Knowledge that Transforms

This paper presents and implements statistical tests of stock-market forecastability and volatility that are immune from the severe statistical problems of earlier tests. It finds that although the null hypothesis of market efficiency is rejected, the rejections are only marginal. The paper also shows how volatility tests and recent regression tests are closely related, and demonstrates that when finite sample biases are taken into account, regression tests also fail to provide strong evidence of violations of the conventional valuation model.

We present estimates of the union wage effect controlling for unmeasured individual effects, and subject the conventional fixed-effects model to specification tests. For PSID men the union wage effect is 5-8% after controlling for person effects, as opposed to 20% in cross-section. Omnibus tests based on an unrestricted reduced form and instrumental variables tests based on differencing are consistent with conventional models. Tests based on comparing those who enter and leave union coverage provide evidence against the usual model. We find evidence for interactions between union status and other variables even after controlling for person effects.

This paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi-period (including infinite-period), continuum-agent, unobservedeffort economy. Actual solutions are displayed illustrating cross-sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time. The optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full-information economy and various restricted-contracting regimes.

A. Postlewaite (1979) and W. Thomson (1987) showed that every individually-rational and Pareto-optimal allocation mechanism is subject to the problem of withholding with full recovery (Postlewaite) or partial recovery (Thomson). The author generalizes these results and show that the assumption of individual rationality can be disposed of in both results: the problem of withholding is present for any allocation mechanism in the class of Pareto-optimal mechanisms, whether it is individually rational or not and whether agents are able to recover the withheld bundle fully or only partially.

This paper extends recent developments in general equilibrium theory and applies them to the problem of measuring the real output of an economy's insurance sector. These developments permit a priced commodity to be a complex incentive-compatible contract. These contracts are not bundles of more basic commodities. These contracts are elementary in the same sense that event-contingent goods deliveries are elementary in the Arrow- Debreu framework.

In this paper, the author considers a risk-neutral competitive firm which is uncertain about the true state of demand. He builds upon K. J. Arrow (1968) by demonstrating that the irreversibility of investment in physical capital together with the anticipation of receiving information and of learning the state of demand lead to (1) cautious investment behavior and, hence, to lower investment levels; (2) a time-varying risk premium or marginal "adjustment cost"; and (3) a gradual adjustment of the capital stock to the desired level.

Our subject is estimation and inference concerning long-run economic equilibria in models with stochastic trends. An asymptotic theory is provided to analyze a menu of currently existing estimators of cointegrated systems. We study in detail the single-equation ECM (SEECM) approach of Hendry. Our theoretical results lead to prescriptions for empirical work, such as specifying SEECM's nonlinearly and including lagged equilibrium relationships rather than lagged differences of the dependent variable as covariates. Simulations support these prescriptions, and point to problems of overfitting not encountered in the semiparametric approach of Phillips and Hansen (1990).

This paper suggests tests for the heterogeneity of parameters in linear least-squares estimation. The tests are based on the properties of resampled estimates, and test the hypotheses that the parameters have a common mean, or that they are independently and identically distributed. The tests can be viewed as the analogue of those based on recursive residuals, in cross-sectional models. We analyse the properties of tests based on jack-knifed estimates in the linear regression model, and compare their performance in a small empirical application.

A competitive, dynamic model of entry into a new industry is set up and both its positive and normative aspects are studied. The main assumptions are that entry is sequential, that it occurs under imperfect information on the size of the market and that better information becomes available as time goes on. The gradual improvement in information is due to the fact that later waves of entrants are able to observe the profitability of earlier entrants. The major results reported here (under suitable restrictions) are that the equilibrium rate of entry is monotonically decreasing over time, and that—at any given point in time—it is smaller than the socially optimal one.

An organization's promotion decision between two workers is modeled as a problem of boundedly rational learning about ability. The decisionmaker can bias noisy rank-order contests sequentially, thereby changing the information they convey. The optimal final-period bias favors the "leader," reinforcing his likely ability advantage. When optimally biased rank-order information is a sufficient statistic for cardinal information, the leader is favored in every period. In other environments, bias in early periods may (1) favor the early loser, (2) be optimal even when the workers are equally rated, and (3) reduce the favored worker's promotion chances.