Knowledge that Transforms

In recent years, the "leverage theory" of tied good sales has faced heavy and influential criticism. In an important sense, though, the models used by its critics are actually incapable of addressing the leverage theory's central concerns. Here I reconsider the leverage hypothesis and argue that tying can indeed serve as a mechanism for leveraging market power. The mechanism through which this leverage occurs, its profitability, and its welfare implications are discussed in detail.

This paper tests the rationality of individual price forecasts in a panel of professional forecasters. Here, unlike in most previous studies, rationality is not rejected. The results here differ because (1) using individual forecasts avoids aggregation bias, (2) comparison of forecasts to initial data avoids bias due to data revision, (3) the professional forecasters have economic incentives to state their expectations accurately, (4) a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used.

Manufacturing is undergoing a revolution. The mass production model is being replaced by a vision of a flexible multiproduct firm that emphasizes quality and speedy response to market conditions while utilizing technologically advanced equipment and new forms of organization. Our optimizing model of the firm generates many of the observed patterns that mark modern manufacturing. Central to our results is a method of handling optimization and comparative statics problems that requires neither differentiability nor convexity.

We propose a view of optimal currency areas that is based on the principles of public finance. Inflation taxes are distortionary, and an optimal spreading of tax distortions may require high inflation in one region and low inflation in another. Each region would need its own currency to do this. On the other hand, multiple currencies imply valuation and currency conversion costs, which impede trade between regions. This tradeoff is explored in the context of the European Community's debate over a common currency, using a two-country variant of Lucas and Stokey's cash-in-advance model.