Knowledge that Transforms

A framework is developed for decomposing product price changes into changes in input prices, technical efficiency, and deviations of price from unit cost. This framework facilitates the measurement of productivity growth in noncompetitive industries. The history of American steel rail prices between 1879 and 1910 is analyzed, and it is concluded (in contrast with much recent work) that productivity growth remained rapid until the twentieth century and that the steel industry was sufficiently collusive so that the rail producers received the benefits of that productivity growth as excess profits.

[Unequal inheritance of material wealth is commonly considered a major cause of inequality in consumption. However, theoretical models of the intergenerational transmission of inequality by Becker, Blinder, and Ishikawa imply that unequal inheritance may either increase or reduce consumption inequality. Differences in inherited wealth resulting from unequal parental incomes increase inequality in recipients' consumption. However, unequal bequests caused by differences among families in the endowed ability of children or the costs of producing human capital are equalizing. Empirical results confirm these predictions: The inheritance received by children is inversely related to both children's income and parental education. Thus bequests are "compensatory" in that (ceteris paribus) low-income children inherit more than their advantaged contemporaries.]

Dixit has recently presented a model in which established firms select capacity to discourage entry but cannot employ threats they would not rationally execute after entry. Entry deterrence in a slight modification of this model involves the classical limit-price output. Under linear or concave demand, however, the capital cost of a firm of minimum efficient scale is an upper bound on the present value of the monopoly profit stream that can be shielded from entry. It is argued that this suggests the general unimportance of entry barriers erected by scale economies.

This paper develops and tests a simple model for the determination of tariff and nontariff barriers to trade across industries within the United States, using 1970 trade data. We find that nontariff trade restrictions have supplemented tariff protection in the United States. Both tariff and nontariff trade restrictions are biased toward industries in which the United States has an apparent comparative disadvantage in world trade and away from industries in which consumer welfare losses from protection would be great. We also find substantial evidence that tariff and nontariff trade restrictions predominate in industries with very different market characteristics.

Two economies, represented by Diamond-type overlapping-generations models and differing only in their pure rates of time preference, are joined together. Capital formation, balance-of-payments behavior, and welfare are compared under autarky and openness. With a positive natural rate of growth, the low-time-preference country runs a current account surplus in the steady state but not necessarily outside it. If preexisting capital is not shiftable between countries, integration in the world economy makes the high-time-preference country worse off in the short run. The ranking of stationary utility levels under autarky and openness is ambiguous.

This paper examines the effect of a change in the rate of monetary expansion on the dynamics of the real exchange rate under fully flexible domestic prices and a floating exchange rate. The model is similar in structure to an ealier paper by Calvo and Rodríguez, the main difference being that in our model consumers have an infinite planning horizon and long-run perfect foresight. One of the main findings is that an increase in the rate of monetary expansion has the impact effect of creating a real appreciation of the exchange rate and a deterioration of the balance of payments, contrary to the results of Calvo and Rodríguez.

This paper presents a unified model of consumer search when both prices and qualities are uncertain. It is assumed that price can be observed prior to purchase but that quality can be observed only after purchase and experience. This two-stage decision problem is of particular interest since, in practice, there is usually some connection between quality and price. Of the many interesting implications of this dependence explored in this paper is the result that the usual "reservation-price rule" may no longer be optimal; indeed, the optimal stopping set may take one of several alternative (and more realistic) forms.

A search is made for violations of the axiom of revealed preference in aggregate consumption data for the United Kingdom. No such violations are found. This is taken as evidence that tastes remained constant throughout the period under study. The strength of this evidence is estimated within the context of a particular model of taste change.