Knowledge that Transforms

Why are there such large differences in saving rates across countries? Conventional economic analyses have not been successful in explaining international saving differences, so economists have sometimes suggested that national saving differences may be explained by cultural differences. This paper tests the hypothesis that cultural factors influence saving by comparing saving patterns of immigrants to Canada from different cultures. Using data from the Canadian Survey of Family Expenditures, we find no evidence of cultural effects on saving.

When the responsibility for output decisions was shifted from the state to the firm, and when firms were allowed to retain more of their profits, managers of Chinese state-owned enterprises strengthened workers' incentives. The managers paid more in bonuses and hired more workers on fixed-term contracts. The new incentives were effective: productivity increased with increases in bonus payments and in contract workers. The increase in autonomy raised workers' incomes (but not managers' incomes) and investment in the enterprise, but tended not to raise remittances to the state.

Private enforcement of regulatory policy is a significant feature of many government-sponsored contests, such as procurements. Although private enforcement is supposed to promote social welfare, we show that competitors can use it to achieve collusive outcomes. In a noncooperative duopoly setting, we show that the threat of litigation, and the possibility of settlement can dramatically affect ex ante competition in the relevant market. Essentially, the settlement process provides a legal mechanism for the exchange of side-payments, while the possibility of a court decision provides the plaintiff with a credible threat against the defendant so as to avert cheating. The result does not require repeated play, ex ante contracts, or other commitment devices. In the federal procurement context, we show that our results are robust to alterations in the court remedy, bargaining power of the litigants, and many other factors.

Standard models of policy credibility, defined as the expectation that an announced policy will be carried out, emphasize the preferences of the policymaker and the role of tough policies in signaling toughness and raising credibility. Whether a policy is carried out, however, will also reflect the state of the economy. We present a model in which a policymaker maintains a fixed parity in good times, but devalues if the unemplo3nnent rate gets too high. Our main conclusion is that if there is persistence in unemplo3n3ient, observing a tough policy in a given period may lower rather than raise the credibility of a no-devaluation pledge in subsequent periods. We test this implication on EMS interest rates and find support for our hypothesis.

This paper develops a framework for analyzing transactions that transfer a company's controlling block from an existing controller to a new controller. This framework is used to compare the market rule, which is followed in the United States, with the equal opportunity rule, which is used in many other countries. The market rule is superior to the equal opportunity rule in facilitating efficient transfers of control but inferior to it in discouraging inefficient transfers. Conditions under which one of the two rules is overall superior are identified; for example, the market rule is superior if existing and new controllers draw their characteristics from the same distributions. Finally, the rules' effects on surplus division are analyzed, and this examination reveals a rationale for mandatory rules.

We analyze the response of small versus large manufacturing firms to monetary policy. The goal is to obtain evidence on the importance of financial propagation mechanisms for aggregate activity. We find that small firms account for a significantly disproportionate share of the manufacturing decline that follows tightening of monetary policy. They play a surprisingly prominent role in the slowdown of inventory demand. Large firms initially borrow to accumulate inventories. After a brief period, small firms quickly shed inventories. We attempt to sort financial from nonfinancial explanations with evidence on asymmetries and on balance sheet effects on inventory demand across size classes.

The tax haven affiliates of American corporations account for more than 20 percent of U. S. foreign direct investment, and nearly a third of the foreign profits of U. S. firms. American companies report extraordinarily high profit rates on their tax haven investments in 1982. This behavior implies that the revenue-maximizing tax rate for a typical haven is around 5–8 percent. American (and foreign) investment in tax havens has an uncertain effect on U. S. tax revenue, but since low tax rates encourage American companies to shift profits out of high-tax foreign countries, it is possible that low foreign tax rates ultimately enhance U. S. tax collections.

We analyze twenty years of personnel data from one firm. The hierarchical structure is quite simple and stable. Career movements suggest that the employee's rate of learning and the firm's learning about ability are important. There are promotion “fast tracks.” Exit rates vary little with tenure or salary. The firm has personnel policies like those described in the internal labor markets literature, although several theoretical preconditions for ILMs, such as ports of entry and exit, are lacking. Job levels are important to compensation, but there is also substantial individual variation in pay within levels. Our companion paper (in this issue) explores the wage policy of this firm.

In the period since the 1960's, as in other periods, aggregate time series on real wages have displayed only modest cyclicality. Macroeconomists therefore have described weak cyclicality of real wages as a salient feature of the business cycle. Contrary to this conventional wisdom, our analysis of longitudinal microdata indicates that real wages have been substantially procyclical since the 1960's. We also find that the substantial procyclicality of men's real wages pertains even to workers that stay with the same employer and that women's real wages are less procyclical than men's. Numerous longitudinal studies besides ours have documented the substantial procyclicality of real wages, but none has adequately explained the discrepancy with the aggregate time series evidence. In accordance with a conjecture by Stockman (I983), we show that the true procyclicality of real wages is obscured in aggregate time series because of a composition bias: the aggregate statistics are constructed in a way that gives more weight to low-skill workers during expansions than during recessions. We conclude that, because real wages actually are much more procyclical than they appear in aggregate statistics, theories designed to explain the supposed weakness of real wage cyclicality may be unnecessary. and theories that predict substantially procyclical real wages become more credible.

We present a model of bargaining between politicians and managers that explains many stylized facts about the behavior of state firms, their commercialization, and privatization. Subsidies to public enterprises and bribes from managers to politicians emerge naturally in the model. We use the model and several extensions to understand why commercialization and privatization might work, and what forces contribute to effective restructuring of public enterprises. We illustrate the model using examples from several countries.