Knowledge that Transforms

We adopt the collective approach to consumer behavior with egoistic agents and assume that household consumption is either private or public. We then show that (1) household demand functions have to satisfy testable constraints and (2) some elements of the decision process can be retrieved from observed behavior. These results are based on a conditional demand (m-demand) framework in which household demand functions are directly derived from the individual marginal rates of substitution. Finally, we present an empirical illustration of these theoretical results using the U.S. Consumer Expenditure Survey.

Forward-looking behavior on the part of the monetary authority makes it difficult to estimate the effect of monetary policy interventions on output. We present instrumental variables estimates of the impact of interest rates on quarterly real output for several European countries, using German interest rates as the instrument. These estimates confirm a strong forward-looking bias in least squares estimates that persists even conditional on standard controls for the history of the system. Due to the potential for correlation of output shocks across countries, we interpret our estimates as lower bounds for the effect of monetary policy on real output.

This paper finds that fertility responds to productivity differently depending on the economy's stage of development. At low levels of development, productivity increases will increase fertility, while at the more advanced stages of development, productivity increases lower fertility. During the process, there may be important interaction effects between productivity and education demand. Increases in secondary education demand generate fertility declines regardless of the stage of development.

Using detailed data on traffic speeds for 12 Los Angeles freeway routes from 2001 to 2006, we investigate aggregate behavioral response to gasoline prices. If traffic is free flowing, drivers should slow to more fuel-efficient speeds as the price of gasoline rises. However, we find little evidence that drivers respond to increased fuel costs by slowing down. When congestion constrains traffic flow, freeway speeds should rise with gasoline price, and we find a $1.00 increase in price raises average freeway speeds by approximately 7% during rush-hour periods. Finally, we introduce a novel method to calculate the short-run vehicle miles traveled demand elasticity during rush hour.

This paper argues that localized price spikes should be a regular feature of competitive commodity markets. It develops a rational expectations model of physical arbitrage in which trade takes time, and shows that inventory management plays a crucial role in the way regional prices are determined. In equilibrium, arbitrageurs choose export quantities to ensure inventories in the importing center regularly fall to 0. They earn enough profits from high prices on these occasions to offset small losses at other times. An analysis of detailed data from Chicago and New York corn markets provides empirical support for the model.

We propose a new approach to the international comparison of real GDP, as measured from the output-side. The traditional Gary-Khamis system, which measures real GDP from the expenditure-side, is modified to include differences in the terms of trade between countries. It is shown that this system has a strictly positive solution under mild assumptions. On the basis of a sample of 151 countries in 1996, it is shown that differences between real GDP measured from the expenditure-side and output-side can be substantial, especially for small open economies. We also obtain cross-country measures of “real openness” and the terms of trade.

Two papers published in this journal (Jantti, 1994, and Mocan, 1999), among others, find empirical evidence that “increases in structural unemployment have a substantial aggravating impact on income inequality.” The main point of this work is to show that standard job-search models can help us understand this empirical regularity. As a byproduct of the analysis, the paper also provides a closed-form general expression that enables direct calculation of the Gini coefficient of wage-income inequality as a function of any arbitrary initial distribution of wage offers. Three numerical examples illustrate the results.

The contingent valuation method for estimating willingness to pay for public goods typically adopts a single referendum question format, which is relatively statistically inefficient. As an alternative, Cooper, Hanemann, and Signorello (2002) propose the one-and-one-half bound (OOHB) format, allowing researchers to question respondents about both a lower and higher limit on project costs, thereby securing substantial gains in statistical efficiency. Using an experimental design, we find that responses to OOHB valuation questions fail crucial tests of procedural invariance. We test various competing models of observed response patterns including strategic misrepresentation of standard preferences and nonstandard models of preference formation.

We exploit variation in gasoline and cigarettes taxes in adjacent political jurisdictions for northern Illinois and Indiana to examine consumers' trade-off between prices and travel. We develop a model that relates activity in the retail gasoline industry around the tax borders to consumer locations. Our results indicate that the willingness of a typical Chicagoland consumer to travel an additional mile to buy gasoline corresponds to about $0.065 to $0.084 per gallon. According to our estimates, the observed area of Chicago, the jurisdiction with the highest taxes, is missing approximately 40% of the capacity that would exist were taxes equalized.

We propose an industry-level index of capital resalability—the share of used capital in aggregate industry capital expenditure—that relates (inversely) to sunkenness of investments. Using data from U.S. manufacturing, we then test the effect of capital resalability on industry productivity dispersion, mean productivity, and industry concentration. As predicted by standard models of industry equilibrium with heterogeneous firms, we find that increases in capital resalability are associated with a reduction in productivity dispersion, and an increase in the mean and median of the productivity distribution. Furthermore, we find that capital resalability is negatively correlated with industry concentration.