Knowledge that Transforms

In this paper we define a cost-of-living index including direct taxes. We show its relationship to the traditional index and demonstrate how nonconsumption costs are properly treated. We then define a fixed-weight approximation, a tax and price index (TPI). Using federal, state, local, and social security tax rates for 1967-85, we construct annual TPI series based on household data. We find that inclusion of direct taxes has sizable impacts on the estimated rate of inflation. Partitioning our household sample, we find that recognition of taxes significantly alters inflation rate differentials estimated using consumption prices alone. I.

This paper derives the cost-of-living index of an individual who faces imperfect and costly information about prices. Traditional cost-of-living in dexes assume that the consumer passively accepts prices as given. The authors derive a multiprice search model in which the consumer choos es the search strategy that minimizes the expected cost of buying a g iven level of utility. In contrast to existing search models, the mod el allows the consumer to change the allocation of expenditures among goods as information about prices changes and enables them to constr uct a cost-of-living index for an agent who searches across distribut ions of offer prices. Unlike traditional cost-of-living measures that ignore search behavior, the searcher's cost-of-living index depends on search costs.

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.

Two previous models of the dissipation of profits generated by the use of quality-guaranteeing prices assumed that pro fits were dissipated through investment in brand-name capital and ent ry. The model of this paper allows both possibilities. It is shown th at both types of dissipation will, in general, occur and that brand-n ame investment will dissipate a greater share of profits as the elast icity of consumer response to brand-name investment grows larger.

David Hume's (1955 ) analysis of how a change in the quantity of money can have a temporary effect on real income has been variously interpreted and misinterpreted for over two hundred years. A possible reason for some misinterpretation is Hume's archaic use of the term "labor." With the correct interpretation, which is consistent with Hume's other theories and in particular his theory ofthe interest rate, the reason for the temporary effect on real income is that prices lag behind money wages, and a rise in real wages leads to an increased supply of effort.

A two-stage technology is a sequential production process that first uses pri mary inputs to produce intermediate inputs and then uses theintermediate inputs to produce final output. In this paper the authors show that two-stage technologies provide a general procedure for combining production functions or cost functions to obtain new specifications suitable for empirical production analysis. They investigate two new cost functions for which the input demand systemssatisfy global regularity conditions in a wide range of nondegenerate cases. Using six data sets, the authors estimate thesetwo input demand systems, both with and without imposing global regularity conditions, and find that one of them performs well.