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. The mechanism through which this welfare loss arises is apparently a decrease in average productivity, since this policy results in a decrease in average productivity of over 2 percent.

This paper investigates the role of induced innovation in the development of American agriculture from 1880 to 1980. The induced innovation hypothesis, most closely associated with the work of Hayami and Ruttan, argues that successful economies develop technologies in accordance with market price signals to loosen constraints on growth imposed by factor scarcities. Our analysis employing new state and regional level data fails to find support for Hayami and Ruttan's hypothesis. This paper suggests that many of the fundamental generalizations about American agricultural development need to be reconsidered and redirects attention to the role of settlement, changing crop patterns, and biological investments in explaining changes in factor utilization in American agriculture.

This study examines the effects of antitrust prosecution on prices charged by firms indicted for price fixing. In a survey of 25 cases filed between 1973 and 1984, prices are found to gradually rise by about 7 percent over the 4 years following an indictment. However, the severity of penalties is negatively correlated with prices. These two findings suggest either that penalties are too lenient or that prosecution is too broad, penalizing economically efficient conspiracies along with those that are inefficient.

The hypothesis that takeovers provide managers with the incentive to maximize firm value is tested by examining the relationship between profitability and state statutes governing takeover activity among banks. The evidence indicates that firms in states with an active takeover market are more profitable. When takeover activity is restricted, increased use of other mechanisms that provide an incentive to maximize firm value, such as concentration of equity ownership and management ownership of stock, is observed. However, these alternative methods have a smaller effect on profitability and do not completely compensate for the absence of an active takeover market.

Trade is sequential: Buyers arrive in batches, and each batch completes trade before the next arrives. Producers allocate the available supply among all potential batches of buyers. Inventories accumulate whenever a batch does not arrive. Shocks to cost and demand are serially independent. There is a stationary relationship between inventories and prices with the following properties. Larger beginning-of-period inventories tend to depress prices. Inventories are positively serially correlated. A unit increase in inventories reduces output by less than one unit. An increase in inventories leads to an increase in the price spread. Output tends to vary more than sales.

We report market experiments in which human traders are replaced by "zero-intelligence" programs that submit random bids and offers. Imposing a budget constraint (i.e., not permitting traders to sell below their costs or buy above their values) is sufficient to raise the allocative efficiency of these auctions close to 100 percent. Allocative efficiency of a double auction derives 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 models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Because of capital market imperfections, poor agents choose working for a wage over self-employment, and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will there 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, we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long-run effects. In one case the economy develops either widespread cottage industry (self-employment) or factory production (employment contracts), depending on the initial distribution; in the other example, it develops into prosperity or stagnation.

We investigate whether omitted family background variables are responsible for high returns to schooling estimated in Brazil. Returns to schooling fall by about one-third when parental schooling is added to wage equations. Surprisingly, the schooling of fathers-in-law has larger effects on wages than the schooling of fathers. On the basis of a model of assortative mating, we interpret this as evidence that parental characteristics represent unobservable worker attributes rather than nepotism in the labor market. We conclude that the "family background bias" in returns to schooling is modest and need not imply returns to family connections.