Knowledge that Transforms

Nominal wages in manufacturing were left unchanged by the large decline in nominal demand that marked the first two years of the Great Depression. This rigidity in nominal wages is explained using the tools of the behavioral theory of the firm. The emphasis is on the reasons firms changed their decision rules linking fluctuations in final sales to changes in nominal wages.

Nominal price rigidity has a negative externality: rigidity in one firm's price increases the variability of aggregate real spending, which harms all firms. This paper investigates whether this externality is large, which would imply that stabilization policy can be highly beneficial even if the costs of making prices flexible are small. There are three conclusions. First, both the private cost of price rigidity and the externality are second order in the size of fluctuations. Second, the externality can nonetheless be arbitrarily large. Third, in a simple model the externality is small for plausible parameter values.

This paper builds a bridge between the two existing approaches for wage and employment determination in a unionized market: the monopoly union model and the efficient bargaining model. Both fail to capture the dynamic aspects of wage bargaining. When the repeated nature of the wage bargaining process is considered, the equilibria are neither as inefficient as the monopoly union model predicts nor as fully efficient. Rather, the two models can be regarded as particular cases with certain discount rates. We apply our model to issues such as the endgame interpretation of the U. S. steel industry, wage concessions, and featherbedding.

R. Preston McAfee, John McMillan, Michael D. Whinston; Multiproduct Monopoly, Commodity Bundling, and Correlation of Values*, The Quarterly Journal of Econ

This paper considers the implications of heterogeneity in information-processing abilities for macroeconomic models that exhibit “strategic complements.” The latter is the same concept that has received much attention in the recent macro literature under the headings Keynesian coordination problems and positive trading externalities. We consider environments in which agents vary in terms of their ability to form expectations, and ask whether it is the “sophisticated” agents or the “naive” agents who have a disproportionately large effect on macroeconomic equilibrium. We find that if macroeconomic interaction exhibits strategic complementarity, then it is the naive agents who have a disproportionate impact.

The paper analyzes the issue of commitment in Grossman and Hart's model of optimal labor contracts under asymmetric information about firm profitability. We extend their framework by allowing employment to vary over time, at equidistant intervals. When both parties can precommit ex ante not to renegotiate the contract, this replicates the Grossman-Hart outcome each subperiod. When precommitment is not possible, information revealed through the contract can create Pareto-improving renegotiation opportunities, and the issue of optimal information revelation arises. The paper analyzes the impact of ex post Pareto-improving renegotiations on the optimal contract.

In standard pricing models, movements in demand are partially offset by price responses. In a customer market, however, price markups may decrease with high demand. Thus, price may magnify, rather than stabilize, demand movements. I consider a monopolist selling a good of which first-time consumers are uncertain. Repeat customers know that the product works. The monopolist trades the objec-tives of exploiting past customers and attracting new ones. In a period with many new potential customers, the monopolist gives more weight to attracting and lowers its markup. Last, I examine some evidence on whether expansions are periods with disproportionately many new customers. I.

Candidates for office are modeled as promising services, such as support for legislation and intervention in the bureaucracy, to interest groups in exchange for campaign contributions. An electoral equilibrium is characterized in which candidates choose service-contribution offers and interest groups choose whether to contribute. The model provides several explanations of congressional incumbents' success in over 90 percent of their reelection contests: a recognition advantage, a high personal valuation of the office, a lower cost of providing services, and policy alignment with high demand interest groups. The model yields predictions that are consistent with empirical findings on the relation between campaign contributions and election outcomes.

A simple aggregate growth model is presented in which technology is described by a probability distribution from which new plants are drawn. Especially good draws are viewed as technological innovations that shift the mean of the following period's plant distribution function. The resulting technical change is endogenous, random, and cumulative. In contrast to conventional growth models, the model's growth path displays nonstationary drift rather than deterministic trend, and the long-run per capita growth rate has positive rather than zero sensitivity to the model's saving parameter.

A recent literature has shown that asymmetric information about a firm's profitability does not by itself explain strikes of substantial length if the firm and workers can bargain very frequently without commitment. In this paper we show that substantial strikes are possible if (a) there is a small (but not insignificant) delay between offers; and (b) a strike-bound firm may experience a decline in profitability after a certain point. A brief discussion of the ability of the theory to explain the data on strikes is included.