Knowledge that Transforms

The theory of clearance sales is expanded and applied to explain why markups, markdowns, and the frequency of sales of merchandise sold by department stores have increased dramatically in recent years and why they differ across merchandise groups. Tha major theme of the paper is that the growing role of fashion and product variety is an important reason for these increases and for the differences between merchandise groups. The growing importance of fashion is illustrated by documenting the declining use of whites and the increasing use of colors and prints. Estimates of the effects of imports, and technological and demographic changes on markups and markdowns, are presented.

New claimants for Unemployment Insurance were randomly assigned to one of two experiments that were designed to hasten reemployment. In the first, a 500 dollar bonus was offered to claimants who obtained employment within eleven weeks. This experiment reduced the number of weeks of insured unemployment, averaged over all assigned claimants whether or not they participated, by more than one week. In the second experiment, the bonus was offered to the claimant's subsequent employer. This experiment reduced the weeks of insured unemployment for only one important group-white women--by about one week.

The authors present a theory of involuntary unemployment which explains why the unemployed workers ("outsiders" ) are unable or unwilling to find jobs even though they are prepared to work for less than the prevailing wages of incumbent workers ("in siders"). The outsiders do not underbid the insiders since, were the y to do so, the insiders would withdraw cooperation from them, making their work unpleasant with harassment, and thereby reducing the prod uctivity and increasing the reservation wages of the underbidders. Th e resulting labor-turnover costs create economic rent which the insid ers tap in wage setting and, as a result, involuntary unemployment ma y arise.

The problems associated with accurately measuring the value of a public good in an applied setting are considered. The values obtained from hypothetical elicitation procedures are compared and contrasted with those obtained in a marketplace. When hypothetical measurements are elicited in the field, buying-selling discrepancies similar to those predicted by psychological models of behavior are observed. However, when the market-like elicitation process is repeated, values are more consistent with diminishing marginal utility. The authors cannot reject the hypothesis that these individuals exhibit loss- aversion behavior. The marketplace, however, is a strong disciplinarian of limiting this type of behavior.

Stiglitz and Weiss reply regarding credit rationing in markets with imperfect information.

The author examines third-degree price discrimination by an upstream monopolist in an intermediate good market. Discrimination is motivated by the fact that downstream firms differ in their abilities to integrate backward into supply of the input. The author shows that under reasonable specifications of equilibrium, price discrimination leads to all buyers facing higher input prices. In other cases, discrimination raises some prices and lowers others. The author derives conditions under which discrimination lowers welfare by reducing total output and shows that in some markets discrimination will raise welfare by preventing socially inefficient backward integration.

This paper examines the impact of social security on national saving and individual welfare in the presence of realistic capital-market imperfections: market failure in the private provision of annuities and restrictions on borrowing against anticipated future wages. The introduction of social security increases lifetime welfare and reduces national saving if borrowing restrictions are absent. However, the increase in individual welfare is reduced, and in some cases eliminated, when borrowing constraints are taken into consideration. The substantial difference suggests the importance of reexamining the proportional payroll tax finance of social security.

Microeconomic theory typically concerns exchange between individuals or firms in a market setting. To make predictions precise, individuals are usually assumed to use the laws of probability in structuring and revising beliefs about uncertainties. Recent evidence, mostly gathered by psychologists, suggests probability theories might be inadequate descriptive models of individual choice. (See the books edited by Daniel Kahneman et al., 1982a, and by Hal Arkes and Kenneth Hammond, 1986.)