Knowledge that Transforms

Two economies, represented by Diamond-type overlapping-generations models and differing only in their pure rates of time preference, are joined together. Capital formation, balance-of-payments behavior, and welfare are compared under autarky and openness. With a positive natural rate of growth, the low-time-preference country runs a current account surplus in the steady state but not necessarily outside it. If preexisting capital is not shiftable between countries, integration in the world economy makes the high-time-preference country worse off in the short run. The ranking of stationary utility levels under autarky and openness is ambiguous.

The paper provides a theoretical description of hedging in futures markets that account for the behavior of a broad class of agents. Specific optimal decision rules are derived for agents concerned with the mean and variance of profit. These rules are used to evaluate how optimal cash and futures positions are related to price expectations, the production possibilities, and the number of futures markets available.

Starting from an initial (baseline) budget line, income-compensated price changes always resulted in substitution effects consistent with the Slutsky-Hicks theory. This behavior cannot be explained by a simple random-behavior model. Similar changes in relative prices that did not originate from the initial (baseline) budget line resulted in "undersubstitution effects": The composition of consumption changed in the expected direction, but the magnitude of change was not large enough to be consistent with the initial commodity bundle chosen. These undersubstitution effects are not explainable by shifting preference patterns or anchoring effects found in inconsistent choice sequences with human subjects.

In this paper we formulate and test a model of collusive pricing in the presence of antitrust enforcement. We show that a cartel's optimal price is likely to be neither the competitive price nor the price that the cartel would set in the absence of antitrust enforcement but rather an intermediate price that depends on the levels of antitrust enforcement efforts and penalties. Our empirical results reveal that increasing antitrust enforcement in the presence of a credible threat of large damage awards has the deterrent effect of reducing mark-ups in the bread industry.

This paper develops and tests a simple model for the determination of tariff and nontariff barriers to trade across industries within the United States, using 1970 trade data. We find that nontariff trade restrictions have supplemented tariff protection in the United States. Both tariff and nontariff trade restrictions are biased toward industries in which the United States has an apparent comparative disadvantage in world trade and away from industries in which consumer welfare losses from protection would be great. We also find substantial evidence that tariff and nontariff trade restrictions predominate in industries with very different market characteristics.

The case for positive time preference is absolutely compelling, unless there is an infinite time horizon with the expectation of unending technological advance combined with what we call "drastically diminishing marginal utility." This finding holds both in the positive and normative senses. A corollary is that savings are interest elastic.

Unequal inheritance of material wealth is commonly considered a major cause of inequality in consumption. However, theoretical models of the intergenerational transmission of inequality by Becker, Blinder, and Ishikawa imply that unequal inheritance may either increase or reduce consumption inequality. Differences in inherited wealth resulting from unequal parental incomes increase inequality in recipients' consumption. However, unequal bequests caused by differences among families in the endowed ability of children or the costs of producing human capital are equalizing. Empirical results confirm these predictions: The inheritance received by children is inversely related to both children's income and parental education. Thus bequests are "compensatory" in that (ceteris paribus) low-income children inherit more than their advantaged contemporaries.

With imperfect job information flows, it is plausible that the distribution of job offerings becomes more attractive when there are more vacancies and more unemployed. With word-of-mouth communication, this condition is derived. Given this condition, steady-state equilibrium is not efficient, with welfare increased by the introduction of unemployment compensation even though all agents are risk neutral. In this way workers become more selective in the jobs they accept.

The paper investigates whether compensation among local jurisdiction is, by itself, sufficient to ensure efficient provision of local public goods. Jurisdictions have fixed boundaries, and each has an entrenched government with the power to tax and supply the public good. Residents can move costlessly among jurisdictions. It is shown that competition among numerous jurisdictions is not sificient to guarantee public sector efficiency. Though residents can "vote with their feet," land is immobile. Hence, governments can unsurp some land rents for their own ends. Increasing the number of jurisdictions limits but cannot completely eliminate the ability to exercise discretionary governmental power.

By considering investor order placement strategy, this paper demonstrates that transaction costs cause bid-ask spreads to be an equilibrium property of asset markets. With transaction costs, the probability of a limit order executing does not go to unity as the order is placed infinitesimally close to a counterpart market quote; thus, with certainty of execution at the counterpart market quote, a "gravitational pull" is generated that keeps counterpart quotes from being placed infinitesimally close to each other. An equilibrium spread is defined and its size linked to market thinness; implications are noted for the design of a trading system.