Showing papers in "Research Papers in Economics in 1985"

Productivity Growth, Convergence and Welfare: What the Long Run Data Show

Abstract: Maddison's 1870-1979 data are analyzed, showing the historically unprecedented growth in productivity, GDP per capita and exports and the remarkable convergence of productivities of industrialized market economies, with convergence apparently shared by planned economies but not less developed countries. Productivity lag's relation to "deindustrialization," unemployment and balance of payments is examined. The data confirm that U.S. productivity growth fell behind its extraordinary postwar peak but probably not below its long term level. It is also shown that more rapid productivity growth of other countries may only be a normal concommitant of convergence. Copyright 1986 by American Economic Association.(This abstract was borrowed from another version of this item.)

Income and Price Effects in Foreign Trade

Abstract: The following sections are included:INTRODUCTIONSPECIFICATION ISSUES IN TRADE MODELLINGECONOMETRIC ISSUES IN TRADE MODELLINGESTIMATES OF PRICE AND INCOME ELASTICITIES AND RELATED POLICY ISSUESCONCLUDING OBSERVATIONSREFERENCES

Relying on the Information of Interested Parties

Abstract: We investigate the conventional wisdom that competition among interested parties attempting to influence a decision maker by providing verifiable information brings out all the relevant information. We find that, if the decision maker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties, competition may be unnecessary; while if the decision maker is unsophisticated or not well informed, competition is not generally sufficient. However, if the interested parties' interests are sufficiently opposed, or if the decision maker is seeking to advance the parties' decision maker's need for prior knowledge about the relevant variables and for strategic sophistication. In other settings, only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow defective decision making.

Qualitative Choice Analysis: Theory, Econometrics, and an Application to Automobile Demand

Abstract: This book addresses two significant research areas in an interdependent fashion. It is first of all a comprehensive but concise text that covers the recently developed and widely applicable methods of qualitative choice analysis, illustrating the general theory through simulation models of automobile demand and use. It is also a detailed study of automobile demand and use, presenting forecasts based on these powerful new techniques. The book develops the general principles that underlie qualitative choice models that are now being applied in numerous fields in addition to transportation, such as housing, labor, energy, communications, and criminology. The general form, derivation, and estimation of qualitative choice models are explained, and the major models - logit, probit, and GEV - are discussed in detail. And continuous/discrete models are introduced. In these, qualitative choice methods and standard regression techniques are combined to analyze situations that neither alone can accurately forecast. Summarizing previous research on auto demand, the book shows how qualitative choice methods can be used by applying them to specific auto-related decisions as the aggregate of individuals' choices. The simulation model that is constructed is a significant improvement over older models, and should prove more useful to agencies and organizations requiring accurate forecasting of auto demand and use for planning and policy development. The book concludes with an actual case study based on a model designed for the investigations of the California Energy Commission.

Trade and Civilisation in the Indian Ocean

Abstract: Before the age of Industrial Revolution, the great Asian civilisations - whether located in the Middle East, India, South-East Asia, or the Far East - constituted areas not only of high culture but also of advanced economic development. They were the First World of human societies. This 1985 book examines one of the driving forces of that historical period: the long chain of oceanic trade which stretched from the South China Sea to the eastern Mediterranean. It also looks at the natural complement of the seaborne commerce, its counterpart in the caravan trade. Its main achievement is to show how socially determined demand derived from cultural habits and interpretations operated through the medium of market forces and relative prices. It points out the unique and limiting features of Asian commercial capitalism, and shows how the contribution of Asian merchants was valued universally, in reality if not legally and formally. Professor Chaudhuri's book, based on more than twenty years' research and reflection on pre-modern trade and civilisations, was a landmark in the analysis and interpretation of Asia's historical position and development.

Unnatural Value: Or Art Investment as Floating Crap Game

Abstract: (1985). Unnatural Value: Or Art Investment as Floating Crap Game. Journal of Arts Management and Law: Vol. 15, No. 3, pp. 47-60.

Dissolving a Partnership Efficiently

Abstract: Several partners jointly own an asset that may be traded among them. Each partner has a valuation for the asset; the valuations are known privately and drawn independently from a common probability distribution. We characterize the set of all incentive-compatible and interim- individually- rational trading mechanisms, and give a simple necessary and sufficient condition for such mechanisms to dissolve the partnership ex post efficiently. A bidding game is constructed that achieves such dissolution whenever it is possible. Despite incomplete information about the valuation of the asset, a partnership can be dissolved ex post efficiently provided no single partner owns too large a share; this contrasts with Myerson and Satterthwaite's result that ex post efficiency cannot be achieved when the asset is owned by a single party.

Consumer Involvement Profiles: A New and Practical Approach to Consumer Involvement

Abstract: Today, many advertising recommendations mention the target market's degree of involvement in justifying the chosen strategy. Consumers' involvement in products is believed to moderate considerably their reactions to marketing and advertising stimuli. Therefore it should affect copy, format, media, and repetition decisions. Foote, Cone, & Belding agencies worldwide have even adopted a strategy planning device, the "Grid," based on a highlow involvement dichotomy (Vaughn, 1980). Current practice measures involvement by a single index, or even a single item of product's perceived importance. A new stream of research initiated in Europe since 1981 has shown that the degree of involvement counts actually less than the source of this involvement. Empirical data on 37 product categories and derived from more than 7500 interviews show that involvement is not limited to a single dimension. It should rather be thought of as a profile of the dimensions of interest, perceived risk, pleasure value, and sign value (Kapferer and Laurent, 48 1984, 1985; Laurent and Kapferer. 1985). For advertising managers the involvement profile is an enlightening new tool for understanding the full dynamics of the relationship of consumers to products, for describing targets, and for market segmentation. The purpose of this article is to present the rationale and the main aspects of this new approach to the conceptualization and measurement of consumer involvement. Since its theoretical and methodological bases have already been presented at length elsewhere, we shall stress here the practical applications of the involvement profile.

The Specification and Influence of Asset Markets

Abstract: This paper is a chapter in the forthcoming Handbook of International Economics. It surveys the literature on the specification of models of asset markets and the implications of differences in specification for the macroeconomic adjustment process. Builders of portfolio balance models have generally employed "postulated" asset demand functions, rather than deriving these directly from micro foundations. The first major sec-tion of the paper lays out a postulated general specification of asset markets and summarizes the fundamental short-run results of portfolio balance models using a very basic specification of asset markets. Then,rudimentary specifications of a balance of payments equation and goods market equilibrium conditions are supplied, so that the dynamic distribution effects of the trade account under static and rational expectations with both fixed goods prices and flexible goods prices can be analyzed.The second major section of the paper surveys and analyzes microfoundation models of asset demands using stochastic calculus. The microeconomic theory of asset demands implies some but not all of the properties of the basic specification of postulated asset demands at the macrolevel. Since the conclusions of macroeconomic analysis depend crucially on the form of asset demand functions, it is important to continue to explore the implications of micro foundations for macro specification.

Are Devaluations Contractionary

Abstract: Recently a number of authors have criticized the role of devaluations in traditional stabilization programs It has been argued that, contrary to the traditional view, devaluations are contractionary, and generate a decline in aggregate output In spite of the renewed theoretical interest in the possible contractionary effects of devaluations, the empirical evidence on the subject has been quite sketchy In this paper the Khan and Knight (1981)model is extended to empirically address the issue of contractionary devaluations The extended model considers the effect of money surprises, fiscal factors, terms of trade changes and devaluations on the level of real output The results obtained, using a variance components procedure on data for 12 developing countries, provide some support to the short-run contractionary devaluation hypothesis; the results obtained indicate that in the short-run a devaluation will generate a decline in aggregate output It is also found that after one year a devaluation will have an expansionary effecton output The evidence suggests that in the long run, devaluations will have no effect on output

The Gathering Crisis in Federal Deposit Insurance

Abstract: The system of federal deposit insurance adopted during the 1930s has become increasingly costly and unreliable. This timely study warns bankers, regulators, politicians, and taxpayers that no matter how well the deposit-insurance system may have run in the past it is headed for an expensive bureaucratic breakdown. It forcefully argues that unless market discipline can be reintroduced, this breakdown threatens to take depository institutions into de facto nationalization. Reversing these trends, it points out, requires redesigning the deposit insurance system to curtail the subsidizing of risk taking by deposit institutions, a practice that has resulted in widespread insolvency among financial institutions. The Gathering Crisis in Federal Deposit Insurance provides more than a warning. It shows that the current system is unfair and has transformed the federal government into the chief supplier of equity funds to depository institutions. And it observes that whenever the financial environment is changing rapidly, the existing system of deposit insurance subsidizes risk-taking in ways that impose a huge, but largely unrecognized burden on the general taxpayer and conservatively managed financial institutions. In one way or another, the taxpayer is going to be called upon to make good the financially staggering amount of the system's guarantees. The book provides a comprehensive discussion of FDIC and FSLIC policies and procedures, describes the variety of risks facing deposit institutions and their implications for the insurance system, explains the perverse risk-bearing incentives inherent in the current deposit insurance system, documents the extent of actual insolvency at insured institutions, and proposes a framework for reform.

The Strategy Structure of Two Sided Matching Markets

Abstract: We study two-sided markets in which agents are buyers and sellers or firms and workers or men and women. The agents are to form partnerships (which provide them with satisfaction) and at the same time make monetary transfers (e.g. salaries or dowries). The core of this market game is shown to have a particularly nice structure so that precise answers can be given to questions concerning comparative statics and manipulability.

Testing the Efficiency of Employment Contracts

Abstract: This paper presents data on airline mechanics at eight of the largest U.S. airlines and describes the impact of the 1978 Airline Deregulation Act on their wage rates and employment levels. The major findings are: (1) up to 1983, real and relative wage rates of airline mechanics remained more or less constant across firms and over time; (2) the independence of mechanics' wage rates from firm-specific employment conditions after 1978 is consistent with pre-deregulatory experiences; (3) deregulation contributed to an existing trend of declining employment; and (4) deregulation did not bring about any systematic increase in mechanics' productivity.

Federal Tax Policy and Charitable Giving

Abstract: The United States is distinctive among Western countries in its reliance on nonprofit institutions to perform major social functions. This reliance is rooted in American history and is fostered by federal tax provisions for charitable giving. In this study, Charles T. Clotfelter demonstrates that changes in tax policy—effected through legislation or inflation—can have a significant impact on the level and composition of giving. Clotfelter focuses on empirical analysis of the effects of tax policy on charitable giving in four major areas: individual contributions, volunteering, corporate giving, and charitable bequests. For each area, discussions of economic theory and relevant tax law precede a review of the data and methodology used in econometric studies of charitable giving. In addition, new econometric analyses are presented, as well as empirical data on the effect of taxes on foundations. While taxes are not the most important determinant of contributions, the results of the analyses presented here suggest that charitable deductions, as well as tax rates and other aspects of the tax system, are significant factors in determining the size and distribution of charitable giving. This work is a model for policy-oriented research efforts, but it also supplies a major (and very timely) addition to the evidence that must inform future proposals for tax reform.

Adjusting Output and Productivity Indexes for Changes in the Terms of Trade

Abstract: In this paper we employ index number theory in addressing the problem of adjusting real national income and real domestic product for changes in a country's terms of trade More specifically, using recent developments in the theory of production, we address the problems related to measuring: (i) real output produced and real input utilized by the private business sector;(ii) productivity growth or technical change; (iii) the effects on domestic real output of changes in the terms of trade; and (iv) the impact on final sales to domestic purchasers of changes in the balance of payments deficit, in a consistent accounting frameworkThis treatment of international trade allows us to undertake comparative statics analyses using only production theory, whereas in the traditional paradigm which treats traded goods as perfectly substitutable with a class of domestic goods, a general equilibrium framework is required We illustrate our suggested solutions using US data for the years 1968-82

Dynamic R&D Competition

Abstract: We study a simple, two-stage, stochastic patent race involving two firms We examine the behavior of the participants as they gain the lead or fall behind in the race We find that the leader engages in R&D more intensively than does the follower, and that both firms intensify their efforts if the follower does catch up with the leader We also analyze (1) the attractiveness of licensing, whereby the leader shares his results with the follower,(2) a policy of issuing patents for intermediate research results, and (3) the effects of research joint ventures, whereby the firms coordinate their initial research efforts and share their results

Intergenerational Risk Sharing

Abstract: In this paper, we argue that in designing government debt and tax-transfer policies, it is important to consider their implications for the allocation of risk between generations. There is no reason to presume that the market or the family can allocate risk efficiently to future generations, implying that stochastic government policies have the potential to create first-order welfare improvements. The model provides a non-Keynsian justification for debt-finance of wars and recessions, as well as an added rationale for Social Security type tax-transfer schemes which aid unlucky generations, e.g., the Depression generation,at the expense of luckier generations.

Estimating the Continuous Time Consumption Based Asset Pricing Model

Abstract: The consumption based asset pricing model predicts that excess yields are determined in a fairly simple way by the market's degree of relative risk aversion and by the pattern of covariances between percapita consumption growth and asset returns Estimation and testingis complicated by the fact that the model's predictions relate to the instantaneous flow of consumption and point-in-time asset values, but only data on the integral or unit average of the consumption flow is available In our paper, we show how to estimate the parameters of interest consistently from the available data by maximum likelihood We estimate the market's degree of relative risk aversion and the instantaneous covariances of asset yields and consumption using six different data sets We also test the model's overidentifying restrictions

A Variance Bounds Test of the Linear Quardractic Inventory Model

Abstract: This paper develops and applies a novel test of the Holt, et al(1961) linear quadratic inventory model It is shown that a central property of the model is that a certain weighted sum of variances and covariances of production, sales and inventories must be nonnegative The weights are the basic structural parameters of the model The model may be tested by seeing whether this sum in fact is nonnegative When the test is applied to some non-durables data aggregated to the two-digit SIC code level, it almost always rejects the model, even though the model does well by traditional criteria

R&D and Productivity Growth: Comparing Japanese and U.S. Manufacturing Firms

Abstract: We compute rates of growth in labor productivity during the 1973-80 period for samples of individual manufacturing firms, in both Japan and the US, and relate them to differences in the rates of growth in their capital-labor ratios and in their intensities of R&D effort Japanese firms spent about as much of their own money on R&D, relative to sales, as did similar USfirms An econometric analysis of R&D performing firms leads to the acceptance of the hypothesis that the contribution of such expenditures to productivity growth was about the same in both countries Hence, the rather large differences on the observed rates of productivity growth between the two countries can not be accounted for by differences in either the intensity or fecundity of such expenditures We do find two important differences between the two countries which help to explain a significant fraction of the observed differences in productivity but require in turn, an explanation of their own: 1) Japanese firms reduced their employment levels significantly during this period while US firms were increasing theirs This, by itself, accounts for the twice as fast growth in capital-labor ratio in Japanese manufacturing 2) The estimated effect of the growth in the capital-labor ratio on firm productivity is approximately twice as large in Japan than in the US The two factors together can account for about half of the observed differences in the average rates of productivity growth between the two countries

On the current state of the stock market rationality hypothesis

Abstract: "Presented at the Italian-American Conference in honor of Franco Modigliani, at Martha's Vineyard, September 19-20, 1985."

Occupational change, employer change, and the transferability of skills

Abstract: The individual propensity to change occupations has been little analyzed by economists, despite its important implications for income growth and market adjustment. Individual income growth is commonly associated with one form of occupational change, that of upward occupational mobility. Several examples of upward mobility sequences are: technician to engineer to manager; receptionist to secretary to administrative assistant; laborer to operative to craft worker. Changes in these directions are likely to be accompanied by income growth, and conversely, downward occupational mobility would decrease income. The implicit cause of the income growth associated with upward mobility is the increase in the individual's skills and the return to those skills. In other words, each of the sequences listed above appears to represent a discontinuous sequence of investments in occupational skills. The resulting life cycle profile of investment and income growth is discontinuous and concave. Similar life cycle profiles would characterize an individual's change of employer or region. Yet, these latter two types of mobility have received much more attention by economists than has occupational change.' This paper attempts to address this gap, by developing a human capital investment model describing the direction and timing of occupational change. To place the research described below in perspective, one must first ask why there has been so little analysis of occupational change. Sociologists have long been interested in occupational mobility, analyzing it as a means of upward income mobility. Yet economists have focused on models of occupational choice, disregarding occupational change over the life cycle [4; 15]. These models of occupational choice rely most heavily on the effects of formal schooling, thus disregarding the majority of the labor force for whom formal schooling is not a major determinant of either occupational choice or subsequent occupational change. Two factors may have contributed to the lack of interest in occupational change. First, the analysis of occupational change has relatively little direct policy relevance, as compared to the analysis of labor institutions, for example. Occupational change was last examined in

Measuring consumer involvement profiles

Abstract: There is more than one kind of consumer involvement. Depending on the antecedents of involvement (e.g., the product's pleasure value, the product's sign or symbolic value, risk importance, and probability of purchase error), consequences on consumer behavior differ. The authors therefore recommend measuring an involvement profile, rather than a single involvement level. These conclusions are based on an empirical analysis of 14 product categories.