Knowledge that Transforms

This paper discusses the interaction between competition and price regulation in telecommunications markets. First, we discuss how to achieve efficient entry when an incumbent's regulated retail prices are out of line with its costs. Second, the analysis is extended to the case where entrants need to purchase network services from the incumbent. Except in the extreme case where entrants have no alternative but to use the incumbent's network to provide their own services, I argue that (i) retail instruments should be used to combat retail-level distortions such as universal service obligations, and (ii) network access charges should be equal to the incumbent's cost of access (excluding opportunity costs) in order to achieve productive efficiency.

This paper studies the labor supply contributions to individual and family earnings inequality during the period of rising wage inequality in the early 1980's. Working couples have positively correlated labor market outcomes, which are almost entirely attributable to permanent factors. An intertemporal family labor supply model with this feature is used to estimate labor supply elasticities for husbands of 0.05, and wives of 0.40. This implies that labor supply explains little of the rising annual earnings inequality for married men, but over 20 percent of the rise in family inequality and 50 percent of the modest rise in female inequality.

National Money as a Barrier to International Trade: The Real Case for Currency Union by Andrew K. Rose and Eric van Wincoop. Published in volume 91, issue 2, pages 386-390 of American Economic Review, May 2001

This paper uses a new, large-scale, dynamic life-cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the U.S. federal income tax, including a proportional consumption tax and a flat tax. The model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems. Simulation results project significant long-run increases in output for some reforms. For other reforms, namely those that seek to insulate the poor and initial older generations from adverse welfare changes, long-run output gains are modest.

Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach by Richard Clarida, Jordi Gali and Mark Gertler. Published in volume 91, issue 2, pages 248-252 of American Economic Review, May 2001

We use data from classic professional tennis matches to provide an empirical test of the theory of mixed strategy equilibrium. We Þnd that the serve-and-return play of John McEnroe, Bjorn Borg, Boris Becker, Pete Sampras and others is consistent with equilibrium play. The same statistical tests soundly reject the assumption of equilibrium play in experimental data, including the data from Barry ONeills celebrated experiment. ∗We are indebted to many people for helpful comments and discussions, but especially to Robert Aumann, Bruno Broseta, Bill Horrace, Tom Palfrey, Robert Rosenthal, Jason Shachat, and Vernon Smith, and to an anonymous referee for the Review. Ed Agranowitz provided indispensable assis-tance in obtaining data, and Barry ONeill graciously provided us with the data from his experiment.

There is abundant evidence that the production process of firms is becoming increasingly fragmented internationally, in the sense that a final manufactured good will consist of parts that have been manufactured in a variety of different countries. Studies of manufacturing industries suggest that the share of imported inputs in international trade rose significantly in the 1970's and 1980's, and that the fragmentation of the production process has been particularly pronounced in industries such as transportation equipment and electrical machinery.1 What difference does it make if trade reflects a fragmentation of the production process, rather than the traditional horizontal specialization in final goods? In this paper I focus on the implications of fragmentation for the analysis of commercial policy and emphasize two features of vertical relationships.2 The first is the market linkages that are introduced in models of fragmentation due to the interaction between tariffs on final goods and tariffs on intermediate goods. The incentives of countries regarding tariff reduction can vary significantly depending on the pattern of trade. The second feature of vertical specialization is that producers of final goods often require inputs that are specialized to their particular needs, so that vertical relationships may create contracting problems because of the possibility for opportunistic behavior. Commercial policy may play a role in altering the form of these vertical relationships.

Comparing Apples to Oranges: Productivity Convergence and Measurement across Industries and Countries: Comment by Anders Sorensen. Published in volume 91, issue 4, pages 1160-1167 of American Economic Review, September 2001