Knowledge that Transforms

To make high-quality research more accessible and easier to explore.

Fields:

Power and Linear Income Taxes: An Example

Econometrica 1986 54(1), 87
[This paper amends the Aumann and Kurz single commodity "Power and Taxes" model in several ways: A linear production technology is assumed, incentive effects are introduced, and tax schedules are restricted to be linear. A theorem is stated which characterizes the linear tax schedules which are the NTU solutions of the model. The solutions of an example are computed, providing a perspective on a result of the Aumann and Kurz model that equilibrium marginal tax rates are not less than 50 per cent. For this example, equilibrium marginal tax rates are less than 50 per cent; incentive effects appear to be responsible for the low tax rates.]

Theoretic Models: Mathematical Form and Economic Content

Econometrica 1986 54(6), 1259
[Changes in the mathematical form of theoretic models of an economy during the past four decades and the growth of mathematical economics in that period are considered in relation to each other and to the development of the Econometric Society. The fit of the mathematical form to the economic content of theoretic models, their separation in a completed axiomatic theory and their interplay in its elaboration are examined. Consequences of the axiomatization of economic theory are analyzed.]

Neighborhood Systems for Production Sets with Indivisibilities

Econometrica 1986 54(3), 507
A production set with indivisibilities is described by an activity analysis matrix with activity levels which can assume arbitrary integral values. A neighborhood system is an association with each integral vector of activity levels of a finite set of neighboring vectors. The neighborhood relation is assumed to be symmetric and translation invariant. Each such neighborhood system can be used to define a local maximum for the associated integer programs obtained by selecting a single commodity whose level is to be maximized subject to specified factor endowments of the remaining commodities. It is shown that each technology matrix (subject to mild regularity assumptions) has a unique, minimal neighborhood system for which a local maximum is global. The complexity of such minimal neighborhood systems is examined for several examples.

Reporting Errors and Labor Market Dynamics

Econometrica 1986 54(6), 1319
[This paper estimates the incidence of response errors in the Current Population Survey. It proposes a procedure for adjusting the Bureau of Labor Statistics' gross flows data on labor market transitions to account for these errors. Although the findings are not definitive because the procedure makes particular assumptions regarding the stochastic process generating response errors, they illustrate the potentially substantial effect of response errors on studies of labor market behavior. The adjustment procedure suggests that because measurement errors give rise to spurious transitions between labor market states, the labor market may be less dynamic than previously thought. The results imply that conventional measures may understate the duration of unemployment by as much as eighty per cent, and overstate the frequency of labor force entry and exit by even more.]

Borrowing Constraints and Aggregate Economic Activity

Econometrica 1986 54(1), 23
A model of aggregate economic activity is formulated which enmphasizes the effects of borrowing constraints in the presence of uninsurable risk. An important determinant of current income level is shown to be the cross-sectional distribution of wealth. As this distribution evolves endogenously, the model is capable of producing rich dynamics from a simple specification of exogenous shocks. The model shows that this phenomena can contribute to observed price volatility. IT IS COMMONLY THOUGHT that individuals have only limited opportunities to borrow against future labor income and cannot totally insure all types of risk. It has also been suggested that such departures from the presumptive norm of frictionless, complete information capital markets may have implications for aggregate economic activity. AlthLough there has been some work analyzing the implications of borrowing constraints for individual savings behavior (18, 2, 8), there has been no systematic analysis of how such borrowing constraints will affect the time series properties of output, prices, and interest rates. In this paper, we present a completely specified infinitely lived two agent equilibrium model which emphasizes the roles of borrowing constraint and uninsured risk for affecting aggregate outcomes. Specifically we assume that agents are prohibited from ever having negative nonhuman wealth. The model has the central feature that there is no aggregate uncertainty, but each agent's own productive opportunities are stochastic. If there were a full set of Arrow- Debreu contingent claim markets each agent could attain a certain consumption stream and the resulting allocation and (implicit) relative prices would be constant through time. However, we assume that such markets do not exist. Rather, we assume that at each point in time agents may trade only the single durable asset for the single perishable consumption good. This may be interpreted either as fiat mon ay with a fixed own nominal return of zero, or as claims to productive capital which emits a fixed exogenous flow of the consumption good. We assume also that output may be produced by labor. However, only one of the two agents is productive at any instant in time. The duration of time over which a single agent is productive is assumed to be random, and, for analytical simplicity, is assumed to be generated by a Poisson counting process. The resulting allocation has the property that the agent who is not productive exchanges some of his

The Durable Goods Monopolist and Consistency with Increasing Costs

Econometrica 1986 54(2), 275
[This paper derives the equilibrium behavior of a monopoly producer of a durable good in a continuous time framework. We show that if purchasers are subject to rational expectations then a monopolist who cannot precommit to a particular production strategy produces more at every instant of time than does a monopolist who can precommit. Asymptotically the total production of a monopolist who cannot precommit is equal to the welfare maximizing producer's; however the monopolist produces more slowly, as long as firms are subject to increasing marginal costs. Thus we formally demonstrate that the original Coase intuition regarding the efficiency of the monopoly producer of a durable good only holds in the case of constant marginal costs.]