Knowledge that Transforms

In a recent article in this Review (Kuhn, 1987), Peter Kuhn seeks to assess the relative importance of statistical and other types of evidence in determining women's perceived level of discrimination. The author's point of departure is what he characterizes as a surprising relationship. He finds a robust, but statistically insignificant, negative correlation between the conventional measure of salary discrimination (statistical in Kuhn's terminology) facing a female worker and the probability that the worker will report discrimination on a confidential survey. In other words, workers facing higher levels of measured salary discrimination are less likely to perceive discrimination. Kuhn explains this finding by hypothesizing the existence of some other evidence (4nonstatistical evidence), which, in addition to the salary differential, leads women to recognize and report sex discrimination in their employment. If the quantity of nonstatistical evidence is low, according to Kuhn, women may not report discrimination even if the statistically measured salary differential is large. Kuhn assumes that the quantity of nonstatistical evidence, which is observed by the worker, but not the researcher, is a function of the worker's observed human capital characteristics. Finally, Kuhn evaluates the effect of the nonstatistical evidence using the worker's observed characteristics as a proxy for the unobserved nonstatistical evidence. According to Kuhn's findings, the unobserved variable is a more important determinant of the worker's decision to report discrimination than is the level of statistically measured wage discrimination. Kuhn uses these results to question the importance of recent Supreme Court decisions allowing statistical measures of discrimination to be admitted into evidence in civil sex discrimination suits. As he concludes that such evidence is not the primary factor influencing workers' reporting behavior, allowing these measures to be presented in court should not lead to a large increase in litigation. In this comment, we argue that Kuhn's result, that workers facing a high level of measured discrimination are less likely to report the discrimination, may be explained by incorporating the quality of information, employers' preferences, and the costs of discrimination into the model. We derive conditions under which the negative correlation between measured and reported salary discrimination may be seen as the result of a rational balancing by employers of the benefits and costs of discrimination. Briefly, employers are more likely to discriminate when employees have less accurate information and the probability of reporting, and hence detection, is low. We also offer statistical evidence from the academic labor market to illustrate this alternative hypothesis.

In an earlier paper (Raymond C. Battalio, John H. Kagel, and Don N. Mac Donald, 1985), we reported Allais-type violations of the independence axiom of expected utility theory with rats choosing over positively valued payoffs (food rewards). This note extends this research, examining animals' choices over losses, testing for (1) standard Allais-type common ratio effect violations of expected utility theory and (2) fanning out of indifference curves for random prospects, tests of Mark J. Machina's (1982, 1987) hypothesis II (hereafter H2), over previously unexplored areas of the unit probability triangle. Results from a parallel series of experiments using human subjects choosing over real losses are also reported. For both rats and people, we find standard Allais-type violations of expected utility theory and a systematic failure of the fanning out hypothesis in the southeast corner of the unit probability triangle, in the case of losses. Thus, the fanning out hypothesis (Machina 1982, 1987) cannot provide a satisfactory explanation for behavioral deviations from expected utility theory.

Sufficient evidence now exists to confirm a strong rising trend in wage inequality in the United States since at least the mid-1970s. Still elusive is a definitive explanation for this tendency. In the pursuit of one, researchers have now begun to turn their attention to two factors: 1) on the supply side, an apparent rapid growth in the rates of return to education; and 2) on the demand side, an acceleration in industrial restructuring, in particular, the shift in employment from goods production to services. In this connection, the decline in unionization and the expanded exposure of the manufacturing sector to international competition have received renewed consideration. This paper contends that it is precisely the increasing returns to schooling in both goods and services in combination with the shift in employment between the two that is responsible for the recent growth in wage dispersion.

A nonparametric analysis of technology, technical change, and productivity is presented in the context of cost minimizing behavior. A number of nonparametric tests concerning the existence and nature of technical change are applied to U.S. and Japanese manufacturing data. Nonparametric measures of technical change are presented.

The federal income tax has been under attack by the economics profession for more than a decade. The attack comes from two directions: supply-siders who believe that progressive income taxation impairs economic incentives,' and more traditional economists who would substitute a progressive expenditure tax for the income tax.2 At one time, support for the expenditure tax was confined to a few members of our profession, including such distinguished names as John Stuart Mill, Irving Fisher, Nicholas Kaldor, and James Meade. Today, it is fair to say that many, if not most, economists favor the expenditure tax or a flat rate income tax. This group has joined the opponents of progressive taxation in the attack on the income tax. Despite an incessant barrage from both groups, no country in the world is planning to abandon the income tax or is even considering a personal expenditure tax. A wave of tax reform, beginning with the U.S. reform in 1986, has been sweeping the world, aimed at improving the income tax, not at eliminating it. Tax preferences formerly regarded as sacrosanct are being removed and there is a distinct movement toward comprehensive income taxation.3 However, individual income tax rates are being cut, tax progressivity has been declining almost everywhere, and reliance on the income tax has been diminishing. It will come as no surprise to this audience that I approve of the base-broadening feature of the current tax reform movement, but I believe that the reduction in the redistributive effect of the income tax has gone too far. In this paper, I shall show that the progressivity of the U.S. tax system-never very pronounced, except during and immediately after the two world wars-has been declining for more than two decades and that the Tax Reform Act of 1986 reversed this decline, but only slightly. Consequently, we have a long way to go to improve the equity of the tax system. I believe this can be done without punitive tax rates that will hurt economic incentives. I begin with a brief review of recent changes in the U.S. distribution of income and follow this with an analysis of the effect of taxes on the income distribution. I next examine arguments for and against the income tax, with particular emphasis on its effects on economic incentives and its merits when compared with the expenditure tax. I then evaluate the income tax as it emerged from the 1986 tax reform and conclude with tJoseph Pechman passed away on August 19, 1989. His Presidential address was delivered at the onehundred second meeting of the American Economic Association, December 29, 1989, Atlanta, Georgia. *Joseph A. Pechman, Economic Studies Program, The Brookings Institution, 1775 Massachusetts Avenue NW, Washington, DC 20036. I have benefited from the comments and suggestions on an earlier draft of this paper by Henry J. Aaron, Richard Goode, Jane G. Gravelle, Robert W. Hartman, Donald W. Kiefer, Herbert E. Klarman, Robert D. Reischauer, Clifford M. Winston, and H. Peyton Young, but they should not be held responsible for the views expressed in this paper. I am indebted to Richard Kasten for various simulations. I am also grateful to Stephen J. Kastenberg for research assistance and to Diane A. Shugart, Valerie M. Owens, and Sara C. Hufham for secretarial assistance. 'Some of the more extreme supply siders argued that large tax cuts pay for themselves (see, for example, Laffer, 1981), but I believe it is fair to say that this view has been totally discredited. For a more reasonable supply-side view, see the Economic Report of the President 1982. 2See, for example, Michael J. Boskin (1978), David E. Bradford (1980), Charles L. Ballard, Don Fullerton, John Shoven and John Whalley (1985), Paul Courant and Edward Gramlich (1982), Martin Feldstein (1978), Robert Hall and Alvin Rabushka (1985), John Kay and Mervyn King (1983), Charles McLure (1987), Mieszkowski (1980), and Lawrence Summers (1981). It is interesting that the recent popularity of the expenditure tax among economists was stimulated by a tax lawyer, William D. Andrews (1974). 3See Pechman (1988).

One question development economists are especially interested in but so far left unanswered is: how would the societal income distribution be affected by introducing a family-planning program to reduce the reproduction rate of the poor which is usually high in developing countries? The purpose of this paper is to search for analytical answers to this question. We are able to make definite comparisons about some class of inequality measures of the steady-state societal income distributions and these comparisons provide strong theoretical support in favor of the above-mentioned family-planning program. (EXCERPT)

A sequential equilibrium model of private antitrust enforcement is presented. Consumers have incomplete information about cartel costs and cannot accurately estimate a priori the damage recovery from an antitrust action. Consumers are able to infer cartel costs from the equilibrium pricing strategy of firms. The universal divinity criterion is used to characterize the sequential equilibrium. It is shown that, for a sufficiently large damage multiple, antitrust enforcement effectively increases social welfare.

This paper presents a definition of the long-run equilibrium exchange rate that emphasizes the role of supply factors in addition to the more traditional price differential variables. Using this definition, we estimate the long-run equilibrium yen-dollar rate during the period of 1973-87. This calculation demonstrates that supply factors are in fact very important determinants of the long-run movement of the exchange rate. Despite the central role the exchange rates play in the economy, economists seem to doubt their own ability to explain, let alone predict, exchange rate movements. The reason is that in many cases structural exchange rate equations do not significantly outperform various other models that do not appeal to economic theory such as the random walk. (See, for example, Richard Meese and Kenneth Rogoff, 1983.) While we also share this pessimism concerning our ability to forecast exchange rates in the short run (intradaily to monthly or quarterly), we argue that it is possible to reasonably explain, if not predict, long-run movements. The long-run equilibrium rate is most often thought to be determined by purchasing power parity (PPP), which tends to focus only on price differentials. Medium-run divergences of the exchange rate from the long-run equilibrium are therefore commonly identified with fluctuations in the inflation-adjusted real exchange rate. This paper demonstrates, however, that the simple PPP is unsatisfactory because it emphasizes only the inflation differential. In the more elaborated theory of purchasing power parity, of course, the potential importance of supply-side real factors as critical determinants of the exchange rate has been well recognized. (See, for example, John M. Keynes, 1923; Rudiger Dornbusch, Stanley Fischer, and Paul A. Samuelson, 1977; Alan Stockman, 1980.) Nevertheless, in empirical applications and policy discussions these supply-side real factors have been curiously ignored: To our knowledge, an exception is David Hsieh (1982). The main point of this paper is to show that these supply-side factors actually have been very important determinants of the yen-dollar rate over the period of 1973 to 1987.

The preceding articles by Martin Feldstein and Douglas Elmendorf and by Franco Modigliani and Arlhe Sterling give us a welcome opportunity to return to the effects of fiscal policy on private consumption. At stake in this debate, we believe, is a potential paradigm change-from what Kormendi (1983) termed the Standard Approach, which bases private consumption on disposable personal income, to what he termed the Consolidated Approach, which bases consumption on aggregate income, government spending, and transfer payments, each with separate effects. The Standard Approach excludes Ricardian equivalence a priori. The Consolidated Approach not only incorporates Ricardian equivalence but, in its augmented form, allows one to nest the various hypotheses associated with the two approaches. Feldstein and Elmendorf argue that Kormendi's (1983) results (and implicitly those of Kormendi and Meguire, 1986), which reject the Standard Approach in favor of the Consolidated/Ricardian alternative, are not robust to the exclusion of data from World War II and other specification changes. Modigliani and Sterling argue that accounting for temporary taxes reverses our rebuttal of their 1986 comment. We first take up the challenge of Feldstein and Elmendorf before turning to Modigliani and Sterling. We then assess the validity of our preference for estimating in differences, by testing whether consumption, income, and the fiscal variables are cointegrated. Finally, we summarize what can be learned from the debate. I. Feldstein and Elmendorf