Knowledge that Transforms

The authors introduce a class of alternating-move, infinite-horizon models of duopoly. The timing captures the presence of short-run commitment s. They apply this framework to a natural monopoly in which costs are so large that at most one firm can make a profit. The firms install short-run capacity. In the unique symmetric Markov perfect equilibriu m, only one firm is active and practices the quantity analogue of lim it pricing. For commitments of brief duration, the market is almost c ontestable. The authors conclude with a discussion of more general mo dels where the alternating timing is derived rather than imposed. Copyright 1988 by The Econometric Society.

This article presents an empirical study of strike activity in a panel of contract negotiations for some 250 firm-and-union pairs. Evidence is presented on two sources of variation in dispute rates: changes in the characteristics of the collective bargaining agreement that affect subsequent strike outcomes and the effects of lagged strikes on the incidence and duration of subsequent disputes. Strike probabilities are significantly affected by the duration and expiration month of the previous agreement. Dispute rates are also increased by the occurrence of a short strike during the previous negotiations and reduced by the occurrence of a long strike.

This paper considers labor contracts between the risk-neutral firm and risk-averse workers with heterogeneous outside opportunities (alternative wages), which become known to the worker after a costly on-the-job search. In the case of a deterministic alternative wage, self-selection over a menu of contract wages would achieve the first-best contract. If the alternative wages are stochastic, the second-best contract emerges as a trade-off between productive efficiency and risk sharing. Workers who voluntarily search are fewer, and workers who search are less likely to quit. If the search effort is not monitored, even fewer workers search.

The wage differential between men and women is a thorn in the side of economists, theorists and empiricists alike. Theorists are by and large at a loss to explain the persistence of such a wage gap in a competitive environment, and empiricists are hard pressed to identify the factors that explain it.

This paper analyzes the joy of giving bequest motive in which the utility obtained from leaving a bequest depends only on the size of the bequest. It exploits the fact that this formulation can be interpreted as a reduced form of an altruistic bequest motive to derive a relation between the value of the altruism parameter and the value of the joy of giving parameter. Using previous discussions of an a priori range of plausible values for the altruism parameter we then derive plausible restrictions on the joy of giving parameter. We demonstrate that this parameter may well be orders of magnitude larger than assumed in the existing literature.

"Revised April 1986."

In his seminal 1943 paper on the political business cycle, Michal Kalecki (1971) argued that industrial leaders feared employment because the economic insecurity created by unemployment was necessary to keep wages low and maintain work intensity and discipline on the shop floor. On the basis of this reasoning, Kalecki concluded that governments would not use demand management policies to achieve permanent full employment. In terms of current macroeconomic debates, Kalecki had sketched the outlines of a theory of the neutral or natural rate of unemployment based on the importance of disciplinary unemployment as a regulator of unit labor costs. Kalecki's pessimism about the prospects for employment was premised in part on a view of firms in which the threat of dismissal was the central motivational device used by employers, and employees had only a tenuous connection to employers. This assumption may have been appropriate when analyzing labor markets in the United States during the 1930's. Since that time, however, the spread of unions, implicit employment contracts, and large, bureaucratically organized enterprises has resulted in a modern U.S. labor market in which many workers enjoy long job tenure and in which many firms do not appear to rely on dismissal threats as their primary motivational strategy (see David Gordon, Richard Edwards, and Michael Reich, 1982; Sanford Jacoby, 1983; and my forthcoming paper). From this perspective, it is reasonable to ask whether the presence of long-term employment relations alters the regulatory role played by unemployment. This paper examines the effect that unemployment and long-term employment relations exert on the determination of unit labor costs. The central empirical findings can be briefly summarized. First, as suggested by Kalecki, movements towards employment increase the rate of growth of wages and reduce the rate of growth of labor productivity. Second, where long-term employment relations are prevalent, the effect of unemployment on both wage and labor productivity growth is diminished.

In the presence of aggregate demand spillovers, an imperfectly competitive form's profit is positively related to aggregate income, which in turn rises with profits of all firms in the economy. This pecuniary externality makes a dollar of a firm's profit raise aggregate income by more than a dollar since other firms' profits also rise, and in this way gives rise to a "multiplier." Since such multipliers are ignored by firms making investment decisions, privately optimal investment decisions under uncertainty will not in general be socially optimal. Under reasonable conditions, investment is too low.

Throughout the 1930s and early 1940s, U.S. Treasury bonds and notes appeared to have negative nominal yields as they approached maturity. But negative nominal interest rates are impossible in a world in which one can always hold cash. The resolution to this puzzle is that Treasury securities, in addition to making coupon payments, gave the owner the right to buy a new security on a future date. This paper describes the institutional environment that led to the apparent negative nominal interest rates; develops a method for valuing the "exchange privilege"; and computes accurate measures of the yield to the coupon-bearing component of these composite bond/options. Copyright 1988 by University of Chicago Press.

In his well-known analysis of the national debt, Robert Barro introduced the notion of a "dynastic family." This notion has since become a standard research tool, particularly in the areas of public finance and macroeconomics. In this paper, we critique the assumptions upon which the dynastic model is predicated, and argue that this framework is not a suitable abstraction In contexts where the objective is to analyze the effects of public policies. We reach this conclusion by formally considering a world in which each generation consists of a large number of distinct individuals, as opposed to one representative individual. We point out that family linkages form complex networks, in which each individual may belong to many dynastic groupings. The resulting proliferation of linkages between families gives rise to a host of neutrality results, including the irrelevance of all public redistributions, distortionary taxes, and prices. Since these results are not at all descriptive of the real world, we conclude that, in some fundamental sense, the world is not even approximately dynastic. These observations call into question all policy related results based on the dynastic framework, including the Ricardian equivalence hypothesis.