Showing papers in "The American Economic Review in 1973"

The Economic Theory of Agency: The Principal's Problem.

Abstract: The relationship of agency is one of the oldest and commonest codified modes of social interaction. We will say that an agency relationship has arisen between two (or more) parties when one, designated as the agent, acts for, on behalf of, or as representative for the other, designated the principal, in a particular domain of decision problems. Examples of agency are universal. Essentially all contractural arrangements, as between employer and employee or the state and the governed, for example, contain important elements of agency. In addition, without explicitly studying the agency relationship, much of the economic literature on problems of moral hazard (see K. J. Arrow) is concerned with problems raised by agency. In a general equilibrium context the study of information flows (see J. Marschak and R. Radner) or of financial intermediaries in monetary models is also an example of agency theory. The canonical agency problem can be posed as follows. Assume that both the agent and the principal possess state independent von Neumann-Morgenstern utility functions, G(.) and U(.) respectively, and that they act so as to maximize their expected utility. The problems of agency are really most interesting when seen as involving choice under uncertainty and this is the view we will adopt. The agent may choose an act, aCA, a feasible action space, and the random payoff from this act, w(a, 0), will depend on the random state of nature O(EQ the state space set), unknown to the agent when a is chosen. By assumption the agent and the principal have agreed upon a fee schedule f to be paid to the agent for his services. T he fee, f, is generally a function of both the state of the world, 0, and the action, a, but we will assume that the action can influence the parties and, hence, the fee only through its impact on the payoff. T his permits us to write,

Some International Evidence on Output-Inflation Tradeoffs.

Abstract: This paper reports the results of an empirical study of real output-inflation tradeoffs, based on annual time-series from eighteen countries over the years 1951-67. These data are examined from the point of view of the hypothesis that average real output levels are invariant under changes in the time pattern of the rate of inflation, or that there exists a "natural rate" of real output. That is, we are concerned with the questions (i) does the natural rate theory lead to expressions of the output-inflation relationship which perform satisfactorily in an econometric sense for all, or most, of the countries in the sample, (ii) what testable restrictions does the theory impose on this relationship, and (iii) are these restrictions consistent with recent experience? Since the term "'natural rate theory" refers to varied aggregation of models and verbal developments,' it may be helpful to sketch the key elements of the particular version used in this paper. The first essential presumption is that nominal output is determined on the aggregate demand side of the economy, with the division into real output and the price level largely dependent on the behavior of suppliers of labor and goods. The second is that the partial "rigidities" which dominate shortrun supply behavior result from suppliers' lack of information on some of the prices relevant to their decisions. The third presumption is that inferences on these relevant, unobserved prices are made optimally (or "rationally") in light of the stochastic character of the economy. As I have argued elsewhere (1972), theories developed along these lines will not place testable restrictions on the coefficients of estimated Phillips curves or other single equation expressions of the tradeoff. They will not, for example, imply that money wage changes are linked to price level changes with a unit coefficient, or that {"long-run"' (in the usual distributed lag sense) Phillips curves must be vertical. They will (as we shall see below) link supply parameters to parameters governing the stochastic nature of demand shifts. The fact that the implications of the natural rate theory come in this form suggests an attempt to test it using a sample, such as the one employed in this study, in which a wide variety of aggregate demand behavior is exhibited. In the following section, a simple aggregative model will be constructed using the elements sketched above. Results based on this model are reported in Section II, followed by a discussion and conclusions.

Private Demands for Public Goods

Abstract: Author(s): Bergstrom, Ted; Goodman, Robert P. | Abstract: This paper develops a method for using data for a large cross-section of municipalities relating expenditures on specific local public goods, median income, median house value, total assessed valuation, and population to estimate demand functions for local public goods. The key idea is to make the assumption that the quantity chosen in any municipality is the median of the preferred quantities of its citizens. The method is applied to cities with population exceeding 10,000 in several states. Seemingly plausible estimates of income and price elasticity are found. The estimated crowding parameter suggests that most local public goods are congestible in the sense that utility functions depend on the per capita quantity of public goods.

Modern Economic Growth: Findings and Reflections

Abstract: Lecture to the memory of Alfred Nobel, December 11, 1971(This abstract was borrowed from another version of this item.)

A Theory of Labor Market Segmentation

Abstract: A growing body of empirical research has documented persistent divisions among American workers: divisions by race, sex, educational credentials, industry grouping, and so forth (F. B. Weisskoff, B. Bluestone, S. Bowles and H. Gintis, D. Gordon, 1971 and 1972, B. Harrison, M. Reich, H. Wachtel and C. Betsey, and H. Zellner). These groups seem to operate in different labor markets, with different working conditions, different promotional opportunities, different wages, and different market institutions. These continuing labor market divisions pose anomalies for neoclassical economists. Orthodox theory assumes that profitmaximizing employers evaluate workers in terms of their individual characteristics and predicts that labor market differences among groups will decline over time because of competitive mechanisms (K. Arrow). But by most measures, the labor market differences among groups have not been disappearing (R. Edwards, M. Reich, and T. Weisskopf, chs. 5, 7, 8). The continuing importance of groups in the labor market thus is neither explained nor predicted by orthodox theory. Why is the labor force in general still so fragmented? Why are group characteristics repeatedly so important in the labor market? In this paper, we sum-

Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934

Abstract: The Securities Exchange Act of 1934 was one of the earliest and, some believe, one of the most successful laws enacted by the New Deal. The stock market crash in 1929 and the Great Depression provided the impetus for reform of the stock markets in the belief that weaknesses of the institutions and ineptitude and/or chicanery among brokers and bankers were partially responsible for the losses incurred by stockholders. Although many critics, reformers and congressmen wanted Congress to enact "blue skies" legislation that would require all securities sold and traded to be approved by the federal government, President Franklin Roosevelt preferred the concept of "disclosure" (see Francis Wheat (1967)). Rather than having the government approve or disapprove securities, corporations whose securities are publicly sold and traded are required to disclose a large amount of predominantly financial information to the Securities and Exchange Commission (SEC) who make these data available to the public. Indeed, the Securities Exchange Act is described in its title and usually referred to as a "disclosure statute." Although the financial community generally opposed this legislation and the preceding Securities Act of 1933,1 most brokers, investors and government officials probably would find it difficult to conceive of the successful operation of the stock markets without the Securities Acts. Yet the economic rationale for the regulation of the securities markets was not examined carefully before the legislation was passed (which is not surprising, given turbulent times) nor has it been since,2 even though the Securities Act of 1934 was extended in 1964 to include most corporations whose stock is publicly owned. Such an examination of one important part of the law-the financial disclosure requirements-is presented here. This analysis is particularly timely because the SEC appears to be shifting its emphasis towards increasing the disclosure requirements of almost all corporations whose stock is traded in the markets.3

Devaluation, Money, and Nontraded Goods

Abstract: This paper develops a monetary approach to the theory of currency devaluation.1 The approach is "monetary" in several respects. The role of the real balance effect is emphasized and a distinction is drawn between the relative prices of goods, the exchange rate and the price of money in terms of goods. Furthermore, money is treated as a capital asset so that the expenditure effects induced by a monetary change are spread out over time and depend on the preferred rate of adjustment of real balances.2 The latter aspect gives rise to the analytical distinction between impact and long-run effects of a devaluation. The first part of this paper develops a one-commodity and two-country model of devaluation. The simplicity of that structure is chosen quite deliberately to emphasize the monetary aspect of the problem as opposed to the derivative effects that arise from induced changes in relative commodity prices. Trade is viewed as the exchange of goods for money or a means of redistributing the world supply of assets. A devaluation is shown to give rise to a change in the level of trade and the terms of trade, the price of money in terms of goods. In the second part the implications of the existence of nontraded goods are investigated, and induced changes in the relative prices of home goods enter the analysis.

Labor Market Segmentation: Positive Feedback and Divergent Development

Abstract: There are good jobs and there are bad jobs. This is such a commonplace fact of life that it often goes unquestioned, even by specialists in the economics of labor and poverty. Studies of labor market segmentation appear from this point of view to make unnecessarily much of a simple consequence of the uneven distribution of talent and effort. Yet when bad jobs are found to be so widespread that perhaps 60 percent of workers in the inner city fail to earn enough to support a family at even minimum levels of decency, conventional explanations based on individual differences in labor productivity become incredible (W. Spring, B. Harrison, and T. Vietorisz). These facts of life point to institutionalized labor market conditions that call for detailed analysis in their own right. A number of institutional and econometric studies have measured and analyzed the existence and dimensions of labor market segmentation. (See B. Bluestone, 1970; P. B. Doeringer and M. J. Piore; D. M. Gordon, 1971 and 1972; B. Harrison, 1972a, especially ch. 5; Harrison, 1972b; Piore, 1972; and H. M. Wachtel and C. Betsey.) These studies find that the labor market in the United States is divided into discrete segments across which mobility is severely restricted by technological and social barriers. Research is now under way to refine our measures of the extent and the parameters of this intersectoral immobility.

General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choice

Abstract: : The lecture is designed to survey modern development of the theory of general equilibrium in a competitive economy and its role in the allocation of resources A survey is given of the state of the theory as developed by JR Hicks, PA Samuelson, and their predecessors as of about 1945, followed by an evaluation of the needs for further development The differing general equilibrium tradition in the German-language literature is summarized

On Monopoly Welfare Losses

Abstract: Studies welfare losses due to monopolistic pricing in the United States. Evaluation of calculations indicating that welfare losses from monopolistic pricing is inconsequential; Consumer's surplus analysis; Proposed method in deriving coefficient of net compensating variation. (Из Ebsco)

The Demand for State and Local Government Employees

Abstract: Excerpt] The primary purpose of this paper is to present empirical estimates of the wage elasticities of demand for different categories of state and local government employees. The employment demand equations that are estimated are derived from a utility maximization model of state and local government behavior. After presenting this model in the first section, we next briefly discuss the data used in the study. The structural system of demand equations is then estimated using pooled time-series and cross-section information, with annual individual state data as the units of observation. A number of alternative estimation methods are used in the analysis. Parameter estimates obtained from the model are utilized in the final section to simulate the disemployment effects of postulated future relative wage increases for individual classes of state and local government employees, as well as increases for all classes relative to the private sector.

Welfare-Maximizing Price and Output with Stochastic Demand: Comment

Abstract: In a comment to Gardner Brown, Jr. and M. Bruce Johnson (hereafter called B-J), Michael Visscher points out that the B-J conclusions change if the rationing system changes. In the B-J approach it is assumed that available production is allocated to those with the highest consumer's surplus. Visscher analyzes two alternatives. In the first system service is offered first to those claimants with the least willingness to pay given a limited production. In the second system it is assumed that the available production is allocated randomly between all customers willing to pay the price P. The purpose of this note is primarily to point out some unnoticed implications of Visscher's two rationing systems, but also to correct a minor error in his analysis. The notation is the same as that of Visscher.