Knowledge that Transforms

In this paper, we examine the idea that a general model of consumption should allow for the direct effect of government expenditures in a two-good permanent-income model. We show, given an assumed preference specification, that there is a cointegration restriction implied by an intraperiod first-order condition of the model. This restriction leads to a linear deterministic cointegration relation between government spending, private consumption, and their relative price that is supported by the data. Using this restriction to recover the preference parameters, we estimate the intraperiod elasticity of substitution for both government and private consumption to be about 0.9. Overall, we find consistent empirical evidence in support of our model.

This note estimates the long-run demand for skilled and unskilled labor using panel data for Colombian manufacturing plants. Unobserved heterogeneity and measurement error problems that commonly arise in microdata production estimates are examined. Output measurement errors cause OLS estimators to underestimate the output and wage response of employment demand. Time-difference estimators exaggerate the measurement error biases. Instrumental-variable estimates of the output elasticities are 0.89 and 0.76 and own-wage elasticities are −0.42 and −0.65 for skilled and unskilled labor, respectively. The output elasticity is larger for skilled labor whereas the wage elasticity is larger for unskilled labor in virtually every industry.

The productivity slowdown of the early 1970s continues to puzzle economists. A frequent explanation of this puzzle is that mismeasurement of output has worsened enough to help account for the apparent shortfall of output growth. Griliches (1994) highlighted one channel through which this worsening measurement could occur. He raised the possibility that—because output growth in the service sector likely is undermeasured—the rising share of services has led to greater undermeasurement of overall economic growth. This paper demonstrates that this argument is of little quantitative significance. Even under assumptions most favorable to the hypothesis, the rising share of services has had only a small impact on measurement error. These results—along with evidence from Baily and Gordon (1988)—make mismeasurement of output an improbable explanation for the productivity slowdown in aggregate data.

The rate of time preference (RTP) and the intertemporal elasticity of substitution (IES) are two important factors shaping intertemporal consumption decisions. Models in which the RTP and/or the IES differ systematically between rich and poor households have different empirical and policy implications for economic development, growth, and the distribution of income and consumption from those of standard models in which these parameters are constant across households. In this paper, we estimate a model in which both RTP and IES are allowed to differ across rich and poor households using household-level panel data from India. Our empirical results are consistent with the view that the RTP is constant across poor and rich households, but the IES is larger for the rich than it is for the poor.

This paper reassesses a finding by Martin Prachowny (1993) that the value of the Okun coefficient for the United States (linking unemployment changes to output changes) is only around −0.67 rather than around the more typical value of −2.25. Using a cointegration framework, and the same data sets as Prachowny, we find, for one of the data sets, that the Okun coefficient is much closer to a value of −2.25, which supports previous research work.

This paper estimates a multiple-output hospital cost function using a panel data technique that allows for correlation between unobservable individual effects and observable determinants of behavior. Analysis of 1733 facilities for the period of 1987–1991 yields estimates that differ widely from those obtained from a more standard cross-sectional procedure. While the latter method results in negative and stable measures of ray economies of scale, the panel model indicates positive economies of scale that fall slightly over time.

This paper analyzes the impact of the age structure of the population on Japan's household saving rate by applying cointegration techniques to time-series data for the 1955–1993 period. It finds that the ratio of minors to the working-age population and that of the aged to the working-age population both have a negative and significant impact on the household saving rate. This finding suggests that the life-cycle model applies even in a country such as Japan, in which this model is less likely to apply due to cultural peculiarities such as the greater prevalence of intergenerational transfers.

This paper studies the problems of estimation and inference in the linear trend model yt = α + βt + ut, where ut follows an autoregressive process with largest root ρ and β is the parameter of interest. We contrast asymptotic results for the cases | ρ | < 1 and ρ = 1 and argue that the most useful asymptotic approximations obtain from modeling ρ as local to unity. Asymptotic distributions are derived for the OLS, first-difference, infeasible GLS, and three feasible GLS estimators. These distributions depend on the local-to-unity parameter and a parameter that governs the variance of the initial error term κ. The feasible Cochrane–Orcutt estimator has poor properties, and the feasible Prais–Winsten estimator is the preferred estimator unless the researcher has sharp a priori knowledge about ρ and κ. The paper develops methods for constructing confidence intervals for β that account for uncertainty in ρ and κ. We use these results to estimate growth rates for real per-capita GDP in 128 countries.

An increase in computer usage could improve product and labor quality. Unfortunately, many quality improvements are not incorporated in price indexes. Thus, a quality bias could distort conventional estimates of the marginal productivity of computers, which are based on the assumption that prices are measured without error. Using detailed industry data, we estimate a multiple-indicators, multiple-causes model that allows us to investigate this relationship, while controlling for measurement errors. Our findings suggest that computers are an important source of quality change and that computers are positively related to productivity growth when adjustments are made for measurement errors.

Most previous studies of the dynamics of industry structure, by emphasizing changes in concentration, conceal much of the nature of underlying competitive processes. Here we employ a stochastic firm growth model, estimated on U.K. data of 1979–1986 for over 200 leading firms, to derive joint predictions about the stability of market shares and the change of concentration. We find that changes in the market shares of surviving firms are the dominant influence on concentration, which is typically fairly stable in spite of considerable market-share turbulence. Advertising plays a major role in the dynamics of market shares and, therefore, affects both concentration and turbulence.