Knowledge that Transforms

Individuals or households often have some scope for choice of peer groups, whether through the selection of neighborhood of residence, school, or friends. This study addresses the estimation of peer group effects in cases in which measures of peer group influence are potentially endogenous variables. Using a rich data set on individual behavior, the paper explores teenage pregnancy and school dropout behavior. For both cases, the estimation of a straight-forward single-equation model yields statistically significant peer group effects; however, these effects disappear under simultaneous equation estimation. The results are robust and suggest the need for careful modeling of the choice of peer groups.

What causes individual suppliers to allocate goods in such a way that the aggregate allocation satisfies the law of one price? A satisfactory answer to this question must confront two related problems: Equal net prices at all allocations provide no information to suppliers about the quantity to deliver to a specific location, and strategic uncertainty makes an observed violation of the law of one price an unreliable indicator of a profit opportunity. This paper develops a simple analytical framework to formalize these two problems, reviews some solutions found in the literature, and reports laboratory evidence on how people solve them. In addressing these issues, we focus on the role historical prices play in coordinating decentralized allocation decisions.

Empirical public choice literature and casual observation suggest that the behavior of political action committees is remarkably unsophisticated, meaning that PACs give to those legislators who would support their interests anyway. Thus it is suggested that contributor behavior deviates from rational behavior, which is a cornerstone of economic analysis. In this paper, a switching regression model is estimated that allows for strategies of PACs to vary for different contribution recipients. I analyze the behavior of farm PACs over three election cycles. In contrast to previous findings, I find that contributor behavior is not inconsistent with rational behavior. Contributors who attempt to influence the voting behavior of members of Congress give the most money to legislators whose constituency interest suggests that they are likely to be undecided on how to vote and PACs give less money to legislators who represent districts with larger farm populations because those legislators are likely to vote in contributor interests anyway.

John Harsanyi has provided an intriguing argument that social welfare can be expressed as a weighted sum of individual utilities. His theorem has been criticized on the grounds that a central axiom, that social preference satisfies the independence axiom, has the morally unacceptable implication that the process of choice and considerations of ex ante fairness are of no importance. This paper presents a variation of Harsanyi's theorem in which the axioms are compatible with a concern for ex ante fairness. The implied mathematical form for social welfare is a strictly quasi-concave and quadratic function of individual utilities.

We construct a dynamic general equilibrium model in which the typical industry colludes by threatening to punish deviations from an implicitly agreed-on pricing path. We use methods similar to those of Kydland and Prescott to calibrate linearized versions of both our model and an analogous perfectly competitive model. We then compute the two models' predictions concerning the economy's responses to a change in military spending. The responses predicted by the oligopolistic model are closer to the empirical responses estimated with postwar U.S. data than the corresponding predictions of the competitive model.

It is well known that the inability to observe workers' full labor market productivity can bias estimates of compensating wage differentials. This paper attempts to determine how serious this bias is likely to be. It adopts a stochastic framework of workers' tastes over job attributes and models their equilibrium wage-job attribute choices. Workers' productivity is assumed to consist of observed and unobserved components. Applying the standard estimation methodology, we find that the degree of bias can be surprisingly large. On the basis of our analysis, we conclude that contemporary labor market studies are likely to severely underestimate workers' willingness to pay for job attributes. This has implications for a number of applications of compensating wage differentials, including value of life studies.

A time-series counterpart of Engel's law is that the expenditure share on food declines as the economy grows. The main purpose of this paper is to test whether Houthakker's addilog utility function can simultaneously explain this time-series observation and cross-sectional observations concerning Engel's law. Ogaki and Park's cointegration approach is used to estimate parameters of the utility function from time-series data. Total expenditure elasticities implied by the estimated addilog utility function are compared with estimates of the elasticities from cross-sectional data.

This paper estimates the effects of school quality--measured by the pupil/teacher ratio, average term length, and relative teacher pay--on the rate of return to education for men born between 1920 and 1949. Using earnings data from the 1980 census, we find that men who were educated in states with higher-quality schools have a higher return to additional years of schooling. Rates of return are also higher for individuals from states with better-educated teachers and with a higher fraction of female teachers. Holding constant school quality measures, however, we find no evidence that parental income or education affects average state-level rates of return.

This paper analyzes the effects of inflation on the dispersion of prices, as well as other aspects of price behavior, using disaggregated data on prices of foodstuffs in Israel during 1978-84. We find that the effect of expected inflation on intramarket price variability is stronger than the effect of unexpected inflation. We show that even in times of high inflation, price quotations are not trivially short and price changes are not synchronized across firms. These facts, taken together, confirm that there is some staggering in the setting of prices. We find that the distribution of real prices is far from being uniform, as many menu cost-based models assume or conclude. In fact, as inflation increases to very high levels, this distribution is not even symmetric. When the annual inflation rate reaches 130 percent, there are equal chances of finding real prices above or below the market average, but upward deviations in the real price are further away from zero than downward ones. Furthermore, as the annual rate of inflation more than doubles from 60 to 130 percent, real prices are pushed toward both tails of the distribution.

We describe a model in which rental and owner housing are risky assets, tenure choice is endogenous, and each household is constrained to consume the same amount of owner housing that it has in its investment portfolio. At each iteration in the search for an equilibrium, we determine the new taxable income for each of 3,578 households (from the Survey of Consumer Finances), and we use statutory schedules to find the marginal rate and tax paid. Equilibrium net rates of return are major determinants of the amount of owner housing, but a logit model indicates that demographic factors are the main determinants of ownership rates. In our simulation, taxes on owner housing would raise welfare not only by reallocating capital but also by the government's taking part of the risk from individual properties and diversifying it away. Measures to disallow property tax or mortgage interest deductions do not help share this risk. Simulations of the 1986 tax reform indicate a small shift from rental to owner housing and welfare gains from reallocating risk.