Knowledge that Transforms

Why do bookies use the point-spread device for wagering on football games when odds betting on the winner is also feasible? One possibility is that point-spread betting is more fun than odds betting. The existence of point spreads, however, does not logically entail this "more fun" explanation. Given simple specifications of beliefs and betting behavior, and given that point spreads and odds are equally thrilling, it is demonstrated that the point-spread game can exist as the game produced by a profit-maximizing bookie. The disparate beliefs which create the demand for some form of betting market can also explain the particular betting game produced by the bookie.

This paper examines the effect of a change in the rate of monetary expansion on the dynamics of the real exchange rate under fully flexible domestic prices and a floating exchange rate. The model is similar in structure to an ealier paper by Calvo and Rodríguez, the main difference being that in our model consumers have an infinite planning horizon and long-run perfect foresight. One of the main findings is that an increase in the rate of monetary expansion has the impact effect of creating a real appreciation of the exchange rate and a deterioration of the balance of payments, contrary to the results of Calvo and Rodríguez.

There are two possible outcomes of transport regulation: (1) maintaining a carrier cartel and (2) imposing equalizing discrimination against advantaged and in favor of disadvantaged shippers. Both functions have required a complex rate structure to enforce the respective forms of price discrimination. Using a sample of freight bills from motor carriers and railroads, this paper demonstrates that the principal result of motor carrier regulation has been to maintain a cartel of truckers, while railroad regulation has thwarted the wishes of the railroad cartel by imposing equalizing discrimination on weak and strong shippers. Motor carrier rates respond in an economically rational manner to costs and shipper bargaining power; rail rates are either unresponsive or perversely responsive to the same factors. Deregulation should have divergent effects in the two industries.

This paper tests Mincer's minimum-wage model by estimating reduced-form wage and employment equations for both the covered and uncovered sectors in nine regions of the United States. As theory predicts, in regions with comparatively small covered-sector demand elasticities, the northern and midwestern regions, the uncovered-sector wage increases after a minimum-wage hike; and in regions with comparatively large demand elasticities, the southern and western regions, the uncovered-sector wage decreases. Because of data limitations the uncovered-sector employment effect could not be estimated sharply, and so its relationship to the covered-sector demand elasticity is weak.

The choice of capital durability is affected by the rate of inflation because nominal depreciation deductions are based on historical cost rather than replacement cost. This paper analyzes a model with competitive firms and demonstrates that an increase in the rate of inflation will lead to an increase in the durability of capital, if the ratio of the nominal discount rate to the rate of depreciation exceeds a critical value. However, if this ratio is less than the crucial value, this effect is reversed. The effect of costs of adjustments on the crucial value is analyzed.

The demand distribution is employed as a novel and powerful basis for analyzing monopoly provision of price-excludable public goods (and could be used to analyze other market structures or, in some circumstances, private goods provision). For (uniform) per-unit, all-or-none, two-part, and multipart pricing, we identify: Characteristics of revenue functions, relative profitability, and operational procedures for selecting price-output levels. Under all these strategies, rationing of some consumers by output is required, and a positive price-output relationship may arise. In general the revenue ranking of pricing strategies is sensitive to the distribution of demand and, though multipart pricing can be expected to be revenue dominant, uniform per-unit pricing emerges as a surprisingly robust strategy even before operational complexity is fully taken into account.

A search is made for violations of the axiom of revealed preference in aggregate consumption data for the United Kingdom. No such violations are found. This is taken as evidence that tastes remained constant throughout the period under study. The strength of this evidence is estimated within the context of a particular model of taste change.

This paper presents a unified model of consumer search when both prices and qualities are uncertain. It is assumed that price can be observed prior to purchase but that quality can be observed only after purchase and experience. This two-stage decision problem is of particular interest since, in practice, there is usually some connection between quality and price. Of the many interesting implications of this dependence explored in this paper is the result that the usual "reservation-price rule" may no longer be optimal; indeed, the optimal stopping set may take one of several alternative (and more realistic) forms.