Knowledge that Transforms

The notion that the price of substitutes serves as a determinant of lively arts demand is hardly new. It dates back decades at least to the seminal work by William Baumol and William Bowen (1966, p. 244), who contended that movies substitute for live performances. Susan Touchstone (1980, p. 36), examining lively arts demand in the United States, followed the lead of Baumol and Bowen by defining substitute price in terms of movie admission, while Glenn Withers (1980, p. 739), also for the United States, cast it in terms of reading or recreation. I (1984, p. 462) considered both types of measures in connection with a study of the demand for Shakespeare in Great Britain. But surely if movies or reading or recreation are substitutes for the lively arts, then so are those arts themselves. Should Richard II become dearer, an individual might elect to attend La Boheme or Fidelio or Swan Lake rather than to sit through Superman II. The lively arts are not homogeneous. Each has its own set of characteristics, and consequently substitutes lie within the arts spectrum. Apart from fleeting acknowledgment by, say, Alan Peacock (1981, p. 3), this point has been ignored by demand analyses to date. It is not ignored here.

This paper develops and tests an optimizing model determining the distribution of family planning and health subsidies across heterogeneous households and assesses the biases in cross-area estimates of the health effects of such subsidies due to public resource optimization. The model incorporates both health externalities and the endogenous response of the size of the recipient population to program subsidies. Longitudinal data describing child health and publicly provided family planning and health programs in 20 barrios in Laguna Province in the Philippines are used to estimate the effects of such programs on child health and the relationships between the distribution of the programs and preprogram health levels. The impact of a program on a particular childs health status is viewed as dependent upon the childs length of exposure to the program. A basic feature of the model is the presence of health externalities which is shown to be sufficient along with plausible features of household behavior to make selective subsidization of fertility control (either alone or in combination with health investment subsidies) Pareto efficient. The model suggests that subsidization of fertility control is likely to be Pareto efficient in the presence of health or human capital externalities when human capital and family size are gross substitutes and/or when any per child human capital subsidies may substitute for direct subsidies to health investment and an equalizing distribution of the subsidies (the highest family planning subsidies to the lowest health recipient households) is efficient. When both health and family planning subsidies are used fertility control subsidies minimize the subsidy burden for donors and are highest when total subsidy expenditures per child are greatest.

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Of all of the paradoxical patterns of behavior reported in laboratory experiments, one of the most perplexing for decision theorists is the preference phenomenon. A subject in a preference experiment is typically given a choice between a lottery with a high probability of winning a modest amount of money, a bet, and a lottery with a low probability of winning a large amount of money, a lowest amount of money for which the subject would willingly sell either of these lotteries is also elicited. most common reversal is for a subject to choose the P bet over the $ bet but to put a higher selling price on the $ bet. Preference reversals were first reported by Harold Lindman (1971) and Sarah Lichtenstein and Paul Slovic (1971). In discussing the psychologists' discovery of such reversals, David Grether and Charles Plott remark: The inconsistency is deeper than mere lack of transitivity or even stochastic transitivity. It suggests that no optimization principles of any sort lie behind even the simplest of human choices... (1979, p. 623). This paper offers a simple alternative explanation of documented preference reversals, an explanation that does not require the abandonment of the transitivity assumption.

This paper reviews evidence on the structure of anticipation from a number of empirical studies. Jack Muth's "rational expectations hypothesis" is compared with a variety of alternative models, including Ferber's Law, the "implicit expectations" model of Edwin Mills, and Muth's new "errors in the variables" model. The cumulative evidence is of such strength as to compel the suspension of belief in the concept of rational expectations. This implies that it is a mistake to proceed under the maintained hypothesis that expectations are rational; instead, it is necessary to test the sensitivity of empirical and theoretical results to alternative assumptions about the structure by which anticipations are generated.

The Heckscher-Ohlin-Vanek model predicts relationships among industry input requirements, country resource supplies, and international trade in commodities. These relationships are tested using data on twelve resources, and the trade of twenty-seven countries in 1967. The Heckscher-Ohlin propositions that trade reveals gross and relative factor abundance are not supported by these data. The Heckscher-Ohlin-Vanek equations among input requirements, resource supplies, and trade are also rejected in favor of weaker models that allow technological differences and measurement errors.

Panel data are used to estimate the effect of marital separation on labor supply. Female labor supply increases substantially and male labor supply declines marginally, lending support to the theory of specialization within the household. The most interesting finding is that women began to increase their labor supply well before the actualsplit occurs, suggesting either that shocks to labor supply change divorce probabilities or that women with a higher likelihood of divorcework more. This argument is pursued by constructing and estimating a simultaneous model of labor supply and divorce risk.

This paper presents an empirical test of two contrasting models of contracting in marital relationships. The major distinction between the two models concerns the role of information. The first model assumes that ex post information about the value of opportunities outside the relationship is symmetric. The second model assumes that information is asymmetric. Each assumption leads to different implications about the effects of rules allowing unilateral versus mutual divorce decisions on the probability of initiating and terminating the marriage and on the distribution of marital resources at divorce.

This paper uses evidence on individual transaction prices to analyze price behavior. The evidence shows that, for many transactions, pricesremain rigid for periods exceeding one year. The rigidity of price ispositively correlated with industry concentration. For several productsthe correlation of price changes across buyers is low. The paper alsoinvestigates the relationship between price rigidity, price change, andthe length of time a buyer and seller have been doing business together. The author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets.

This paper studies implicitly colluding oligopolists facing fluctuatingdemand. The credible threat of future punishments provides the discipline that facilitates collusion. However, the authors find that the temptation to unilaterally deviate from the collusive outcome is often greater when demand is high. To moderate this temptation, the optimizing oligopoly reduces its profitability at such times, resultingin lower prices. The behavior of the railroads in the 1880s, the automobile industry in the 1950s, the cyclical behavior of cement prices, and of price-cost margins are consistent with this theory. Thereduction of price by the oligopolistic sectors may have macro consequences.