Knowledge that Transforms

We extend our 1985 test of restrictions on Layson and Seaks' (1984) Box-Cox difference transformation to models with autoregressive terms and moving average errors. The tests are based on the Lagrange Multiplier principle. Several empirical examples are given.

A census of all housing values was made in the United States in 1798 which provides the basis for obtaining an estimate of the distribution of income in that year. A 7% sample of the 576,800 dwelling units was adjusted for the number of families in a house and various assumptions were made concerning the elasticity of housing with respect to income. The relative inequality of income with a Gini coefficient of between 0.63 and 0.71 was much greater than it is today. Similar results were found for housing distributions then and now. How much income inequality existed in the United States two centuries ago? Was the Gini coefficient, G, less than now? These are questions that can be answered by studying the 1798 census of housing. This data set provides an excellent opportunity for the study of income groups in America, including a detailed quantification of the extremes, the affluent groups and their mansions and the many who lived in humble circumstances. This data set shows such surprising inequality that adjustments for crowding (the number of famlies in each house) and for possible income-rent elasticities have little effect. Analysis of the data supports the hypothesis that income inequality in the United States at the end of the 18th century was quite large, and that it is more tenable than is a hypothesis of mild

This paper examines the magnitude of changes in relative wages across industries between 1860 and 1983 and analyzes the macroeconomic determinants of such changes at different intervals during this period. The variance across industries in wage growth was at least four times larger before 1948 than afterward. Except for smaller year-to-year variability in output growth across industries after 1948, the macroeconomic factors examined cannot account for this increased rigidity of relative wages. Increases in average establishment size and improved communication of wage trends are probably partially responsible for the observed increase in relative wage rigidity. No single macroeconomic model was consistent with the year-to-year fluctuations in relative wage rigidity in every historical period examined.

Abdul Rahman, Lawrence Kryzanowski, Ah Boon Sim, Simultaneous Estimation of the Parameters of the Black-Scholes Option Pricing Models, The Review of Economics and Statistics, Vol. 69, No. 4 (Nov., 1987), pp. 727-732

On the assumption that the natural root of dynamics lies in the intertemporal dimension of the optimization process and that an operational and meaningful solution has to be found by appropriately placing restrictions on preferences, this paper develops and tests on U.K. 1952-81 data a dynamic demand system exploiting W. M. Gorman's concept of quasi separability. Comparison with a static (intertempora lly weakly separable) alternative provides further evidence for the i dea that dynamic modeling can overcome the usual rejection of theoret ical constraints in demand analysis. Copyright 1987 by MIT Press.

The standard neoclassical theory is rejected as an explanation for the observed reluctance of most holders of whole life insurance to borrow against the cash value of their policies at favorable rates of interest. Even when the neoclassical theory is augmented with transactions costs and short awareness lags, several empirical tests using survey and time-series data reject the standard theory in favor of an explanation invoking self-imposed rules against borrowing or the "debt ethic." This evidence lends support to the psychology-based theories of Thaler and Shefrin (1981). Copyright 1987 by MIT Press.

Ralph M. Bradburd, Richard E. Caves, Transaction-Cost Influences on the Adjustment of Industries' Prices and Outputs, The Review of Economics and Statistics, Vol. 69, No. 4 (Nov., 1987), pp. 575-583

High labor costs in large Midwestern metropolitan areas have significantly reduced their manufacturing capital stock. For the period 1974 to 1978, the authors estimate that sixteen metropolitan areas in the Midwest, taken together, had approximately $2.8 billion less capital stock than they would have had if their labor costs had been at the national average. This difference is equal to 4 percent of the capital stock in these areas. The results are simulated from the estimation of a labor demand equation that is derived from a generalized Leontief cost function. Copyright 1987 by MIT Press.