Knowledge that Transforms

Should managers, when taking investment decisions, follow the signals given by the stock market even when those do not coincide with their own assessment of fundamentals? Do they? In this paper we review theoretical arguments and examine the empirical evidence. First, we look at the relation between investment, market valuation, and proxies for fundamentals over the last 90 years. Second, we look at the behavior of investment during the episodes associated with the crashes of 1929 and 1987. We find a limited role of market valuation, given fundamentals.

How does movement toward freer trade affect income disparity among countries? This paper attempts to shed some light on the issue by examining episodes of major postwar trade hberalization within specified groups of countries. The findings suggest a strong link between the timing of trade reform and income convergence among countries.

This paper reports the results of an experiment that was designed to test the impact of fairness on market prices. Prices were determined in a one-sided oral auction, with buyers as price-makers. Upon acceptance of an offer, sellers determined the quality of the good. Buyers offered prices that were substantially above the market-clearing level and expected sellers to respond with high quality levels. This expectation was, on average, confirmed by the behavior of sellers. These results provide, therefore, experimental support for the fair wage-effort theory of involuntary unemployment.

When will an industry subject to agglomeration economies move from an old, high-cost site to a new, low-cost site? It is argued that history, in the form of sunk costs resulting from the operation of many firms at a site, creates a first-mover disadvantage that can prevent relocation. It is demonstrated that developers of industrial parks can partly overcome this inertia through discriminatory pricing of land over time, and empirical evidence is provided that they actually engage in such behavior. It is also shown that other aspects of developer land-sale strategy can be a source of information on the nature of interfirm externalities.

This paper uses Current Population Survey data to examine whether workers who use a computer at work earn a higher wage rate than otherwise similar workers who do not use a computer at work. A variety of models are estimated to try to correct for unobserved variables that might be correlated with job-related computer use and earnings. Estimates suggest that workers who use computers on their job earn 10 to 15 percent higher wages. Additionally, the expansion in computer use in the 1980s can account for one-third to one-half of the increase in the rate of return to education.

Because of financial market imperfections, such as those generated by asymmetric information in financial markets, which lead to breakdowns in markets, like that for equity, in which risks are shared, firms act in a risk-averse manner. The resulting macroeconomic model accounts for many widely observed aspects of actual business cycles: (a) cyclical movements in real product wages, (b) cyclical patterns of output and investment including inventories, (c) sensitivity of the economy to small perturbations, and (d) persistence. More downward flexibility in wages and prices may exacerbate the plight of an economy that is in a deep recession.

We propose an explanation for the wide variation in rates of taxation across developed economies, based on differences in labor market institutions. In "corporatist" economies, which feature centralized labor markets, taxes on labor input will be less distortionary than when labor supply is determined individually. Since the level of labor supply is set by a small group of decision-makers, these individuals will recognize the linkage between the taxes that workers pay and the benefits that they receive. Labor tax burdens are indeed higher in more corporatist nations, and non-labor taxes are lower, which is consistent with this theory. There is also some evidence that the distortionary effects of labor taxes are lower in more corporatist economies.

We investigate the channels through which partisan influence from a Presidential administration could affect monetary policy-making. Influence could be a result of direct Presidential pressure exerted on members of the Federal Open Market Committee (FOMC), or it could be a result of partisan considerations in Presidential appointments to the Board of Governors. To investigate these two channels of influence, we devise and apply a method for estimating parameters of monetary policy reaction functions that can vary across individual members of the FOMC. Our results suggest that the appointments process is the primary mechanism by which partisan differences in monetary policies arise.

Standard models of dynamic labor demand rely on the presence of adjustment costs to explain the observed smoothness in employment patterns, although the costs are often difficult to quantify. The experience rating feature of the U. S. Unemployment Insurance (UI) system provides a measurable linear cost of adjustment. Using a unique data set with administrative data on over 8000 firms, I estimate the effect of a UI-induced linear adjustment cost on seasonal labor demand in retail trade. I find strong support for the large role of adjustment costs in reducing the employment response of firms to seasonal fluctuations in demand.