Knowledge that Transforms

The (S, s) model has enjoyed tremendous popularity over the past decade. It has been employed almost everywhere that discrete adjustment is observed. Today microeconomic rigidities are seen as an important influence on aggregate dynamics. In this paper we quickly characterize the microeconomic evidence for the model. To narrow the scope of our discussion, we will focus our attention on real variables, and we will comment on price inertia where appropriate. We conclude that, in spite of its popularity, the evidence for the importance of the (S, s) adjustment is surprisingly weak. We argue that discrete adjustment is, in and of itself, of little macroeconomic interest. To be important these frictions must coordinate agents to act together, thereby exacerbating deviations from the neoclassical benchmark. To date there have been few attempts at empirically identifying such interactions. In the last section, we present some results of our own. We test one of the main implications of (S, s) adjustment, that a greater variance in the forcing process leads to more frequent adjustment. Using data on automobiles from the Consumer Expenditure Survey, we find that more variable income leads to less frequent adjustment. We speculate that this correlation is indicative of a link between discrete adjustment and imperfect capital markets. This interaction could provide an important role for (S, s) frictions.

Output Fluctuations in the United States: What Has Changed since the Early 1980's? by Margaret M. McConnell and Gabriel Perez-Quiros. Published in volume 90, issue 5, pages 1464-1476 of American Economic Review, December 2000

The effect of insecure ownership on ordinary investment and natural resource use is examined. Insecure ownership is postulated to depend on the type of government regime in power and the prevalence of political violence or instability. The political determinants of economywide investment are estimated from cross-country data, and the results are used to form an index of ownership security. When introduced into empirical models of natural resource use, this index has a significant and quantitatively important effect on the use of forests and petroleum. Contrary to conventional wisdom, ownership risk slows resource use in some circumstances. (JEL Q20, Q30, E22)

Optimal Risk Adjustment in Markets with Adverse Selection: An Application to Managed Care by Jacob Glazer and Thomas G. McGuire. Published in volume 90, issue 4, pages 1055-1071 of American Economic Review, September 2000

Garfinkel: Department of Economics, University of fornia, 3151 Social Science Plaza, Irvine, CA 92697; Lee: artment of Economics, University of California, 3151 SoScience Plaza, Irvine, CA 92697, and International MonFund, 700 19th Street, NW, Washington, DC 20431. We k, without implicating, Avinash Dixit, Amihai Glazer, chel Grossman, Luisa Lambertini, Stergios Skaperdas, an ymous referee, and seminar participants at the University alifornia-Los Angeles, California State Universityerton, and the 1998 Winter Meetings of the Econometociety for helpful comments on previous drafts of this r, which had been circulated under the title “Political ipline and the Dynamic Consistency of Policy.” The s expressed in this paper are those of the authors and ld not be attributed to the International Monetary Fund. See Torsten Persson and Guido Tabellini (1990) for a ul survey of this literature.

Nominal Wage Rigidity and Industry Characteristics in the Downturns of 1893, 1929, and 1981 by Christopher Hanes. Published in volume 90, issue 5, pages 1432-1446 of American Economic Review, December 2000

High and rising executive pay levels over the past two decades have attracted considerable popular and political hostility. As Michael Jensen and Kevin J. Murphy (1990 p. 227) argue, these forces may constrain compensation practices in informal and indirect ways. Our earlier work documents the impact of such indirect political constraints on executive compensation in regulated sectors (Paul Joskow et al., 1993, 1996). This study investigates the political use of the corporate tax code to influence executive-pay decisions more broadly. In particular, we analyze the provision of the Omnibus Budget Reconciliation Act of 1993 (OBRA) that eliminated corporate tax deductibility for compensation in excess of $1 million for the CEO and each of the next four highestpaid executives within a firm. Congressional proponents of this legislation argued that this provision would reduce excessive CEO pay by raising its cost to the corporation. Exemptions for qualified performance-based compensation could have further indirect effects by inducing changes in the structure of executive compensation plans. Given the broad scope for exemptions and the minimal impact that tax deductibility of executive pay typically has on overall corporate profitability, however, the real impact of the tax cap on executive-pay patterns remains an open question. This paper, with Rose and Wolfram (2000), extends analyses by Tod Perry and Marc Zenner (1999) and Brian Hall and Jeffrey Liebman (2000), to provide further evidence on the impact of this legislation on CEO pay.