Knowledge that Transforms

Using a two-sector growth model, this paper examines the incidence of a corporation income tax. While the two-sector static model has provided a fairly precise conclusion as to the incidence of that tax, no such clear conclusion emerges from the growth model. This is because the results are quite sensitive to the precise value of the elasticity of savings with respect to the interest rate. However, one point is clear: Because a tax increase raises the price of investment goods, if savings rates are constant, capitalists must bear a smaller burden than that predicted by the static model.

[Our tax system was designed for an economy with little or no inflation. The current paper shows that inflation causes capricious changes in the effective rate of tax on capital income and therefore in the real net rate of return that savers receive. This is not only a temporary disequilibrium effect but one which persists in steady-state equilibrium. Unlike earlier papers by Feldstein and by Green and Sheshinski, the current study recognizes that firms finance investment by both debt and equity in a ratio that depends on the tax rates and on the rate of inflation.]

An economic definition of family ties relevant to migration decisions leads to the exploration of their effects on the probability of migration, on consequent changes in employment and earnings of family members, and on family stability. It is shown that ties represent negative "personal" externalities which are usually, but not always, internalized by the family. ties tend to deter migration, to reduce the employment and earnings of migrating wives, and to increase the employment and earnings of their husbands. The growth of labor market attachment of women creates an increase in migration ties, which both deters migration and contributes to marital instability. Conversely, growing marital instability stimulates migration and reinforces the upward trends in women's labor force participation.

This paper proposes and tests the joint hypothesis that (1) the bond market is efficient and (2) the variation in long-term bond rates is due solely to expectations effects. Under this joint hypothesis, long-term bond rates for any fixed maturity follow (approximately) a martingale sequence. Tests with Canadian data serve not only to support the joint hypothesis but also to cast doubt upon the usefulness of the "preferred habitat" model of Modigliani-Sutch and Modigliani-Shiller as well as several single-equation macro models of interest-rate determination.

Sims's finding that nominal money stock is strictly exogenous in a distributed-lag regression of nominal income on nominal money stock is not inconsistent with the appearance and real income and nominal interest rates as strictly exogenous regressors in the quarterly money-demand equations estimated in real form. This strict exogeneity of real income and interest rates in real money-demand equations is due to the restriction implied by estimation in the real form, and these implicit restrictions seem to conflict with the sample information.

Most studies of nonrenewable resource production and pricing assume there is a fixed reserve base to be exploited over time, but in fact, with economic incentives reserves can be increased. Here we treat the reserve base as the basis for production and exploratory activity as the means of increasing or maintaining reserves. "Potential reserves" are unlimited, but as depletion ensues, given amounts of exploratory activity result in ever smaller discoveries. Given these constraints, resource producers must simultaneously determine their optimal rates of exploratory activity and production. We solve this problem for competitive and monopolistic markets and show that if the initial reserve endowment is small, the price profile will be U-shaped; at first production will increase as reserves are developed, and later production will decline as both exploratory activity and the discovery rate fall.

This paper uses a model of the valuation of bonds bearing call options, together with observed market yields on callable bonds, to infer information about the uncertainty associated with interest rate expectations. A dynamic programming solution of the model simultaneously determines both the bond price and the issuer's optimal refunding strategy, given the relevant data describing the bond and the market's expectations of future interest rates. Application of the valuation model in reverse, for quarterly average data for 1969-76, generates a time series representing the uncertainty which the market associated with its expectations of future interest rates during this interval, given the then-prevailing yields on new issues of utility bonds and industrial bonds callable after 5 years and 10 years, respectively. This uncertainty, parameterized as the standard deviation of a truncated normal distribution, fluctuated between 1/2 percent and 3/4 percent between 1969 and early 1974, then rose to sharply higher levels from mid-1974 through mid-1975, and has fluctuated between 3/4 percent and 1 percent since late 1975.

It is commonly felt that a financial market achieves informational efficiency as traders with the best information and the most skill make profits at the expense of those with inferior information or ability and come to dominate the market. This paper develops a model of a speculative market in which this redistribution of wealth among traders with different information and ability can be studied. In the short run the market tends toward increased efficiency, but in neither the short nor the long run is full efficiency likely. The average deviation from efficiency is shown to depend on traders' characteristics such as the quality and diversity of their information and their risk aversion.