Knowledge that Transforms

Eduardo Luzio, Shane Greenstein, Measuring the Performance of a Protected Infant Industry: The Case of Brazilian Microcomputers, The Review of Economics and Statistics, Vol. 77, No. 4 (Nov., 1995), pp. 622-633

This paper estimates a dynamic demand model for liquor in the United States using panel data from 43 states. Because of taste changes over time and between states in liquor consumption, purely time series or cross sectional studies do not elicit reliable price elasticity estimates. This study makes the case for pooling and shows how one can control for individual state effects and endogeneity of the regressors using estimators suited for a dynamic demand model. Our results indicate that the long-run price elasticity is in the -0.7 range. The findings also support strong habit persistence, a small positive income elasticity, and very weak evidence of bootlegging from adjoining states. The magnitude of the long-run price effect suggests that sin taxes can serve not only as an important income source but also as a significant deterrent effect.

Empirical estimation of input market power hindered by problems in measuring an input's value of marginal product (VMP). By estimating a variable profit function system, however, one can infer a factor's VMP through its shadow price. This technique is used here to specify a structural equation system, which is estimated using time series data for the U.S. sawmilling and paper industries, to empirically measure the degree of oligopsony power for sawlog and pulpwood inputs respectively. Results evaluated at sample means indicate that pulpwood markets are more oligopsonistic than sawlog markets, though both perform closer to perfect competition than monopsony. Time trends for market power differ for each product and perfect competition cannot be rejected for sawlogs in later years.

Mean and variance measures of health information about cholesterol and saturated fat are included in a demand system for fats and oils. A Bayesian model of health risk belief and consumer awareness surveys are the basis for computing these measures. The empirical demand model shows that health information has resulted in significant increases in consumption for corn, cottonseed, and soybean oils and decreased consumption for butter and lard. The predicted demand effects based on the Bayesian information model are more reasonable than predictions from using either a time trend or a simple cumulative cholesterol information index.

This paper separates the components of capital appreciation returns in an asset market into fixed and stochastic portions. It proposes a control for the problem of fixed components in the capital appreciation return used in transactions-based return estimates. We find a consistent bias in the index resulting from repeat sales regressions which may be eliminated through simple methods. The sign and magnitude of the bias, as well as its systematic variation across property, suggest that it is caused by incremental home improvements, as well as by price risk. We propose a maximum likelihood method for estimating the first and second moments of the fixed and temporal components of real estate returns that relies upon relatively small samples.

James M. Poterba, Lawrence H. Summers, Unemployment Benefits and Labor Market Transitions: A Multinomial Logit Model with Errors in Classification, The Review of Economics and Statistics, Vol. 77, No. 2 (May, 1995), pp. 207-216

The effect of schooling on the odds that smokers quit smoking is estimated. Particular attention is given to the possible importance of unobservables in measuring the schooling effect. It is shown that schooling has a relatively substantial positive effect on the odds that men and women ages twenty-five and older quit smoking.

Entry and exit literature focuses almost exclusively on firm-level decisions, leaving out an important aspect of firm behavior: whether to introduce new models while the firm produces similar goods and where to locate them in the existing product space, taking into account own models and the possibility of new entry. This paper analyzes model entry and exit decisions in the case of the personal computer market. Differences in new model spatial location between incumbents and entrants are found, while both model overpricing and firm reputation are found to be significant in the probability of model's exit estimation.

Over the last twenty years, many studies have been made of the elasticity of substitution between capital and labor. The reported estimates are highly variable, and reveal an apparent dichotomy between cross-sectional and time-series studies. The former suggest that capital and energy are substitutes while the latter suggest the converse. All these studies reported Allen partial elasticities of substitution. We suggest that the Morishima elasticity may be a more useful measure for the issues of concern to capital energy substitution. We calculate the Morishima elasticities from parameters estimated in a selection of earlier studies and find no excessive variability, nor any evidence of the time-series/cross-section dichotomy. Capital and energy are Morishima substitutes.

We examine evidence on omitted-ability bias in estimates of the economic return to schooling, using proxies for unobserved ability. We consider measurement error in these ability proxies and the potential endogeneity of both experience and schooling, and examine wages at labor market entry and later. Including ability proxies reduces the estimate of the return to schooling, and instrumenting for these proxies reduces the estimated return still further. Instrumenting for schooling leads to considerably higher estimates of the return to schooling, although only for wages at labor market entry. This estimated return generally reverts to being near (although still above) the OLS estimate if we allow experience to be endogenous. In contrast, for observations at least a few years after labor market entry, the evidence indicates that OLS estimates of the return to schooling that ignore omitted ability are, if anything, biased upward rather than downward.