Showing papers in "Social Science Research Network in 1982"

An Evolutionary Theory of Economic Change

Abstract: This study develops an evolutionary theory of the capabilities and behavior of business firms operating in a market environment. It includes both general discussion and the manipulation of specific simulation models consistent with that theory. The analysis outlines the differences between an evolutionary theory of organizational and industrial change and a neoclassical microeconomic theory. The antecedents to the former are studies by economists like Schumpeter (1934) and Alchian (1950). It is contrasted with the orthodox theory in the following aspects: while the evolutionary theory views firms as motivated by profit, their actions are not assumed to be profit maximizing, as in orthodox theory; the evolutionary theory stresses the tendency of most profitable firms to drive other firms out of business, but, in contrast to orthodox theory, does not concentrate on the state of industry equilibrium; and evolutionary theory is related to behavioral theory: it views firms, at any given time, as having certain capabilities and decision rules, as well as engaging in various ‘search' operations, which determines their behavior; while orthodox theory views firm behavior as relying on the use of the usual calculus maximization techniques. The theory is then made operational by the use of simulation methods. These models use Markov processes and analyze selection equilibrium, responses to changing factor prices, economic growth with endogenous technical change, Schumpeterian competition, and Schumpeterian tradeoff between static Pareto-efficiency and innovation. The study's discussion of search behavior complicates the evolutionary theory. With search, the decision making process in a firm relies as much on past experience as on innovative alternatives to past behavior. This view combines Darwinian and Lamarkian views on evolution; firms are seen as both passive with regard to their environment, and actively seeking alternatives that affect their environment. The simulation techniques used to model Schumpeterian competition reveal that there are usually winners and losers in industries, and that the high productivity and profitability of winners confer advantages that make further success more likely, while decline breeds further decline. This process creates a tendency for concentration to develop even in an industry initially composed of many equal-sized firms. However, the experiments conducted reveal that the growth of concentration is not inevitable; for example, it tends to be smaller when firms focus their searches on imitating rather than innovating. At the same time, industries with rapid technological change tend to grow more concentrated than those with slower progress. The abstract model of Schumpeterian competition presented in the study also allows to see more clearly the public policy issues concerning the relationship between technical progress and market structure. The analysis addresses the pervasive question of whether industry concentration, with its associated monopoly profits and reduced social welfare, is a necessary cost if societies are to obtain the benefits of technological innovation. (AT)

Inside the Black Box: Technology and Economics

Abstract: Explores how technological innovation has shaped and been shaped by science, industry, and economics in the twentieth century. Technological change and specific technologies have impacted productivity, the learning process, technology transfer and technology policies. Starting with a summary of historical literature on technical progress, the book goes on to discuss and promote Karl Marx's influential method of studying technology as the result of interrelated social processes -- especially emphasizing the mutual interaction between technology and the economy. Analysis of current empirical studies shows the need for an enlarged framework for understanding the relation between the economy and technical change. Technological interdependence in the American economy is analyzed, and later expanded to encompass international business. High-tech industries are discussed as particularly reliant upon scientific research. The commercial aircraft industry from 1925-75 is also examined, as an exemplary instance in which technological innovation and government support and regulation allowed for economic success. The book concludes that scientific progress is heavily influenced by technological considerations that are, in turn, shaped by industry and economics. Thus, decisions made in the private and public sectors should affect both supply and demand, favoring the creative, mutually advantageous connection between science and technology. (CJC)

The Social Dimensions of Entrepreneurship

Abstract: Conventional ways of viewing the social aspects of entrepreneurship are considered unsatisfactory; hence, this emphasis is recast in terms of the "entrepreneurial event." The entrepreneurial event is shaped by groupings of social variables (such as ethnic groups) and the social and cultural environment. The entrepreneurial event is denoted by initiative-taking, consolidation of resources, management, relative autonomy, and risk-taking. The proposed paradigm attempts to include all versions of the entrepreneurial event and all variables (situational, social, and individual) identified with the event. The paradigm will answer two basic questions: what brought about the life-changing event? and why this particular event? Negative information, events, or displacements often lead to entrepreneurial events. The particular action taken depends upon (1) perceptions of desirability (values), and (2) perceptions of feasibility. The utility of the paradigm lies in its application to questions of policy, historical examples, and future research. (TNM)

The Psychology of the Entrepreneur

Abstract: This chapter surveys the psychological literature on entrepreneurs, published prior to 1982, including research on their personal characteristics and previous personal and business experiences There is no well-defined population of entrepreneurs (due to lack of consensus on definition), so comparisons and generalizations are dangerous; however, there is some consistency in psychological characteristics Three categories of research are discussed (1) Psychological characteristics A causal link between high need for achievement and small business ownership is not found; an internal locus-of-control belief does not distinguish entrepreneurs, but may identify successful ones; propensity for risk-taking may not be related to either entrepreneurship decision or success; personal values (need for achievement, independence, and effective leadership) may effectively distinguish successful entrepreneurs from the general population (2) Effects of previous experience Dissatisfaction with previous jobs (except pay) characterizes entrepreneurs; an unemployed person is more likely to start a business; and a large percentage of entrepreneurs had role models who were entrepreneurs (3) Personal characteristics associated with entrepreneurs Entrepreneurial decisions are most likely made between ages 25 and 40; entrepreneurs are better educated than the general population; and entrepreneurs are likely to remain in their home area The research is synthesized into a tentative model of the entrepreneur Future research subjects and methods are proposed (TNM)

Adapting to Environmental Jolts

Abstract: This paper examines organizational adaptations to an environmental jolt -- a sudden and unprecedented event (in this case, a doctors' strike) that created a natural experiment within a group of hospitals Although adaptations were diverse and appeared anomalous, they are elucidated by considering the hospitals' antecedent strategies, structures, ideologies, and stockpiles of slack resources Assessments of the primacy of the antecedents suggest that ideological and strategic variables are better predictors of adaptations to jolts than are structural variables or measures of organizational slack Although abrupt changes in environments are commonly thought to jeopardize organizations, environmental jolts are found to be ambiguous events that offer propitious opportunities for organizational learning, administrative drama, and introducing unrelated changes

Corporate Financial Structure and Managerial Incentives

Abstract: No abstract is available for this paper.

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.

Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets

Abstract: We examine the implications of arbitrage in a market with many assets. The absence of arbitrage opportunities implies that the linear functionals that give the mean and cost of a portfolio are continuous; hence there exist unique portfolios that represent these functionals. These portfolios span the mean-variance efficient set. We resolve the question of when a market with many assets permits so much diversification that risk-free investment opportunities are available. Ross 112, 141 showed that if there is a factor structure, then the mean returns are approximately linear functions of factor loadings. We define an approximate factor structure and show that this weaker restriction is sufficient for Ross' result. If the covariance matrix of the asset returns has only K unbounded eigenvalues, then there is an approximate factor structure and it is unique. The corresponding K eigenvectors converge and play the role of factor loadings. Hence only a principal component analysis is needed in empirical work.

The Effect of the Minimum Wage on Employment and Unemployment: A Survey

Abstract: In this paper, we survey theoretical models of the effect of the minimum wage and, in somewhat greater detail, evidence of its effect on employment and unemployment. Our discussion of the theory emphasizes recent work using two-sector and heterogeneous-worker models. We then summarize and evaluate the large literature on employment and unemployment effects of the minimum on teenagers. Finally, we survey the evidence of the effect of the minimum wage on adult employment, and on employment in low-wage industries and areas.

The Entrepreneur: An Economic Theory

Abstract: Casson contends that, because of several assumptions made by classical economic theory, there is no established economic theory of the entrepreneur. A theory of the entrepreneur is needed to explain firm success or failure, firm creation and growth, economic growth and development, and income distribution. The entrepreneur is significant historically because, although he is atypical, he has altered the course of history. The essence of a theory of the entrepreneur should be both the rationalization of success and explanation of failure. A theory of the function of the entrepreneur will have an important role in a theory of economic dynamics, the competitive process, and trade cycles. The book proceeds based on two reconstructions of economic theory. (1) Individuals differ in taste and access to information; the entrepreneur proceeds on the basis of the unique information available to him. (2) There are inherent difficulties (transaction costs) in organizing markets; the entrepreneur often must create market institutions. Casson's theory converges functional and indicative definitions of the entrepreneur. He defines an entrepreneur as "someone who specializes in taking judgmental decisions about the coordination of scarce resources." Skills essential for the entrepreneur are identified. The most important concept for Casson's theory is coordination, as a problem and a process, private or social. It is the dynamic counterpart of allocation; two mechanisms are contract and conjecture. Bargaining must converge to equilibrium. The entrepreneur's assessment (the role of his superior judgment) of a situation (coupled with his role as intermediator) is crucial toward influencing where, when, and how coordination occurs. Coordination reduces the entrepreneur's exposure to uncertainty through insurance and speculation. Coordination is difficult in the realm of public goods (goods in common ownership). Entrepreneurial coordination is always partial, because it engages only a small sector of the economy; partial coordination is continuous, and overall consistency cannot be guaranteed. The theory of the entrepreneur is related to the theory of the market making firm: the entrepreneur operates in a market economy through the firm, of which the entrepreneur is the founder or owner-manager. To overcome obstacles to trade, market-making activities are required, which involve information and incur costs. Transaction costs can be reduced by market internalization. The entrepreneur can internalize the exploitation of commercial information upon which his superior judgment is based. When re-contracting is difficult, the market-maker responds by building inventory. Market-making services to buyers and sellers are usually packaged by an intermediator; the entrepreneurship function of producers and retailers is "impure." The economies of centralized control, which can be delegated and occur in many forms, can be attributed to the internalization of a market. Entrepreneurs adopt hard-line bargaining strategies because they believe they have superior market knowledge. The economic factors governing the growth rate of the firm are analyzed using concepts developed previously in the book. New firm formation results from opportunity recognition by the entrepreneur and the belief that it is best exploited by self-employment; the family is a major source of capital, labor, and information. The market for entrepreneurs operates uniquely; it allocates judgment decisions to entrepreneurs. The number of entrepreneurs and their rewards are analyzed. Because of major social and economic barriers, the heroic figure of the entrepreneur is a myth; entrepreneurship, however, is important for social mobility, even though the absolute degree is rather limited. Alternative economic theories of Leibenstein, Hayek and Kirzner, Knight, Schumpeter, and Andrews and Penrose are critically reviewe

Coordination and Collaboration: Regimes in an Anarchic World

Abstract: The study of regimes can contribute to our understanding of international politics only if regimes represent more than international organizations and less than all international relations. The conceptualization of regimes developed here accepts the realist image of international politics, in which autonomous self-interested states interact in an anarchic environment. Yet there are situations in which rational actors have an incentive to eschew unconstrained independent decision making, situations in which individualistic self-interested calculation leads them to prefer joint decision making (regimes) because independent self-interested behavior can result in undesirable or suboptimal outcomes. These situations are labeled dilemmas of common interests and dilemmas of common aversions. To deal with these, states must collaborate with one another or coordinate their behavior, respectively. Thus there are different bases for regimes, which give rise to regimes with different characteristics. Coordination is self-enforcing and can be reached through the use of conventions. Collaboration is more formalized and requires mechanisms both to monitor potential cheating and to insure compliance with the regime. The article elucidates the assumptions of such an interest-based approach to regimes, assimilates alternative explanations into this framework, and develops the implications for regime maintenance and change.

Encyclopedia of entrepreneurship

Abstract: Reviews the state of entrepreneurship research from multiple frameworks, including sociological and psychological views of the entrepreneur, economic development, venture capital, and education. Entrepreneurship is defined as the creation of new business enterprises by individuals or small groups, with the entrepreneur assuming the role of society's major agent of change, initiating the industrial progress that leads to wider cultural shifts. Entrepreneurship research flourished in the 1970s, with growing general public interest, an increase in course offerings, and rising federal interest and spending. These trends point to the necessity of synthesizing entrepreneurship research, which is still in its infant stage. With this goal in mind, the book is divided into five categories of research: (1) the entrepreneur (general definitions, psychology and sociology); (2) entrepreneurial technology (small vs. big business, venture and risk capital; (3) progress (economic growth and development, innovation, and environmental factors); (4) academia (methods and directions of research and education); and, finally (5) areas for future study. While findings from the reviewed research provide important insights into entrepreneurship, overall the literature lacks a clear basis for understanding the effects and effectiveness of entrepreneurship education -- that is, what the entrepreneurial process consists of, and whether it can be taught or learned. In addition, as most of the studies are considered 'exploratory,' more developed, systematic research methods need to be implemented as the field develops. After all, it is concluded, policies based on entrepreneurship research will play a key role in shaping not only industry, but our society's rate of progress and future well-being. (CJC)

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 waiting.Simulations 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.

Who Does R&D and Who Patents?

Abstract: This paper describes the construction of a large panel data set covering about 2600 firms in the U.S. manufacturing sector for up to twenty years which contains annual data on financial variables, employment, research and development expenditures, and aggregate patent applications. This data set is to be used in a larger study of R&D, inventive output and technological change. In the present paper we present preliminary results on the R&D and patenting behavior of the 1976 cross section of these firms. We find an elasticity of R&D with respect to sales of close to unity, with both very small and very large firms being slightly more R&D intensive than average. Because only 60% of the firms report R&D expenditures, we attempt to correct for selectivity bias and find that though the correction is small, it increases the estimated complementarity between capital intensity and R&D intensity. In exploring the relationship of the patenting activity of these firms to their contemporaneous R&D expenditures, we look with some care at the choice of econometric specifications since the discrete nature of the patents variable for our smaller firms may cause difficulties with the conventional log linear model. The choice of specification does indeed make a difference, and the negative binomial model, which is a Poisson-type model with a disturbance, is preferred. Substantively, we find a much larger output of patents per R&D dollar for the small firms, with a decreasing propensity to patent with size of R&D programs throughout the sample. However, this conclusion is highly tentative both because of its sensitivity to specification and choice of sample and also because we expect that errors in variables bias due to our focus on R&D and patent applications in a single year is far worse for the small firms.

New Methods for Analyzing Structural Models of Labor Force Dynamics

Abstract: This paper takes a first step toward developing econometric models for the structural analysis of labor force dynamics. Our analysis is presented in continuous time, although most of the points raised here can be applied to discrete time models. We show that in previous attempts to estimate "structural" models of job search, a key source of information necessary to identify certain structural parameters has been neglected. We discuss the conditions under which structural search models can be estimated. In particular, the wage offer distribution must be recoverable -- i.e., it must be the case that the parameters of the untruncated wage offer distribution be estimable from the truncated accepted wage distribution. The wage offer distribution must be assumed to belong to a parametric family. Estimates of structural parameters are shown to be sensitive to the distributional assumption made. A partial equilibrium two state model of employment dynamics is estimated, using data from the National Longitudinal Survey of Young Men. We find employment and nonemployment rates implied by the structural parameter estimates to be generally consistent with those observed for the population of young males.

Are Unemployment and Out of the Labor Force Behaviorally Distinct Labor Force States

Abstract: This paper formulates and tests the hypothesis that the categories unemployed and out of the labor force are behaviorally distinct labor force states. Our empirical results indicate that they are. In the empirically relevant range the exit rate from unemployment to employment exceeds the exit rate from out of the labor force to employment. This evidence is shown to be consistent with a simple job search model of productive unemployment with log concave wage offer distributions. We prove that if unemployed workers receive job offers more frequently than workers out of the labor force, and if wage offer distributions are log concave, the exit rate from unemployment to employment exceeds the exit rate from out of the labor force to employment.

Are Real Interest Rates Equal Across Countries? an Empirical Investigation of International Parity Conditions

Abstract: The proposition that real rates are equal across countries is worth studying because it is central to our understanding of open economy macroeconomics and because it is also an important issue to policy makers. If it is true, then domestic monetary authorities have no control over their real rate relative to the world rate, limiting the impact of their stabilization policies. In addition, as Feldstein has pointed out, unless real rates can differ across countries, policies directed at increasing domestic savings cannot increase the rate of capital formation and hence productivity. The equality of real rates is also worth investigating, because it is intimately linked to and provides information on the basic parity conditions featured so prominently in open economy macro models.This paper conducts empirical tests of the equality of real rates and other parity conditions across countries using euro rate data over the1967-II to 1979-II sample period. The empirical evidence strongly rejects the hypothesis of the equality of real euro rates across countries. The joint hypotheses of uncovered interest parity and ex ante relative PPP, or the unbiasedness of forward rate forecasts and ex ante relative PPP, are also strongly rejected. Yet independent tests of uncovered interest parity, the unbiasedness of forward rate forecasts and ex ante relative PPP yield few rejections and high marginal significance levels. The evidence suggests that it is worth studying open economy models which allow: 1) domestic real rates to differ from world rates, 2) time varying risk premiums in the forward market or 3) deviations from ex ante relative purchasing power parity.The evidence also leaves open the possibility for policy makers to exertsome control over their domestic real rate relative to those in the rest of the world. However, the evidence does not rule out that there is a tendency for real rates across countries to equalize over time, and this is an important topic for further research.

International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence

Abstract: In an open economy, the scope for activist stabilization policy depends on the nature of the lincages between domestic and international markets for goods and assets. Tgo important relationships--purchasing power parity and uncovered interest-rate parity--have received extensive empirical atpention in recent years and are fundamental building blocks of several eipirical ex- change rate models. This paper reviews and extends recent econometric findings on these two classical parity relationships and on their corollary, the international equality of expected real interest rates. Econometric tests assuming rationality of expectations are on the whole unfavorable to the classical parity relationships: with few exceptions, they are strongly rejected. A central theme in the review of empirical work is the conditional heteroskedasticity of inflation and exchange rate forecast errors and the bias this statistical problem may impart to tests of inter- national parity relationships. The paper proposes and implements a test for conditional heteroskedasticity which in many cases produces strong evidence that the problem is indeed important.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Unionization and Firm Performance: The Impact on Profits, Growth and Productivity

Abstract: This paper examines the impact of unionization on profit- ability, growth and productivity using time series data on over 900 product line businesses in the North American manufacturing sector (predominantly U.S.). The first section of the paper develops a simple theoretical framework for studying the effect of the union on firm performance. A key result of this analysis is that information about union wage and productivity effects is not sufficient to permit prediction of the sign (or magnitude) of consequent changes in the rate of return on capital; one must know the parameters of production and demand. Expanding the model to allow for the effects of market structure and alternative bargaining regimes establishes the need to examine several indicators of firm performance in assessing the impact of the union. The empirical analysis reveals sizeable negative union effects on profitability, but growth, productivity and the capital-labor ratio appear to be little affected by unionization in this data. The data are thus consistent with a model of union-firm interaction in which collective bargaining affects the distribution of profits, but leaves real magnitudes unchanged. The evidence suggests, however, that unionization may have longer term implications for efficiency since the impact on profitability appears to fall most heavily on firms with relatively little market power.

A Transactions Based Model of the Monetary Transmission Mechanism: Part 1

Abstract: What are the effects of open market operations? How do these differ from money falling from heaven? We propose a new explanation of how open market operations can change real and nominal interest rates which emphasizes three often mentioned but seldom explicitly articulated features of actual monetary economies: i) going to the bank is costly so that people will tend to bunch cash withdrawals, ii) people don't all go to the bank simultaneously and, because of these, iii) at any instant of time agents hold different amounts of cash. We show that these considerations imply that an open market purchase of a bond for fiat money will drive down nominal and real interest rates, lead to a delayed positive price response, and have damped persistent effects on both prices and nominal interest rates if agents have logarithmic utility of consumption. We assume output is exogenous, so that the model can shed only indirect light on the relationship between money and aggregate output. The model has emphasized how a change in the money supply affects the spending decision of those agents making withdrawals at the time of an open market operation. Considerations of intertemporal substitution imply that the real rate must decline to induce these agents to consume more. Because this new money is spent gradually, prices will rise slowly and reach their steady state level long after the interval of time between trips to the bank.

Models for the Analysis of Labor Force Dynamics

Abstract: This paper presents new econometric methods for the empirical analysis of individual labor market histories. The techniques developed here extend previous work on continuous time models in four ways: (1) A structural economic interpretation of these models is presented. (2) Time varying explanatory variables are introduced into the analysis in a general way. (3) Unobserved heterogeneity components are permitted to be correlated across spells. (4) A flexible model of duration dependence is presented that accommodates many previous models as a special case and that permits tests among competing specifications within a unified framework. We contrast our methods with more conventional discrete time and regression procedures. The parameters of continuous time models are in- variant to the sampling time unit used to record observations. Problems plague the regression approach to analyzing duration data which do not plague the likelihood approach advocated in this paper. The regression approach cannot be readily adopted to accommodate time varying explanatory variables. The functional forms of regression functions depend on the time paths of the explanatory variables. Ad hoc solutions to this problem can make exogenous variables endogenous to the model and so can induce simultaneous equations bias. Two sets of empirical results are presented. A major conclusion of the first analysis is that the discrete time Markov model widely used in labor market analysis is inconsistent with the data. The second set of empirical results is a test of the hypothesis that "unemployment" and "out of the labor force" are behaviorally different labor market states. Contrary to recent claims, we find that they are separate states for our sample of young men.

Tax Policy and Foreign Direct Investment in the United States

Abstract: This paper provides some evidence on one aspect of international investment, the impacts of domestic tax policy on foreign direct investment in the United States. The possible impacts, which are discussed in the first section, are complex. For example, an investment incentive which applies to both domestic and foreign investors would be expected to result in an increased foreign investment in the U.S. On the other hand, a savings incentive, which has no direct impact on foreign investors, would nevertheless tend to increase domestic investors' demand for capital assets, thereby driving down the returns expected by foreign investors and possibly resulting in significant decreases in foreign investment. Because of measurement difficulties, we are only partly successful in obtaining precise estimates of this sort of impact. However, the results we do obtain suggest that foreign investment in the U.S. is strongly affected, in the manner predicted, by changes in domestic tax policy.

The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect

Abstract: This paper critically re-examines theory and evidence on the relation- ship between interest rates and inflation. It concludes that there is no evidence that interest rates respond to inflation in the way that classical or Keynesian theories suggest, For the period 1860-1940, it does not appear that inflationary expectations had any significant impact on rates of inflation in the short or long run. During the post-war period interest rates do appear to be affected by inflation. However, the effect is much smaller than any theory which recognizes tax effects would predict. Further- more, all the power in the inflation interest rate relationship comes from the 1965-1971 period. Within the 1950's or 1970's, the relationship is both statistically and substantively insignificant. Various explanations for the failure of the theoretically predicted relationship to hold are considered. The relationship between inflation and interest rates remains weak at the even low frequencies. This is taken as evidence that cyclical factors or errors in measuring inflation expectations cannot account for the failure of the results to bear out Fisher's theoretical prediction. Rather, comparison of real interest rates and stock market yields suggests that Fisher was correct in pointing to money illusion as the cause of the imperfect adjustment of interest rates to expected inflation.

Economics Departmental Rankings: Research Incentives, Constraints, and Efficiency

Abstract: The paper has no abstract, but is an early contributor to the literature that ranks economics departments according to the publication performance of affiliated faculty Additional considerations are taken up

The Theory of Excess Burden and Optimal Taxation

Abstract: The purpose of this paper is to present the chronological development ofthe concept of excess burden and the related study of optimal tax theory. A main objective of this exercise is to uncover the interrelationships among various apparently distinct results, so as to bring out the basic structure of the entire problem.The paper includes a discussion of various measures of excess burden,focusing on issues of approximation, informational requirements, aggregation over individuals, and the effects of technology. Included in the presentation of optimal tax theory is a section on tax reform, as well as an application of the theory to the case where uncertainty is present.

Price Asynchronization and Price Level Inertia

Abstract: If price decisions are taken neither continuously nor in perfect synchronization, the process of adjustment of all prices to a new nominal level will imply temporary movements in relative prices. It might then well be that, to avoid these movements in relative prices, each price setter will want to move his own price slowly compared to others. The result will be a slow movement of all prices to their new nominal level, and substantial inertia of the price level. This paper formalizes this intuitive argument and reaches four main conclusions: (1) Even small departures from perfect synchronization can generate substantial price level inertia. (2) If price decisions are desynchronized, even anticipated movements in money will usually have an effect on economic activity. It is however possible to find paths of money deceleration which reduce inflation at no cost in output. (3) Price desynchronization has implications for relative price movements as well as for the price level. Goods early in the chain of production have more price and profit variability than goods further down the chain. (4) Price inertia, if it is due to price desynchronization, may be difficult to remove. It may well be that, given the timing decisions of others, no agent has an incentive to change his own timing decision: the time structure of price desynchronization may be stable.

Selection and the Evolution of Industry

Abstract: Proposes a theory that explains why smaller firms have higher and more variable growth rates than larger firms. Relying on employer heterogeneity and market selection to generate patterns of employer growth and failure, the model states that efficient firms grow and survive while inefficient firms decline and fail, regardless of firm size. However, firms that fail are actually firms that, if given more time to succeed, would have grown more slowly. These slow growing firms are most often smaller firms. Also provided is a behavior characterization of entry and prices in equilibrium, which is defined as a pair of functions that characterize optimal output and exit behavior of firms. (SFL)

Words that Wound: A Tort Action for Racial Insults, Epithets, and Name-Calling

Abstract: One of the first articles to discuss the problem of hate speech, Words That Wound discusses the harms of racist speech before proposing a new tort enabling its victims to recover damages from the utterer. I later expanded the article into a book with Jean Stefancic. Entitled Understanding Words That Wound, the book covers a range of recent problems including hate speech on the Internet, campus hate speech codes, and child porn.

LDC Borrowing with Default Risk

Abstract: This paper presents a theoretical model to describe the effects of default risk on international lending to LDC sovereign borrowers. The threat of defaults in international lending is shown to give rise to many characteristics of the syndicated loan market: (1) quantity rationing of loans; (2) LDC policies designed to enhance creditworthiness; (3) prevalence of short maturities on international loans; and (4) a prevalence of bank lending relative to bond-market lending