Simultaneity between prisoner populations and crime rates makes it difficult to isolate the causal effect of changes in prison populations on crime. To break that simultaneity, this paper uses prison overcrowding litigation in a state as an instrument for changes in the prison population. The resulting elasticities are two to three times greater than those of previous studies. A one-prisoner reduction is associated with an increase of fifteen Index I crimes per year. While calculations of the costs of crime are inherently uncertain, it appears that the social benefits associated with crime reduction equal or exceed the social costs of incarceration for the marginal prisoner.

As traders learn about the true distribution of some asset's dividends, a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred. Small differences in prior beliefs lead to large speculative premiums during the learning process. This phenomenon helps explain a paradox concerning the pricing of initial public offerings. The result casts light on the significance of the common prior assumption in economic models.

This paper investigates the relative importance of cyclical fluctuations in labor and capital utilization, increasing returns to scale, and technology shocks as explanations for procyclical productivity. It exploits the intuition that materials inputs do not have variable utilization rates, and materials are likely to be used in fixed proportions with value added. Therefore, materials growth is a good measure of unobserved changes in capital and labor utilization. Using this measure shows that cyclical factor utilization is very important, returns to scale are about constant, and technology shocks are small and have low correlation with either output or hours growth.

Building on earlier work by Eichengreen and Sachs, we use data for 22 countries to study the role of wage stickiness in propagating the Great Depression. Recent research suggests that monetary shocks, transmitted internationally by the gold standard, were a major cause of the Depression. Accordingly, we use money supplies and other aggregate demand shifters as instruments to identify aggregate supply relationships. We find that nominal wages adjusted quite slowly to falling prices, and that the resulting increases in real wages depressed output. These findings leave open the question of why wages were so inertial in the face of extreme labor market conditions.

We develop a dynamic model of learning about worker ability in a competitive labor market. The model produces three testable implications regarding wage dynamics: (1) although the role of schooling in the labor market's inference process declines as performance observations accumulate, the estimated effect of schooling on the level of wages is independent of labor-market experience; (2) timeinvariant variables correlated with ability but unobserved by employers ( such as certain test scores) are increasingly correlated with wages as experience increases; and (3) wage residuals are a martingale. We present evidence from the NLSY that is broadly consistent with the model's predictions.

Using a panel of 51 prices from 48 cities in the United States, we provide an upper bound estimate of the rate of convergence to purchasing power parity. We find convergence rates substantially higher than typically found in cross-country data. We investigate some potentially serious biases induced by i.i.d. measurement errors in the data, and find our estimates to be robust to these potential biases. We also present evidence that convergence occurs faster for larger price differences. Finally, we find that rates of convergence are slower for cities farther apart. However, our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders.

We study a barter economy in which each good is produced in two qualities and no trader can distinguish between the qualities of those goods he neither consumes nor produces. We show that in competitive equilibrium there exists a (unique) good—the one for which the discrepancy between qualities is smallest—that serves as the medium of exchange: this good mediates every trade. Equilibrium is inefficient because production of the medium would be lower if it were not for its mediating role. Introducing fiat money enhances welfare by eliminating this distortion. However, high inflation drives traders back to the commodity medium.

Capital investment decisions must recognize the limitations on the firm's ability to later sell or expand capacity. This paper shows how opportunities for future expansion or contraction can be valued as options, how their valuation relates to the q theory of investment, and their effect on the incentive to invest. Generally, the option to expand reduces the incentive to invest, while the option to disinvest raises it. We show how these options determine the effect of uncertainty on investment, how they are changed by shifts of the distribution of future profitability, and how the q-theory and option pricing approaches are related.