Knowledge that Transforms

This paper develops a theory of sharecropping which emphasizes the dual role of moral hazard in the provision of effort and financial constraints. The model is compatible with a large variety of contracts as observed in the region of El Oulja in Tunisia. Using an original data set including financial data, various tests of the theory are undertaken. Production functions stressing the role of effort are estimated. The data support the theory which predicts lower efficiency when the tenant's share of output is lower. The role of financial constraints in explaining which type of contract is selected (as well as the implications that financial constraints have upon effort and therefore output) are supported by the data.

We survey recent work on competition in markets in which consumers have costs of switching between competing firms' products, even when all firms' products are functionally identical. We address issues in macroeconomics and international trade, as well as industrial organization: In a market with switching costs (or 'brand loyalty'), a firm's current market share is an important determinant of its future profitability. We examine how the firm's choice between setting a low price to capture market share, and setting a high price to Harvest profits by exploiting its current locked-in customers, is affected by the threat of new entry interest rates, exchange rate expectations, the state of the business cycle, etc. We also discuss the causes of switching costs, explain introductory offers and price wars, and examine industry profits, firms' product choices, and implications for multi-product competition.

Standard models of public education provision predict an implicit transfer of resources from higher-income individuals toward lower-income individuals. Many studies have documented that public higher education involves a transfer in the reverse direction. We show that this pattern of redistribution is an equilibrium outcome in a model in which education is only partially publicly provided and individuals vote over the extent to which it is subsidized. We characterize economies in which poorer individuals are effectively excluded from obtaining an education and their tax payments help offset the cost of education obtained by others. We show that increased inequality in the income distribution makes this outcome more likely and that the efficiency implications of this exclusion depend on the wealth of the economy.

This paper focuses on the role of an initial public offering (IPO) in maximizing the proceeds an initial owner obtains in selling his company. In deciding whether to undertake an IPO, and what fraction of ownership to retain, the initial owner must balance two factors. By selling to dispersed shareholders, he maximizes his proceeds from the sale of cash flow rights. However, by directly bargaining with a potential buyer, he maximizes his proceeds from the sale of control rights. The model provides implications on the strategy to be followed in selling a company as well as on the timing of IPOs and going-private transactions.

The paper presents a dynamic contracting model of myopic firm behaviour caused by the fear of early project termination by outside investors. Although the parties can conclude longterm contracts, asymmetric information between investors and firms can make it impossible to implement profitable long-term projects. The paper characterizes the structure of optimal, renegotiation-proof contracts for unmonitored and monitored finance. Monitoring by investors, although itself subject to distorting incentive constraints, is shown to be able to overcome the short-term bias of investment and thus to lengthen the firms' planning horizon.

We introduce a new model for time-varying conditional variances as the most general quadratic version possible within the ARCH class. Hence, it encompasses all the existing restricted quadratic variance functions. Its properties are very similar to those of GARCH models, but avoids some of their criticisms. In univariate applications to daily U.S. and monthly U.K. stock market returns, QARCH adequately represents volatility and risk premia. QARCH is easy to incorporate in multivariate models to capture dynamic asymmetries that GARCH rules out. Such asymmetries are found in an empirical application of a conditional factor model to 26 U.K. sectorial stock returns.

In an industry where naturally monopolistic and competitive activities are vertically related, should the natural monopolist be allowed also to operate in the deregulated competitive sector? This paper assumes that monopoly pricing behavior is regulated and, therefore, the effect of vertical integration on the task of regulation is central to the analysis. When vertical integration by the monopolist is allowed, the regulator's task is made harder as the monopolist has anticompetitive incentives to raise rivals' costs. On the other hand, integration may lead to less duplication of fixed costs. The overall welfare comparison between separation and integration is ambiguous.

This paper investigates the properties of the joint distribution of the duration to the first post-schooling full-time job and of the accepted wage for that job within a search-matching-bargaining theoretic model. The model provides an interpretation of the observations on duration to first job and accepted wages that differentiates between behavioural influences and market fundamentals in determining the accepted wage-schooling relationship. The return to schooling is appropriately measured by differences in the wage offer distribution, which depends only on market fundamentals. We use data from the 1979 youth cohort of the National Longitudinal Surveys of Labor Market Experience to follow several school-leaving cohorts of young males. A model which allows for five types of heterogeneous workers within schooling/race groups fits the duration and wage data well for all such groups. Offer probabilities for all groups are estimated to be close to one. Mean offered wages are about $1000 less than mean accepted wages and the internal annual rate of return for attending college relative to graduating from high school is 32% for blacks and 17% for whites.

One of the important determinants of fertility is the value of children as perceived by parents. This paper estimates gender- and age-specific values of children using a dynamic programming model. Findings from the Korean data indicate that children impose net costs when young and net benefits when old. Both the early costs and the later benefits are larger for male children than female children, and for better-educated women than lower-educated women. Simulation studies that use estimated values of children suggest that a decrease in the costs of abortion and prenatal gender-screening tests may raise the male-birth ratio through gender-selective abortions.

The aggregate rate of R&D in a competitive economy is compared with the optimal rate. The optimal rate of R&D is shown to be the same for all preferences in a broad family, while the competitive rate is sensitive to the form of substitutability among products and so can vary dramatically within a family. The second-best level of R&D is shown to be also common within a family and equal to the optimal rate. Numerical examples suggest that diminishing returns in the innovation technology is the most important potential source for excessive R&D in a competitive economy.