Knowledge that Transforms

This paper examines the dynamic impact of government purchases in a simple general equilibrium model with both durable and non-durable consumer goods as well as productive capital. The model generates perhaps surprising results. In particular, increases in government purchases are shown to cause reductions in real interest rates. The model thus provides a possible explanation for the observed behavior of real interest rates around wars.

This paper examines the effect of federal deductibility of state and local taxes on the fiscal behavior of state and local governments. The primary finding is that deductibility affects the way that state-local governments finance their spending as well as the overall level of spending.

The traditional model for assessing the effects of treble damage pena lties on price fixing is reexamined and shown to yield surprising res ults. Unless the probability of detection is extremely sensitive to the price charged, increasing the damage multiple will affect neither market efficiency nor expected distribution, and will raise the mark et price. Copyright 1987 by University of Chicago Press.

Many empirical studies of production specify a deterministic model of the firm, derive the implied behavioral equat ions (input demand or share system), and then "embed this system in a stochastic framework" by tacking on linear error terms. In contras t, this paper proposes general error models (GEMs) in which the error specification is an integral part of the optimization model. These m odels are the statistical embodiment of Stigler's view that apparent observed inefficiencies reflect the investigator's ignorance of the t rue optimization problems. Additive GEMs are proposed and interpreted Specification tests indicate that a translog additive GEM is superi or to the standard translog specification. Copyright 1987 by University of Chicago Press.

Labor is likely to be an important claimant to firms' rents, particularly in a regulated environment. This study analyzes wage responses to trucking deregulation to test labor rent-sharing hypotheses. The results indicate substantial declines in union wages as a consequence of reduced regulatory rents. Union premia over nonunion wages fell from 50 percent to less than 30 percent, implying aggregate annual losses of $950 million to $1.6 billion. Rent spillovers to nonunion drivers and truck drivers outside the regulated trucking industry appear insignificant. The results suggest that union workers captured more than two-thirds of total industry rents and provide strong support for union rent-sharing hypotheses. Copyright 1987 by University of Chicago Press.

This paper uses a variant of the standard search model to examine market equilibrium and the consequences of an increase in the number of firms. If marginal search costs increase with the number of searches, then the demand curve facing any firm will be kinked, with the elasticity of demand with respect to price decreases being less than with respect to price increases; prices may not change in response to changes in marginal costs. As the number of firms increases, the maximum price that is consistent with equilibrium increases to the monopoly price, but the minimum price decreases. On the other hand, if marginal search costs decrease with the number of searches, equilibrium, if it exists, is characterized by a price distribution.