The motivating intuition is that the presence of nonmaximizing agents induces maximizing agents to take advantage of them, and that this might magnify the effect of small deviations from maximizing behavior. This intuition is explored using a simple dynamic model. With an inflexible entry process, small deviations from maximizing behavior may have a substantial impact on the allocation of gains from trade. With a flexible entry process, the effect is dampened by adjustments in entry. Yet these deviations result in a first-order efficiency loss, in contrast to the second-order loss that one would expect from looking at standard static models.

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 study the relationship between politics and economic growth in a simple model of endogenous growth with distributive conflict among agents endowed with varying capital/labor shares. We establish several results regarding the factor ownership of the median individual and the level of taxation, redistribution, and growth. Policies that maximize growth are optimal only for a government that cares solely about pure “capitalists.” The greater the inequality of wealth and income, the higher the rate of taxation, and the lower growth. We present empirical results that show that inequality in land and income ownership is negatively correlated with subsequent economic growth.

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.

Alan J. Auerbach, Kevin A. Hassett, Stephen D. Oliner; Reassessing the Social Returns to Equipment Investment*, The Quarterly Journal of Economics, Volume

The term-structure slope contains information about expected future inflation. Mishkin shows that the spread between the twelve-month and three-month interest rates helps predict the difference between twelve-month and three-month inflation. We apply a simple existing framework, which lets the real interest rate vary in the short run but converge to a constant in the long run, to this problem. The appropriate indicator of expected inflation uses the entire length of the yield curve, estimating the steepness of a specific nonlinear transformation, rather than being restricted to a spread between two points. The resulting indicator better predicts inflation, over 1960–1991.

We analyze optimal task assignment when a firm needs to learn the abilities of employees. When projects require collaboration between juniors and seniors and only team outputs are observable, having juniors divide their time between two projects ("junior sharing") is less informative about their abilities, but more informative about their senior teammates' abilities, than having juniors devote all their time to a single project ("no sharing"). In an overlapping-generations model, we show that no sharing is more (less) attractive than junior sharing if the prior uncertainty about abilities is small (large) relative to exogenous shocks to team production.

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.

This paper examines micro data on U. S. manufacturing firms' inventory behavior during different macroeconomic episodes. Much of the analysis focuses on the 1981–1982 recession, which was apparently caused in large part by tight monetary policy. We find that the inventory investment of firms without access to public bond markets is significantly liquidity-constrained during this period. A similar pattern emerges during the 1974–1975 recession, in which tight money also appears to have played a role. In contrast, such liquidity constraints are largely absent during periods of looser monetary policy in the 1970s and 1980s.

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.