Knowledge that Transforms

This study examines the Treasury's experiment with single-price bond auctions in the mid-1970s and finds that, controlling for factors unrelated to auction technique, markups of auction average rates over when-issued rates shortly after auctions were a statistically significant seven to eight basis points higher at single-price auctions than at discriminating-price auctions. These results suggest that single-price auctions raised Treasury borrowing costs by roughly 3/4 percent of the issuing price of auctioned securities. Copyright 1994 by MIT Press.

The instantaneous probability (hazard rate) of a firm's exit from Chapter 11 protection is examined. Using the Weibull duration model, the effect of various regressors and the effect of the time a firm spends under Chapter 11 protection on this instantaneous probability is analyzed. I show that the hazard increases significantly under Chapter 11. Among the variables chosen, the interest burden of the firm and the capacity utilization of the firm's industry significantly increase the hazard. Other firm-specific variables like the long-term debt-to-assets ratio and the number of shares outstanding and economy wide variables, like the prime interest rate and the gross national product growth rate have no significant effect on the hazard. Copyright 1994 by MIT Press.

A transaction-cost model of vertical integration is tested, based on detailed descriptions of every pulp and paper mill operating in the United States between 1900 and 1940. This study contributes to the literature on integration through the use of a large, disaggregated database that allows identification of individual mills over time. Vertical integration of pulp and paper production is found to be positively associated with regional concentration, paper-mill capacity, and production of standardized grades of paper. Over time, new entrants behaved differently than established mills, because few mills switched between integration and specialization once established. Copyright 1994 by MIT Press.

Available from British Library Document Supply Centre- DSC:3597.9512(CEPR-DP--660) / BLDSC - British Library Document Supply Centre

We estimate the general deterrent effect of criminal justice resources on criminal behavior using panel data for a sample representative of young men in U.S. urban areas. Our data, which combine individual-level information on arrests and personal characteristics with aggregate information on criminal justice resources, allow us to obtain deterrence measures that reflect theoretical concepts and are of potential policy relevance. We find robust evidence of a general deterrent effect flowing from criminal justice, particularly police, resources. The nature of our data also allows us to conduct extensive exogeneity tests and to explore a number of possible 'third causes' for the deterrent effect. We find strong evidence that our deterrence variables are exogenous and no evidence that our deterrence result stems from commonly hypothesized third causes. Copyright 1994 by MIT Press.

Instrumental variable tests for serial correlation can be carried out by adding lagged residuals from initial estimation to the regressors of the model under scrutiny and then checking their joint significance. It is shown that asymptotically valid tests are obtained if the lagged residuals are also added to the initial instrument set. Monte Carlo evidence suggests that useful improvements in finite sample behavior under null and alternative hypotheses can be produced when the instrument set is extended to include the relevant lagged residuals. Links with other tests are discussed and a modification allowing for conditional heteroskedasticity is described. Copyright 1994 by MIT Press.

Isamu Matsukawa, Yoshifumi Fujii, Customer Preferences for Reliable Power Supply: Using Data on Actual Choices of Back-Up Equipment, The Review of Economics and Statistics, Vol. 76, No. 3 (Aug., 1994), pp. 434-446

This paper offers a theoretical explanation of why previous attempts to statistically explain intraindustry trade have been unsuccessful and proposes an econometric approach that tests the implications of the monopolistic competition model for the volume of trade. Using disaggregated data on 1983 manufacturing trade within the OECD, the paper finds strong evidence that bilateral imports depend systematically on the exporting country's output and somewhat weaker evidence that the volume of trade is higher in sectors with larger scale economies. Copyright 1994 by MIT Press.

This proposed theoretical model is based on new models of Barro and Becker and Becker Murphy and Tamura and explains the interaction of family decisions about fertility and the macroeconomy in a growth situation. The proposed model captures a dynamic interaction between labor/leisure and fertility choice and a structural fertility preference shock. Endogenous factor are consumption labor/leisure and fertility while exogenous factors are production and utility parameters. The aim was to develop a general equilibrium model which expresses short- and long-term dynamics to test the impact of economic disturbances on fertility and to explain the US baby boom and subsequent fertility patterns. Savings in capital accumulation and in labor supply were expected to have ambiguous effects while improved productivity was expected to increase steady state consumption. The methodology a structural Vector Auto Regression (VAR) model was developed by Blanchard and Quah and Ihmed Ickes Wang and Yoo. Structural impacts include disturbances in employment fertility (theoretical preference shift) and output. Long-term restrictions are based on theory rather than on ad hoc causal orderings (Sims method) or current responses (Bernanke method). The structural VAR model is estimated using the logged differences of labor fertility rate and output. The empirical results are based on analysis of US data (1949-88) on fertility weekly hours worked and real gross national product. The model revealed that fertility choice should not be considered exogenous to the labor market or to economic growth. Variance of the forecast error for the fertility rate was significantly explained by employment shocks; the effect was reduced fertility and increased labor force effort. Output responses to fertility and technology shocks were similar to those reported by Shapiro and Watson. In the variance decomposition analysis output shocks explained about 33% of output variance. Fertility shocks explained about 33% of labor growth and 25% of output growth after the first year. With a lag of one year about 37% of fertility variance was explained by employment shocks. Concluding remarks underscore the importance of knowing which shock initiated the motion and causal ordering.

Scott B. Smart, Joel Waldfogel, Measuring the Effect of Restructuring on Corporate Performance: The Case of Management Buyouts, The Review of Economics and Statistics, Vol. 76, No. 3 (Aug., 1994), pp. 503-511