Knowledge that Transforms

This paper presents an empirical analysis of changes in individual earnings and hours ov&r time. Using longitudinal data from three panel surveys, we catalogue the main features of the covariance structure of changes in earnings and hours. We then present an interpretation of these features in terms of both a life-cycle labor supply model and a fixed-wage labor contract nDdel. Our major findings are: (1) there is a remarkable similarity in the covariance structure of earnings and hours changes across the three surveys; and (2) apart from simple measurement error, the major component of variance in earnings and hours affects earnings and hours equi-proportionately.

Methods for the systematic application of Monte Carlo integration with importance sampling to Bayesian inference are developed. Conditions under which the numerical approximation converges almost surely to the true value with the number of Monte Carlo replications, and its numerical accuracy may be assessed reliably, are given. Importance sampling densities are derived from multivariate normal or student approximations to the posterior density. These densities are modified by automatic rescaling along each axis. The concept of relative numerical efficiency is introduced to evaluate the adequacy of a chosen importance sampling density. Applications in two illustrative models are presented. Copyright 1989 by The Econometric Society.

This paper models occasional, discrete shifts in the growth rate of a nonstationary series. Algorithms for inferring these unobserved shifts are presented, a byproduct of which permits estimation of parameters by maximum likelihood. An empirical application of this technique suggests that the periodic shift from a positive growth rate to a negative growth rate is a recurrent feature of the U.S. business cycle, and indeed could be used as an objective criterion for defining and measuring economic recessions. The estimated parameter values suggest that a typical economic recession is associated with a 3 percent permanent drop in the level of GNP. Copyright 1989 by The Econometric Society.

IN MANY AREAS OF SCIENCE, when drawing conclusions concerning a set of phenomena, individual or linear combinations of parameters are assumed to be nonnegative, nonpositive, or to lie between upper and lower bounds. Likewise, many functions are assumed to be monotonic, convex, or quasiconvex. Consequently, questions naturally arise as to the correctness of the assumptions and, within the context of statistical inference, how to evaluate the evidence against these assumptions and to use the data at hand to seek the appropriate statistical model and the corresponding method of estimation. Within the context of the general linear statistical model, multivariate analogues of one-sided (inequality hypotheses) tests have been explored by Bartholomew (1959), Kudo (1963), Osterhoff (1969), Barlow, et al. (1972), Yancey, Judge, and Bock (1981), Yancey, Bohrer, and Judge (1982), Gourieroux, Holly, and Montfort (GHM) (1982), Judge and Yancey (1986), Wolak (1987) and Shapiro (1988). In general, the likelihood ratio framework has been used in developing a test statistic and determining acceptance and rejection regions. In order to facilitate the interpretation of these test results in econometric practice, in this paper we evaluate, under a squared error loss (SEL) measure, the risk characteristics of the preliminary test (PT) estimators that evolve when, based on the data at hand, an estimation decision is taken as a result of the outcomes of two one-sided multivariate hypothesis tests.

The error Components regression model is now widely applied in econometics and statistics. Given the potentially high costs of incorrectly excluding the component from the model, an error components test should have high power. In addition, if a test is to gain acceptance from practitioners, the test should be computed easily. To obtain improved critical-value approximations, we introduce a standardized Lagrange multiplier (SLM) test statistic, which is centered and scaled to have a zero mean and unit variance under the null hypothesis. We also examine the F test, which is easily computed and has a well-known exact distribution under the null hypothesis if the regression errors are normally distributed

This paper considers the enforceability of employment contracts when employees' performance cannot be verified in court so that piece-rate contracts are not legally enforceable. Part I shows that there exists a variety of self-enforcing implicit contracts, modelled as perfect equilibria in a repeated game, and characterizes all the wage and performance outcomes that can be implemented. Implementation requires a strictly positive surplus from employment, the form of the contract depending on how this surplus is divided between firm and employee. Piece-rate contracts, and contracts with an informally agreed bonus, can be made self-enforcing but the use of severance pay and bonding does not extend the set of implementable allocations. The resulting contracts resemble actual labor contracts more than do the contracts in standard principal-agent models. Part II analyses market equilibrium with these contracts, also modelled as perfect equilibria in a repeated game, and shows that many such equilibria exist. Unfilled vacancies and unemployed workers can co-exist despite the existence of contracts that are potentially mutually beneficial. For those jobs that are filled, any division of the potential surplus is possible so that the market can have, at the same time, involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits. As a criterion for selecting equilibria, a notion of renegotiation proofness is applied. Then either all workers are employed or all jobs filled but any division of the potential surplus is still possible. The paper explores what further restrictions on beliefs give rise to a Walrasian outcome, in which all the potential surplus goes to the short side of the market, and to an efficiency wage type outcome, in which the potential surplus goes to the long side.

A test for the ex ante efficiency of a given portfolio of assets is analyzed. The relevant statistic has a tractable small sample distribution. Its power function is derived and used to study the sensitivity of the test to the portfolio choice and to the number of assets used to determine the ex post mean-variance efficient frontier. Several intuitive interpretations of the test are provided, including a simple mean-standard deviation geometric explanation. A univariate test, equivalent to our multivariate-based method, is derived, and it suggests some useful diagnostic tools which may explain why the null hypothesis is rejected. Empirical examples suggest that the multivariate approach can lead to more appropriate conclusions than those based on traditional inference which relies on a set of dependent univariate statistics. Copyright 1989 by The Econometric Society.

Altruistic parents make choices of family size along with decisions about consumption and intergenerational transfers. The authors apply this framework to a closed economy, where the determination of interest rates and wage rates is simultaneous with the determination of population growth and the accumulation of capital. Thus, they extend the literature on optimal economic growth to allow for optimizing choices of fertility and intergenerational transfers. The authors use the model to assess the effects of child-rearing costs, the tax system, the conditions of technology and preferences, and shocks to the initial levels of population and the capital stock. Copyright 1989 by The Econometric Society.