Showing papers in "Social Science Research Network in 1992"

A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades

Abstract: An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.

Risk Management: Coordinating Corporate Investment and Financing Policies

Abstract: This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide-ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange-rate hedging strategies for multinationals. as well as strategies involving "nonlinear" instruments like options.

Network Dyads in Entrepreneurial Settings: A Study of the Governance of Exchange Relationships

Abstract: Investigates network dyads and the manner in which control is exercised in these structures. Four entrepreneurial, high growth firms, each from a different industry, were selected to participate in this ethnographic analysis. The represented industries are telephone equipment, clothing, computer hardware, and environmental support systems. Seven network dyads were identified for the four firms considered. The partnerships were typically other members of the value chain - e.g., suppliers, distributors and final customers. The analysis identified three phases for the network dyad development: preconditions for exchange, conditions to build, and integration and control. The first phase, preconditions, utilized prior relations in addition to personal and firm reputations to reduce uncertainty and establish expectations and obligation. The second phase, the building process, has significant reliance on the trust and the development of reciprocity norms. The third phase is marked by three forms of integration: operational, strategic, and social control. Examination of the four firms and their seven dyadic relationships support the model. These firms were found to be engaged in stable, sustained relationships with a high degree of cooperation and collaboration. The mode of exchange found in these dyadic relationships is characterized as a network form of governance, which appears to be beneficial to high growth firms. Further research using this model could be done for R&D partnerships, cooperative marketing agreements, and other forms of strategic alliances and joint ventures. (SRD)

Protection for Sale

Abstract: We develop a model in which special interest groups make political contributions in order to influence an incumbent government's choice of trade policy. In the political equilibrium. the interest groups bid for protection, and each group's offer is optimal given the offers of the others. The politicians maximize their own welfare. which depends on the total amount of contributions collected and on the aggregate welfare of voters. We study the structure of protection that emerges in political equilibrium and the equilibrium contributions that are made by the different industry lobby groups. and show why these groups may in some cases prefer to have the government use trade policy to transfer income rather than more efficient means. We also discuss how our framework might be extended to include endogenous formation of lobby groups. political competition between incumbents and challengers. and political outcomes in a multicountry trading system.

Social Desirability Bias and the Validity of Indirect Questioning

Abstract: Indirect (i.e., structured projective) questioning has been employed frequently in marketing and other social sciences to reduce social desirability bias, that is, systematic error in self-report measures resulting from the desire of respondents to avoid embarrassment and project a favorable image to others. Yet little is known about the validity of indirect questioning in reducing social desirability bias. This article reports on three studies that examine indirect questioning as a technique to reduce social desirability bias on self-report measures. The effects of asking indirect (i.e., structured, projective) questions were compared with direct (i.e., structured, personal) questions The pattern of results indicates that indirect questioning reduces social desirability bias on variables subject to social influence and has no significant effect on socially neutral variables. The social nature of the differences between direct and indirect questioning groups, and the attribution of an undesirable trait to an out-group but not an in-group target, supports the view that subjects projected their beliefs and evaluations in the indirect response situation. These results are consistent across several product categories and indirect question wordings.

Efficient Tests for an Autoregressive Unit Root

Abstract: This paper derives the asymptotic power envelope for tests of a unit autoregressive root for various trend specifications and stationary Gaussian autoregressive disturbances. A family of tests is proposed, members of which are asymptotically similar under a general 1(1) null (allowing nonnormality and general dependence) and which achieve the Gaussian power envelope. One of these tests, which is asymptotically point optimal at a power of 50%, is found (numerically) to be approximately uniformly most powerful (UMP) in the case of a constant deterministic term, and approximately uniformly most powerful invariant (UMPI) in the case of a linear trend, although strictly no UMP or UMPI test exists. We also examine a modification, suggested by the expression for the power envelope, of the Dickey-Fuller (1979) t-statistic; this test is also found to be approximately UMP (constant deterministic term case) and UMPI (time trend case). The power improvement of both new tests is large: in the demeaned case, the Pitman efficiency of the proposed tests relative to the standard Dickey-Fuller t-test is 1.9 at a power of 50%. A Monte Carlo experiment indicates that both proposed tests, particularly the modified Dickey-Fuller t-test, exhibit good power and small size distortions in finite samples with dependent errors.

Learning by Knowledge-Intensive Firms

Abstract: Knowledge-intensive firms (KIFs) specialize in expertise, especially esoteric knowledge that few other firms possess. KIFs must keep their knowledge up-to-date, so they need to learn continually. However, their ability to satisfy clients depends on the close relations that some of KIFs' personnel develop with specific clients.

Survival Chances of Newly Founded Business Organizations

Abstract: Uses human capital theory and organizational ecology to explore the success of newly formed firms. Human capital focuses on the firm's founder and his/her background whereas organizational ecology considers the characteristics of the organization and its environmental conditions. Data used in the analysis were collected from 1,849 firm founders in Germany whose firms were formed in 1985-1986. Variables used were survival time, general and specific human capital of the founder, newness of the firm, initial size, organizational strategies, location, branch of industry, and market conditions. Of the firms considered, almost one-fourth had failed in the first two years, and 37% had failed within five years. The firms with founders who had more work experience and schooling improved their chances of survival. Those businesses that were novel were more likely to survive than those firms that were considered followers. Overall, the results show that all human capital variables considered have strong selection effects. (SRD)

The Dynamics of Productivity in the Telecommunications Equipment Industry

Abstract: Technological change and deregulation have caused a major restructuring of the telecommunications equipment industry over the last two decades. We estimate the parameters of a production function for the equipment industry and then use those estimates to analyze the evolution of plant level productivity over this period. The restructuring involved significant entry and exit and large changes in the sizes of incumbents. Since firms' choices on whether to liquidate and on the quantities of inputs demanded should they continue depend on their productivity, we use an equilibrium model to suggest an estimation algorithm that takes into account the relationship between productivity on the one hand. and both input demand and survival on the other. A fully parametric version of the estimation algorithm would be both computationally burdensome and require a host of auxiliary assumptions. So we develop a semi parametric technique which is both consistent with a quite general version of the theoretical framework and easy to use. The algorithm produces markedly different estimates of both production function parameters and of productivity movements than traditional estimation procedures. We find an increase in the rate of industry productivity growth after deregulation. This in spite of the fact there was no increase in the average of the plants' rates of productivity growth, and there was actually a fall in our index of the efficiency of the allocation of variable factors conditional on the existing distribution of fixed factors. Deregulation was, however, followed by a reallocation of capital towards more productive establishments (by a down sizing, often shutdown. of unproductive plants and by disproportionate growth of productive establishments) which more than offset the other factors' negative impacts on aggregate productivity.

Revising Axis V for DSM-IV: A Review of Measures of Social Functioning

Abstract: Objective: Axis V, which uses the Global Assessment of Functioning Scale in the multiaxial system of DSM-III-R, is under review for DSM-IV. This article examines what is known about axis V and selectively reviews the literature on measures of social functioning to identify potential alternatives to the Global Assessment of Functioning Scale. Method: About 25 studies on the use, reliability, and validity of axis V in DSM-III and DSM-III-R are reviewed. In addition, nearly 30 measures of social functioning are reviewed and analyzed as potential substitutes for the Global Assessment of Functioning Scale. The analysis focuses on the strengths and weaknesses of each measure for assessing functioning on axis V. Results: Axis V measures are modestly reliable and valid but not widely used. The authors identify and discuss two particular limitations on the Global Assessment of Functioning Scale: 1) the combination of measures of symptoms and measures of social functioning on a single axis and 2) the exclusion of physical impairments from the rating of functioning. Conclusions: None of the measures of social functioning reviewed is clearly superior to the Global Assessment of Functioning Scale for use on axis V. A modified version of the Global Assessment of Functioning Scale, separating the measures of social and occupational functioning from the measures of symptoms and psychological functioning, is proposed for field testing, along with a new set of instructions permitting the rating of limitations due to both physical and mental impairments.

Stoking the Fires? Co2 Emissions and Economic Growth

Abstract: Over the past decade, concern over potential global warming has focused attention on the emission of greenhouse gases into the atmosphere, and there is an active debate concerning the desirability of reducing emissions. At the heart of this debate is the future path of both greenhouse gas emissions and economic development among the nations. We use global panel data to estimate the relationship between per capita income and carbon dioxide emissions, and then use the estimated trajectories to forecast global emissions of CO2. The analysis yields four major results. First, the evidence suggests a diminishing marginal propensity to emit (MPE) CO2 as economies develop; a result masked in analyses that rely on cross-section data alone. Second, despite the diminishing MPE, our forecasts indicate that global emissions of CO2 will continue to grow at an annual rate of 1.8 percent. Third, continued growth stems from the fact that economic and population growth will be most rapid in the lower-income nations that have the highest MPE. For this reason, there will be an inevitable tension between policies to control greenhouse gas emissions and those toward the global distribution of income. Finally, our sensitivity analyses suggest that the pace of economic development does not dramatically alter the future annual or cumulative flow of CO2 emissions.

The Financial Instability Hypothesis

Abstract: The Financial Instability Hypothesis (FIH) has both empirical and theoretical aspects that challenge the classic precepts of Smith and Walras, who implied that the economy can be best understood by assuming that it is constantly an equilibrium-seeking and sustaining system. The theoretical argument of the FIH emerges from the characterization of the economy as a capitalist economy with extensive capital assets and a sophisticated financial system. In spite of the complexity of financial relations, the key determinant of system behavior remains the level of profits: the FIH incorporates a view in which aggregate demand determines profits. Hence, aggregate profits equal aggregate investment plus the government deficit. The FIH, therefore, considers the impact of debt on system behavior and also includes the manner in which debt is validated. Minsky identifies hedge, speculative, and Ponzi finance as distinct income-debt relations for economic units. He asserts that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system: conversely, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a "deviation-amplifying" system. Thus, the FIH suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by hedge finance (stable) to a structure that increasingly emphasizes speculative and Ponzi finance (unstable). The FIH is a model of a capitalist economy that does not rely on exogenous shocks to generate business cycles of varying severity: business cycles of history are compounded out of (i) the internal dynamics of capitalist economies, and (ii) the system of interventions and regulations that are designed to keep the economy operating within reasonable bounds.

Estimates of the Economic Return to Schooling from a New Sample of Twins

Abstract: This paper uses a new survey to contrast the wages of genetically identical twins with different schooling levels. Multiple measurements of schooling levels were also collected to assess the effect of reporting error on the estimated economic returns to schooling. The data indicate that omitted ability variables do not bias the estimated return to schooling upward, but that measurement error does bias it downward. Adjustment for measurement error indicates that an additional year of schooling increases wages by 12-16 percent, a higher estimate of the economic retums to schooling than has been previously found. (JEL J31) This paper uses a new survey of identical twins to study the economic returns to schooling. We estimate the returns to schooling by contrasting the wage rates of identical twins with different schooling levels. Our goal is to ensure that the correlation we observe between schooling and wage rates is not due to a correlation between schooling and a worker's ability or other characteristics. We do this by taking advantage of the fact that monozygotic (from the same egg) twins are genetically identical and have similar family backgrounds. In our survey we also took some unusual steps to measure a worker's schooling level accurately. We obtained independent estimates of each sibling's schooling level by asking the twins to report on both their own and their twin's schooling. These new data provide a simple and powerful method for assessing the role of measurement error in estimates of the economic returns to schooling.

Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model

Abstract: This paper examines the effect of the labor-leisure choice on portfolio and consumption decisions over an individual's life cycle. The model incorporates the fact that individuals may have considerable flexibility in varying their work effort (including their choice of when to retire). Given this flexibility, the individual simultaneously determines optimal levels of current consumption, labor effort, and an optimal financial investment strategy at each point in his life cycle. We show that labor and investment choices are intimately related. The ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante. The model explains why the young (enjoying greater labor flexibility over their working lives) may take greater investment risks than the old. It also offers an explanation as to why consumption spending is relatively "smooth" despite volatility in asset prices. Finally, the paper provides a compact method for valuing the risky cash flows associated with future wage income.

Public-Sector Capital and the Productivity Puzzle

Abstract: A number of studies have suggested a quantitatively important relationship between public-sector capital accumulation and private sector productivity, with the most compelling evidence derived from analyses of state-level data. Estimates herein of production functions that use standard techniques to control for unobserved, state-specific characteristics, however, reveal essentially no role for public-sector capital in affecting private sector productivity. Only estimates of state production functions that do not include such controls find substantial productivity impacts. This result reconciles existing econometric estimates with the findings of Hulten and Schwab based on growth accounting techniques, as such techniques effectively control for state-specific effects. Region-level estimates are essentially identical to those from state data, suggesting no quantitatively important spillover effects across states.

Capital Mobility in Neoclassical Models of Growth

Abstract: The empirical evidence reveals conditional convergence in the sense that economies grow faster per capita if they start further below their steady-state positions. For a homogeneous group of economies - like the U.S. states, regions of western European countries, and the GECD countries - the convergence is unconditional in that the poor economies grow faster than the rich ones. The neoclassical growth model for a closed economy fits these facts if capital is viewed broadly to encompass human investments, so that diminishing returns to capital set in slowly, and if differences in government policies or preferences about saving lead to heterogeneity in steady-state positions. Yet if the model is opened to allow for full capital mobility, then the predicted rates of convergence for capital and output are much higher than those observed empirically. We show that the open-economy model conforms with the evidence if an economy can use foreign debt to finance only a portion of its capital, even if 50% or more of the total. The problems in using human capital as collateral can explain the required imperfection in the credit market.

Intertemporal Asset Pricing Without Consumption Data

Abstract: This paper proposes a new way to generalize the insights of static asset pricing theory to a multi-period setting. The paper uses a loglinear approximation to the budget constraint to substitute out consumption from a standard intertemporal asset pricing model. In a homoskedastic lognormal selling, the consumption-wealth ratio is shown to depend on the elasticity of intertemporal substitution in consumption, while asset risk premia are determined by the coefficient of relative risk aversion. Risk premia are related to the covariances of asset returns with the market return and with news about the discounted value of all future market returns.

Venture Capital at the Crossroads

Abstract: Venture capital (VC) has had a profound impact on the U.S and world economies. The landmarks of venture capitalism are the formation of the venture capital fund ARD in 1946 and the establishment of small business investment companies by the U.S. Small Business Administration in 1958. After a boom in the 1960s, the VC industry all but collapsed between 1970 and 1977. The VC industry revived in the 1980s and reached a peak in 1987 from which it declined. At the moment of its decline in 1990, the industry was radically altered and transformed and was at a crossroads from its recent shake-out. This book examines the state of the VC industry at this point in 1990, examining current trends, developments, and practices, and looking at future prospects for the industry, suppliers, and users of risk capital, as well as the nation's economy as a whole. The VC industry has been transformed by two changes. (1) New and specialized financial and investment strategies emphasize deal making, transaction crafting and closing, fee generating, and short-term gains. This "merchant capital" approach is oriented to investing in established firms, as opposed to the classic VC approach of providing equity financing in new, emerging, innovating, and technology-based firms. This change may be due to professionals entering the field from MBA backgrounds rather than business-building backgrounds. (2) The altered market has resulted in reduced opportunities, globalization, increase in available capital, and dominance of institutional money, and the VC industry is losing its classic company-building skills. The major virtue of the traditional VC industry, which has been a wellspring of innovation and great rewards, is the skills brought by the venture capitalists that add value in the firm's forming, building, and harvesting. Changes in the VC industry are seen in an explosion of investing activity, heterogeneity of industry structure, niche funds, declines in rate of return, and increased competition and shake-out. Examples of classic revolutionary industries financed by VC are the semiconductor, computer, and biotechnology industries. Some lessons from these industries are drawn. Lessons are also drawn from the case of the Winchester disc-drive industry, which represents a case of "capital market myopia." Historical VC returns have been in the 10% to 20% range, occasionally in the 20% to 30% range, and rarely higher. The main reason for the unsatisfactory returns on VC since 1983 has been the initial public offering (IPO) drought. The benefits and implications for the VC industry of syndicated investments are examined. The contribution of VC to economic development is explored in terms of internal and external factors. Some high-tech regions were not planned; some planned regional centers have failed. Three factors affect the flow of VC: investors who put up the money, entrepreneurs who form the company, and the venture capitalists. The value-added of classic VC investment lies in the guidance, contracts, know-how, and support of the backers. The relationship between the venture capitalist and management team critically affects the success of the venture. Also examined are relationships between flows of VC and public policy, capital markets, new technologies, and changes in industries. Most important in fostering VC are government policies. Since VC is vital element to entrepreneurship, the U.S. must actively foster classic venture capital by changing some national attitudes and policies in culture, education, and role of government, for which recommendations and suggestions are offered. (TNM)

Trade Policy and the Third World Metropolis

Abstract: Many of the world's largest cities are now in developing countries. We develop a simple theoretical model, inspired by the case of Mexico, that explains the existence of such giant cities as a consequence of the strong forward and backward linkages that arise when manufacturing tries to serve a small domestic market. The model implies that these linkages are much weaker when the economy is open to international trade -- in other words, the giant Third World metropolis is an unintended by-product of import-substitution policies, and will tend to shrink as developing countries liberalize.

Institutional and Strategic Choice Perspectives on Board Involvement in the Strategic Decision Process

Abstract: The level of a board of director's involvement in strategic decisions can be viewed as an institutional response or as a strategic adaptation to external pressures for greater board involvement. We examined the antecedents and effects of board involvement from both the institutional and strategic choice perspectives. Data obtained from personal interviews with 114 board members and archival records indicated the board size, levels of diversification, and insider representation were negatively related to board involvement, and organizational age was positively related to it. Furthermore, we found board involvement to be positively related to financial performance, after controlling for industry and size effects. Overall, the results suggest that both theoretical perspectives are necessary for a comprehensive description of the strategic role of the board.

Empirical Linkages between Democracy and Economic Growth

Abstract: Using cross-sectional and pooled data for up to 125 countries over the period from 1960 to 1985, this paper evaluates the two-way linkages between democracy and economic growth. The effects of income on democracy are found to be robust and positive. The effects of several measures of democracy on growth are assessed in a comparative growth framework in which growth of per capita GDP depends negatively on initial income levels, as implied by the convergence hypothesis, and positively on rates of investment in physical and human capital. Adjusting for the simultaneous determination of income and democracy makes the estimated direct effect of democracy on subsequent economic growth negative but insignificant. Allowing for the possible positive indirect effect of democracy on income, flowing through the positive effect of democracy on education and investment, tends to offset the negative direct effect of democracy on economic growth. The general result of the growth analysis is that it is still not possible to identify any systematic net effects of democracy on subsequent economic growth.

Asymmetric Price Adjustment and Economic Fluctuations

Abstract: This paper considers a possible explanation for asymmetric adjustment of nominal prices. We present a menu-cost model in which positive trend inflation causes firms' relative prices to decline automatically between price adjustments. In this environment, shocks that raise firms' desired prices trigger larger price responses than shocks that lower desired prices. We use this model of asymmetric adjustment to address three issues in macroeconomics: the effects of aggregate demand, the effects of sectoral shocks, and the optimal rate of inflation.

International Comparisons of Pricing-to-Market Behavior

Abstract: This paper measures the degree of price discrimination across export destinations that is associated with exchange rate changes using U.S., U.K., German and Japanese industry-level data. Given the industries sampled more price discrimination across destinations is observed in the U.K., German and Japanese data. For industries that match across source countries, however, behavior is very similar across source countries. Furthermore, destination-specific price adjustment on exports to the U.S. from Germany and Japan is similar to price adjustment observed on shipments to other destinations. Most variation in the data appears to be related to industry.

Measuring the Cyclicality of Real Wages: How Important is Composition Bias

Abstract: In the period since the 1960's, as in other periods, aggregate time series on real wages have displayed only modest cyclicality Macroeconomists therefore have described weak cyclicality of real wages as a salient feature of the business cycle Contrary to this conventional wisdom, our analysis of longitudinal microdata indicates that real wages have been substantially procyclical since the 1960's We also find that the substantial procyclicality of men's real wages pertains even to workers that stay with the same employer and that women's real wages are less procyclical than men's Numerous longitudinal studies besides ours have documented the substantial procyclicality of real wages, but none has adequately explained the discrepancy with the aggregate time series evidence In accordance with a conjecture by Stockman (I983), we show that the true procyclicality of real wages is obscured in aggregate time series because of a composition bias: the aggregate statistics are constructed in a way that gives more weight to low-skill workers during expansions than during recessions We conclude that, because real wages actually are much more procyclical than they appear in aggregate statistics, theories designed to explain the supposed weakness of real wage cyclicality may be unnecessary and theories that predict substantially procyclical real wages become more credible

What Explains Developing Country Growth

Abstract: Among developing countries, there was no gross relationship between real income per capita in 1960 and subsequent growth in per capita income However, once other significant influences, such as education, changes in labor force participation rates, inflows of foreign investment, price structures, and fixed investment ratios are taken into account, the lower the 1960 income level, the faster the income growth This "conditional" convergence was particularly strong among the poorest half of the developing countries, contradicting the idea of a "convergence club" confined to relatively well-off countries Inflows of direct investment were an important influence on growth rates for higher income developing countries, but not for lower income ones For the latter group, secondary education, changes in labor force participation rates, and initial distance behind the United States were all major factors

The Inconsistency of Common Scale Estimators When Output Prices are Unobserved and Engogenous

Abstract: This paper explores the inconsistency of common scale estimators when output is proxied by deflated sales, based on a common output deflator across firms The problems arise when firms operate in an imperfectly competitive environment and prices differ between firms In particular, we show that the scale estimates will tend to be downward biased in the production function case, under a wide range of assumptions about the pattern of technology, demand and factor price shocks The result also holds for scale estimates obtained from cost functions The empirical part of the paper presents various estimates of scale economies for a sample of Norwegian manufacturing plants The findings provide some support for the hypothesis that the firms face an imperfectly competitive environment The estimates suggests that there are significant markups and scale economies to the variable factors of production in our sample However, the estimates of markups and scale economies presented in this paper are substantially lower than the results obtained by Hall (1988, 1990) and others using industry level data

State Infrastructure and Productive Performance

Abstract: The impact of public infrastructure investment on the productive performance of firms has been an important focus of the recent literature on productivity growth. The size of this impact has important implications for policymakers' decisions to invest in public capital, and productivity analysts' evaluation of productivity growth fluctuations and declines. However, detailed evaluation of the infrastructure impact is difficult using existing studies which rely on restricted models of firms' technology and behavior. In this paper we construct a more complete production theory model of firms' production and input decisions. We then apply our framework to state-level data on the output production and input (capital, nonproduction and production labor and energy) use of manufacturing firms to evaluate the contribution of infrastructure to firms' costs and productivity growth. We find that infrastructure investment does provide a significant direct benefit to manufacturing firms and thus augments productivity growth. We also show, however, that this evidence should be interpreted taking into account the social cost of such capital (which is not reflected in firms' costs), and the indirect impact resulting from scale effects.

Detection of Bid Rigging in Procurement Auctions

Abstract: This paper examines bidding in auctions for state highway construction contracts on Long Island in the early 1980s, in order to determine whether bid rigging occurred. Detection of collusion is possible because of limited participation in the collusive scheme. The paper looks at differences in behavior between ring members and non-members. In these auctions, collusio did not take the form of a bid rotation scheme, in which only one ring member submits a bid. Instead, several ring members bid on most jobs. The apparent role of ring meetings prior to the auction was to designate a serious bidder, and its bid, and the other firms then frequently submitted phony higher bids. The bidding data indicate that the bids of non-cartel firms, as well as their rank distribution, were related to cost measures, such as how much backlog a firm was carrying. In contrast, the rank distribution of higher cartel bids was unrelated to similar cost measures, and differed from the distribution of the low cartel bid.

Wages, Profits and Rent-Sharing

Abstract: The paper uses CPS data from 1964 to 1985 to test for the existence of rent-sharing in US tabor markets, Using an unbalanced panel from the manufacturing sector, and random-effects and fixed-effects specifications, the paper finds that changes in wages are explained by movements in lagged levels of profitability and unemployment. The results appear to be consistent with rent-sharing theory (or a labor contract framework with risk-averse firms) and to be inconsistent with the competitive labor market model. The paper estimates the unemployment elasticity of pay at approximately -0.03, and the profit elasticity of pay at between 0.02 and 0.05.