Knowledge that Transforms

Professional forecasts of aggregate U.S. consumption series strongly reject Robert E. Hall's (1978) random walk hypothesis. Band spectrum regressions show that low-frequency variations in growth ra tes of expenditures on nondurables and services, defined as cycles takin g more than two years to complete, primarily account for the rejection. Consumption growth and professional forecasts of GNP growth are also closely related at the low but not at the high frequencies. Liquidi ty constraints or durable characteristics of consumption goods may both explain the reported findings.

Robert A. Pollak, Terence J. Wales, Price-Augmenting Returns to Scale: An Application to Nonseparable Two-Stage Technologies, The Review of Economics and Statistics, Vol. 74, No. 2 (May, 1992), pp. 213-220

A procedure is proposed to test for the existence of a fully causal relationship between two variables. The method involves contrasting the probabilistic forecasting performance of a univariate and bivariate specification for the same variable Y. If there exists some theory or belief that X causes Y, and the addition of a variable X to the information set of a prequential forecasting system for a variable Y reduces miscalibration and/or the level of forecast uncertainty with respect Y's distribution for the next period, then a fully causal effect running from X to Y may be inferred. Vector autoregression allows testing for feedback. The method is to be applied to the issue of causality between the live cattle futures market and a major slaughter cattle cash market.

Evidence on costs and factor substitution is presented for a sample of local fire departments in New York State. The results suggest that fire service production does not fit either Leontief, Cobb-Douglas, or CES technology. In addition, exogenous socioeconomic variables are found to significantly affect public-sector costs and the estimates of factor price elasticities. The findings of relatively low factor demand and substitution elasticities suggest that local governments may have limited flexibility in adjusting their production of fire services to minimize the impact of rising factor prices.

This paper extends the standard static model of labor supply and taxation to the case where people are able to legally avoid taxes through the use of itemized deductions. Tax deductible expenditures are treated as a Hicksian composite good with a price (for those who decide to itemize) proportional to one minus the marginal tax rate. Estimation of the commonly used linear labor supply model (extended to incorporate the additional composite good) on a cross-section of prime aged married men suggests that tax deductible consumption is an uncompensated substitute for leisure (and complement with labor). The impact of taxes through the relative price of deductible expenditures appears to be much stronger than through the net wage.

Berger, Allen N., and Timothy H. Hannon, The Price-Concentration Relationship in Banking, this REVIEW 71 (May 1989), 291-299. Demsetz, Harold, Industry Structure, Rivalry, and Public Policy, Journal of Law and Economics 16 (Apr. 1973), 1-9. Jackson, William E. III, Market Structure and Price Adjustments: Evidence from the Banking Industry, unpublished Ph.D. dissertation, University of Chicago, June 1989. Peltzman, Samuel, The Gains and Losses from Industrial Concentration, Journal of Law and Economics 20 (Oct. 1977), 229-263. Salinger, Michael, The Concentration-Margins Relationship Reconsidered, in Brookings Papers on Economic Activity: Microeconomics, Martin N. Bailey and Clifford Winston, (eds.), Brookings (Washington, D.C.: Brookings Institution, 1990). 5 No formal statistical tests of the differences in the estimated coefficients of CONC across subsamples were conducted. This analysis was concerned more with the sign and significance level of each subsample estimated CONC coefficient.

This paper derives elasticity estimates for the electricity demand of a cross section of residential customers in Medellin, Colombia, where prices follow a rising block scheme. It contrasts methods following Jerry Hausman (1979, 1985) with those based on Harvey Rosen (1976). To resolve the difference between the results produced by the two methods, it uses a generalized selectivity bias corrections method due to Frank Vella (1990).

The growth of employee benefits in academe has closely paralleled their economy-wide growth. This study estimates a complete system describing the demand for benefits and wages using panel data on 1477 institutions of higher learning. the demand for benefits is very responsive to changes in real income and the tax price of benefits. These conclusions are robust with respect to varying definitions of the tax price, treating it as endogenous, and accounting for unmeasured individual effects on demand. Simulations suggest that the Tax Reform Act of 1986 sharply reduced the demand for benefits. Extrapolating the impact to the entire economy, the annual flow of compensation shifted away from benefits by at least $15 billion.

Justin Yifu Lin, Hybrid Rice Innovation in China: A Study of Market-Demand Induced Technological Innovation in a Centrally-Planned Economy, The Review of Economics and Statistics, Vol. 74, No. 1 (Feb., 1992), pp. 14-20

This study derives and estimates a dynamic model of factor demand that includes both fixed and quadratic variable costs of adjustment. Using quarterly data on the employment of mechanics at seven airlines, it finds that both types of adjustment costs characterize the dynamic constraints facing employers. Using monthly data covering production-worker employment in seven manufacturing plants, it shows that only fixed costs are important. The apparent diversity of the underlying costs of adjustment means it is difficult to draw useful inferences from macroeconometric estimates. It suggests the importance of examining broader arrays of microeconomic time series describing labor demand.