A dynamic model is used to understand how sharp changes in energy prices affect investment behavior, employment, and energy use. The authors discuss the theory behind their model selection, model specifications, estimation methods and data; list parameter estimates and elasticities for the selected model; and describe the simulations. They conclude that (1) the data strongly reject the hypothesis of constant returns to scale within their specification of aggregate production; (2) the data indicate adjustment costs on labor are small, and (3) their results help reconcile some of the conflicting estimates of energy-demand elasticities appearing in recent literature. 23 references, 3 figures, 3 tables.
Though public intervention in the market for research is virtually universal, economists have paid surprisingly little attention to the choice of the form of research incentive in a given market structure. Many studies concentrate on patents, but any assumption of their superiority over other incentives has been founded on intuition rather than on formal analysis. In this paper I analyze the choice between three of the most alternative means of public intervention in the research market, namely, patents, prizes, and direct contracting for research services. I show why, and under what conditions, any one of the three may be preferred by a social welfare-maximizing administrator in a competitive economy, using a model that, for the first time, pays explicit attention to differences in the informational roles of each of these alternatives. In the extensive literature on the economics of patents (see Arnold Plant, 1934; Fritz Machlup, 1958; Charles Taylor and Z. A. Silberston, 1973; Morton Kamien and Nancy Schwartz, 1975; and F. M. Scherer, 1977, for valuable surveys), formal analysis weighs the benefits of patents as a solution to the market failure associated with the inappropriability of knowledge against the welfare cost due to the restriction on the use of the knowledge generated, and this tradeoff is optimized by patent life adjustment in William Nordhaus (1969). Scant analytical attention is paid to alternative incentive mechanisms. (An exception is Ben Yu, 1981, who considers the role of prior contracting for inventions.) But as many writers (for example, Dan Usher, 1964; Yoram Barzel, 1968; Joseph Stiglitz, 1969; Carole Kitti, 1973; Glenn Loury, 1979; Partha Dasgupta and Stiglitz, 1980a) have pointed out in various contexts, the incentive offered by an unlimited patent to competitive researchers may be excessive, due to the common pool problem discussed further in Section I below. If the patent administrator and researchers share the same information, as implicitly assumed in previous models, then the patent life limitation can be adjusted to provide the optimal patent incentive, given the pool problem. But in all such models, patents would not be chosen in a fully optimized fiscal system. Researchers and the administrator are assumed to have identical information about the shadow price of potential inventions; a patent is just a means of turning this shadow price into a monetary reward. But monetary compensation can instead be offered directly to researchers by the state. Assuming that patent revenues incur a higher deadweight loss than an equivalent amount of public funds financed by less distortionary means (for example, a minimally efficient tax system), appropriate prizes or government contracts are socially preferable to patents with optimal lives. If the patent is ever to be the optimal incentive mechanism for research, it must possess advantages not captured in existing models. Informal discussions of patents emphasize their informational role. To include the latter as a justification for decentralized invention incentives, I incorporate an ex ante imbalance of information about costs and benefits of research in the model presented in Section II. But this alone is not quite enough. It is further necessary to specify that the terms of the award must be fixed before *Department of Economics, Economic Growth Center, Box 1987 Yale Station, Yale University, New Haven, CT 06520. I thank, with the usual caveat, Marguerite Alejandro-Wright, Cindy Arfken, Martin Baily, Nuong Brennan, Steven Englander, Robert Evenson, Richard Levin, Richard Nelson, Susan Rose-Ackerman, Denis Wright, and two referees for assistance of various kinds.
A current-period tax reduction financed by issuing government shifts the timing of tax collection from the current period to the future. If the future taxes implied by government are not fully perceived and discounted by the private sector, there will be a net effect that increases private sector consumption, thus reducing capital accumulation and growth. If, on the other hand, the implied future taxes are perceived and discounted by the private sector, the current-period tax reduction will be used to increase private saving to pay for the future taxes, and government will be absorbed without any real effects on the economy.' The effects of government spending financed by current-period taxation also depend upon private sector perceptions.2 If the benefits of government spending are ignored, private sector consumption will decrease in accordance with the reduction in permanent disposable income. To the extent that government spending is on consumption-type goods that are perceived as substitutes for privately provided consumption goods, there will be a relatively greater reduction in private sector consumption. To the extent that government spending is on investment-type goods yielding future goods and services that are perceived as substitutes for future privately provided consumption goods, there will be a relatively smaller reduction in private sector consumption. The to modeling private sector consumption-saving behavior involves a rather asymmetric set of assumptions as to how the private sector perceives the various elements of government fiscal policy.3 Current-period taxes are assumed to be fully perceived, but current-period government spending is implicitly assumed to be completely ignored by the private sector. In considering permanent personal disposable income, the private sector is assumed to be forward-looking in its assessment of income and taxation. The stock of government is nevertheless included as part of the stock of private wealth, the implicit assumption *Associate Professor of Economics, Graduate School of Business, University of Chicago, 1101 East 58th Street, Chicago, IL 60637. I thank Eugene Fama, Levis Kochin, Michael Mussa, Paul Evans, and an anonymous referee for helpful comments. I am particularly grateful to Daniel Benjamin for contributing many hours of discussion, and Laura Lahaye, who was a research assistant and valuable adviser on earlier drafts. 'The theoretical debate on the burden of the debt has been long standing. Gerald O'Driscoll (1977) documents Ricardo's nineteenth-century position. Robert Barro (1974) reopened the debate by introducing the fundamental issue of intergenerational transfers (also discussed in Merton Miller and Charles Upton, 1974). The empirical side of the debate was initiated by Levis Kochin's (1974) attempt to test for the effects of deficits on consumption and by Martin Feldstein's (1974) attempt to test for the effects of Social Security wealth on consumption. Other empirical contributions include Jess Yawitz and Laurence Meyer (1976), myself (1978) and J. Earnest Tanner (1978, 1979) with respect to the effects of government deficits and debt, and Barro (1978), Michael Darby (1979), and Dean Leimer and Selig Lesnoy (1982) with respect to Social Security wealth. See also interesting recent papers by John Seater (1982), who generates detailed tests of the effects of deficits and on consumption, Charles Plosser (1982), who explores the effects of government spending and shocks on interest rates, and Feldstein (1982), who attempts tests similar to some in this paper (see fn. 29). 2Martin Bailey's (1962, 1971) development of the effects of government spending on private consumption and aggregate economic activity is the seminal contribution. Paul David and John Scadding (1974) extend Bailey's ideas and provide some supporting empirical evidence. More recently, Willem Buiter (1977) and myself (1978) developed models based on Bailey's earlier work. Barro (1981) has an interesting paper on related issues. See also David Aschauer (1982). 3The standard approach incorporates fiscal policy through the concept of personal disposable income and by including the stock of government as part of personal wealth. See, for example, the empirical specification of Albert Ando and Franco Modigliani (1963), which has been the basis of most empirical consumption studies since, and Feldstein (1974) for one of the more influential papers based on the Ando-Modigliani specification.
An applied general equilibrium model of a small open economy is described. The model incorporates industrial organization structures heretofore absent from applied G.E. trade models. Scale economies, product differentiation and explicit price setting are novel model features. Some illustrative results for trade liberalization policies are given for a 1976 Canadian data set and contrasted with a conventional constant returns neoclassical model on the same data set. Results from the alternative models differ significantly.
Although much research discusses the quantity of schooling as an effective impact on productivity and earnings, most such research leaves out the idea of the quality of schooling which may cause biases in the estimated returns to schooling. This paper, consequently, attempts to extend the standard Mincerian approach to incorporate school quality as well as quantity. It demonstrates how exclusion of quality in the standard procedure may cause biases in the estimated returns to years of schooling, probably in the upward direction. The paper explores the implications of this extension of the standard model for the case of young Brazilian males. It shows that the estimate of the private return to years of schooling using the preferred quality-inclusive specification is only one-half the estimate using the standard procedure, indicating substantial upward bias in the standard estimates. It further outlines a method for estimating a social return to quality and finds that it exceeds substantially the social return to quantity. The paper then shows why this in turn suggests there may be an equity-productivity trade-off in schooling investments.
Perhaps the most basic assumption of the economic theory of consumer demand is that more is better than less. Virtually all of the major propositions of consumer theory can, in a certain sense, be derived from the assumption that goods are good. Interestingly, however, this tenet seems to be violated by the behavior of many individuals in the low-income population, for many turn out to be eligible for a positive welfare benefit but do not in fact join the welfare rolls. For example, it has been estimated that in 1970, only about 69 percent of the families eligible for AFDC (Aid to Families with Dependent Children) participated in the program (see Richard Michel, 1980). The corresponding percentage for AFDC-U, the program for which families with an unemployed male are eligible, was only 43 percent and the participation rate in the Food Stamp Program was only 38 percent (see Maurice McDonald, 1977). This phenomenon has puzzled many investigators because such individuals do not locate on the boundaries of their budget sets. Consequently, most investigators ignore the problem when studying the effects of welfare programs on behavior. In this paper, this seemingly irrational rejection of an increase in income is modeled as resulting from welfare stigma -that is, from disutility arising from participation in a welfare program per se.1 The existence of stigma has been amply documented in the sociological literature (Patrick Horan and Patricia Austin, 1974; Lee Rainwater, 1979), where interviews of recipients have often uncovered feelings of lack of self-respect and negative self-characterizations from participation in welfare. Nevertheless, this phenomenon has not been modeled, and many questions consequently remain. When is the disutility of participation strong enough to prevent participation? Shouldn't we expect individuals to weigh the disutility of participation against the potential benefit in their decisions? What is the elasticity of participation with respect to the potential benefit? Also, in a slightly different vein, how are the work disincentives of welfare affected by stigma? These questions have been given scant attention by economists, yet they are crucial for our ability to predict the impact of various welfare programs on the lowincome population. Here these questions are addressed by modeling nonparticipation as a utility-maximizing decision. The model is developed and estimated for the AFDC program.2 The model posits an individual utility function containing not just disposable income, but