Showing papers in "The American Economic Review in 1997"

The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines

Abstract: The authors investigate the productivity effects of innovative employment practices using data from a sample of thirty-six homogeneous steel production lines owned by seventeen companies. The productivity regressions demonstrate that lines using a set of innovative work practices, which include incentive pay, teams, flexible job assignments, employment security, and training, achieve substantially higher levels of productivity than do lines with the more traditional approach, which includes narrow job definitions, strict work rules, and hourly pay with close supervision. Their results are consistent with recent theoretical models which stress the importance of complementarities among work practices.

I Just Ran Two Million Regressions

Abstract: In this paper I try to move away from the Extreme Bounds method of identifying "robust" empirical relations in the economic growth literature. Instead of analyzing the extreme bounds of the estimates of the coefficient of a particular variable, I analyze the entire distribution. My claim in this paper is that, if we do this, the picture emerging from the empirical growth literature is not the pessimistic "Nothing is Robust" that we get with the extreme bound analysis. Instead, we find that a substantial number of variables can be found to be strongly related to growth.

The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs

Abstract: Recent theoretical models of entry predict that, in the presence of sunk costs, current market participation is affected by prior experience This paper quantifies the effect of prior exporting experience on the decisions of Colombian manufacturing plants to participate in foreign markets It develops a dynamic discrete-choice model of exporting behavior that separates the roles of profit heterogeneity and sunk entry costs in explaining plants' exporting status Sunk costs are found to be significant and prior export experience is shown to increase the probability of exporting by as much as sixty percentage points Copyright 1997 by American Economic Association

The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out

Abstract: Twenty-six years ago, Richard M. Titmuss (1970) claimed that monetary compensation tends to undermine an individual’s sense of civic duty. He illustrated his claim with blood donations, contending that paying donors negatively affects their willingness to donate blood. This thesis attracted considerable attention. Among others, Robert S. Solow (1971) and Kenneth J. Arrow (1972) discussed the proposition, both assuming that the effects of price incentives can simply be addedto those of altruistic donation. Contrary to Titmuss, economists therefore generally predicted that if the price of bloodis raised, the total quantity offered would increase in accordance with a normal supply function of blood. This discussion subsided rather quickly because there was neither an analytical framework nor convincing empirical evidence to support Titmuss’s case. Today, new theoretical developments suggest that economists should considerpossible detrimental effects of using price incentives. In this paper, we present such a theory whichis derived from social psychology and focuses on the crowding-out of intrinsic motivation.It stipulates that intrin-

Agency costs, net worth, and business fluctuations: A

Abstract: This paper develops a computable general equilibrium model in which endogenous agency costs can potentially alter business-cycle dynamics. A principal conclusion is that the agency-cost model replicates the empirical fact that output growth displays positive autocorrelation at short horizons. This hump-shaped output behavior arises because households delay their investment decisions until agency costs are at their lowest--a point in time several periods after the initial shock. Copyright 1997 by American Economic Association.

Optimal departures from marginal cost pricing

Abstract: Focuses on departures from marginal cost pricing. Optimal allocation or resources; Level of tax revenue that will be collected by the government; theorems developed for resource allocation. (Из Ebsco)

Roads to Prosperity? Assessing the Link between Public Capital and Productivity

Abstract: Does the positive correlation between infrastructure and productivity reflect causation? If so, in which direction? The author finds that, when growth in roads (the largest component of infrastructure) changes, productivity growth changes disproportionately in U.S. industries with more vehicles. That vehicle-intensive industries benefit more from road-building suggests that roads are productive. At the margin, however, road investments do not appear unusually productive. Intuitively, the interstate system was highly productive, but a second one would not be. Road-building thus explains much of the productivity slowdown through a one-time, unrepeatable productivity boost in the 1950s and 1960s.

Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment.

Abstract: Foreign direct investment (FDI) theory and empirical studies have generated mixed support for a link between exchange rates and FDI. This paper argues that exchange rate movements may affect acquisition FDI because acquisitions involve firm-specific assets which can generate returns in currencies other than that used for purchase. Using data on Japanese acquisitions in the United States across three-digit SIC industries from 1975 to 1992, maximum-likelihood estimates from discrete dependent variable models support the hypothesis that real dollar depreciations make Japanese acquisitions more likely in U.S. industries, particularly those which more likely have firm-specific assets. Copyright 1997 by American Economic Association.

Productivity growth, technical progress, and efficiency

Abstract: In their comment, Subhash C. Ray and Evangelia Desli (1997) (hereafter RD) point out that the specification of the decomposition of the Malmquist productivity index used by Fare et al. (1994) (hereafter FGNZ) is not unique, and propose and compute an alternative specification of that decomposition. We will discuss additional decompositions at the end of this note, but proceed here by comparing the RD decomposition with FGNZ based on both conceptual and computational grounds. RD provide a discussion of the overall Malmquist productivity index, including the important issue of when this index is equivalent to the traditional notion of total factor productivity (TFP) -namely under the condition that the reference technology be consistent with constant returns to scale (CRS). As they point out, this will yield a measure of TFP even if the "true" underlying technology is not CRS, for example. Both RD and FGNZ use the CRS reference technology to compute overall Malmquist productivity. One of the key issues raised is the role of the underlying scale properties of the benchmark technologies used to define and compute both productivity and its components. In particular, two "reference" technologies are employed in both RD and FGNZ: what we refer to as CRS and variable returns to scale (VRS) technologies.' By construction, these technologies are nested: the CRS technology "contains" the VRS technology, as in Figure 1 in RD. This nestedness provides the logical basis for our decomposition. At a very intuitive level, we would argue that these two benchmarks can be used to provide bounds on the underlying true-but unknown-technology.2 Intuitively we see the VRS technology providing a type of convex "inner approximation," whereas the CRS technology provides a type of convex "outer approximation." Thus these two technologies provide alternative benchmarks; they do not require that the data satisfy either CRS or VRS. Another possible intuitive interpretation is that the CRS captures a (perhaps hypothetical) "long run" and the VRS approximates the short run. As a reference technology, the CRS technology has some very useful features; for example, it captures the notion of maximal

Information Cascades in the Laboratory

Abstract: When a series of individuals with private information announce public predictions, initial conformity can create an 'information cascade' in which later predictions match the early announcements. This paper reports an experiment in which private signals are draws from an unobserved urn. Subjects make predictions in sequence and are paid if they correctly guess which of two urns was used for the draws. If initial decisions coincide, then it is rational for subsequent decisionmakers to follow the established pattern, regardless of their private information. Rational cascades formed in most periods in which such an imbalance occurred. Copyright 1997 by American Economic Association.

The invisible hand and the grabbing hand

Abstract: Evidence from a survey of 105 shop-owners in Moscow and Warsaw shows that the reliance on private protection, as well as the burden of regulation and corruption, are much greater in Moscow. The evidence suggests that the `invisible hand' model of government better fits the Warsaw local government, and the`grabbing hand' model is more appropriate for Moscow. The evidence implies that the singular focus on the speed of economic reforms to understand the success of transition is misplaced, and that the quality of government may be as essential.

The Consumption Smoothing Benefits of Unemployment Insurance

Abstract: Previous research on unemployment insurance (UI) has focused on the costs of the program, in terms of the distorting effects of generous UI benefits on worker and firm behavior. For assessing the optimal size of an unemployment insurance program, however, it is also important to gauge the benefits of increased UI generosity, in terms of smoothing consumption across periods of joblessness. I do so through a reduced form approach which directly measures the effect of legislated variations in UI benefits on consumption changes among individuals becoming unemployed. I use annual observations on food consumption expenditures for 1968-1987 from the Panel Study of Income Dynamics, matched to information on the UI benefits for which unemployed persons were eligible in each state and year. I estimate that a 10 percentage point increase in the UI replacement rate leads to a consumption fall upon unemployment which is 2.7% smaller. Over this period, the average fall in consumption for the unemployed was 7%; my results imply that, in the absence of unemployment insurance, this fall would have been over three times as large. I also find that the positive effect of UI only extends for one period, smoothing consumption during initial job loss but having no permanent effect on consumption levels; that individuals who anticipate layoff see a smaller consumption smoothing effect; and that UI appears to somewhat crowd out other forms of public consumption insurance. Despite the substantial estimated consumption smoothing effect, however, my results imply that the optimal UI benefit level is within the range of current replacement rates only at fairly high levels of risk aversion.

Anomalous behavior in public goods experiments: How much

Abstract: The authors report the results of voluntary contributions experiments where subjects are randomly assigned different rates of return from their private consumption. These random assignments are changed round to round, enabling the measurement of individual player contribution rates as a function of that player's investment cost. The authors directly test these response functions for the presence of warm-glow and/or altruism effects. They find significant evidence for heterogeneous warm-glow effects that are, on average, low in magnitude. The authors statistically reject the presence of an altruism effect. Copyright 1997 by American Economic Association.

The Simple Economics of Easter Island: A Ricardo-Malthus Model of Renewable Resource Use

Abstract: This paper presents a general equilibrium model of renewable resource and population dynamics related to the Lotka-Volterra predator-prey model, with man as the predator and the resource base as the prey. The authors apply the model to the rise and fall of Easter Island, showing that plausible parameter values generate a 'feast and famine' pattern of cyclical adjustment in population and resource stocks. Near-monotonic adjustment arises for higher values of a resource regeneration parameter, as might apply elsewhere in Polynesia. The authors also describe other civilizations that might have declined because of population overshooting and endogenous resource degradation. Copyright 1998 by American Economic Association.

Asset Inequality Matters: An Assessment of the World Bank's Approach to Poverty Reduction.

Abstract: The fight against poverty has been adopted by the multilateral development banks as their principal objective. Almost three decades after Robert McNamara announced that the World Bank's fundamental work was to improve the lives of the poor, its new president, James Wolfensohn, has reiterated that poverty reduction is the World Bank's principal purpose. Similarly, in 1994 the Inter-American Development Bank set social progress and social equity as its central objective. The emphasis in the international institutions contrasts with disappointing results in the real world. Although life expectancy, school enrollmuent, and other indicators of social wellbeing have improved dramatically across the developing world, and although the proportion of the poor has declined in the last few decades, the absolute number of poor people in the world has actually increased. Today about 1.3 billion people in less developed countries still subsist on less than $1 per day (World Bank, 1980, 1990, 1996). The case of Latin America is dramatic. While in the 1970's the number of poor fell, it nearly doubled in the 1980's, increasing from about 80 to almost 150 million; and in the last few years, the number of poor, now 33 percent of the total population, has failed to fall despite economic recovery (Birdsall and Londofio, 1997). The contrast between the multilateral banks' goals and these disappointing results suggests the need for a critical reassessment of their approach to poverty reduction. In this paper we describe the approach reflected in the work of World Bank economists and, based on new empirical work, assess its relevance for Latin America.'

A Political-Economic Analysis of Free-Trade Agreements

Abstract: This paper demonstrates that bilateral free-trade agreements can undermine political support for further multilateral trade liberalization. If a bilateral trade agreement offers disproportionately large gains to key agents in a country, then their reservation utility is raised above the multilateral free-trade level, and a multilateral agreement would be blocked. Bilateral agreements between countries with similar factor endowments are most likely to have this effect. It also follows that bilateral free-trade agreements can never increase political support for multilateral free trade. Copyright 1997 by American Economic Association.

Evidence of nominal wage stickness from microdata

Abstract: For much of this century, sticky nominal wages have been considered a key reason that nominal shocks to the economy may have real effects. Historical explanations of sticky nominal wages often rely on money illusion, a concept unpopular with neoclassical economists because it implies irrationality. More modem explanations cite menu costs (for instance, George Akerlof and Janet Yellen, 1985) and imperfect information about the rate of inflation (for instance, Edmund S. Phelps, 1970). Tests of sticky nominal wages have looked at their indirect effects, particularly regarding the countercyclicality of real wages (for instance, see Gary Solon et al., 1994). There has been little direct empirical analysis. This paper addresses that shortcoming by examining longitudinal microeconomic data on the distribution of annual nominal wage and salary changes of workers who remain on the same job. This paper finds that there are some workers whose wages or salaries exhibit nominal stickiness. Specifically, it finds: (1) A significant fraction of workers remaining on the same job over a year receive the same nominal wage/salary in consecutive years. (2) When a given real wage/salary change requires a small nominal change, it is less likely to occur than when it requires a larger nominal change. Over the period studied, between 1 and 2 percent of workers would have received a small pay change in the absence of menu costs, but instead received none. (3) There is also evidence of downward nominal wage stickiness, but with important differences between wage earners and salary earners. Wage earners receive nominal wage cuts less frequently than would be expected on the basis of distributions of real wage changes. In the period studied, approximately 9.4 percent of wage earners would have received a nominal wage reduction in the absence of downward wage rigidities, but instead do not.' In contrast, salary earners do not receive pay cuts less frequently than would be expected, particularly in later years. The frequency of zero nominal pay changes combined with the relative infrequency of small pay changes provide micro-level evidence of the presence of "menu costs," which can lead firms to postpone small pay rate changes. Menu costs in pay rate adjustments may include the administrative costs of changing payrolls and the costs of performance appraisal and negotiations that generally accompany wage/salary changes. While there is considerable debate over whether menu costs can have a profound impact on aggregate fluctuations and create nonneutrality of money, this paper does not address the macroeconomic implications of menu costs in wage/salary adjustments.2 Instead, it asks whether the distribution of annual wage and salary adjustments shows microeconomic evidence of menu costs, a necessary but not sufficient condition for macroeconomic effects. Menu costs are not enough to explain the sharp drop in wage distributions below nominal zero. The phenomenon strongly suggests that either workers or firms resist nominal pay cuts, as would be predicted by traditional Keynesians. Because of this resistance,

Contagion and Bank Failures During the Great Depression: The June 1932 Chicago Banking Panic

Abstract: The authors examine the social costs of asymmetric-information-induced bank panics in an environment without government deposit insurance. Their case study is the Chicago bank panic of June 1932. The authors compare the ex ante characteristics of panic failures and panic survivors. Despite temporary confusion about bank asset quality on the part of depositors during the panic, which was associated with widespread depositor runs and bank stock price declines, the panic did not produce significant social costs in terms of failures among solvent banks. Copyright 1997 by American Economic Association.

The Welfare State and Competitiveness

Abstract: In all industrial countries, fiscal policy is increasingly about redistribution. In this paper, the authors study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation. They show that an increase in transfers financed by distortionary taxation has nonlinear effects on unit labor costs relative to the other countries, depending on the degree of centralization of the wage-setting process in the labor market. The authors find considerable empirical support for the model in a sample of fourteen OECD countries. Copyright 1997 by American Economic Association.

The role of the family in immigrants' labor-market Activity: An Evaluation of Alternative Explanations

Abstract: We evaluate some explanations of immigrants family labor-supply behavior [in Canada]. Upon arrival immigrant husbands work less than natives but immigrant wives work more. A conventional labor-supply model uses wage assimilation to explain these differences but is not supported by the data. More favorable results are obtained for the `family investment model in which wives in immigrant families take on `dead-end jobs to finance their husbands investments in human capital. We conclude that family composition is an important correlate of immigrants assimilation and the family investment model can account for many of the patterns in the data. (EXCERPT)

Equity and Time to Sale in the Real Estate Market

Abstract: Evidence from the Boston condominium market of the early 1990s reveals that an owner's equity position determines his experience as a seller. An owner of a property with a high loan-to-value ratio sets a higher asking price, has a higher expected time on the market and, if he sells, receives a higher price than an owner with proportionately less debt. The down payment requirement for purchasers, but not incumbent owners, provides a simple explanation for this phenomenon among owner-occupants. The results provide supporting evidence for equity-based aggregate theories of price- volume movements in the housing market. Copyright 1997 by American Economic Association.

Is inequality harmful for growth? Comment

Abstract: Endogenous growth models have reignited interest in institutional and path dependencies in the economic growth process One reason for the interest in endogenous growth models is that they may explain why countries consistently grow at different rates In this vein, it has been recently proposed that greater economic inequality reduces future economic growth An important paper in this literature is by Torsten Persson and Guido Tabellini (1994), who will be referred to as PT PT's model shows why it is reasonable to expect a negative relationship between inequality and future economic growth Moreover, their empirical evidence is consistent with their contention If PT's findings are robust to other data sets, there would be important policy implications For example, they imply that policy makers should not only be concerned with the distributional implications of government policies for political and social reasons, but also because income distribution has long-run effects on economic growth This indicates that greater US income inequality since the early 1970's may have resulted in lower subsequent economic growth However, PT's results are somewhat fragile to various specifications, suggesting that they should be replicated with different data sets and over different time periods (PT p 617) With these implications in mind, this study employs data from a panel of US states to further explore the relationship between economic growth and income inequality In what follows, Section I summarizes PT's study and discusses how this comment extends their findings The empirical implementation and results in Section II directly examine the link between overall income inequality and growth Section III expands the analysis to alternative measures of income distribution and government policy One emphasis in Section III is the distinction between how the overall income distribution (especially at the tails) influences economic growth from how the relative well-being of the median voter affects economic growth Section IV provides some concluding discussion

Social Norms and the Law: An Economic Approach

Abstract: By "social norm" ("norm" for short) I shall mean a rule that is neither promulgated by an official source, such as a court or a legislature, nor enforced by the threat of legal sanctions, yet is regularly complied with (otherwise it wouldn't be a rule)' The rules of etiquette, including norms of proper dress and table manners; the rules of grammar; and customary law in prepolitical societies and private associations are all examples of norms in my sense A full understanding of law requires consideration of norms Law is older than political society, which means that it originates as a set of norms-as it remains in the case of public international law because there is no world government Even in societies that have strong governments, norms are both a source of law and often a cheap and effective substitute for law -and sometimes they are an antagonist to law The incentives for obeying law are clear enough, but what about the incentives for obeying norms? The answer to this question will help toward an understanding of the relation between law and norms There are four incentives for obeying norms: (i) Some norms are self-enforcing (the incentive to obey comes from the fact that obedience confers private benefits) because they are constitutive of advantageous transactions If you don't speak the language, you can't make yourself understood If you don't play chess by the rules, you're not playing it at all, so if you enjoy playing chess, you will not cheat unless the net expected gain is great2 This point bears on the norms governing judicial behavior of judges-not those norms backed by law, such as the rule against taking bribes, but those subtler norms that adjure the judge to lay aside personal or partisan sympathies, disregard public blame or praise, follow precedent rather than his own values-in short, adhere to the traditional "rule-of-law" virtues Compliance with these norms is far from uniform, because there are incentives to deviate, and the costs of deviation are small But why is there any compliance? The answer is that the private costs of compliance are low because the law-backed rules of judicial behavior' make it difficult for the judge to profit from partiality, while the private benefits are substantial because the rule-of-law norms are the constitutive rules of the practice of judging; if you don't obey them, you're not playing the judicial "game" Law school and the judiciary teach the game to new lawyers, while judicial selection procedures select for persons who want to play the judicial game rather than some other game, such as partisan politics Even when judicial appointments are elective rather than appointive or when appointments are based on patronage or ideology rather than merit, self-selection is present, in the decision to seek or accept appointment (ii) Some norms are enforced by the emotions, a point vital to understanding the emergence of law The honor code of the Old South (see Jack K Williams, 1980) will illustrate The code, which required a man to challenge to a duel any man who infringed his dignity, was a survival of a revenge-based system of law (more precisely, pre-law) Before there were governments, what is now called law was * US Court of Appeals for the Seventh Circuit, and University of Chicago Law School, 1111 E 60th St, Chicago, IL 60637 I thank Gary Becker, Dan Kahan, Lawrence Lessig, Martha Nussbaum, Eric Posner, Eric Rasmusen, Cass Sunstein, and Yuval Tal for many helpful comments on a previous draft ' I do not require, however, that it be internalized as a preference, as in the definition of norm in Gary Becker (1996 p 225) 2 These are examples of compensated norm-imposed constraints (Becker, 1996 p 228) 'Not only must the judge not take bribes, but he must not sit in cases in which he or his relatives might derive a pecuniary benefit from his decision

When does it take a Nixon to go to China

Abstract: Substantial policy changes, like market-oriented reforms by populist parties and steps towards peace by 'hawks,' are sometimes implemented by 'unlikely' parties. To account for such episodes, this paper develops a framework in which incumbent politicians have better information about the state of the world than voters. The incumbent is unable to credibly transmit all this information since voters are also imperfectly informed about his ideology. The paper identifies conditions under which an incumbent party's electoral prospects increase the more atypical the policy it proposes. Popular support for a policy, or its 'credibility,' depends on the policymaker-policy pair. Copyright 1998 by American Economic Association.