Showing papers in "The American Economic Review in 1974"

The Political Economy of the Rent-Seeking Society

Abstract: Studies the impact of competitive import licenses on the economy. Value of rents associated with import licenses; Relationship between welfare cost of quantitative restrictions and tariff equivalents; Impact of wage legislation on equilibrium levels of unemployment. (Из Ebsco)

Toward a Theory of Property Rights

Abstract: When a transaction is concluded in the marketplace, two bundles of property rights are exchanged. A bundle of rights often attaches to a physical commodity or service, but it is the value of the rights that determines the value of what is exchanged. Questions addressed to the emergence and mix of the components of the bundle of rights are prior to those commonly asked by economists. Economists usually take the bundle of property rights as a datum and ask for an explanation of the forces determining the price and the number of units of a good to which these rights attach.

Limited Knowledge and Economic Analysis

Abstract: Considers the idea that the uncertainties about economics stem from the need to understand the economics of uncertainty. Also argues that the lack of economic knowledge is largely due to the difficulty in modeling the economic agent's ignorance. The neoclassical model, founded on concepts regarding the individual economic agent and the market, is the starting point for the discussion. It is suggested that a market system is informationally economical and that the individual agent need not know very much about the economic system as a whole because there is far more in it than any one individual can learn. What the individual must know is the motivation and production conditions that define him or her. In addition, the simplification of an individual's decision making processes is possible because the markets have supplied the needed economic information in the form of prices. Also examined is the nonexistence of markets for future goods. This is done by considering the implications for the rest of the system and the reasons for the market's nonexistence. Finally, it is proposed that when uncertainty exists, risk aversion implies that steps will be taken to reduce risks. (SFL)

Economics of Production from Natural Resources

Abstract: This paper attempts to provide a unified theory of production from natural resources. A single model of an industry is used to describe a dynamic process of recovery from such technologically diverse resources as fish, timber, petroleum, and minerals. Recovery from each of these resources is seen as a special case of a general model, depending upon whether the resource is replenishable, and on whether production exhibits significant externalities. A model of centralized management, with particular reference to “common property” resources, such as fisheries, under stationary conditions, is also discussed and compared with competitive recovery in the stationary state.

On the Social Rate of Discount

Abstract: Few topics in our discipline rival the social rate of discount as a subject exhibiting simultaneously a very considerable degree of knowledge and a very substantial level of ignorance. Economists understand thoroughly just what this variable should measure: the opportunity cost of postponement of receipt of any benefit yielded by a public investment. They agree also on the components that should be considered in making up this figure: primarily the welfare foregone by not having these benefits available for immediate consumption or reinvestment and (perhaps) a premium corresponding to the risk incurred in undertaking government projects. Above all, economists are quite generally in accord on the view that a very serious misallocation of resources can result from the use of an incorrect estimate of the value of this variable in a cost-benefit calculation. Yet, while they agree that exernalities can play a significant role in the matter, there is some considerable question even about the direction of these effects. There is substantial obscurity and divergence of views in discussions of the implications of differences (if indeed there are any) in the degree of risk that is incurred when a given project is undertaken by a private firm on the one side and by government on the other.

Life Cycle Consumption and Labor Supply: An Explanation of the Relationship Between Income and Consumption Over the Life Cycle

Abstract: In a recent paper in this Review, Lester Thurow presents empirical evidence in apparent contradiction with the conventional life cycle consumption theory enunciated by Franco Modigliani and Richard Brumberg, Menahem Yaari, and James Tobin. That theory predicts no necessary relationship between consumption and income receipts at any age, but Thurow demonstrates a strong relationship and shows that income and consumption expenditure both peak in the age interval 45-54. Thurow's principal explanation for his finding is that credit market restrictions prevent consumers from borrowing as much against their future income as they desire at the going interest rate. As long as income tends to increase with age, and discounted future income cannot be fully transferred at the borrowing rate, a consumer's effective net worth increases with age which causes increasing consumption with age. Based on this argument, Thurow recommends government intervention into the consumption loan market to allow for optimal adjustment of consumption. Keizo Nagatani explains the same facts by building a model based on the uncertainty of future income. By adjusting expected future income for risk, a "typical" consumer will buy less than he would in a riskless environment with the same expected income stream. However, being the typical consumer, he realizes his expected income, and he successively revises his consumption plan upward since his realized income exceeds his risk adjusted income forecast. For this reason, his consumption expenditure and income streams are closely related. Both authors relax a standard neoclassical assumption to obtain their theoretical results: Thurow assumes imperfect credit markets while Nagatani invokes uncertainty.' However, their different explanations lead to different policy implications, since Nagatani's results provide no basis for government intervention to break down institutional barriers in the credit market.2 In this paper, we present an alternative neoclassical model which can explain Thurow's results without resort to either credit market imperfections or uncertainty. Rather than treating income as exogenously given, we view earnings as resulting from a life cvcle labor supply decision. If individuals are free to set their hours of work, and if wage rates change systematicallv over the life cycle, the path of consumption of market goods will depend on the wage rate at each age unless goods and leisure are independent of each other in utility. There is strong empirical evidence that * Columbia University and the National Bureau of Economic Research. This research was sponsored by a IU.S. Department of Labor Manpower Administration dissertation grant. I am deeply indebted to Edmund Phelps for comments, and to members of my dissertation committee at Princeton: Orley Ashenfelter, Stanley Black, Richard Quandt, Albert Rees, and Harry Kelejian. I retain responsibility for all errors. This paper is not an official National Bureau publication since the findings reported herein have not yet undergone the full critical review accorded the National Bureau's studies, including approval of the Board of Directors. 1 Both authors also discuss alternative explanations such as family composition effects, shifts in preferences, and measurement errors. 2 One might argue that some portion of the risk adjustment of income in the Nagatani model is due to "market imperfection." However, in the presence of uncertainty, market imperfection is not a well-defined operational concept and specific policy recommendations are more difficult to obtain. I am indebted to Phelps for this point.

The Empirical Relationships Between the Dividend and Investment Decisions of Firms

Abstract: Franco Modigliani and Merton Miller (M-M) establish that in a perfect capital market1 optimal investment decisions by a firm are independent of how such decisions are financed. T his theorem has an important corollary: Investment decisions should never be determined by dividend decisions, and dividend decisions periodby-period need not be affected by investment decisions. The main goal of the present paper is to examine empirically the extent to which the dividend and investment decisions of individual firms are interrelated.2 Many models of investment and financing decisions based on the assumption of an imperfect capital market are available. Only the model of Phoebus Dhrymes and Mordecai Kurz is discussed here, since they provide what appears to be corroborating empirical evidence. Following John Meyer and Edmund Kuh, Dhrymes and Kurz propose a world in which, because of capital market imperfections, internal funds are a cheaper source of financing for the firm than new security issues, and dividends and investments are competing uses for limited internal funds. Moreover they hypothesize that firms not only allow investment decisions to affect dividend decisions, but that the desire to pay 'reasonable" dividends causes investment decisions to be affected by dividend decisions. The Dhrymes-Kurz empirical evidence is discussed later.

Education and Home Production

Abstract: Valuable insights into the labor supply of married women have recently been gained by analyzing the problem in the household production context. Pioneered by Jacob Mincer, this approach sees women as choosing not simply between work and leisure, but between work in the home, work in the market, and leisure. While income affects the total amount of work, its division between home and market depends on wage rates, productivity in the home, and the price and availability of substitutes for the wife's labor in the home. Participation of married women in the market has, of course, increased dramatically in the past thirty years; this increase in labor force participation has been accompanied by various changes in inputs and outputs of household work which have only recently come under detailed scrutiny. It appears that over a fifty-year period the total time devoted to work in the home by urban nonemployed women has remained virtually constant at fiftythree hours per week (Joann Vanek). But since employed women have always devoted less time to household production than nonemployed women, and since the proportion of women in the labor force has been rising, the average time devoted to household tasks by all women has been falling over the past fifty years. One of the factors drawing women into the labor market has been their rising educational attainment. But what is the effect of the considerable rise in schooling levels on production within the home? First, it is important to understand how home production varies with schooling. Michael Grossman has recently found that a married man's health is positively related to his wife's schooling level. Lee Benham finds evidence to support his hypothesis that the earnings of married men are positively related to their wives' schooling. Robert T. Michael finds that education affects the efficiency with which contraception is carried on. In contrast to these papers, which relate a woman's education to various household production outputs, the present paper will try to determine how schooling affects one of the inputs of household production, namely, time. Time budget data will be used to determine how time allocation to various activities varies with schooling level.

Fairness and Envy

Abstract: Standard neoclassical economic analysis is typically concerned with individual utility maximization In this paper we shall consider a problem of constrained social welfare maximization Our criterion of social welfare is "fairness," and we shall discuss how this may be maximized by a move from an initial allocation to a final fairer allocation, subject to the constraint that no one be made worse off by the move We think the goal of fairness maximization characterizes, albeit in a simplistic way, the goals pursued by "enlightened" governments in their redistributional policies We shall also discuss a concept of complete fairness and illustrate some of its weaknesses The fairness problem is ancient and dates back at least to classical Greece It has been treated recently by mathematicians who typically are concerned with the existence of a "fair division" of a nonuniform object among n persons; that is, a division with the property that each party thinks he is getting at least t/nth of the value of the object (See, for example, Lester Dubins and Edwin Spanier, Harold Kuhn, and Hugo Steinhaus) This is not the approach we will take, since we will assume a world of homogeneous infinitely divisible goods in which the mathematical fair division problem becomes trivial The concept of fairness has also been treated extensively by philosophers The most recent philosophical approach is that of John Rawls, who argues at length for a social contract theory of justice: a society which maximizes the welfare of its worst off members is most just and that is the sort of society people will, from an initial position of ignorance about their endowments and interests, contract to enter Rawls' approach has been extended to a theory of taxation by Edmund Phelps Again, Rawlsian fairness, or "justice," is not the fairness we are interested in; we do not assume a precontractual state of ignorance, we do assume that knowledge of wealth and tastes is given In fact, knowledge about one's own and others' bundles of goods is crucial in our discussion What then is our notion of fairness? It is fairness in the sense of non-envy A completely fair social state is one in which no citizen would prefer what another has to what he himself has; a relatively fair social state is one in which few citizens would prefer what others have to what they themselves have; a totally unfair state is one in which every citizen finds his position to be inferior to that of everyone else This concept of fairness is appealing because it only depends, like other economic concepts, on individual tastes and endowments Fairness in the non-envy sense has been discussed in several recent papers by economists Serge Christophe Kolm considers allocative fairness, and shows that there exist allocations which are both completely fair and efficient' David Schmeidler and Karl Vind define fair trades as

Capital controversies: ancient and modern

Abstract: Offers perspectives on controversies about capital Measure of real capital; Values of capital goods; Deflation by an index of the prices of the capital goods; Use of production functions; Concept of classical fundism; Marginal efficiency of capital in the general theory

Relative Efficiency in Wheat Production in the Indian Punjab

Abstract: In recent contributions to this Review, Lawrence Lau and Pan Yotopoulos (L-Y) applied the profit function concept to the analysis of relative efficiency of Indian agriculture. They developed an operational model to measure and compare economic efficiency and its components of technical efficiency and price (or allocative) efficiency for groups of firms. By comparing the actual profit functions of small and large farms at given output and input prices and fixed quantities of land and capital, they found that smaller farms had higher profits (total revenue minus the total cost of the variable factors of production, in this case labor) than larger farms within the range of output studied and hence were economically more efficient. Further, they were able to show that the relative economic superiority of small farms was due to their technical efficiency since both tvpes of farms were price efficient. Their results also indicate constant returns to scale in Indian agriculture. Both these findings have far-reaching implications for the optimal allocative structure of Indian agriculture. In this paper, the L-Y model is confronted with new and recent data for wheat farms' in the Indian Punjab. My results run counter to their findings in that I do not find any differences in the economic efficiency (or its components of technical efficiency and price efficiency) of small and large wheat farms. Using their model, I also compare the economic performance of old Indian wheat varieties with Mexican varieties, and tractoroperated with non-tractor-operated wheat farms. The last mentioned two comparisons have considerable relevance in the context of the "green revolution" and the absorption of a rapidly growing labor force in India and other LDCs. Section I of the present paper establishes a link between my estimation procedure and the L-Y model and briefly describes the data and the variables. Section II provides empirical estimates, derives the implications of these results, and compares them with those of L-Y. Section III summarizes my conclusions.

Structure of the World Economy: Outline of a Simple Input-Output Formulation

Abstract: This invited paper presents the outline of a simple input formulation of a structure of the world economy. Such a formulation should provide a framework for assembling and organizing the mass of factual data needed to describe and understand the world economy.