Knowledge that Transforms

North-South trade is studied in a model of vertical product differentiation. The South produces a low-quality spectrum of goods and the North a high-quality spectrum. An increase in the South's population lowers its relative wage, expands the spectrum of Southern goods at the top, and shifts the Northern spectrum upward. An increase in Northern labour productivity raises its relative wage. If the increase is neutral or export-biased, then the South's terms of trade improve, the spectrum of Northern products expands, the spectrum of Southern products contracts, and the volume of trade grows. If it is biased against Northern exports, these effects are reversed. Similar results hold for neutral increases in Southern productivity.

A matching model is analyzed in which firms imperfectly test workers prior to hiring them. If (some) firms hire only workers who pass the test, there is an informational externality; unemployment duration is a signal of productivity. In equilibrium, if it is profitable for a firm to test, it is also profitable for it to condition its hiring decision on duration, hiring those whose duration is less a than critical value. Sensitivity analysis of the latter suggests explanations for the dependence of reemployment probabilities on duration and the instability of the U-V curve.

This paper is about accidents involving two risk-neutral parties. Both parties engage in actions that are profitable but affect the magnitude of possible bilateral accidents. We analyse how the action choices can be decentralized by liability rules that assign the accident costs to the two parties. If we allow for punitive damages, we can implement the first-best actions by a liability rule even if agents are not identical. Under this liability rule some individuals may be in expectation better off in the event of an accident than in the event of no accident. We provide conditions under which this problem does not arise.

This article shows how standard errors can be estimated for a measure of the number of excited degrees of freedom (the correlation dimension), and a measure of the rate of information creation (a proxy for the Kolmogorov entropy), and a measure of instability. These measures are motivated by nonlinear science and chaos theory. The main analytical method is central limit theory of U-statistics for mixing processes. The paper takes a step toward formal hypothesis testing in nonlinear science and chaos theory.

This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.

This paper models the specialist system as a monopolistically competitive market. Demand for the asset is found by solving the investor's portfolio problem with transactions costs. These demand equations are used as inputs in the specialist's price-setting problem. Equilibrium prices and, hence, equilibrium portfolio holdings depend upon the characteristics of the assets and the investors and the number of assets being traded. Conditions are given under which the bid and ask prices will converge to the competitive level as the number of assets increases. Predictive differences between a monopolistically competitive market and a market where specialists collude are also discussed.

This paper concerns the pattern of contributions to a joint project when commitments and enforceable contracts are not available. We analyse a game in which partners alternate in making contributions to the project until the project is completed. Contributions are sunk when they are made. The game has a unique subgame perfect equilibrium path, which is inefficient in the sense that socially desirable projects may not be completed. By contrast, in a “subscription game” in which the cost of the contribution is borne only if and when the contributions committed to the project cover its cost, the outcome is efficient.

An endogenous growth model with multiple assets is developed. Agents who face random future liquidity needs accumulate capital and a liquid, but unproductive asset. The effects of introducing financial intermediation into this environment are considered. Conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital, causing intermediation to be growth promoting. In addition, intermediaries generally reduce socially unnecessary capital liquidation, again tending to promote growth.

Four foreign exchange spot rate series, recorded on an hourly basis for a six-month period in 1986 are examined. A seasonal GARCH model is developed to describe the time-dependent volatility apparent in the percentage nominal return of each currency. Hourly patterns in volatility are found to be remarkably similar across currencies and appear to be related to the opening and closing of the worlds major markets. Robust LM tests designed to deal with the extreme leptokurtosis in the data fails to uncover any evidence of misspecification or the presence of volatility spillover effects between the currencies or across markets.

This paper addresses two topics. First, it nests the consumption and static capital asset pricing model in a unified framework. Second, it tests for market efficiency. The first test is based on the idea that different models price risk on the basis of the covariance with different benchmark portfolios. The test of market efficiency is based on the idea that excess returns should be predictable only if risk and, therefore, second moments are predictable. The empirical results show that the static capital asset pricing model performs better than the consumption capital asset pricing model and that the former model accounts for the effects of dividend yields on expected returns.