A sequential equilibrium model of private antitrust enforcement is presented. Consumers have incomplete information about cartel costs and cannot accurately estimate a priori the damage recovery from an antitrust action. Consumers are able to infer cartel costs from the equilibrium pricing strategy of firms. The universal divinity criterion is used to characterize the sequential equilibrium. It is shown that, for a sufficiently large damage multiple, antitrust enforcement effectively increases social welfare. Copyright 1990 by American Economic Association.
This paper presents a definition of the long-run equilibrium exchange rate that emphasizes the role of supply factors in addition to the more traditional price differential variables. Using this definition, we estimate the long-run equilibrium yen-dollar rate during the period of 1973-87. This calculation demonstrates that supply factors are in fact very important determinants of the long-run movement of the exchange rate. Despite the central role the exchange rates play in the economy, economists seem to doubt their own ability to explain, let alone predict, exchange rate movements. The reason is that in many cases structural exchange rate equations do not significantly outperform various other models that do not appeal to economic theory such as the random walk. (See, for example, Richard Meese and Kenneth Rogoff, 1983.) While we also share this pessimism concerning our ability to forecast exchange rates in the short run (intradaily to monthly or quarterly), we argue that it is possible to reasonably explain, if not predict, long-run movements. The long-run equilibrium rate is most often thought to be determined by purchasing power parity (PPP), which tends to focus only on price differentials. Medium-run divergences of the exchange rate from the long-run equilibrium are therefore commonly identified with fluctuations in the inflation-adjusted real exchange rate. This paper demonstrates, however, that the simple PPP is unsatisfactory because it emphasizes only the inflation differential. In the more elaborated theory of purchasing power parity, of course, the potential importance of supply-side real factors as critical determinants of the exchange rate has been well recognized. (See, for example, John M. Keynes, 1923; Rudiger Dornbusch, Stanley Fischer, and Paul A. Samuelson, 1977; Alan Stockman, 1980.) Nevertheless, in empirical applications and policy discussions these supply-side real factors have been curiously ignored: To our knowledge, an exception is David Hsieh (1982). The main point of this paper is to show that these supply-side factors actually have been very important determinants of the yen-dollar rate over the period of 1973 to 1987.
The preceding articles by Martin Feldstein and Douglas Elmendorf and by Franco Modigliani and Arlhe Sterling give us a welcome opportunity to return to the effects of fiscal policy on private consumption. At stake in this debate, we believe, is a potential paradigm change-from what Kormendi (1983) termed the Standard Approach, which bases private consumption on disposable personal income, to what he termed the Consolidated Approach, which bases consumption on aggregate income, government spending, and transfer payments, each with separate effects. The Standard Approach excludes Ricardian equivalence a priori. The Consolidated Approach not only incorporates Ricardian equivalence but, in its augmented form, allows one to nest the various hypotheses associated with the two approaches. Feldstein and Elmendorf argue that Kormendi's (1983) results (and implicitly those of Kormendi and Meguire, 1986), which reject the Standard Approach in favor of the Consolidated/Ricardian alternative, are not robust to the exclusion of data from World War II and other specification changes. Modigliani and Sterling argue that accounting for temporary taxes reverses our rebuttal of their 1986 comment. We first take up the challenge of Feldstein and Elmendorf before turning to Modigliani and Sterling. We then assess the validity of our preference for estimating in differences, by testing whether consumption, income, and the fiscal variables are cointegrated. Finally, we summarize what can be learned from the debate. I. Feldstein and Elmendorf
William Julius Wilson's influential book The Truly Disadvantaged (1987) has sparked a vigorous debate about the existence and causes of an urban underclass. While there is still no clear agreement about definitions, the growing literature on the underclass focuses both on traits of the current generation and the traits of their parents. If an underclass exists, its current members are assumed to live in deteriorating inner cities, to experience long spells of joblessness or welfare dependency, and/or to engage in illegal and antisocial activities. Furthermore, these traits are assumed to be correlated across generations, leading to a cycle of deprivation. In this paper, I focus on one such link across generations by examining the correlation in welfare participation of daughters and their parents. I first present the state of knowledge about the extent to which children of parents who received Aid to Families with Dependent Children (AFDC) are themselves more likely to participate in this welfare program. Second, I discuss the remaining gaps in our understanding and give several contrasting altemative explanations for the observed correlation, each with a different policy implication.
In a recent article in this Review (Borias, 1987), George Borjas uses a standard model of self-selection to demonstrate that immigrants in the United States may not necessarily be positively selected, as is commonly assumed. Borjas' empirical results, based on U.S. Census micro data merged with country-of-origin characteristics for 41 sending countries, however, do not provide clear or consistent results with respect to the immigration selection issue, although they do confirm earlier findings that the characteristics of the countries of origin of U.S. immigrants explain a substantial proportion of the differences in their economic status (Jasso and Rosenzweig, 1986b).' The purpose of this note is to show that Borjas' results are themselves subject to biases due to additional processes of self-selection. In particular, his inconclusive findings with respect to immigration selectivity arise from the use of a choice-based sample; enlargement of his highly selective sample of countries, based on the number of foreign-born in the United States, yields results that appear to conform much more closely and consistently to conventional wisdom, namely that the United States appears to attract those persons with above-average skills. We also provide evidence that changes in the earnings of aggregate immigrant entry cohorts, used by Borjas to measure the assimilation of immigrants, reflect another evidently important selection process, namely selective emigration. The effects of country characteristics on the wages of the foreign-born at entry (immigration selectivity) are thus not comparable to the effects of such variables on the changes in the characteristics of an immigrant cohort over time (emigration selectivity). The effects via immigration self-selection of country-of-origin characteristics on the Q of immigrants who migrate to a destination country is neatly summarized by Borjas in his equation (12). With unobservables determining earnings normally distributed, the expected quality of immigrants in the United States is given by
In any voluntary cooperative agreement, the potential gain from deviation should determine the minimum influence required over common decision-making. This paper begins by observing that a highly asymmetric distribution of power between two partners is not sustainable if the choice variables are strategic substitutes. It then studies a simple general-equilibrium model of a monetary union and shows that a small economy will not take part in the agreement unless it can secure influence that is more than proportional to its size and a transfer of seigniorage revenues in its favor. Copyright 1992 by American Economic Association.
The authors 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 Robert Lucas and Nancy Stokey's cash-in-advance model. Copyright 1990 by American Economic Association.