Showing papers in "Research Papers in Economics in 1982"

Judgment under Uncertainty

Abstract: The thirty-five chapters in this book describe various judgmental heuristics and the biases they produce, not only in laboratory experiments but in important social, medical, and political situations as well. Individual chapters discuss the representativeness and availability heuristics, problems in judging covariation and control, overconfidence, multistage inference, social perception, medical diagnosis, risk perception, and methods for correcting and improving judgments under uncertainty. About half of the chapters are edited versions of classic articles; the remaining chapters are newly written for this book. Most review multiple studies or entire subareas of research and application rather than describing single experimental studies. This book will be useful to a wide range of students and researchers, as well as to decision makers seeking to gain insight into their judgments and to improve them.

The Value of Waiting to Invest

Abstract: This paper studies the optimal timing of investment in an irreversible project where the benefits from the project and the investment cost follow continuous-time stochastic processes The optimal time to invest and an explicit formula for the value of the option to invest are derived The rule "invest if benefits exceed costs" does not properly account for the option value of waitingSimulations show that this option value can be significant, and that for surprisingly reasonable parameter values it may be optimal to wait until benefits are twice the investment cost Finally, we perform comparative static analysis on the valuation formula and on the rule for when to invest

Market Structure and Innovation

Abstract: Technical advance requires resources and is motivated by the quest for profits; therefore, the rate and direction of advance is determined by the economic system. Recognition of this fact has focused attention on the performance of the market economy in the allocation of resources to technical advance, and the consequent body of research is surveyed and synthesised in this book. The theories of market structure and innovation proposed by Schumpeter, Galbraith, Arrow, Schmookler, Scherer, Mansfield, Phillips, Barzel, Kamien and Schwartz, Loury, Nelson and Winter, Grabowski, Dasgupta and Stiglitz, and others are presented in an integrated form. These theories deal with the nature of competition, the incentives to innovate and the pace of innovative activity under different market structures, and the existence of a market structure that yields the most rapid rate of innovation. In addition, the findings of seventy empirical studies dealing with various facets of the microeconomics of technical innovation are presented. The book is designed to be accessible to economists working in a variety of situations - in universities, business and government - and who are concerned with questions of technical innovation. It is also suitable for senior-level undergraduates and first year graduate students approaching the subject in a comprehensive way for the first time.

Uncertain Innovation and the Persistence of Monopoly

Abstract: In a recent paper published in this Review, Gilbert and Newbery (1982) show that, because an incumbent firm enjoys greater marginal incentives to engage in R and D (under their assumption of deterministic invention), the incumbent firm will engage in preemptive patenting. Thus the industry will tend to remain monopolized, and by the same firm. They then argue heuristically that this result extends to the case in which innovation is uncertain. One form of this conjecture is that the incumbent patents the innovation more often than not. We briefly review the Gilbert and Newbery argument as well as those in related papers (Gilbert, 1981 and Craswell, 1981). We then present a model which incorporates uncertainty and concludes the contrary; that is, in a Nash equilibrium the incumbent firm invests less on the innovation than a challenger. Consequently, the incumbent firm will patent the innovation less often than not. This result indicates that one need worry far less about persistent monopoly than would be suggested by the Gilbert and Newbery analysis.

On the Estimation of Structural Hedonic Price Models

Abstract: MANY COMMODITIES can be viewed as bundles of individual attributes for which no explicit markets exist. It is often of interest to estimate structural demand and supply functions for these attributes, but the absence of directly observable attribute prices poses a problem for such estimation. In an influential paper published several years ago, Rosen [3] proposed an estimation procedure to surmount this problem. This procedure has since been used in a number of applications (see, for example, Harrison and Rubinfeld [2] or Witte, et al. [4]). The purpose of this note is to point out certain pitfalls in Rosen's procedure, which, if ignored, could lead to major identification problems. In Section 2 we summarize briefly the key aspects of Rosen's method as it has been applied in the literature. Section 3 discusses the potential problems inherent in this procedure and provides an example. Section 4 concludes with a few suggestions for future research.

Time Preference and Health: An Exploratory Study

Abstract: This paper reports the results of an exploratory survey designed to measure differences in time preference across individuals and to test for relationships between time preference and schooling, health behaviors, and health status. Approximately 500 adults age 25-64 were surveyed by telephone. Time preference was measured by a series of six questions asking the respondent to choose between a sum of money now and a larger sum at a specific point in the future. Approximately two-thirds gave consistent replies to the six questions. The implicit interest rate revealed in their replies is weakly correlated with years of schooling (negative), cigarette smoking (positive), and health status(negative). Family background, especially religion, appears to be an important determinant of time preference.

Intertemporal Substitution in Macroeconomics

Abstract: Modern neoclassical theories of the business cycle posit that aggregate fluctuations in consumption and employment are the consequence of dynamic optimizing behavior by economic agents who face no quantity constraint. In this paper, we estimate an explicit model :f this type. In particular, we assume that the observed fluctuations correspond to the decisions of an optimizing representative individual. This individual has a stable utility function which is additively separable over time but not necessarily additively separable in consumption and leisure. We estimate three first order conditions which represent three margins on which the individual is optimizing. He can trade off present consumption for future consumption, present leisure for future leisure and present consumption for present leisure. Our results show that the aggregate U.S. data are extremely reluctant to be characterized by a model of this type. Not only are the overidentifying restrictions statistically rejected but, in addition, the estimated utility function is often not concave. Even when it is concave the estimates imply that either consumption or leisure is an inferior good.

On Least Squares Estimation when the Dependent Variable is Grouped

Abstract: This paper examines the problem of estimating the parameters of an underlying linear model using data in which the dependent variable is only observed to fall in a certain interval on a continuous scale, its actual value remaining unobserved. A Least Squares algorithm for attaining the Maximum Likelihood estimator is described, the asymptotic bias of the OLS estimator derived for the normal regressors case and a "moment" estimator presented. A "two-step estimator" based on combining the two approaches is proposed and found to perform well in both an economic illustration and simulation experiments.

The biology and culture of tilapias

Abstract: The 1980 international conference on the Biology and Culture of Tilapias held in Bellagio, Italy, was a unique gathering of biologists and culturists to review existing information on tilapias and to suggest profitable areas for future work.

Bubbles, Rational Expectations and Financial Markets

Abstract: This paper investigates the nature and the presence of bubbles in financial markets. Are bubbles consistent with rationality? If they are, do they, like Ponzi games, require the presence of new players forever? Do they imply impossible events in finite time, such as negative prices? Do they need to go on forever to be rational? Can they have real effects? These are some of the questions asked in the first three sections. The general conclusion is that bubbles, in many markets, are consistent with rationality, that phenomena such as runaway asset prices and market crashes are consistent with rational bubbles. In the last two sections, we consider whether the presence of bubbles in a particular market can be detected statistically. The task is much easier if there are data on both prices and returns. In this case, as shown by Shiller and Singleton, the hypothesis of no bubble implies restrictions on their joint distribution and can be tested. In markets in which returns are difficult to observe, possibly because of a nonpecuniary component, such as gold, the task is more difficult. We consider the use of both "runs tests" and "tail tests" and conclude that they give circumstantial evidence at best.

Asset Accumulation and Economic Activity

Abstract: In this work James Tobin discusses two major issues of macroeconomics: the strength of automatic market forces in maintaining full employment equilibrium and the efficacy of government fiscal and monetary policies in stabilizing the economy.

Employment and Unemployment

Abstract: This book was first published in 1982. Unemployment is perhaps one of the most serious social problems. In economic terms the cost of unemployment, both to the individual and to the collective, is extremely high. But unemployment has other effects too. In this book Marie Jahoda looks beyond the obvious economic consequences, to explore the psychological meaning of employment and unemployment. The book is an accessible and nontechnical account of the contribution which social psychology can make to understanding unemployment and clearly reveals the limitations of an exclusive concentration on its economic aspects. Professor Jahoda shows that the psychological impact is hugely destructive, throwing doubt on the popular diagnosis that the work ethic is disappearing. She also analyses the experience of unemployment in the context of the experience of employment and argues that one of the socially destructive consequences of large-scale unemployment is that it detracts from the need to humanise employment.

Time-Separable Preference and Intertemporal-Substitution Models of Business Cycles

Abstract: Time-separability of utility means that past work and consumption do not influence current and future tastes This form of preferences does not restrict the size of intertemporal-substitution effects--notably, we can still have a strong response of labor supply to temporary changes in wages However, there are important constraints on the relative responses of leisure and consumption to changes in relative-price and in permanent income When the usual aggregation is permissible, time-separability has some important implications for equilibrium theories of the business cycle Neglecting investment, we, find that changes in perceptions about the future -- which night appear currently as income effects -- have no influence on current equilibrium output With investment included, no combination of income effects and shifts to the perceived profitability of investment will yield positive co-movements of output, employment, investment and consumption Therefore, misperceived monetary disturbances or other sources of changed beliefs about the future cannot be used to generate empirically recognizable business cycles Some richer specifications of intertemporal production opportunities may eventually yield more satisfactory answers Because of the positive correlation between cyclical movements of consumption and work, equilibrium theories with time-separable preferences inevitably predict a procyclical behavior for the real wage rate, arising from shifts to labor's marginal product Empirically, we regard the cyclical behavior of real wages as an open question Aside from analyzing autonomous real shocks to productivity, we suggest that such shifts may occur as firms vary their capital utilization in response to intertemporal relative prices However, we still lack some parts of a complete theory

Asset Prices in a Production Economy

Abstract: This paper develops an intertemporal general equilibrium theory of capital asset pricing. It is an attempt to put together ideas from the modern finance literature and the literature on stochastic growth models. In this way we will obtain a theory that ultimately is capable of addressing itself to general equilibrium questions such as: (1) What is the impact of an increase in the corporate income tax upon the relative prices of risky stocks? (2) What is the impact of an increase in progressivity of the personal income tax upon the relative price structure of risky assets? (3) What conditions on tastes and technology are needed for the validity of the Sharpe-Lintner certainty equivalence formula and the Ross (1976) arbitrage theory and so forth?

Expectations, Life Expectancy, and Economic Behavior

Abstract: Unlike price expectations, which are central to macroeconomic theory and have been examined extensively using survey data, formation of individuals' horizons, which are central to the theory of life-cycle behavior, have been completely neglected. This is especially surprising since life expectancy of adults has increased especially rapidly in Western countries in the past ten years. This study presents the results of analyzing responses by two groups--economists and a random sample--to a questionnaire designed to elicit subjective expectations and probabilities of survival. It shows that people do not extrapolate past improvements in longevity when they determine their subjective horizons, though they are fully aware of levels of and movements within today's life tables. They skew subjective survival probabilities in a way that implies the subjective distribution has greater variance than its actuarial counterpart; and the subjective variance decreases with age. They also base their subjective horizons disproportionately on their relatives' longevity, and long-lived relatives increase uncertainty about the distribution of subjective survival probabilities. As one example of the many areas of life-cycle behavior to which the results are applicable, the study examines the consumption-leisure choices of the optimizing consumer over his lifetime. It finds that shortfalls in utility in old age because people's ex ante horizons had to be updated as -- average longevity increased are relatively small. This implies that large subsidies to retirees under today's Social Security system cannot be justified as compensation for an unexpectedly long retirement for which they failed to save.

Tanzania: A Political Economy

Abstract: Tanzania in the 1970s was at the forefront of policy innovation. Near-universal primary education, access to health services and supplies of clean water subsequently became mainstream ambitions in Africa and elsewhere. But its policies towards agricultural and industrial production failed and left the country in a particularly weak position when it faced the demands of structural adjustment in the 1980s. This book, originally published in 1982, has been reissued with a new introduction which brings its themes up to the present, when income from gold mining and natural gas is making Tanzania one of the most dynamic economies in Africa today. The author, first an economic civil servant in Tanzania, later an academic at the University of Dar es Salaam, was in a unique position to write it, drawing on his own experiences as well as the plethora of ideas and debates in Dar es Salaam in the 1970s. The book has stood the test of time not only because of the range of material it covers but more profoundly because of the approach it takes to the work of Tanzania's founding president, Julius Nyerere - sympathetic to his ideas, deeply critical of failures in implementation. 25 short easily-read chapters take the story of Tanzania from pre-colonial times to the present, and show how Nyerere was hemmed in by what he inherited from the German and British colonialists who ran the country up to Independence in 1961. It provides an invaluable introduction to anyone coming to the country for the first time, and offers a profound assessment of the theoretical debates that have made Tanzania of such interest to students of development.

The Production and Inventory Behavior of the American Automobile Industry

Abstract: Understanding inventory movements is central to an understanding of business cycles. This paper presents an empirical study of the behavior of inventories in the automobile industry. It finds that inventory behavior is well explained by the assumption of intertemporal optimization with rational expectations. The underlying cost structure appears to have substantial costs of changing production as well as substantial costs of being away from target inventory, the latter being a function of current sales. Given this cost structure, whether inventory behavior is stabilizing or destabilizing depends on the characteristics of the demand process. In the automobile industry, inventory behavior is destabilizing: the variance of production is larger than the variance of sales.

An Intertemporal Model of Saving and Investment

Abstract: The standard model of optimal growth, interpreted as a model of a market economy with infinitely long-lived agents, does not allow separation of the savings decisions of agents from the investment decisions of firms. Investment is essentially passive: the "one good" assumption leads to a perfectly elastic investment supply; the absence of installation costs for investment leads to a perfectly elastic investment demand. On the other hand, the standard model of temporary equilibrium used in macroeconomics characterizes both the savings-consumption decision and the investment decision, or, equivalently, derives a well-behaved aggregate demand which, in equilibrium, must be equal to aggregate supply. Often, however, we want to study the movement of the temporary equilibrium over time in response to a particular shock or policy. The discrepancy between the treatment of investment in the two models makes imbedding the temporary equilibrium model in the growth model difficult. This paper characterizes the dynamic behavior of the optimal growth model with adjustment costs. It shows the similarity between the temporary equilibrium of the corresponding market economy and the short-run equilibrium of standard macroeconomic models: consumption depends on wealth, investment on Tobin's q. Equilibrium is maintained by the endogenous adjustment of the term structure of interest rates. It then shows how the equivalence can be used to study the dynamic effects of policies; it considers various fiscal policies and exploits their equivalence to technological shifts in the optimal growth problem.

Exact Small Sample Theory in the Simultaneous Equations Model

Abstract: Publisher Summary This chapter provides a general framework for the distribution problem and details formulae that are frequently useful in the derivation of sampling distributions and moments. It also provides an account of the genesis of the Edgeworth, Nagar, and saddlepoint approximations. The chapter discusses the Wishart distribution and some related issues that are central to modem multivariate analysis and on which much of the present development of exact small-sample theory depends. The chapter discusses the exact theory of single-equation estimators, commencing with a general discussion on the standardizing transformations that provide research economy in the derivation of exact distribution theory in this context and simplify the presentation of final results without loss of generality. The current information on the exact small-sample behavior of structural variance estimators, test statistics, systems methods, reduced-form coefficient estimators, and estimation under misspecification are also discussed in the chapter.

The Optimal Level of Social Security Benefits

Abstract: The optimal level of Social Security benefits depends on balancing the protection that these benefits offer to those who have not provided adequately for their own old age against the welfare costs of distorting economic behavior The primary such cost is the distortion in private saving The present paper derives the level of Social Security benefits that is optimal in three basic cases In the first section of the paper, the optimal level of benefits is derived for an economy in which all individuals do not anticipate retirement at all and therefore do not save The second and third sections then derive the optimal benefits for economies with two different definitions of attitudes toward retirement and saving

Are Bond-Financed Deficits Inflationary? A Ricardian Analysis

Abstract: This paper considers the possible theoretical validity of the following "monetarist hypothesis": that a constant, positive government budget deficit can be maintained permanently and without inflation if it is financed by the issue of bonds rather than money The question is studied in a discrete-time, perfect-foresight version of the competitive equilibrium model of Sidrauski (1967), modified by the inclusion of government bonds as a third asset It is shown that the monetarist hypothesis is invalid if the deficit is defined exclusive of interest payments, but is valid under the conventional definition It is also shown that the stock of bonds can grow indefinitely at a rate in excess of the rate of output growth, provided that the difference is less than the rate of time preference In addition to the main analysis, the paper includes comments on alternative deficit concepts, a brief consideration of data pertaining to the announced budget plans of the Reagan administration, and a new look at a much- studied issue: whether the operation of a Friedman-type constant money growth rule (with non-activist fiscal rules) would be dynamically feasible

Import Competition and Response

Abstract: These papers, by a number of leading international-trade theorists, present the first significant theoretical work to be done on a topic of considerable interest, import competition. Nine theoretical papers, on topics ranging from protectionist lobbying to adjustment costs, are synthesized in the editor's Introduction, which also contrasts these contributions with the traditional classroom analysis of import competition. Three major empirical studies close the volume. It will prove indispensable for anyone who wishes to think clearly about import competition and about how economies do and should respond to it."

Money and Finance in the Macro-Economic Process

Abstract: Prize Lecture to the memory of Alfred Nobel, December 8, 1981(This abstract was borrowed from another version of this item.)(This abstract was borrowed from another version of this item.)