Knowledge that Transforms

Recent research in international business cycles finds that international consumption comovements do not match the risk-sharing predictions of standard complete markets models. In this paper, I ask whether two different types of explanations can help explain this result: (1) nonseparabilities between tradables and nontradable leisure or goods and (2) the effects of capital market restrictions on consumption risk sharing. I find that risk sharing cannot be resolved by either explanation alone. However, when I allow for both nonseparabilities and certain market restrictions, risk sharing among unrestricted countries cannot be rejected. This evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries.

The authors regress young adult wages on current age and the score of a basic skills test that was administered over ten years earlier, when respondents were preparing to leave high school and embark on work careers or postsecondary education. Controlling for this one measure of premarket skill greatly reduces the measured black-white wage gap for young adults. The authors' results suggest that the black-white wage gap primarily reflects a black-white skill gap that exists before young men and women enter the labor market. This skill gap in part reflects measured black-white differences in wealth and family background. Copyright 1996 by University of Chicago Press.

We use a survey of 452 Russian shops, most of which were privatized between 1992 and 1993, to measure the importance of alternative channels through which privatization promotes restructuring. Restructuring is measured as major renovation, a change in suppliers, an increase in hours stores stay open, and layoffs. There is strong evidence that the presence of new owners and new managers raises the likelihood of restructuring. In contrast, there is no evidence that equity incentives of old managers promote restructuring. The evidence points to the critical role new human capital plays in economic transformation.

A hedonic analysis of principal-agent employment contracts is developed in which workers and employers exchange labor services and contractual payment patterns. Within this framework, tests of alternative hypotheses are formulated and applied to contract data from a unique household-level survey of economic activity in rural China in 1935. The results indicate that credit market constraints motivated workers' and employers' contract choices, that shirking by workers rather than by employers was the dominant incentive issue, that reputational concerns rather than threats of termination were the key worker-disciplining device, and, finally, that the contract's third party acted as an enforcement device rather than as a matchmaker. Subject to the availability of matched agent-principal data, this structural approach to modeling agency relationships can also be used in contemporary settings.

Core theory is a powerful tool to find competitive market-clearing prices. A familiar economic setting shows this, beginning with a single commodity produced using many factors of production and ending with the general case of many outputs and inputs. The analysis describes when the market has a core. When it has no core, there is a least upper bound on the payment each firm that does not participate in a central market must make that serves as an inducement to restore the core. Since each firm can avoid this penalty by trading in the central market, the result is market-clearing prices that can support an efficient equilibrium.