Knowledge that Transforms

The author uses an equilibrium model of job matchings with a Nash wage equation to derive the response of wages and unemployment to productivity shock. By endogenizing labor's threat point, he shows that wages absorb fully permanent shocks but only partially temporary shocks. Hence, unemployment responds to perceived temporary shocks but not to permanent shocks. Copyright 1987 by The Review of Economic Studies Limited.

We formalize the Marshallian idea that when the proportion of income spent on any commodity is small then the income effects are small. If n is the number of goods, we show, under certain assumptions on preferences and prices, that the order of magnitude of the norm of the income derivative of demand is 1/√n. As a corollary we get that for the case of a single price change the percentage error in approximating the Hicksian Deadweight Loss by its Marshallian counterpart goes to zero at least at the rate 1/√n and that demand is downward sloping for n large enough.

A two-period game between firms and consumers is considered. Firms are privately informed about their individual costs, and consumers must pay a search cost in order to learn a firm's current price. Consumers thus have incentive to use introductory price as a signal of cost and, hence, second period price. Recent refinements of the sequential equilibrium concept are employed, and the resulting equilibria involve low introductory prices (introductory sales).

This paper presents the specification and estimation of a search model applied to the transition from education to work. The theoretical search model includes the possibility of variable search intensity. The empirical model with a reservation wage relation is estimated using maximum likelihood methods. A data set containing information on new law graduates is used for the estimation. Finally, the model is estimated for two separate subperiods to investigate the effects of market changes.

A method is presented for generating test statistics that share the same first order asymptotic optimality properties of the classical statistics. Generalizing J. Neyman's work (1959), t he linearized classical statistic tests restrictions in implicit func tion form using a parameter estimator that is consistent and symptoti cally normally distributed under the alternative hypothesis. By judic ious choice of estimator and form of restrictions at which to evalua te the statistic, a class of asymptotically optimal statistics is obt ained, among which are numbered some familiar classical statistics. A n application is presented for testing common factor restrictions in a single equation dynamic regression model with moving average distu rbances. Copyright 1987 by The Review of Economic Studies Limited.

We study a dynamic model of duopoly in which firms choose both prices and quantities. If quantity (capacity) choices are relatively inflexible, firms generally carry excess (idle) capacity in equilibrium. Because of this enforcement cost, firms are unable to achieve monopoly levels. This contrasts with models in which which firms compete in either prices or quantities alone. On the other hand, if capacities are flexible firms may be able to sustain monopoly behaviour.

Transfer sensitivity has been seen as a means of strengthening the Pigou-Dalton “principle of transfers”, by ensuring that more weight in the inequality assessment is attached to transfers taking place lower down in the distribution. This paper examines the concept of transfer sensitivity in detail and proposes a new definition that can be usefully applied in general contexts. The definition is based on the notion of “favourable composite transfers” which involve a regressive transfer combined with a simultaneous progressive transfer at a lower income level. The paper proceeds to identify when one distribution can be obtained from another using a sequence of progressive transfers and favourable composite transfers, and hence when all transfer sensitive Pigou-Dalton indices agree on their pairwise inequality ranking. Since agreement occurs in some situations when Pigou-Dalton indices are not unanimous, transfer sensitivity adds power to the “unambiguous” inequality judgements based on the Pigou-Dalton condition and, in particular, enables distributions whose Lorenz curves intersect to be conclusively ranked.

This paper considers a multiperiod model of a regulated firm that has (stationary) private inf ormation, which may be revealed through performance. A "Fairness" arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods. The properties of such arrangements are studied, and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment. Copyright 1987 by The Review of Economic Studies Limited.

An important question is how well competitive models approximate models of large finite economies. For a class of differentiated products models, static Nash equilibria, if they exist, always converge to competition as the number of firms increases. Dynamic Nash equilibria need not so converge. Easily checked conditions for convergence to competition do, however, exist. Copyright 1987 by The Review of Economic Studies Limited.

The duration of employment has been studied by Betancourt and Clague (1981), Winston and McCoy (1974) and Betancourt (1986). Results obtained, summarized in Section 3 below, supposed homotheticity of production functions and a constant speed or intensity of capital usage. The simultaneous cost minimising determination of speed and duration is studied here with an explicit analytical expression being developed relating duration to parameters of interest, including returns to scale and the substitution elasticity, both traditionally measured. The propositions of Betancourt, Clague and Winston and McCoy are then established using differential analysis.