Knowledge that Transforms

[This paper examines the practice of "isolating" certain errors observed in an audit sample and subsequent failure to project the errors in estimating total error in an audit population. An abstract (normative) model of inference is developed to analyze this practice and related descriptive theories of human information processing are reviewed. Previous descriptive research suggests that auditors may be inclined to isolate errors that are considered to be "unique." However, the normative analysis suggests that isolation is seldom appropriate. The responses of auditors to a number of hypothetical cases are analyzed to provide descriptive empirical evidence on the practice of error isolation. The responses indicate a strong tendency to isolate errors whose cause is perceived as "unique." An analysis of isolation/projection decisions as a function of firm membership, experience, and training in statistics indicates that the tendency to isolate errors is, for individual cases, related to firm membership and experience. However, the observed firm membership and experience effects are not consistent across all cases. Thus, the results are not well explained by a simple model which posits that inappropriate error isolation is limited to a few firms or to inexperienced auditors. While incorrect error isolation appears to be prevalent in practice, we suggest several factors which may mitigate its adverse effects.]

[Seventy-one second-year MBA students participated in a computer-based laboratory experiment involving bankruptcy prediction. The study tested for main and interaction effects of variation in task predictability and disclosure of the prior probability of bankruptcy on subjects' predictive accuracy and related confidence levels. As hypothesized, task predictability was significantly and positively related to predictive accuracy. The main effect of disclosure of the prior probability of bankruptcy was not significant, but its interaction effect with task predictability was significant when accuracy rates for bankrupt and nonbankrupt firms were analyzed separately. In particular, disclosure of the prior probability to subjects in the low task predictability condition resulted in a significant improvement in their predictive accuracy. Subjects in all treatment groups were overconfident about their predictive accuracy, with subjects in the low task predictability condition significantly more overconfident than subjects in the high task predictability condition.]

From automobile insurance data for Alberta over the period 1974-81, we find thatpremiums are highly correlated across driver classes in a given year, but that premiums for a given driver class are not correlated over a period of more than 5 years. Firms' relative market shares among drivers over age 25 and married males under 25 are inversely related to their deviations from the mean premiums.In these driver classes, the variance of real premiums decreases with the numberof firms in the market and increases with the real loss cost per car insured and the number of cars insured. From these results we conclude that the price dispersion in automobile insurance in Alberta is based on costly consumer search.

New data on probated wealth, landownership, debts, and occupations extend our view of the distribution of English wealth back from 1911 to 1670. There were widening gaps in mean wealth between the top landed-plus-merchant classes and the middle classes across the Industrial Revolution century. Size distributions for individual assets also widened. So did those for income or total wealth (including human). But nonhuman net worth did not become more unequal because of important shifts in the land share. All inequality measures before 1914 exceeded all those since 1950. The estimates illuminate classical theories of distribution.

This paper investigates whether predatory price cutting reduces a trust's cost of acquiring its competitors. A variant of the Litzenberger-Rao valuation model is estimated with the expenditures for 43 rival firms purchased by the old American Tobacco Company between 1891 and 1906. The coefficient estimates indicate that, ceteris paribus, alleged predation significantly lowered the acquisition costs of the tobacco trust both for asserted victims and, through reputation effects, for competitors that sold out peacefully. Although qualified by data limitations, these results support the classical view of predatory pricing as a systematic business practice.

The class struggle is formalized as a differential game in a strictly supply-side model, an approach that synthesizes the models of Lancaster and Goodwin. Four different steady-state equilibria are derived, each corresponding to different assumptions about the degree to which each class is organized to promote its own interests. In particular, the Goodwin growth cycle is shown to emerge from a world characterized by unorganized capitalists and workers, in which individuals ignore the effects of their own actions on economywide variables. More relevant for discussion of modern capitalism are the hierarchical equilibria, especially the codetermination equilibrium in which the existence of a full-employment equilibrium turns out to be problematic. Finally, comparative-statics results suggest that the incentives for technological change differ widely among the four regimes.

In the most frequently used microdata sets, over a quarter of all respondents now refuse to answer some questions about their incomes. The Census Bureau has dealt with this problem, which has been increasing in severity over time, by imputing incomes of non-respondents. Their imputation procedure, called the "hot deck," essentially matches nonrespondents with demographically similar donors. In this paper we evaluate the census imputation methodology and raise some questions. First, the census procedure is tied to commonality of events in the population rather than the more appropriate informational content of regressors. Clearly, the census procedure severely understates income in certain occupations. Because it is based on the apparently invalid assumption that income does not affect reporting propensities, it most likely understates average incomes as well.

This paper presents a discrete-time version of Jovanovic's model of worker-firm matching. Descriptive evidence is presented that supports the notion that unobserved worker-firm heterogeneity is an important component in the intertemporal structure of wages for young workers. A structural econometric model of wage dynamics under worker-firm sorting is developed and estimated. Finally, a formal test of the matching model is carried out, and the matching structure on intertemporal covariances of wages is not rejected. My results indicate the necessity of jointly considering processes of turnover and wage growth when analyzing the labor market experiences of young workers.