Showing papers in "Social Science Research Network in 1984"

Subjective Well-Being

Abstract: The literature on subjective well-being (SWB), including happiness, life satisfaction, and positive affect, is reviewed in three areas: measurement, causal factors, and theory. Psychometric data on single-item and multi-item subjective well-being scales are presented, and the measures are compared. Measuring various components of subjective well-being is discussed. In terms of causal influences, research findings on the demographic correlates of SWB are evaluated, as well as the findings on other influences such as health, social contact, activity, and personality. A number of theoretical approaches to happiness are presented and discussed: telic theories, associationistic models, activity theories, judgment approaches, and top-down versus bottom-up conceptions.

Corporate Financing and Investment Decisions When Firms Have Informationthat Investors Do Not Have

Abstract: This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions.The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities.The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.

Upper Echelons: The Organization as a Reflection of its Top Managers

Abstract: This analysis considers the impact of the top managers in an organization on the organization's outcomes, specifically strategic choices and performance levels. The focus is not on the chief executive alone, but rather on the entire top management team. Using a macro view, these organizational outcomes are perceived to be related to the values and cognitive bases of those high-power individuals in the organization. In developing the model, emphasis is on the background characteristics of the top managers as opposed to the psychological dimensions. A series of propositions that should be tested to support the upper echelons theory are presented. The topics of these propositions include age, functional track, other career experiences, education, socioeconomic roots, financial position, and group characteristics. The creation of this model is just the beginning of the work that is necessary to evaluate and understand the upper echelons theory. Further input is needed from areas such as the executive recruiting industry. Additionally, clinical and statistical studies are both necessary to fully develop this theory. (SRD)

Econometric Models for Count Data with an Application to the Patents-R&D Relationship

Abstract: This paper focuses on developing and adapting statistical models of counts (non-negative integers) in the context of panel data and using them to analyze the relationship between patents and RD persistent individual (fixed or random) effects, and "noise" or randomness in the Poisson probability function. We apply our models to a data set previously analyzed by Pakes and Griliches using observations on 128 firms for seven years, 1968-74. Our statistical results indicate clearly that to rationalize the data, we need both a disturbance in the conditional within dimension and a different one, with a different variance, in the marginal (between) dimension. Adding firm specific variables, log book value and a scientific industry dummy, removes most of the positive correlation between the individual firm propensity to patent and its R&D intensity. The other new finding is that there is an interactive negative trend in the patents - R&D relationship, that is, firms are getting less patents from their more recent R&D investments, implying a decline in the "effectiveness" or productivity of R&D.

Rational and Self-Fulfilling Balance-of-Payments Crises

Abstract: The recent balance-of-payments literature shows that-speculative attacks on a pegged exchange rate must sometimes-occur if the path of the rate is riot to offer abnormal profit opportunities. Such attacks are fully rational, as they reflect the market's response to a regime breakdown that is inevitable.This paper shows that, given certain expectations about policy, balance-of-payments crises can also be purely self-fulfilling events. In such cases even a permanently viable regime maybreak down, and the economy will possess multiple equilibria corresponding to different subjective assessments of the probability of collapse. The behavior of domestic interest rates and foreign reserves will naturally reflect the possibility of a speculative attack. Work on foreign-exchange crises derives from the natural-resource literature initiated by Salant and Henderson (1978),where the definition of "abnormal" profit opportunities is straightforward. Because the definition is not always straight-forward in a monetary context, this paper also shows how crises occur in a discrete-time stochastic monetary model when an eventual breakdown is inevitable.

Classification of Flexible Manufacturing Systems

Abstract: There has been some uncertainty concerning the conditions under which a manufacturing system may be termed 'flexible'. To clarify this confusion eight types of flexibilities are defined and described.

Capital Structure Puzzle

Abstract: This paper contrasts the "static tradeoff" and "pecking order" theories of capital structure choice by corporations. In the static tradeoff theory, optimal capital structure is reached when the tax advantage to borrowing is balanced, at the margin, by costs of financial distress. In the pecking order theory, firms preferinternal to external funds, and debt to equity if external funds are needed. Thus the debt ratio reflects the cumulative requirement for external financing. Pecking order behavior follows from simple asymmetric information models. The paper closes with a review of empirical evidence relevant to the two theories.

The persistence of volatility and stock market fluctuations

Abstract: This paper examines the potential influence of changing volatility in stock market prices on the level of stock market prices. It demonstrates that volatility is only weakly serially correlated, implying that shocks to volatility do not persist. These shocks can therefore have only a small impact on stockmarket prices, since changes in volatility affect expected required rates of return for relatively short intervals. These findings lead us to be skeptical of recent claims that the stock market's poor performance during the 1970's can be explained by volatility-induced increases in risk premia.

Informational Imperfections in the Capital Market and Macro-Economic Fluctuations

Abstract: This paper describes the role that informational imperfections in capital markets are likely to play in business cycles. It then developes a simple illustrative model of the impact of adverse selection in the equity market and the way in which this may lead to large fluctuations in the effective cost of capital in response to relatively small demand shocks.The model also derives an expression for the cost of equity capital in the presence of adverse selection and provides informational explanations for several widely observed macro-economic phenomena.

The Woman Entrepreneur: Management Skills and Business Problems

Abstract: Studies female entrepreneurs in order to identify obstacles that women face in business and to explore means of improvement Though the number of self-employed women has been increasing dramatically - from 17 million in 1977 to 23 million in 1982 - the vast majority of studies of entrepreneurs are still narrowly focused on non-minority men In an effort to expand the research on entrepreneurial women, this study questions 468 self-employed women in 18 states, assessing demographics, the nature of their business ventures, and the problems they encounter According to this research, the "typical" female entrepreneur is married with children, herself the first-born child of middle class parents Her business is most likely to be service-oriented, and she tends to start it around the age of 40 Obstacles include problems with finance and credit, as well as lack of business and financial planning training Consequently, most of the businesses are small with low growth rates and revenues According to the business owners themselves, in order to further develop women's role in business, stereotypes need to be eliminated concerning women as entrepreneurs, and more visible role models and mentors for younger women are needed The analysis concludes with specific recommendations for improvement: (1) Women should be encouraged to study in fields other than liberal arts (2) Women should have access to seminars on finance, management, marketing, etc (3) Women should seek assistance from experts, colleagues, and friends to establish formal and informal networks (CJC)

Monetary Policy Games and the Role of Private Information

Abstract: Consider the following scenario: monetary aggregates surge ahead of expected or targeted rates; the Fed claims that it is accommodating a perceived increase in money demand in order to stabilize the price level; the private sector (or the administration, or Congress) counters that the Fed is running an inflationary policy to expand employment; a period of credibility building ensues, which may focus upon the personalities of policymakers, targeting procedures, or even proposals for legislative reform. A key element in this scenario is that the private sector cannot verify the Fed's claim; the Fed's forecast of money demand is private information. A plausible explanation for such a scenario is that the Fed is involved in a noncooperative game with certain agents in the private sector, or with some other branch of government. Why else, for example, would the Fed seek to constrain its own behavior, with say a targeting procedure, unless it thought that this would bring a resolution to a credibility problem resulting from a noncooperative game.' And why does the Fed have a "credibility" problem, as opposed to an "information" problem; that is, why are its announcements not accepted at face value? A game suggested by Finn Kydland and Edward Prescott (1977) has received considerable attention.2 In this game, wage setters have to specify the nominal wage in a labor contract before the Fed sets the money supply. The Fed wants a higher level of employment than the wage setters, but it is also inflation conscious. The wage setters know that the Fed will be tempted to inflate away some of their real wage, to achieve a higher level of employment, so they purposely set the wage high. The Fed weights its employment and inflation objectives, and only finds it optimal to inflate the real wage down to the level wanted by the wage setters. The noncooperative solution has an inefficient inflation bias, simply because the Fed has no credible way of precommitting itself to a noninflationary policy. Adding a stabilization role for monetary policy, and private information, the Kydland-Prescott game can be used to model the scenario outlined above. There are a variety of ways in which the noncooperative solution described above might be improved upon. Congress could legislate institutional reforms. It could legislate a monetary policy rule directly, or it could constrain the behavior of the players by changing the rules of the game; wage-price guidelines and legislated targeting procedures are examples of the later. Earl Thompson (1981) and Kenneth Rogoff suggest changing the incentive structure for Fed policymakers, or simply choosing a policymaker with " perverse" preferences. And Robert Barro and David Gordon (1983a) suggest that the players themselves may have already found a resolution to the problem in a reputation-building mechanism. An efficient resolution of the credibility problem must leave the Fed with the latitude to perform its stabilization role. Rogoff and *Georgetown University, Washington, D.C. 20057. I thank R. Cooper, J. Friedman, E. Green, D. Henderson, B. McCallum, K. Rogoff, J. Taylor, and an anonymous referee for helpful comments; however, the views presented here are my own. They are not necessarily shared by the Federal Reserve Board or any other member of its staff. ' Targeting money or interest rates is not likely to be efficient in terms of meeting final targets; see, for example, my 1977 article. This observation is the principal theme of Kenneth Rogoff (forthcoming). 2See Robert Barro and David Gordon (1983a,b), John Taylor (1983), S. Green (1983), Rogoff, David Baccus and John Driffill (1985), and more generally, W. Lee (1981). Edmund Phelps (1967) had many of the elements of this game.

Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?

Abstract: Recent work by David Lilien has argued that the existence of a strong positive correlation between the dispersion of employment growth rates across sectors (G) and the unemployment rate implies that shifts in demand from some sectors to others are responsible for a substantial fraction of cyclical variation in unemployment. This paper demonstrates that, under certain empirically satisfied conditions, aggregate demand movements alone can produce a positive correlation between G and the unemployment rate. Two tests are developed which permit one to distinquish between a pure sectoral shift interpretation and a pure aggregate demand interpretation of this positive correlation. The finding that G and the volume of help wanted advertising are negatively related and the finding that G is directly associated with the change in unemployment rather than with the level of unemployment both support an aggregate demand interpretation. A proxy for sectoral shifts that is purged of the influence of aggregate demand is then developed. Models which allow sectoral shifts in the composition of demand and fluctuations in the aggregate level of demand to affect the unemployment rate independently are estimated using this proxy. The results support the view that pure sectoral shifts have not been an important source of cyclical fluctuations in unemployment.

Are Business Cycles All Alike

Abstract: This paper examines two questions. The first is whether economic fluctuations-business cycles-are due to an accumulation of nall shocks or instead mostly to infrequent large shocks. The paper concludes that neither of these two extreme views accurately characterize fluctuations. The second question is whether fluctuations are due mostly to one source of shocks, for example monetary, or instead to many sources. The paper concludes that evidence strongly supports the hypothesis of many, about equally important, sources of shocks.To analyze the empirical evidence and to reach these conclusions, the paper uses two different statistical approaches. The first is estimation ofa structural model, using a set of just identifying restrictions. The secondis non-structural and may be described as a formalization of the Burns Mitchell techniques. Both approaches are somewhat novel and should be of independent interest.

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.

The Demand for Labor in the Long Run

Abstract: The theory of the demand for labor is presented along with a catalog and critique of methods that are used to estimate the parameters that describe empirical labor-demand and substitution possibilities. A critical survey is presented of studies of own-price demand elasticities for labor as a whole and for workers categorized by demographic group, of substitution parameters among workers of different types, and of workers for capital. The main findings are: 1) The long-run constant-output demand elasticity for labor that istreated as homogeneous is between .15 and .5; 2) Own-price demand elasticities are higher for workers that have less general human capital embodied and them; 3) Skilled labor and physical capital are p-complements; and 4) More tentatively, youths and wornenare q-substitutes in production. The implications and importance for policy of these and other results are discussed. Suggestions for improving the literature and narrowing the range of knowledge of the underlying parameters, especially by concentrating more on disaggregated and even microeconornic data, are presented.

Agency Theory, Managerial Welfare, and Takeover Bid Resistance

Abstract: Tender offers provide an ideal setting for the analysis of agency relationships since the best interests of the principal (target firm shareholders) and agent (target firm managers) are often in conflict. Moreover, the actions and stated rationale of target managers in resisting or not resisting tender offers are readily observable, and the size of the possible agency costs is great. This research provides direct empirical evidence on the relationship between managerial welfare and takeover bid resistance. Tests on a sample of cash tender offers provide support for the managerial welfare hypothesis. The existence or absence of bid resistance is found to be directly related to the personal wealth changes of the target firm's managers. The relationships between managerial actions and bid premium size, bidder nationality, conglomerate offers, and "ex post settling up" are also examined.

The Economic Effects of Dividend Taxation

Abstract: This paper tests several competing hypotheses about the economic effects of dividend taxation. It employs British data on security returns, dividend payout rates, and corporate investment, because unlike the United States, Britain has experienced several major dividend tax reforms in the last three decades. These tax changes provide an ideal natural experiment for analyzing the effects of dividend taxes. We compare three different views of how dividend taxes affect decisions by firms and their shareholders. We reject the"tax capitalization" view that dividend taxes are non-distortionary lump sum taxes on the owners of corporate capital. We also reject the hypothes is that firms pay dividends because marginal investors are effectively untaxed. We find that the traditional view that dividend taxes constitute a "double-tax" on corporate capital income is most consistent with our empirical evidence. Our results suggest that dividend taxes reduce corporate investment and exacerbate distortions in the intersectoral and intertemporal allocation of capital.

Macroeconomics and Finance: the Role of the Stock Market

Abstract: The treatment of the stock market in finance and macroeconomics exemplifies many of the important differences in perspective between the two fields. In finance, the stock market is the single most important market with respect to corporate investment decisions. In contrast, macroeconomic modelling and policy discussion assign a relatively minor role to the stockmarket in investment decisions. This paper explores four possible explanations for this neglect and concludes that macro analysis should give more attention to the stock market. Despite the frequent jibe that "the stockmarket has forecast ten of the last six recessions," the stock market is in fact a good predictor of the business cycle and the components of GNP. We examine the relative importance of the required return on equity compared with the interest rate in the determination of the cost of capital, and hence,investment. In this connection, we review the empirical success of the Q theory of investment which relates investment to stock market evaluations of firms. One of the explanations for the neglect of the stock market in macroeconomics may be the view that because the stock market fluctuates excessively, rational managers will pay little attention to the market informulating investment plans. This view is shown to be unfounded by demonstrating that rational managers will react to stock price changes even if the stock market fluctuates excessively. Finally, we review the extremely important issue of whether the market does fluctuate excessively, and conclude that while not ruled out on a priori theoretical grounds, the empirical evidence for such excess fluctuations has not been decisive.

Debt, Deficits and Finite Horizons

Abstract: Many issues in macroeconomics, such as the level of the steady state interest rate, or the dynamic effects of government deficit finance, depend crucially on the horizon of economic agents. This paper develops a simple analytical model in which such issues can be examined and in which the horizon of agents is a parameter which can be chosen arbitrarily.The first three sections of the paper characterize the dynamics and steady state of the economy in the absence of a government. The focus is on the effects of the horizon index on the economy. The paper clarifies in particular the separate roles of finite horizons and declining labor income through life in the determination of steady state interest rates.The next three sections study the effects and the role of fiscal policy.The focus is on the effects of deficit finance both in closed and open economies. The paper clarifies the respective roles of government spending, deficits and debt in the determination of interest rates.

A Resource-Based View of the Firm

Abstract: Firms can be analyzed from the resource or product aspect. This paper develops simple economic tools for analyzing a firm's resource position, and uses a resource product matrix to examine some strategic options suggested by the resource-based view. The resource-based view provides basis for addressing key issues in strategy formulation, such as basis for diversification and acquisition. A resource is any strength or weakness of a given firm, tangible or intangible, that is semi-permanently tied to the firm. Considered specifically are the circumstances that will lead to longer-term high returns. Strategies that allow a firm's resources to be managed for high returns are considered, under four circumstances: bargaining power of suppliers and buyers and threat of substitute resources, first mover advantages, building resource position barriers, and mergers and acquisitions. A resource-product matrix is used to illustrate several patterns of resource development: sequential entry, exploit and develop, and stepping stones. Examining a firm in terms of its resources and assets rather than its products provides a different view of available strategic options, and helps to identify means of using its resources as barriers to other firms. (TNM)

Using the Longitudinal Structure of Earnings to Estimate the Effect of Training Programs

Abstract: In this paper we set out some methods that utilize the longitudinal structure of earnings of trainees and a comparison group to estimate the effectiveness of training for the 1976 cohort of CETA trainees. By fitting a components-of-variance model of earnings to the control group, and posing a simple model of program participation, we are able to predict the entire earnings histories of the trainees. The fit of these predictions to the pre-training earnings of the CETA participants provides a test of the model of earnings generation and program participation and simple check on the corresponding estimate of the effectiveness of training.Two factors appear to have a critical influence on the size of the estimated training effects: the time of the decision to participate in training and the presence or absence of individual-specific trends in earnings. We find considerable evidence that trainee earnings contain permanent, transitory,and trend-like components of selection bias. We are less successful in distinguishing empirically between alternative assumptions on the timing of the participation decision. If earnings in the year prior to training are the appropriate selection criterion, however, our estimate of the training effect for adult male CETA participants is about 300 dollars per year. Our estimates for female CETA participants are larger, and less sensitive to alternative models of program participation.

Export Subsidies and International Market Share Rivalry

Abstract: Countries often perceive themselves as being in competition with each other for profitable international markets. In such a world export subsidies can appear as attractive policy tools, from a national point of view, because they improve the relative position of a domestic firm in noncooperative rivalries with foreign firms, enabling it to expand its market share and earn greater profits. In effect, subsidies change the initial conditions of the game that firms play. The terms of trade move against the subsidizing country, but its welfare can increase because, under imperfect competition, price exceeds the marginal cost of exports. International noncooperative equilibriumis characterized by such subsidies on the part of exporting nations, even though they are jointly suboptimal.

Nutrition and the Decline in Mortality Since 1700: Some Preliminary Findings

Abstract: This paper uses the data in the NBER/CPE pilot sample of genealogies to create a new time series on life expectation in the U.S. since 1720. After attaining remarkably high levels toward the end of the eighteenth century, life expectation as measured by e0(10) began a decline that lasted about 80 years before beginning the new rise with which we have long been familiar. Second, time series on the average adult stature of national populations in North America and Europe are used as a measure of nutritional status. The properties of this measure in the analysis of labor welfare and an explanation for the high correlation between stature and the Cini ratio are discussed.The time series on stature is strongly correlated with the series on e0(10) and other measures of mortality. Third, these correlations are used to estimate the contribution of improvements in nutritional status (not diet alone but diet net of prior claims) to the decline in mortality in Europe and America since 1800. Improvements in nutritional status may have accounted for as ifiuch as four tenths of the decline in mortality rates, but nearly all of this effect was concentrated in the reduction of infant mortality. The new findings are used to resolve several paradoxes and the implication of the findings for the standard-of-living controversy are considered.

The Compliance Cost of the U.S. Individual Income Tax System

Abstract: This paper uses evidence from a survey of Minnesota taxpayers to estimate the magnitude and demographic patterns of the compliance cost of filing federal and state income tax returns. It concludes that in 1982 this cost was between $17 and $27 billion, or from five to seven percent of the revenue raised by the federal and state income tax systems combined. About two billion hours of taxpayer time were spent on filing tax returns, and about $3 billion was spent on professional tax assistance.

Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia?

Abstract: Almost all of the recent empirical tests of the rational expectations - permanent income hypothesis (RE-PIH) have rejected the hypothesis. The null hypothesis in this empirical literature typically consists of the joint hypothesis that 1) agents' expectations are formed rationally, 2) desired consumption is determined by permanent income, and 3) capital markets are"perfect" in the sense that agents can lend or borrow against expected future income at the same interest rate. This paper attempts to determine whether the excess sensitivity of consumption to current income can be attributed to a failure of the third component of the joint hypothesis -- the assumption of "perfect" capital markets -- as opposed to a failure of one or both of the first two assumptions. The paper examines, as a specific alternative to the PIH, a simple "Keynesian" consumption function in which the behavioral MPC out of transitory income is different from zero. Interpreting the unemployment rate as a proxy for the proportion of the population subject to liquidity constraints, the paper uses a generalized version of the econometric model in my earlier paper(1981) to conduct a specification test of the "Keynesian" consumption function. The finding that the estimate of the MPC out of transitory income is dramatically affected, in both magnitude and statistical significance, by the inclusion of the proxy for liquidity constraints suggests that liquidity constraints are an important part of the explanation of the observed excess sensitivity of consumption to current income.

Structural Inertia and Organizational Change

Abstract: Considers structural inertia in organizational populations as an outcome of an ecological-evolutionary process. Structural inertia is considered to be a consequence of selection as opposed to a precondition. The focus of this analysis is on the timing of organizational change. Structural inertia is defined to be a correspondence between a class of organizations and their environments. Reliably producing collective action and accounting rationally for their activities are identified as important organizational competencies. This reliability and accountability are achieved when the organization has the capacity to reproduce structure with high fidelity. Organizations are composed of various hierarchical layers that vary in their ability to respond and change. Organizational goals, forms of authority, core technology, and marketing strategy are the four organizational properties used to classify organizations in the proposed theory. Older organizations are found to have more inertia than younger ones. The effect of size on inertia is more difficult to determine. The variance in inertia with respect to the complexity of organizational arrangements is also explored. (SRD)

The Analysis of Union Behavior

Abstract: There is now a substantial body of economic research that models the behavior of labor unions as maximization of a well defined objective function. This paper presents both a selective critical survey of this literature and a preliminary consideration of some important problems that have not been addressed in the literature to date. Particular emphasis is on work that is operational in the sense that it has an empirical component or is amenable to empirical implementation. Topics surveyed include 1) the general economic modus operandi of labor unions in the U.S. economy; 2) the structure of bargaining and the efficiency of labor contracts; 3) the bargaining process as it relates to the identification of union objectives; and 4) empirical studies of union objectives. While much is learned from the existing literature, it is argued that amore general political/ economic model of union behavior is needed. This model would derive the objective function of the union in a consistent fashion from the preferences of the workers and union leaders through a well defined political process. Three important issues that are central to the development of such a model are addressed: 1) The determination of the size of the union and the rules used for the allocation of scarce union jobs;. 2) the aggregation of preferences when workers are heterogeneous; and 3) the union leadership asan entity capable of pursuing its own goals.

The Imperial Scholar: Reflections on a Review of Civil Rights Literature

Abstract: An early example of Critical Race Theory, this article analyzes citation patterns of leading white scholars of civil rights. After revealing that those dominant figures, all staunch supporters of minority causes, cited mainly each other and not the growing number of black and Latino scholars who were beginning to write about affirmative action, housing discrimination, and other related areas, I go on to show that this pattern of neglect has real consequences, including "blunting and skewing" in the treatments of race and an impoverished discourse on this vital subject.

Theories of Wage Rigidity

Abstract: This paper considers two sets of theories attempting to explain wage rigidities and unemployment: implicit contract theory and the efficiency wage theory. The basic thesis of the paper is that the former set of theories do not provide a convincing explanation of the kind of wage rigidity which is associated with cyclical unemployment,while the latter theories do. Several of the more recent versions of implicit contract theory are considered: implicit contracts with asymmetric information may give rise to over employment rather than underemployment, and the forms of contracts to be expected, were asymmetric information considerations paramount, are not observed.Other versions of the asymmetric information implicit contract model, explicitly long term in nature, may give rise to full employment. One version of implicit contract theory which does give rise to lay-offs arises when search is costly and cannot be monitored. But even this extension does not explain certain important features of observed patterns of unemployment. In contrast, the efficiency wage models not only provide an explanation of the existence of unemployment equilibrium in competitive economies, but they also provide part of the explanation of the observed patterns of unemployment. They also explain why different firms may pay similar workers different wages, why wages may be sticky, why firms maynot loose much if they fail to adjust their wages, and why, when they adjust their wages optimally, they adjust them slowly.The policy implications of the efficiency wage model are markedly different from those of models in which wages are absolutely rigid aswell as from those in which unemployment arises from asymmetric information.

Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?

Abstract: This paper examines the hypothesis that financial markets are myopic by studying the term structure of interest rates. White rejecting decisively the traditional expectations hypothesis regarding the term structure, our statistical results also lead us to conclude that long term interest rates do not overreact to either the level or the change in short termrates. This finding suggests that participants in bond markets are not myopic or overly sensitive to recent events. Our statistical results also suggest that most variations in the yield curve reflect changes in liquidity premia rather than expected changes in interest rates.