This paper introduces a new cost dataset for a commercial aircraft firm and uses this data to analyze the dynamics of learning in commercial aircraft production. This dataset is found to be inconsistent with the simple learning hypothesis, and particularly the prediction that a firm's unit cost must decline with its cumulative production. Instead, strong support is found for the hypothesis of organizational forgetting, a more general learning model where unit costs are similarly dependent on a firm's past production experience, but where that experience depreciates over time. Additionally, it is found that some, but not all, of a firm's production experience transfers from one generation of an aircraft to the next. This evidence adds to our understanding of productivity in industries with learning and thus has implications to many fields of economics.

This paper explores a monetary-policy model with habit formation for consumers, in which consumers' utility depends in part on current consumption relative to past consumption. The empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous confidence, largely because the habit-formation model captures the gradual hump-shaped response of real spending to various shocks. The paper then embeds the habit-consumption specification in a monetary-policy model and finds that the responses of both spending and inflation to monetary-policy actions are significantly improved by this modification. (JEL D12, E52, E43)

The Finance Committee of the American Economic Association met at the Chicago Club, Chicago, IL, at 12:30 P.M. on December 9, 1998. Present were John Cochrane, Robert Dederick, Robert Hamada, C. Elton Hinshaw (Chair) , and John Siegfried (Secretary of the Association ) ; Representing Stein Roe & Farnham, investment counsel for the Association, were Robert McNeill, Scott W. Vogg, and Debbie Jansen. In 1987, the Committee reviewed recommendations presented by the AEA Committee on indexing Association funds concerning the long-term allocation of the Association’s investment assets. As a result of that recommendation, it was agreed that the Association’s portfolio comprise a combination of an S&P 500 Index Fund, Stein Roe & Farnham’s specialty equity mutual funds, and a bond portion managed by Stein Roe & Farnham. This restructuring took place at the end of June 1988. The current portfolio includes holdings in the Vanguard Index Trust Fund, as well as several special Growth Funds and an International Fund, under the supervision of Stein Roe & Farnham (SRF) . The Fixed Income portion of the portfolio is currently invested in SRF’s Intermediate Term Government and Corporate taxable funds. With respect to the calendar-year 1998 performance of the Association’s portfolio, the total return including cash, bonds, and equity holdings was approximately 17.2 percent. The benchmark, which consisted of 5 percent cash, 25 percent Lehman G/C Intermediate Bond Index, 60 percent S&P 500 Index, and 10 percent EAFE index returned 16.7 percent. The returns from the AEA portfolio have now outperformed the benchmark portfolio for six years in a row. The Committee discussed a change to the allocation of the portfolio and the benchmark. It was approved that the benchmark portfolio would become 0 percent cash, 25 percent Lehman G/C Intermediate Bond Index, 60 percent S&P 500 index, 5 percent Russell 2000 index, and 10 percent EAFE index. Additionally, it was agreed to move 5 percent of the assets in the S&P 500 Index Fund into the bond portion of the portfolio immediately. Members can obtain a list of the assets in the portfolio by writing the Treasurer.

The proposed budget for 2000 in Table 1 projects an operating loss of $736 thousand, investment income of $598 thousand, and an overall deficit for the year of $138 thousand.Net

Productivity Levels and International Competitiveness between Canadian and U.S. Industries by Frank C. Lee and Jianmin Tang. Published in volume 90, issue 2, pages 176-179 of American Economic Review, May 2000

In our 1990 paper, we showed that managers concerned with their reputations might choose to mimic the behavior of other managers and ignore their own information. We presented a model in which “smart” managers receive correlated, informative signals, whereas “dumb” managers receive independent, uninformative signals. Managers have an incentive to follow the herd to indicate to the labor market that they have received the same signal as others, and hence are likely to be smart. This model of reputational herding has subsequently found empirical support in a number of recent papers, including Judith A. Chevalier and Glenn D. Ellison’s (1999) study of mutual fund managers and Harrison G. Hong et al.’s (2000) study of equity analysts. We argued in our 1990 paper that reputational herding “requires smart managers’ prediction errors to be at least partially correlated with each other” (page 468). In their Comment, Marco Ottaviani and Peter Sorensen (hereafter, OS) take issue with this claim. They write: “correlation is not necessary for herding, other than in degenerate cases.” It turns out that the apparent disagreement hinges on how strict a definition of herding one adopts. In particular, we had defined a herding equilibrium as one in which agent B always ignores his own information and follows agent A. (See, e.g., our Propositions 1 and 2.) In contrast, OS say that there is herding when agent B sometimes ignores his own information and follows agent A. The OS conclusion is clearly correct given their weaker definition of herding. At the same time, however, it also seems that for the stricter definition that we adopted in our original paper, correlated errors on the part of smart managers are indeed necessary for a herding outcome—even when one considers the expanded parameter space that OS do. We will try to give some intuition for why the different definitions of herding lead to different conclusions about the necessity of correlated prediction errors. Along the way, we hope to convince the reader that our stricter definition is more appropriate for isolating the economic effects at work in the reputational herding model. An example is helpful in illustrating what is going on. Consider a simple case where the parameter values are as follows: p 5 3⁄4; q 5 1⁄4; z 5 1⁄2, and u 5 1⁄2. In our 1990 paper, we also imposed the constraint that z 5 ap 1 (1 2 a)q, which further implies that a 5 1⁄2. The heart of the OS Comment is the idea that this constraint should be disposed of—i.e., we should look at other values of a. Without loss of generality, we will consider values of a above 1⁄2, and distinguish two cases.

Many economic processes are influenced by externalities within groups. Educational outcomes depend on peer-group interactions between students, which may help explain the persistence of income inequality and the stability of subcultures and social classes.' Crime rates exhibit a geographic pattern that strongly suggests the presence of interactions between potential criminals. There is also substantial evidence that amenities are influenced by interactions between neighbors, and that interactions between firms influence labor productivity.2 This paper considers how social interactions affect the institutions of local government. Specifically, we show how social interactions encourage consumers to withdraw from the traditional public sector and join exclusive groups that regulate the activities of their members. Examples include familiar organizations like exclusive suburbs and private schools and new or newly popular institutions like private governments and charter schools. Each of these institutions mediates social interactions by excluding some agents and altering the actions of others. We view the formation of these institutions as a kind of secession, since members withdraw from the civic whole and limit their interactions to other group members. These new organizations are increasingly important, surprisingly powerful, and highly controversial. One of the most widespread innovations in local government in recent years has been the rise of residential private government, including common interest developments (CIDs) and homeowner associations (HOAs). Evan McKenzie (1996) reports that the number of CIDs in the United States grew from a few hundred in the 1960's to 150,000 in 1993, and that their populations now total at least 32 million people. CIDs and HOAs are generally formed by real estate developers, and are eventually governed by an elected board of members. CIDs limit interactions with the rest of the world in a number of ways, most notoriously by building walls (Edward J. Blakely and Mary Gail Snyder, 1997). They tax their members to pay for the local public services they provide (primarily street maintenance, trash collection, and policing), collectively own and manage shared facilities (recreation centers, parks, and sometimes streets), and regulate both property use and individual conduct through covenants, conditions, and restrictions (CCRs) established by the developer. The regulatory activities of CIDs are impressive. Activities that have been prohibited include flying the flag, delivering newspapers, parking pickup trucks in the driveway, kissing outside the front door, using one's own back door too much, building fences, painting the exterior certain colors, having pets, working from one's home, marrying people below a certain age, and even having children (McKenzie, 1996 p. 4). In spite of, or perhaps because of, these regulations, CIDs provide a higher level of amenities than is available in public developments. However, critics view them as undemocratic and discriminatory private governments operating outside the constitutional restrictions that public governments face. A primary goal of this paper is to provide a model that captures the common and general features of the new institutions of local government. To that end, we develop a model of local secession motivated by social interactions and supported by regulation. The model has three essential elements. First, heterogeneous agents belong to groups, and each takes an action that * Faculty of Commerce and Business Administration, 2053 Main Mall, University of British Columbia, Vancouver, BC, V6T 1Z2 Canada. We gratefully acknowledge the financial support of the Social Sciences and Humanities Research Council of Canada, the University of British Columbia Centre for Real Estate and Urban Land Economics, and the Real Estate Foundation of British Columbia. We also appreciate the comments of David Wildasin, two anonymous referees, and seminar participants at the 1996 University of British Columbia Summer Symposium on Urban Land Economics. 1See Anita A. Summers and Barbara L. Wolfe (1977), J. Vernon Henderson et al. (1978), Roland B6nabou (1993, 1996), Steven N. Durlauf (1996), and George A. Akerlof (1997). 2 See Joseph Gyourko and Joseph Tracy (1991), Raaj Sah (1991), William N. Evans et al. (1992), Charles F. Manski (1993), Edward L. Glaeser et al. (1996), and John M. Ouigley (1998).

Most OECD economies, including that of Canada, experienced a slowdown in economic growth from the 1961–1973 period to the 1973– 1988 period, and to the 1988–1995 period. Consequently, progress in the standard of living, as measured by GDP per capita, also slowed down in most OECD countries over the three subperiods. This paper analyses the sources of output growth in 122 industries and in the private business sector to gain an additional perspective on the slowdown of the Canadian economy. We adopt the constant-quality indexes of capital and labor inputs introduced by Dale W. Jorgenson and Zvi Griliches (1967) and later used extensively in Jorgenson et al. (1987), Jorgenson (1995a, b), and Jorgenson and Eric Yip (2000) to identify the sources of growth. These measures allow us to take into account the changing composition of the labor force and the capital stock. At the industry level, we adjust for capital quality by aggregating the capital stock across five asset types by means of the rental prices of capital rather than the asset prices of capital. The use of rental prices allows us to incorporate differences in depreciation rates and tax treatment across different asset types for each industry. At the same time, we combine hours worked by each type of worker using the share of labor compensation to reflect labor quality. At the aggregate level, we apply the same framework by aggregating the capital stock across different asset types and hours worked across different types of workers. A number of studies have compared Canada’s economic growth performance with that of its competitors using this framework (Chrysostom Dougherty, 1991; Dougherty and Jorgenson, 1997; Jorgenson and Yip, 2000). However, this is the first attempt at using this framework to assess Canada’s economic performance at the industry level.

We study the monetary-transmission mechanism with a data set that includes quarterly observations of every insured U.S. commercial bank from 1976 to 1993. We find that the impact of monetary policy on lending is stronger for banks with less liquid balance sheets—i.e., banks with lower ratios of securities to assets. Moreover, this pattern is largely attributable to the smaller banks, those in the bottom 95 percent of the size distribution. Our results support the existence of a “bank lending channel” of monetary transmission, though they do not allow us to make precise statements about its quantitative importance. (JEL E44, E52, G32)