Knowledge that Transforms

Learning-by-doing and increasing returns are often perceived to have similar implications for market structure and conduct. We analyse this in the context of an infinite-horizon price-setting game. Learning is shown to not reduce the viability of market-sharing collusion between a given number of firms, whereas intra-period increasing returns invariably does. We subsequently develop a model where the number of active firms is determined endogenously, under the assumption that the post-entry game is collusive. In this model, learning has no effect on concentration, while scale economies increase concentration.

The authors formulate a simultaneous-equation model to explain the wages, output, education, and quit propensities of a sample of production workers. Their principal finding is that individuals that choose more education than they would expect from their observed characteristics have lower than expected quit propensities. This relationship would bias standard estimates of rates of return to education. The authors also find that the output of nonwhites was no lower than that of whites, although their wages on previous jobs were lower, and that workers with high levels of output were more likely to quit than were workers whose output was average. Copyright 1991 by The Review of Economic Studies Limited.

This paper extends the analysis of wage determination in a search environment to the case where firms employ numerous individuals and benefit from team production. It is shown that monopsony wage offers may display perverse comparative statics properties. Interesting problems then arise concerning the uniqueness of search equilibria. These problems are addressed in a simple equilibrium setting where it is shown that multiple equilibria may exist, with an equilibrium that displays bootstrap properties. Our results suggest the possibility of explaining unsatisfactory equilibria as the consequence of profit-maximizing wage choices in environments with imperfectly coordinated trading.

Decisions made under ongoing uncertainty and costly reversibility entail a range of the state variable where inaction is optimal, which in turn produces hysteresis--permanent effects of temporary shifts. The range is usually defined by nonlinear equations that need numerical solutions. In this paper, a technique of analytical approximations is developed and applied to two models--menu costs and investment. The resulting explicit solutions help clarify why hysteresis is important even for small irreversibility. In the menu cost model, hysteresis is two orders of magnitude larger than under the Akerlof-Yellen or Mankiw assumptions. Copyright 1991 by The Review of Economic Studies Limited.

The paper compares implications of three kinds of models of households' consumption behaviour: the basic permanent-income model, several models of liquidity-constrained households, and a model of an informationally-constrained efficient contract. These models are distinguished in terms of implications regarding the present discounted values of net trades to households at various levels of temporary income, and the households' marginal rates of substitution. Martingale consumption is studied as an approximation to the predicted consumption process of the efficient-contract model.

This paper develops the stochastic theory of distribution with a dynamic model which focuses on the role of incomplete insurance in generating inequality. Unlike previous work, our approach takes explicit account of the reason for market incompleteness in modeling agents' behaviour; in particular, the amount of risk borne is endogenous. Using a model of growth with altruism in which agents are risk-averse and there is moral hazard, we show that lineage wealth follows a Markov process which converges globally to an ergodic distribution; this also represents the long-run population distribution of wealth. We discuss the role of particular assumptions, such as availability of production loans and unboundedness of utility, in yielding the qualitative properties of the distribution of wealth, the choice of “occupation” and the prevention of poverty traps.

This paper examines the empirical relation between nominal exchange rates and macroeconomic fundamentals for five major OECD countries between 1974 and 1987. Five theoretical models of exchange rate determination are considered. Potential non-linearities are examined using a variety of parametric and nonparametric techniques. The authors find that the poor explanatory power of the models considered cannot be attributed to nonlinearities, arising from time-deformation or improper functional form. Copyright 1991 by The Review of Economic Studies Limited.

The main result of this paper is to characterize the class of two-person social choice correspondences which are Nash-implementable. The characterization result is used to formulate domain restrictions which allow the construction of non-dictatorial and Pareto-efficient social choice correspondences which are Nash-implementable.

The Kullback-Leibler information criterion is used as a basis for one-sided testing of nested hypothesis. No distributional form is assumed, so nonparametric density estimation is used to form that test statistic. In order to obtain a normal null limiting distribution, a form of weighting is employed. The test is also shown to be consistent against a class of alternatives. The exposition focuses on testing for serial independence in time series, with a small application to testing the random walk hypothesis for exchange rate series, and tests of some other hypotheses of econometric interest are briefly described. Copyright 1991 by The Review of Economic Studies Limited.

Efficiency is analyzed in a Walrasian model of labor markets with adverse selection. Workers are distinguished by productivity and preferences; firms are distinguished by productivity and ability to distinguish workers. An equilibrium is defined to be constrained efficient if it cannot be dominated by an incomplete mechanism. The set of equilibria turns out to have an interesting structure. Within the class of strongly monotonic economies, there exists at least one efficient equilibrium. Under slightly stronger conditions, an equilibrium is dominated by an incomplete mechanism only if it can be dominated by another equilibrium, that is, equilibria are Pareto optimal. Copyright 1991 by The Review of Economic Studies Limited.