Knowledge that Transforms

This paper examines the pattern of trade in used asset markets where firms have differing factor prices and utilization rates of capital goods. Depreciation is modeled as an increase in down time as machines age, and a measure of comparative advantage is derived that will explain the pattern of trade when there are two types of firms. It is shown that with heterogeneous firms, the price of used machines will reflect the characteristics of firms as well as the productivity of used machines, and the implications of this result for the study of depreciation are discussed. Finally, the relationship between firm characteristics and choice between purchasing new and used truck tractors is presented as an illustration of the predictions of the model.

We integrate the optimal sequential and the optimal sample-size search strategies. In contrast to the existing search literature in which individuals specialize in either search or work, the model in this paper allows for an optimal choice of search intensity that results in individuals' choosing to work and search simultaneously. The existing sequential search strategy literature follows optimal stopping theory in treating work as an absorbing state. We do not, however, require the searcher to stay in a job once it has been accepted but derive this behavior as a result of the searcher's optimization problem.

This paper measures and analyzes the effect of sulfur dioxide emission restrictions on the rate of productivity growth in the electric power industry over the 1973-79 business cycle. A firm-specific measure of regulatory intensity is developed which depends on the severity of the emission standard, the extent of enforcement, and the unconstrained emission rate relevant to each utility. The results indicate that emission regulations result in significantly higher generating costs, primarily from the increased use of low-sulfur fuels. The average rate of productivity growth was reduced by 0.59 percentage points per year for constrained utilities.

A discretionary policymaker can create surprise inflation, which may reduce employment and raise government revenue. But when people understand the policymaker's objectives, these surprises cannot occur systematically. In equilibrium people form expectations rationally and the policymaker optimizes in each period, subject to the way that people form expectations. Then, we find that (1) the rates of monetary growth and inflation are excessive; (2) these rates depend on the slope of Phillips curve, the natural unemployment rate, and other variables that affect the benefits and costs from inflation; (3) the monetary authority behaves countercyclically; and (4) unemployment is independent of money policy. Outcomes improve if rules commit future policy choices in the appropriate manner. The value of these commitments--which amount to long-term contracts between the government and the private sector--underlies the argument for rules over discretion.

Most studies of the welfare economics of groundwater have focused mainly on the dichotomy between optimal control of groundwater use and no control at all. This article argues that, under circumstances that generally prevail in semiarid zones, assigning property rights to groundwater and permitting the market to determine the allocation of water use can lead to a second-best solution. An argument is made that if potential users would be allowed to Coase-bargain with incumbent users on the issuance of new groundwater rights, the second-best solution is elevated to a Pareto-optimal solution. This article is also a tale of two states: water law and performance in New Mexico and Arizona.

This paper shows that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits. Investors face privately observed risks which lead to a demand for liquidity. Traditional demand deposit contracts which provide liquidity have multiple equilibria, one of which is a bank run. Bank runs in the model cause real economic damage, rather than simply reflecting other problems. Contracts which can prevent runs are studied, and the analysis shows that there are circumstances when government provision of deposit insurance can produce superior contracts.

Strong restrictions on the structure of preferences are a central feature in the received theory of intertemporal allocation. In fact, most of the modern literature concerned with capital-theoretic problems represents preferences by a functional in which an additive utility function is discounted by a constant rate of time preference. This specification is attractive because it is analytically tractable in dynamic models, and it clearly delineates how tastes and opportunities interact to determine an economy's (household's) paths of consumption and capital formation. However, its rigid structure (constancy of time preference) severely limits the conclusions and explanatory power of the corresponding models. This paper considers a class of utility functionals (in continuous time) which have the appealing feature that the rate of time preference depends systematically on an index of aggregate future consumption. The more flexible structure embodied in these functionals leads to important generalizations and modifications of standard conclusions. We highlight this added richness by examining five basic problems in dynamic economic analysis.

The paper investigates the optimal time path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rate. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate.