Knowledge that Transforms

This paper addresses the issue of credibility from an econometric perspective. It develops a rational expectations model of inflation in which the dynamics are driven by the level of government spending and by the effect of past inflation rates on the value of real taxes. Government expenditure is modeled as an exogenous autoregressive process subject to discrete changes in regime. The regimes are defined by whether the level of spending is or is not consistent with the rate of inflation targeted by the government as part of a stabilization program. In making their money demand decision, the agents need to construct probability inferences regarding the state of the expenditure process. Credibility is quantified by the agents' inferred probability that the joint observation of inflation, the nominal interest rate, and government spending is generated by the reformed expenditure regime. In an application to Israel, results indicate that the failed stabilization program of November 1984 was less than fully credible to the agents. The uncertainty about the true nature of the expenditure process partially explains the volatility of the rate of inflation in this period. In contrast, for the July 1985 program the agents correctly inferred a change in the regime driving the government spending process.

The efficient redistribution hypothesis says that no available government policies are Pareto superior to observed government policies. Efficient redistribution from government policy is a central tenet of much recent theoretical and applied political economy literature. In this paper, limitations of previous attempts to test the efficient redistribution hypothesis are discussed, and an alternative test of the efficient redistribution hypothesis that uses vector optimization theory and bootstrap methodology is presented.

Altruism has the well-known neutrality implication that the family's demand for commodities is invariant to the division of resources within the family. I test this by estimating Engel curves on a cross section of Japanese extended families forming two-generation households. I find that the pattern of food expenditure is significantly affected by the division of resources. The food components whose budget share increases with the older generation's share of household income are precisely those favored by the old such as cereal, seafood, and vegetables.

Regulatory programs that restrict output levels often impose restrictions on the transfer of rights to produce or to use particular inputs. In this paper, we use a unique cross-section, time-series data set from North Carolina to quantify the welfare effects of transfer restrictions for poundage quota under the U.S. flue-cured tobacco program. We find that the deadweight costs of such restrictions are small but that the distributional effects are substantial. We analyze congressional testimony on quota transfer legislation and conclude that our estimates of the distributional effects are consistent with expressed views of market participants.

This paper examines the congressional passage of the American minimum wage law, the Fair Labor Standards Act of 1938. Voting on the act is modeled as a function of the concentration of the constituencies for minimum wage legislation, North-South differentials, and legislator ideology. It is shown that the House radically altered the final content of the bill, abandoning a proposed Wages and Hours Board with discretionary powers to determine minimum wages in favor of a flat rate following the objections of several interest groups; North-South divisions over the bill had little influence over congressional voting; and the influence of constituent groups increased relative to legislators' ideology as the bill became an important election issue.

In standard durable-goods monopoly models, both the set of buyers and the set of prices are assumed to be continua. If the set of buyers is finite, the perfectly discriminating monopoly outcome is a unique subgame perfect equilibrium when the seller is sufficiently patient. Introducing instead a smallest unit of account yields the Coasian outcome as a generically unique subgame perfect equilibrium for patient enough buyers. A folk theorem is obtained if both sets are finite. These results reflect a strategic disadvantage of having to make moves with a large impact on other players' payoffs. The analysis is extended to durable-goods oligopoly.

This paper investigates the claim, often put forth by real business cycle proponents, that the poor performance of their models in matching real-world aggregate labor market behavior is due to the fact that observed real wage payments do not correspond to the actual marginal productivity of labor but contain an insurance component that cannot be accounted for by the Walrasian pricing mechanism. To test this idea, we dispense with the Walrasian description of the labor market and introduce contractual arrangements between employees and employers. Assuming that employees are prevented from accessing capital markets and are more risk averse than employers, we use the theory of optimal contracts to derive an equilibrium relation between aggregate states of the economy and wage-labor outcomes. This contractual arrangement is then embedded into a standard one-sector, stochastic neoclassical growth model in order to look at the business cycle implications of the contractual hypothesis. The resulting dynamic equilibrium relations are then parameterized and studied by means of standard numerical approximation techniques. The quantitative properties of our model appear to be somewhat encouraging. We have examined different contractual environments, and in all circumstances the contracts-based equilibrium performs better than standard ones with regard to the labor market variables and at least as well with regard to the other aggregate macroeconomic variables. The present paper reports only the simulation results relative to what we consider the most empirically relevant cases.

This paper develops implications of the selection hypothesis of Priest and Klein for the relationship between trial rates and plaintiff win rates. I find strong evidence for the selection hypothesis in estimated relationships between trial rates and plaintiff win rates at trial across case types and judges. I then structurally estimate the model on judge data, yielding estimates of the model's major parameters (the decision standard, the degree of stake asymmetry, and the uncertainty parameter) for each of three major case types, contracts, property rights, and torts.