Knowledge that Transforms

This paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime-separable. The nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked. These cross-relations are examined empirically using postwar monthly U. S. data on quantities, real wages, and the real return on the one-month Treasury bill. The estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models. Several possible explanations of these discrepancies are discussed.

Nils Gottfries, Torsten Persson; Empirical Examinations of the Information Sets of Economic Agents*, The Quarterly Journal of Economics, Volume 103, Issue 1, 1

Wilfrid W. Csaplar, Jr., Edward Tower; Trade and Industrial Policy Under Oligopoly: Comment, The Quarterly Journal of Economics, Volume 103, Issue 3, 1 August 1

A canonical price-normalized form is proposed as a generalization of the ordinary consumer's surplus expression commonly used to evaluate changes in economic welfare. This familiar-looking formula, it is proved, can be rigorously interpreted as representing the first- and second-order terms of a Taylor-series expansion for the equivalent-variation or willingness-to-pay function of a single consumer. In principle, the lowly consumer's surplus triangle-and-rectangle methodology can be rigorously defended as an exact approximation to a theoretically meaningful measure as long as prices are appropriately deflated. The appropriate price deflator is derived, and some implications are discussed.

The expectations theory of the term structure of interest rates supplemented by the rational expectations and time-invariant risk premium assumption implies that the spread between the long and the short rate has in general predictive power for the short rate. This implication was consistently rejected in recent studies Time variations of the risk premium, which are probably important for the behavior of the yield on long-term bonds, are not an entirely satisfactory explanation for these findings. In a more recent article of Mankiw and Miron [1986], who analyzed quarterly data for three-and six-month interest rates over the period 1890-1979, an interesting new explanation for the failure of the expectations theory emerged. They showed that the spread had substantial predictive power for changes in the short rate in the period before the founding of the Federal Reserve (1890-1914), whereas for all other periods considered (1915-1933, 1934-1951, 1951-1958, and 1959-1979), the spread did not help to predict the short rate. Thus, Mankiw and Miron suggested that the rejection of the expectations theory with recent data is a consequence of the commitment of the Federal Reserve to stabilize interest rates resulting in random walk behavior of the short rate. Under these circumstances, expected future short rates are equal to the actual short rate and variations of the spread are only brought about by changes in the risk premium.

We show that a new product monopolist may benefit from (delayed) competition if consumers incur setup costs. Setup costs create a dynamic consistency problem: the monopolist cannot guarantee low future prices once customers have incurred those costs. We show that, if customers anticipate this problem, the monopolist's profits can be improved through ex ante commitment to competition in the post-adoption market, if setup costs are large. If setup costs are small, the monopolist can typically achieve the same level of profits without price commitment as with.