect to remain on the current job experience steeper wage growth per time period on that job. Thus labor turnover has offsetting effects on wage growth, leading to wage gains across jobs but flatter growth in shorter jobs. Our empirical analysis shows however that total life-cycle wage growth is positively related to current tenure. While early mobility may pay, individuals who are still changing jobs later in life experience lower overall wage growth.

Towards an Understanding of Market Processes: Individual Expectations, Market Behavior and Convergence to Rational Expectations Equilibrium

Abstract: I am far from denying that in our system equilibrium analysis has a useful function to perform. But when it comes to the point where it misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is high time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem. [Friedrich Hayek, 1948c, p. 91]

Human Capital and Economic Growth

Abstract: Individuals differ in both inherited and acquired abilities, but only the latter differ among countries and time periods Human capital analysis deals with acquired capabilities which are developed through formal and informal education at school and at home, and through training, experience, and mobility in the labor market Just as accumulation of personal human capital produces individual economic (income) growth, so do the corresponding social or national aggregates At the national level, human capital can be viewed as a factor of production coordinate with physical capital This implies that its contribution to growth is greater the larger the volume of physical capital and vice versa The framework of an aggregate production function shows also that the growth of human capital is both a condition and a consequence of economic growth Human capital activities involve not merely the transmission and embodiment in people of available knowledge, but also the production of new knowledge which is the source of innovation and of technical change which propels all factors of production This latter function of human capital generates worldwide economic growth regardless of its initial geographic locus Contrary to Malthus, economic growth has not been eliminated by population growth Indeed, spatial and temporal patterns of the "demographic transition" appear to be congruent with economic growth Human capital is a link which enters both the causes and effects of these economic-demographic changes

The Effect of Social Security on Retirement in the Early 1970s

Abstract: Improved understanding of retirement behavior is a key to better understanding of many important economic problems. In as close as we can come to a general "social experiment," real Social Security benefits were increased substantially for the period we study the retirement patterns of a cohort of white males: 28% on average between 1970 and 1972, with the maximum benefit increased by over 50% in real terms between 1968 and 1976. Other important structural changes in the method of computing benefits were also made. Hence, we have extremely detailed longitudinal data on a cohort of people spanning the years of most active retirement behavior (ages 58-67) over a period of abrupt change in the economic incentives surrounding their retirement . We have analyzed these data in a variety of ways to examine the impact of the changes in Social Security, as well as other factors, on retirement probabilities. The most simple to the most sophisticated analyses reveal the same set of inferences: 1. The acceleration in the decline in the labor force participation of elderly men over the period 1969-73 was primarily due to the large increase in real Social Security benefits; our probability equations estimate effects of changes in real benefits combined with the actual changes to predict declines in participation rates virtually identical to actual observed changes from independent data. 2. Social Security wealth interacts with other assets. A substantial fraction of the elderly appear to have few other assets and this group shows a markedly larger propensity to retire early, e.g., at age 62 when Social Security benefits become available. We find strong evidence of this liquidity constraint effect for an important subgroup of the elderly. 3. The magnitude of the induced retirement effect is large enough that if it is ignored in estimating the direct fiscal implications of major changes in benefit provisions, these may be substantially underestimated . 4. We interpret our results in the historical context of a particular cohort undergoing a major, unanticipated transfer of wealth via larger real benefits. We make no attempt to distinguish these from the long- run effects if the system were to remain unchanged for many years or if future changes were readily predictable.

Essays in Trespassing

Abstract: This book brings together fourteen articles and papers written by Albert O. Hirschman. About half deal with the interaction of economic development with politics and ideology, the area in which Hirschman perhaps has made most noted contributions. Among these papers are 'The Rise and Declines of Development Economics', a magisterial and yet pointed essay in intellectual history and his famous article 'The Changing Tolerance for Income Inequality in the Course of Economic Development'. Hirschman's ability to trespass - or rather his inability not to trespass - from one social science to another and beyond is the unifying characteristic of the volume. Authoritative, searching surveys alternate here with essays presenting some of Hirschman's characteristic inventions, for instance the 'tunnel effect' and 'obituary-improving activities'. Three of the papers have not been published previously and a number of introductory notes have been especially drafted for the present volume to evoke the intellectual-political climate in which certain groups of essays were written.

On the Role of Social Security as a Means for Efficient Risk-Bearing in an Economy Where Human Capital Is Not Tradeable

Abstract: An intertemporal general equilibrium model of an economy with overlapping generations and two factors of production, labor and capital, is used to analyze the economic inefficiencies caused by the non- tradeability of human capital -and to derive a constrained pareto-optimal sys tern of taxes and transfers which "c.orrectS1 these inefficiencies. It is shown that, in the absence of such a system, this market failure causes the equilibrium path of the economy to deviate from the optimum for two reasons: First, as is well known, people cannot achieve their optimal lifecycle consumption program because early in life when most of their wealth is in the form of human capital, they cannot consume as much as they would otherwise choose. Second, investors cannot achieve an optimal portfolio allocation of their savings. Not only will some investors be forced to bear more risk than they would choose in the absence of this market failure, but because factor shares are uncertain, the portfolios held by investors will be inefficient. The young are "forced" to invest "too much" of their savings in human capital and the old are "forced" to invest "too little" in human capital. Hence, all investors bear "factor-share" risk which if human capital were tradeable, could be diversified away. It is shown that a optimal system of taxes and transfers not unlike the current Social Security system can eliminate this inefficiency, and therefore, it is suggested that a latent function of the present system may be to improve the efficiency of risk-bearing in the economy.