Knowledge that Transforms

Recent empirical work indicates that job creation and destruction rates are large, implying significant amounts of job reallocation across firms. This paper builds a general equilibrium model of this reallocation process, calibrates it using data on firm-level dynamics, and evaluates the aggregate implications of policies that interfere with this process. We find that a tax on job destruction at the firm level has a sizable negative impact on total employment: a tax equal to 1 year's wages reduces employment by roughly 2.5 percent. More striking, however, are the welfare consequences: the cost in terms of consumption of this same tax is greater than 2 percent.

This paper introduces the 'separate spheres' bargaining model, a new model of distribution within marriage. It differs from divorce threat bargaining models in that the threat point is not divorce but a noncooperative equilibrium within marriage; this noncooperative equilibrium reflects traditional gender roles. The predictions of the authors' model thus differ from those of divorce threat bargaining models; in the separate spheres model, cash transfer payments to the mother and payments to the father can--but need not--imply different equilibrium distributions in existing marriages. In the long run, the distributional effects of transfer policies may be substantially altered by changes in the marriage market equilibrium.

An important step in extending the traditional theory of individual rational choice to analyze social issues beyond those usually considered by economists is to incorporate into the theory a much richer class of attitudes, preferences, and calculations. While this approach to behavior builds on an expanded.theory of individual choice, it is not mainly concerned with individuals. It uses theory at the micro level as a powerful tool to derive implications at the group or macro level. The lecture describes the approach and illustrates it with examples drawn from the author's past and current work.

This paper reports market experiments in which human traders are replaced by "zero-intelligence" programs that submit random bids and offers. Imposing a budget constraint (i.e., n ot permitting traders to sell below their costs or buy above their valu es) is sufficient to raise the allocative efficiency of these auctions close to 100 percent. Allocative efficiency of a double auction deri ves largely from its structure, independent of traders' motivation, intelligence, or learning. Adam Smith's invisible hand may be more powerful than some may have thought; it can generate aggregate rationality not only from individual rationality but also from individual irrationality.

This paper shows that the stock price incorporates performance information that cannot be extracted from the firm's current or future profit data. The additional information is useful for structuring managerial incentives. The amount of information contained in the stock price depends on the liquidity of the market. Concentrated ownership, by reducing market liquidity, reduces the benefits of market monitoring. Integration is associated with weakened managerial incentives and less market monitoring. The paper also studies the equilibrium size of the stock market as a function of investor preferences and the available amounts of long- and short-term capital.

Using data from the March Current Population Survey, the authors document an increase over the past 30 years in wage inequality for males. Between 1963 and 1989, real average weekly wages for the least skilled workers declined by about 5 percent, whereas wages for the most skilled workers rose by about 40 percent. The authors find that the trend toward increased wage inequality is apparent within narrowly defined education and labor market experience groups. Their interpretation is that much of the increase in wage inequality fro males over the last 20 years is due to increased returns to the components of skill other than years of schooling and years of labor market experience.

This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Becau se of capital-market imperfections, poor agents choose working for a wa ge over self-employment and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will ther e be employment contracts; otherwise, there is either subsistence or self-employment. Thus, in static equilibrium, the occupational structure depends on distribution. Since the latter is itself endogenous, the authors demonstrate the robustness of this result b y extending the model dynamically and studying examples in which initi al wealth distributions have long-run effects.

This paper suggests a new procedure for evaluating the fit of a dynamic structural economic model. The procedure begins by augmenting the variables in the model with just enough stochastic error so that the model can exactly match the second moments of the actual data. Measures of fit for the model can then be constructed on the basis of the size of this error. The procedure is applied to a standard real business cycle model. Over the business cycle frequencies, the model must be augmented with a substantial error to match data for the postwar U.S. economy. Lower bounds on the variance of the error range from 40 percent to 60 percent of the variance in the actual data.

This paper presents evidence on the nature of productivity growth for five major industries in six countries. Output growth is found to be more correlated across countries than productivity growth. In addition, productivity growth is more correlated across industries within one country than across countries within one industry. Using an error-components model, I find that a substantial fraction of changes in annual productivity can be attributed to nation-specific factors that are common across industries. The evidence suggests that short-run productivity growth is similar across industries in a nation but less similar across countries in any specific industry.

At the microeconomic level, durable purchases are often discontinuous and relatively large. This feature has the potential to explain why aggregate expenditure on durables responds only slowly (relative to the frictionless permanent income model) to wealth and other aggregate innovations. In this paper I develop new results on the problem of dynamic aggregation of stochastically heterogeneous units, which help to characterize the connection between microeconomic behavior and aggregate dynamics in the presence of nonconvex adjustment costs. Using these results and splitting postwar U.S. aggregate durable purchases into different subcategories and time periods, I provide further support for the view that lumpy microeconomic purchases play an important role in explaining the time-series behavior of aggregate expenditure on durable goods.