Knowledge that Transforms

THROUGH cross-sectional analysis of the asset holdings of individual households, this study adds to the evidence available on relative risk aversion. It utilizes the National Longitudinal Surveys (NLS)1 which have advantages over the data bases used in previous studies. Assumptions about relative risk aversion are made in a number of theoretical economic and financial models.2 An empirical study by Cohn, Lewellen, Lease, and Schlarbaum (CLLS, 1975) concluded that relative risk aversion declined as wealth increased across households, while a second empirical study by Friend and Blume (F&B 1975) concluded from mixed evidence that relative risk aversion remained relatively constant as wealth increased. The present study finds that by restricting the sample to higher wealth households and by defining wealth narrowly, patterns consistent with decreasing or constant relative risk aversion emerge and these are compatible with the earlier studies. However, the use of a broader based sample and a more comprehensive measurement of wealth alters the conclusions and a pattern indicative of increasing relative risk aversion emerges. Thus, the paper cautions that constant or decreasing relative risk aversion assumptions in theoretic models may not be realistic descriptions of the risk attitudes of typical U.S. households. First, the literature on relative risk aversion will be reviewed. Second, the model used to estimate the coefficient of relative risk aversion will be discussed. The third section will present empirical results and contrast them with those of earlier studies. Finally, the material will be summarized and the conclusions indicated.

In previous work I have developed an equation explaining votes for president in the United States that seems to have a remarkable predictive ability. In this paper the equation is updated through the 1984 election and then used to predict the 1988 election.

D ESPITE the abundance of literature on mergers, relatively little has been written specifically on the subject of diversification. Noteworthy exceptions are Gort (1962), Berry (1975), Caves (1975), Caves et al. (1977, 1980), and Hassid (1975). But regression analyses of outbound diversification have tended to yield unsatisfactory results, both in terms of the degree of significance of coefficients and in terms of overall explanatory power. In this paper I propose to consider diversification from a different point of view, by looking at patterns of diversification or, to be more specific, at pairs of origin-target industries. This approach emphasizes the role of a class of variables describing a relationship between origin and target industries. A number of such variables are specified, and some supporting empirical evidence is offered. The paper is organized as follows: section I gives definitions and presents the theoretical background; section II discusses the data; section III describes the specification; section IV analyzes the results; and section V summarizes findings.

FOR the economy to work well, resources should flow freely from one industry to another in response to changing demands and costs. In textbooks, this process is via the capital market and entry and exit of firms. But entry can be by new firms or existing ones through diversification. Williamson (1970) and Weston (1970) stress advantages of internal capital transfers over the market.' Gort (1962, p. 4) and Rumelt (1974, p. 2) state multimarket operation of firms will speed redeployment of resources in response to profitable opportunities. They would be right if multimarket operation were not coincident with multimarket contact. While diversified companies may have advantages that would facilitate the movement of capital, they have enhanced opportunity for coordination if they meet in several markets. I term multimarket grouping the phenomenon of groups of diversified firms whose activities span to a significant extent the same markets. Multimarket grouping of sellers could reduce the flow of resources, thereby inhibiting a socially desirable competitive process, if it proceeded until mutual dependence among diversified sellers was recognized and reduction in competition coordinated, tacitly or otherwise. In short, where sellers have grown large through diversification, resources may not be efficiently reallocated among markets in response to changing conditions because interdependent groups of sellers recognize that reduces their profits. Even then, in a frictionless world, sellers other than those in the multimarket group could move resources into profitable areas. I reject such a frictionless world given evidence such as Mueller's (1977b) and the general theory of barriers to mobility (Caves and Porter, 1977). Those sellers having grown interdependent across markets are those who would have been most likely to enter given new profitable opportunities. Capacity expansion given such opportunities should be less rapid than if the multimarket interdependence did not exist. Is it in fact that just as with market concentration, not only the philosophy embodied in the Jeffersonian ideal, but economic efficiency provides grounds for concern about aggregate concentration when it coincides with multimarket grouping? This paper introduces methodology for measuring the significance of grouping and shows that when significant and coincident with high seller concentration, multimarket grouping does have economic implications. That coincidence, ceteris paribus, leads to higher profits. The question is whether those profits result from coordinated behavior or lower costs or both. The evidence suggests they are the result of economies of multimarket operation and barriers to the mobility of resources from outside the interdependent groups of sellers. Profits are lower for lines of business where multimarket contact is high but seller concentration is low, but higher when both contact and concentration are high than when concentration alone is high.

Robert Moffitt, Walter Nicholson, The Effect of Unemployment Insurance on Unemployment: The Case of Federal Supplemental Benefits, The Review of Economics and Statistics, Vol. 64, No. 1 (Feb., 1982), pp. 1-11

T HE purpose of this paper is to study the small sample performance of tests for causal ordering of time series in the sense of Granger (1969). Versions of three tests are studied: that based directly on Granger's definition of causality and suggested by Sargent (1976); that suggested by Sims (1972); and the modification of Sims suggested by Geweke, Meese, and Dent (1982). Tests for causal orderings of time series have been applied often in recent econometric work. Sims (1972) introduced his version of a causal ordering test to inquire whether money was exogenous (as monetarists might suggest) in the money income relationship. Sargent (1976) used Granger and Sims procedures to test the validity of the natural-rate hypothesis inherent in his model. Salemi (1980) employed the Granger test as a test of specification of a money demand equation in hyperinflation. A goal of our research is to conduct our study with data that closely resemble the types of quarterly time series that arise in applied research. The cost of this approach is a research design for which finitely parameterized versions of the tests are never exactly correct. It is our view that users of these tests are likely to encounter this potential source of bias. Indeed, the problem of truncation (of leading and lagging coefficients in the causality test regressions) arises whenever the vector ARMA representation of the time series studied has, in reality, a nontrivial moving average component. To our knowledge, this feature of our research design has not been used before, and is a major difference between our work and the work of Geweke et al. and Nelson and Schwert (1980). Answers to the following research questions interest us. First, how likely is a user of each version of the test to reach a correct decision regarding the causal ordering of the time series? Second, how accurately does each test procedure recover population values of the test regression coefficients? Third, how sensitive are answers to the first and second questions to sample size, contemporaneous correlation of the exogenous errors, and the strength of the causal interrelationship? Fourth, how important a source of bias is the finite parameterization of the test regressions that is required in small samples? Section II of the paper describes the versions of the tests studied. Section III describes the experimental design. The results of the experiments are in section IV, and conclusions are presented in section V.

Full-information maximum likelihood (FIML) estimates of the simultaneous probit-Tobit (SPT) model suggest that effects of campaign contributions on voting are smaller than single equation probit estimates would indicate. The author has generally unable to conclude that contributions have a significant impact on voting decisions, apparently votes are most often decided on the basis of personal ideology or preferences of constituents. These findings differ markedly from earlier results of economists Gary C. Durden and Jonathan J. Silberman, whose single equation models showed a substantial impact of contributions on voting decisions. Despite the lack of significance according to model SPT, it would not, however, be appropriate to unambiguously conclude that contributions have no effects on voting. For six of eight coefficients the anticipated positive sign resulted and one coefficient remained marginally significant. The article also shows that the lack of significance is attributable not only to smaller coefficient size, but also to larger standard errors. The FIML estimates of the contribution coefficients are not very precise.

N recent years, considerable attention has been devoted to understanding the causes of earnings differentials between blacks and whites. Conventional economic analysis of the issue has been divided into supply and demand factors. Demand side arguments point to differential returns to blacks and whites with the same level of market-valued characteristics as a principal cause of the lower earnings of blacks. Supply side arguments, on the other hand, focus on the quality and quantity of the market-valued characteristics of black compared to white workers. Although this dichotomization is obviously a necessary and useful step in understanding the causes of earnings differentials between blacks and whites, it fails to place sufficient emphasis on the process by which market-valued characteristics are actually obtained. In particular, given the effect of parents' economic status on their children, this approach does not illuminate the intertemporal consequences of racial discrimination for the acquisition of market-valued characteristics. Also, given the potential of the effects of the community of origin on achievement, it may, in addition, obscure many of the negative externalities affecting the acquisition process that result from being part of a discriminated-against group. This paper addresses these problems by examining a recursive model of the effects of socioeconomic background on education and earnings of black and white men ages 23-32. The main difference between this analysis and other efforts in this area is that it examines not only the effects of the socioeconomic status of an individual's parents, but also the effects of characteristics of the individual's community of origin. While other studies have included variables measuring differences due to region and/or size of place of origin, this paper also controls for differences between individuals at the more disaggregated neighborhood level. The findings of the study suggest that neighborhood differences are at least as important as family characteristics in explaining the gaps between black and white achievement and that the omission of neighborhood characteristics results in a misleading picture of the source of background effects.

T HE United States is a country of immigrants and sons and daughters of former immigrants. From colonial times to the 1920s, America had an open door immigration policy. Although the formal policy generally welcomed immigrants, those who preceded the newcomers have never looked kindly on the arrival of new immigrants. Xenophobia has been a common reaction by Americans to large scale inflows. Although ethnocentrism undoubtedly is one reason for such isolationist feelings, fear of economic displacement is another underlying cause.' At the center of the debates over immigration policy has been the fear that the newcomers take jobs away from native Americans. The substitutability of natives for immigrants is critical in evaluating the validity of the displacement fears. A number of theoretical contributions, including Gerking and Mutti (1979), Grossman (1981) and Johnson (1980a) have dealt with the economic effects of international labor inflows. However, no empirical investigation of these issues has been undertaken. The absence of such studies is due, at least in part, to the lack of accurate data on the number of employed illegal immigrants, who comprise a substantial portion of the immigrant stock. While it is currently not possible to develop empirical estimates of the substitutability of illegal immigrants and natives, or even between the most recent wave of legal immigrants and natives, it is nonetheless useful to investigate the relationship in production that has historically existed between immigrants and the domestic labor force. In what follows, I use cross-section data for 1970, the most recent year for which such data are available, to estimate aggregate production relationships. The resulting estimates shed light on the substitutability between the stock of immigrants in the United States at that time, and the native work force. Until more is known about the employment behavior of more recent illegal and legal (especially refugee) immigrants, this is the best that can be accomplished.