Knowledge that Transforms

This paper develops a model of dual labor markets based on employers' need to motivate workers. In order to elicit effort from their workers, employers may find it optimal to pay more than the going wage. This changes fundamentally the character of labor markets. The model is applied to a wide range of labor market phenomena. It provides a coherent framework for understanding the claims of industrial policy advocates. It also can provide the basis for a theory of occupational segregation and discrimination that will not be eroded by market forces. Finally, the model provides the basis for a theory of involuntary unemployment.

Although recent research suggests that intergenerational transfers play an important role in aggregate capital accumulation, our understanding of bequest motives remains incomplete. We develop a simple model of strategic bequests in which a testator influences the decisions of his beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries' actions. The model generates falsifiable empirical predictions that are inconsistent with other theories of intergenerational transfers. We present econometric and other evidence that strongly suggests that bequests are often used as compensation for services rendered by beneficiaries.

"This paper develops a model of the transmission of earnings, assets, and consumption from parents to descendants. The model assumes utility-maximizing parents who are concerned about the welfare of their children. The degree of intergenerational mobility is determined by the interaction of this utility-maximizing behavior with investment and consumption opportunities in different generations and with different kinds of luck. We examine a number of empirical studies for different countries. Regression to the mean in earnings in rich countries appears to be rapid. Almost all the earnings advantages or disadvantages of ancestors are wiped out in three generations." A comment by Robert J. Willis is included (pp. 40-7).