Knowledge that Transforms

We estimate the general deterrent effect of criminal justice resources on criminal behavior using panel data for a sample representative of young men in U.S. urban areas. Our data, which combine individual-level information on arrests and personal characteristics with aggregate information on criminal justice resources, allow us to obtain deterrence measures that reflect theoretical concepts and are of potential policy relevance. We find robust evidence of a general deterrent effect flowing from criminal justice, particularly police, resources. The nature of our data also allows us to conduct extensive exogeneity tests and to explore a number of possible 'third causes' for the deterrent effect. We find strong evidence that our deterrence variables are exogenous and no evidence that our deterrence result stems from commonly hypothesized third causes. Copyright 1994 by MIT Press.

Instrumental variable tests for serial correlation can be carried out by adding lagged residuals from initial estimation to the regressors of the model under scrutiny and then checking their joint significance. It is shown that asymptotically valid tests are obtained if the lagged residuals are also added to the initial instrument set. Monte Carlo evidence suggests that useful improvements in finite sample behavior under null and alternative hypotheses can be produced when the instrument set is extended to include the relevant lagged residuals. Links with other tests are discussed and a modification allowing for conditional heteroskedasticity is described. Copyright 1994 by MIT Press.

Isamu Matsukawa, Yoshifumi Fujii, Customer Preferences for Reliable Power Supply: Using Data on Actual Choices of Back-Up Equipment, The Review of Economics and Statistics, Vol. 76, No. 3 (Aug., 1994), pp. 434-446

This paper offers a theoretical explanation of why previous attempts to statistically explain intraindustry trade have been unsuccessful and proposes an econometric approach that tests the implications of the monopolistic competition model for the volume of trade. Using disaggregated data on 1983 manufacturing trade within the OECD, the paper finds strong evidence that bilateral imports depend systematically on the exporting country's output and somewhat weaker evidence that the volume of trade is higher in sectors with larger scale economies. Copyright 1994 by MIT Press.

This proposed theoretical model is based on new models of Barro and Becker and Becker Murphy and Tamura and explains the interaction of family decisions about fertility and the macroeconomy in a growth situation. The proposed model captures a dynamic interaction between labor/leisure and fertility choice and a structural fertility preference shock. Endogenous factor are consumption labor/leisure and fertility while exogenous factors are production and utility parameters. The aim was to develop a general equilibrium model which expresses short- and long-term dynamics to test the impact of economic disturbances on fertility and to explain the US baby boom and subsequent fertility patterns. Savings in capital accumulation and in labor supply were expected to have ambiguous effects while improved productivity was expected to increase steady state consumption. The methodology a structural Vector Auto Regression (VAR) model was developed by Blanchard and Quah and Ihmed Ickes Wang and Yoo. Structural impacts include disturbances in employment fertility (theoretical preference shift) and output. Long-term restrictions are based on theory rather than on ad hoc causal orderings (Sims method) or current responses (Bernanke method). The structural VAR model is estimated using the logged differences of labor fertility rate and output. The empirical results are based on analysis of US data (1949-88) on fertility weekly hours worked and real gross national product. The model revealed that fertility choice should not be considered exogenous to the labor market or to economic growth. Variance of the forecast error for the fertility rate was significantly explained by employment shocks; the effect was reduced fertility and increased labor force effort. Output responses to fertility and technology shocks were similar to those reported by Shapiro and Watson. In the variance decomposition analysis output shocks explained about 33% of output variance. Fertility shocks explained about 33% of labor growth and 25% of output growth after the first year. With a lag of one year about 37% of fertility variance was explained by employment shocks. Concluding remarks underscore the importance of knowing which shock initiated the motion and causal ordering.

Scott B. Smart, Joel Waldfogel, Measuring the Effect of Restructuring on Corporate Performance: The Case of Management Buyouts, The Review of Economics and Statistics, Vol. 76, No. 3 (Aug., 1994), pp. 503-511

This paper explores the determinants of pension funding in the public sector. We formulate and test several hypotheses about the determinants of public employer pension funding practices, using a new data set describing financial and other characteristics of state, local, and teacher plans. The data show that, on average, public sector pension plans were relatively well-funded during the late 1980s. There were, however, wide variations in funding practices in our sample. Our analysis of these variations suggests that past funding practice tends to be perpetuated, that unionized employers are less likely to fully fund future pension obligations, and that funding is sensitive to fiscal pressure.

In this paper, the authors divide actual years of schooling into effective years, repeated years, skipped years, inefficient routing years, and dropout years. Estimation of earnings functions reveals that this topology is statistically superior to the usual concepts of either actual or effective years of schooling. Based on the authors' distinction, they formulate tests that discriminate between the human capital theory and the screening hypothesis. The results give strong support to the human capital theory and refute the screening hypothesis.

Increases in import competition led to large increases in labor productivity growth in highly concentrated industries during the period from 1975 through 1987. The finding is based on a panel of ninety-four manufacturing industries observed over four periods, each of three years duration. Imports had no observable effects on productivity growth in less concentrated industries; the strong effects in concentrated industries did not occur contemporaneously but appeared with a one-period lag. The effects are weakened but still statistically significant when Bureau of Labor Statistics productivity data are replaced by National Bureau of Economic Research data and in a larger panel with less precise trade data. Copyright 1994 by MIT Press.

The authors show that, contrary to the beliefs of some previous analysts of international economic growth, the hypotheses of convergence and of mean-reversion are not equivalent. Under some assumptions, the rate of convergence is independent of the degree of mean-reversion; under other assumptions, mean-reversion is a necessary, but not a sufficient, condition for convergence. The authors show the relationship between the convergence test and the mean-reversion test and provide an empirical example in which the null hypothesis of no mean-reversion is rejected but the null hypothesis of no convergence is not rejected. Copyright 1994 by MIT Press.