Knowledge that Transforms

The front matter of the March 2001 issue contains the Table of Contents.

The front matter of the May 2001 issue contains the Table of Contents.

Whereas most U.S. corporations are widely held, the predominant form of ownership in East Asia is control by a family, which often supplies a top manager. These features of “crony capitalism” are actually more pronounced in Western Europe. In both regions, the salient agency problem is expropriation of outside shareholders by controlling shareholders. Dividends provide evidence on this. Group-affiliated corporations in Europe pay higher dividends than in Asia, dampening insider expropriation. Dividend rates are higher in Europe, but lower in Asia, when there are multiple large shareholders, suggesting that they dampen expropriation in Europe, but exacerbate it in Asia. (JEL G34, G35)

Cable Modems and DSL: Broadband Internet Access for Residential Customers by Jerry A. Hausman, J. Gregory Sidak and HalJ. Singer. Published in volume 91, issue 2, pages 302-307 of American Economic Review, May 2001

Guns, Butter, and Openness: On the Relationship between Security and Trade by Stergios Skaperdas and Constantinos Syropoulos. Published in volume 91, issue 2, pages 353-357 of American Economic Review, May 2001

We examine the equilibrium interaction between a market for price information (controlled by a gatekeeper) and the homogenous product market it serves. The gatekeeper charges fees to firms that advertise prices on its Internet site and to consumers who access the list of advertised prices. Gatekeeper profits are maximized in an equilibrium where (a) the product market exhibits price dispersion; (b) access fees are sufficiently low that all consumers subscribe; (c) advertising fees exceed socially optimal levels, thus inducing partial firm participation; and (d) advertised prices are below unadvertised prices. Introducing the market for information has ambiguous social welfare effects. (JEL D4, D8, M3, L13)

A method is constructed for decomposing the variance of changes in incomes in the world into components, to indicate the most important risk-sharing opportunities among people of the world. A constant absolute risk premium (CARP) model, an intertemporal general-equilibrium model of the world, is presented to permit optimal contract design. For a contract designer maximizing a social welfare function, the optimal contracts maximize the equilibrium world real interest rate. Securities are defined in terms of eigenvectors of a transformed variance matrix. The method is applied using Penn World Table data on the G-7 countries, 1950–1992. (JEL F00, G00, G10)

The expansion of variety in consumer and intermediate goods plays a central role in many theoretical models of growth. Examples include Paul M. Romer (1990), Gene M. Grossman and Elhanan Helpman (1991 Ch. 3), and Robert J. Barro and Xavier Sala-i-Martin (1995 Ch. 6). In contrast, evidence on variety growth is very sparse. Jerry A. Hausman (1997) and Amil Petrin (1999) estimate the consumer gains to the introduction of specific brands of specific products (Apple-Cinnamon Cheerios and minivans, respectively). Similarly, Manuel Trajtenberg (1989) and Hausman (1999) estimate the gains from computed tomography (CT) scanners and cellular phones, respectively. However, quantifying the aggregate importance of new products on a good-by-good basis is probably not feasible. In particular, it is not possible to obtain data to estimate consumer surplus from the myriad of new models and features that are continually introduced. Reflecting these problems, the Boskin Commission (1996) offers only a few, often speculative, calculations in addressing the issue of variety gains. We take an indirect approach. We exploit how new varieties alter spending patterns, drawing expenditures away from comparatively dormant categories. Table 1 illustrates for a few cases of dramatic product innovations. As the table shows, rapid growth in spending on cable television since 1980 has fueled a broad increase in spending on television, despite a relative decline in spending on television sets. Similarly, VCR’s and movie rentals have spurred an increase in overall spending on movies at home and theaters, personal computers have brought about increased spending on home audio and video equipment, and cell phone services have been responsible for the increased spending on all telephone services. In the 20 years prior to the ascendance of these major new items, all of their categories were stagnant or in relative decline. More generally, we find that consumers have been rapidly shifting away from “static” categories (i.e., those in which there has been little variety or quality gain). This shift far exceeds what can be explained by the impact of relative Engel curves or relative price changes. Our results suggest that variety has increased by perhaps 1 percent per year over the past 40 years. More striking is that most of this growth occurs in just the past 20 years—explaining our title. Looking across 106 more detailed categories, we relate share changes to U.S. Bureau of Labor Statistics (BLS) item-substitution rates. Itemsubstitution rates measure how often the BLS replaces an item in the pricing basket with another model because the former has disappeared from a sample outlet. Frequent BLS item substitutions predict increased spending on a category, even after controlling for Engel-curve, price, and demographic effects. This suggests that new varieties do increase spending on a category, as well as drive out or replace incumbent varieties. Compared to Engel curves, we find that item-substitution rates are a more reliable predictor of shifts in spending shares across goods. Related to this, we question Bruce W. Hamilton (1998) and Dora Costa’s (2000) reliance on food’s share and food’s Engel curve to measure the true rate of U.S. economic growth.

This paper reports laboratory data for games that are played only once. These games span the standard categories: static and dynamic games with complete and incomplete information. For each game, the treasure is a treatment in which behavior conforms nicely to predictions of the Nash equilibrium or relevant refinement. In each case, however, a change in the payoff structure produces a large inconsistency between theoretical predictions and observed behavior. These contradictions are generally consistent with simple intuition based on the interaction of payoff asymmetries and noisy introspection about others' decisions. (JEL C72, C92)