Knowledge that Transforms

This paper is concerned with the measurement of aggregate growth rates, where the aggregation is over time. The paper demonstrates that any mechanical procedures for computing aggregate growth rate has welfare implications, and value judgments implicit in various commonly used procedures are not appealing. A new procedure suggested in the paper captures all the essential properties of a welfare function. The methodology of the paper is applied to an analysis of growth rates of per capita GNP of 83 developing countries during the 1970–1987 period.

This paper examines the wealth mobility of a panel of mature American men between 1966 and 1981. Although greater persistence exists than within the income distribution, a sizeable degree of movement within the wealth distribution is observed. Slightly more than half of the households changed quintiles. However, the magnitude of the movement was modest, with 78% of the moves to an adjacent quintile. Movements into either extreme of the wealth distribution were relatively rare. Really big moves, from the poorest to richest group, were extremely rare, with the probability of a black making such a move within fifteen years approximately zero.

Performance may enhance survival probability. When it does, the induced lack of randomness challenges robust and unbiased inference. If survivors are sorted into two groups based on past performance, spurious persistence has been demonstrated if variance in performance is heterogeneous. However, as we show both theoretically and with simulations, if performance is categorized finely, the spurious persistence will be J-shaped; that is, at the bottom better performance in one period “predicts” worse performance for another period. We propose a simple t-test applied to the quadratic coefficient in a regression to distinguish between a spurious J-shape and monotonic patterns. Mutual funds, our example, exhibit the monotonically increasing pattern produced by true performance persistence.

This paper introduces an improved procedure for estimating capital asset price indexes. We jointly estimate conventional hedonic and repeat sales models via maximum-likelihood procedures, thereby taking advantage of the unique features of the individual models and using all the data that are available. Our model captures depreciation within the repeat sales model and accounts for serial correlation in hedonic data. The improvement in precision obtained by estimating the joint model is illustrated by smaller standard errors and narrower interval estimates for the resulting price indexes. We also carry out a simulation experiment that shows estimation errors significantly smaller using the joint estimation technique than either of the individual models or the GLS estimator of Case and Quigley (1991).

In a recent paper Lichtenberg (1994) proposes a test of the convergence hypothesis that the variance of productivity across countries decreases over time. He argues that the ratio of the variance in the first period to that in the last period of the time series is F-distributed but overlooks the dependency between these two variances. As a consequence, probabilities of committing a type II error of incorrectly rejecting the convergence hypothesis are large. This problem manifests most strongly in short time periods. Lichtenberg, for example, rejects the convergence hypothesis for a data set of 22 OECD countries over the 1960–1985 period.

Data on brothers and on fathers and sons from the National Longitudinal Survey are used to consider the impact of omitted variables and measurement errors on the economic returns to schooling. The analysis suggests that the upward bias in estimated returns due to omitted variables is likely offset by an equal downward bias resulting from measurement errors in reported schooling. Controlling for both of these potential sources of bias yields results comparable to conventional regression estimates of the economic return to schooling.

In their seminal study on interindustry wage differentials, Krueger and Summers (1988) expressed estimated industry differences as deviations from a hypothetical employment-share weighted mean. Virtually the whole labor literature has followed their approach, yet most studies avoid calculating the exact standard errors of these differences. This note relates this problem to the general literature on dummy variables and their interpretation. It is demonstrated that the implementation of exact estimates involves only simple matrix operations, making any approximative procedure difficult to justify. Disregarding this conclusion will in practice, even with large samples, lead to substantially overstated standard errors of the estimated differentials and to the understatement of their overall variability.

Equality and efficiency are key issues in educational reform. Here the authors analyze the efficiency and equality consequences of various school finance reforms using a cost-indirect output distance function. This function readily models multiple-output production under conditions of budgetary constraint, and provides a natural measure of performance that is closely related to Farrell-type measures of efficiency. The analysis suggests that despite school district inefficiency, finance reforms can affect student achievement. However, any potential gains in output from redistribution are dwarfed by the potential gains from increased efficiency. More strikingly, the analysis demonstrates that budgetary reforms designed to equalize expenditures could actually increase the inequality of student achievement.

This paper studies exchange rate pass-through in U.S. manufacturing industries and its cross-sectional variation. Through an adapted Dixit–Stiglitz model of product differentiation, the paper predicts that pass-through is positively related to the degree of product differentiation and inversely related to the elasticity of marginal cost with respect to output. Empirical estimates of the pass-through elasticities show that pass-through is incomplete and varies across industries. The degree of pass-through is found to be positively correlated to different proxies for product differentiation, and negatively to a proxy for the elasticity of marginal cost.

We assess the cost-reducing impacts of increasing stocks of “high-tech” equipment (O capital). Our empirical analysis is based on a dynamic production theory model and annual data for two-digit U.S. manufacturing industries (1952–1991). We find evidence of overinvestment in O capital in the mid to late 1980s, following a period of strong investment incentives in the late 1970s. By the end of the 1980s, however, the returns to investment and falling prices for O capital more than justified the high investment levels in nondurable-goods industries, and the benefit–cost ratio was also increasing for durable-goods industries. The underlying substitution patterns suggest that high-tech capital expansion increases demand for most capital and noncapital inputs overall, but saves on materials inputs. In durables industries, however, both energy and “other” capital appear somewhat substitutable with O capital, and in nondurables industries increasing high-tech intensity may be a factor underlying stagnating labor demand.“We see computers everywhere except in the productivity statistics.”Attributed to Robert M. Solow