Knowledge that Transforms

We investigate the possibility that limited participation in asset markets, and the stock market in particular, might explain the lack of correspondence between the sample moments of the intertemporal marginal rate of substitution and asset returns in U.K. data. We estimate ownership probabilities to separate “likely” shareholders from nonshareholders, enabling us to control for changing composition effects as well as selection into the group. We then construct estimates of the IMRS for each of these different groups and consider their time‐series properties. We find that the consumption growth of shareholders is more volatile than that of nonshareholders and more highly correlated with excess returns to shares. In particular, one cannot reject the predictions of the consumption capital asset pricing model for the group of households predicted to own both assets. This is in contrast to the failure of the model when estimated on data for all households.

This paper presents an exchange rate model of a new kind. Instead of relying exclusively on macroeconomic determinants, the model includes a determinant from the field of microstructure financeorder flow. Order flow is a determinant because it conveys information. This is a radically different approach to exchange rates. It is also strikingly successful. Our model of daily deutsche mark/dollar log changes produces an R2 statistic above 60 percent. For the deutsche mark/dollar spot market as a whole, we find that $1 billion of net dollar purchases increases the deutsche mark price of a dollar by 0.5 percent.

This paper estimates the impacts of the Clean Air Act's division of counties into pollutant-specific nonattainment and attainment categories on measures of industrial activity obtained from 1.75 million plant observations from the Census of Manufactures. Emitters of the controlled pollutants in nonattainment counties were subject to greater regulatory oversight than emitters in attainment counties. The preferred statistical model for plant-level growth includes plant fixed effects, industry by period fixed effects, and county by period fixed effects. The estimates from this model suggest that in the first 15 years in which the Clean Air Act was in force (197287), nonattainment counties (relative to attainment ones) lost approximately 590,000 jobs, $37 billion in capital stock, and $75 billion (1987 dollars) of output in pollution-intensive industries. These findings are robust across many specifications, and the effects are apparent in many polluting industries.

Empirical work on contracts typically regresses contract choice on observed principal and agent characteristics. If (i) some of these characteristics are unobserved or partially observed and (ii) there are incentives whereby particular types of agents end up contracting with particular types of principals, estimated coefficients on the observed characteristics may be misleading. We address this endogenous matching problem using a data set on agricultural contracts between landlords and tenants in early Renaissance Tuscany. Controlling for endogenous matching has an impact on parameters of interest, and tenants’ risk aversion appears to have influenced contract choice.

This paper develops a dynamic model with transaction costs to determine the equilibrium resale pattern in a market for a durable good. The key result is that the probability of resale is nonmonotonic in the age of the good. Trade volume is relatively low in the very beginning and in the middle of a good’s life. This result helps explain observed variations of resale rates across vintages for the U.S. market of used cars.

Prostitution is low-skill, labor intensive, female, and well paid. This paper proposes a marriage market explanation to this puzzle. If a prostitute compromises her marriage market prospects, she will have to be compensated for forgone marriage market opportunities. We discuss the link between poverty and prostitution and show that prostitution may decrease with male income if wives and prostitutes are drawn from the same pool of women. We point to the role of male sex ratios, and males in transit, in sustaining high levels of prostitution, and we discuss possible reasons for its low reputation and implications for marriage patterns.

In an economy studied by Lucas and Stokey, tax rates inherit the serial correlation structure of government expenditures, belying Barro's earlier result that taxes should be a random walk for any stochastic process of government expenditures. To recover a version of Barro's random walk tax-smoothing outcome, we modify Lucas and Stokey's economy to permit only risk-free debt. Having only risk-free debt confronts the Ramsey planner with additional constraints on equilibrium allocations beyond one imposed by Lucas and Stokey's assumption of complete markets. The Ramsey outcome blends features of Barro's model with Lucas and Stokey's. In our model, the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in Lucas and Stokey's model, but incomplete markets put a nearunit root component into government debt and taxes, an outcome like Barro's. However, we show that without ad hoc limits on the government's asset holdings, outcomes can diverge in important ways from Barro's. Our results use and extend recent advances in the consumption-smoothing literature.

Market organization significantly affects total output and incentives for firms to invest. I compare three types of market organization. In a market with search and random matching, total output is excessive and there are incentives for inefficient underinvestment. In a market with a monopoly dealer, total output is insufficient and underinvestment also occurs. Competition between the search market and the dealer market improves incentives to invest, and competition between dealers yields efficient total output and investment. This suggests that additional entry of wholesalers and other interbusiness dealers should stimulate aggregate business investment.

We analyze informational lobbying in the context of a multimember legislature that decides on the allocation of a public good. First, we observe that a majoritarian legislature provides widely different incentives for interest groups to lobby than a single decision maker does. Second, we compare a decentralized legislature, such as the U.S. Congress, to a parliament with strong party cohesion. Congress’s decentralized nature allows the strategic formation of policy coalitions among high‐demand districts and the exclusion of low‐demand districts. This increases the incentive to provide information about districts’ demand relative to a legislature in which the governing coalition is fixed.

Theories of government spending driven by a common‐pool problem in the fiscal revenues pool predict that greater districting of a political jurisdiction raises the scale of government. This paper presents evidence on this and related predictions from a cross section of city governments in the United States. The main finding is that, when other plausible determinants of government spending are controlled for, greater districting leads to a considerably greater scale of government activity. The results also show that at‐large electoral systems do not, and forms of government that concentrate powers in the office of the executive do, break this relationship.