Understanding the impacts of transitory oil supply shocks on world oil prices is crucial to the evaluation of the economic impacts of shocks and the design of policy responses to address those impacts. This paper integrates short-run and long-run approaches to oil price determination, with particular emphasis on the "two-price " structure of the world oil market—with coexisting short-term "spot" prices and long-term "contract " prices. Even transitory shocks are shown to exhibit persistence effects on long-term prices. Some implications for econometric models of the relationship between spot and contract prices are discussed. I.

This paper emphasizes the roles played by personal taxation and pension wealth in portfolio choice and composition. A theoretical discussion of the impacts of taxation and participation in social security and private pension systems on individual wealth allocation is followed by empirical evidence based on U.S. cross-section data. Both effects prove to be significant. Anticipated social security and private pension benefits exert a measurable influence on household portfolio allocation. Their omission from an asset demand model may lead to a misinterpretation of the impact of taxation on portfolio composition.

This paper analyzes price adjustment in markets where trade takes place through both spot-market and long-term-contract transactions. The authors develop a model illustrating the role of the resulting two-price system in describing price adjustment to transitory shocks; persistence effects of these shocks on prices depends on, inter alia, the fraction of trades carried out through contracts. The model is tested on price data from the world copper and crude oil markets. Econometric tests of the model provide support for the hypothesis that the increase in the importance of spot markets in copper and oil is associated with an increase in the speed of adjustment of spot prices to supply and demand disturbances.

While recent research has emphasized the desirability of studying effects of changes in marginal tax rates on taxable income, broadly defined, there has been comparatively little analysis of effects of marginal tax rate changes on entrepreneurial entry. This margin is likely to be important both because of the likely greater elasticity of entrepreneurial decisions with respect to tax changes (relative to decisions about hours worked) and because of recent research linking entrepreneurship, mobility, and household wealth accumulation. Previous work focuses on how marginal tax rates affect work incentives, incentives to take compensation in taxable forms, and reporting incentives. In addition, both the level and the progressivity of tax rates can affect decisions about risky activities. The tax system offers insurance for taking risk since taxes depend on outcomes; however, asymmetric taxes on different outcomes, such as progressive rates, may discourage risk taking. Using the Panel Study of Income Dynamics for 1978-1993, we incorporate both of these effects of the tax system in empirical estimations of the probability that people enter self employment. While the level of the marginal tax rate does not affect entry into self employment in a consistent manner across specifications, we find robust results that

Both managerial ownership and performance are endogenously determined by exogenous (and only partly observed) changes in the firm's contracting environment. We extend the cross-sectional results of Demsetz and Lehn (1985), (Journal of Political Economy, 93, 1155–1177) and use panel data to show that managerial ownership is explained by key variables in the contracting environment in ways consistent with the predictions of principal-agent models. A large fraction of the cross-sectional variation in managerial ownership is explained by unobserved firm heterogeneity. Moreover, after controlling both for observed firm characteristics and firm fixed effects, we cannot conclude (econometrically) that changes in managerial ownership affect firm performance.

The importance of disturbances in financial markets for real economic activity and the positive association between price level and output movements typically are explained by appeal to a combination of nominal aggregate demand shocks (particularly money-supply shocks) and rigid prices. We argue that this view is inconsistent with evidence for short-run responsiveness of prices and gold flows to nominal disturbances during the pre-World War I gold-standard era. We offer an alternative explanation that connects financial markets and real activity through disturbances to the availability of credit. This approach links comovements in prices and output through real effects in credit markets associated with price-level shocks. Empirical analysis, using monthly data for the pre-World War I period, supports the assumption of rapid price adjustment, and the credit-supply interpretation of the transmission of financial shocks. Disturbances to credit availability, including price shocks, contribute substantially to our empirical explanation of output fluctuations during this period.

One of the key puzzles in understanding behavior is not so much why people save-the title of this session-but why people don't save. According to the familiar life-cycle model, households should accumulate wealth to provide for their retirement consumption. The surprising result from the data is the sizable fraction of the population who have accumulated so little, even among those nearing retirement. Given that earnings will almost surely decline when households retire, such behavior can imply poor living standards for the elderly. Some might interpret the low wealth accumulation as being evidence of myopia, irrationality, or a failure of households to enforce mental accounting (Richard Thaler, 1994), while others might view the low level of wealth accumulation as evidence of high individual rates of time preference. Determining the underlying causes of low wealth is crucial for public policies that seek to alleviate low aggregate rates in the United States, as well as policies that seek to buttress the adequacy of financial resources for the elderly. In this paper, we outline what we believe to be the causes of why many people do not save. We conclude by speculating about government policies that may be most effective at encouraging saving. Much of the research examining levels of consumption, saving, and wealth, as well as their responsiveness to policy, has been done using a life-cycle model with the simplifying assumption of perfect certainty. Alan Auerbach and Laurence Kotlikoff (1987), for example, developed a model with 55 overlapping generations of individual lifecycle households, each with empirically plausible age-earnings profiles and utility parameters, and used the model to address tax policy and demographic issues in a regime in which all households are identical within a generation, and all generations know future earnings and interest rates. More recently, a line of inquiry has examined the effects of uncertainty on saving, generally in the context of highly stylized models. This research has shown that, in these models, uninsured earnings uncertainty can alter optimal behavior in a variety of important ways. (For a partial review of this precautionary saving literature, see Hubbard et al. [1994].) In two recent papers (Hubbard et al., 1993, 1994), we have combined these two strands of the literature by examining the implications of a life-cycle model of consumption, saving, and wealth accumulation subject to what we think are the three most important sources of uninsured idiosyncratic risk facing households: uncertainty about earnings, medical expenses, and length of life. Our intent has been to create a realistic model in which families live for many periods, working for part of their lives and retiring later in life. To parameterize the uncertainty facing families, we estimate tDiscussants: Christopher Carroll, Federal Reserve Board; John B. Shoven, Stanford University; Laurence Kotlikoff, Boston University.

This paper examines the impact of social security on national saving and individual welfare in the presence of realistic capital-market imperfections: market failure in the private provision of annuities and restrictions on borrowing against anticipated future wages. The introduction of social security increases lifetime welfare and reduces national saving if borrowing restrictions are absent. However, the increase in individual welfare is reduced, and in some cases eliminated, when borrowing constraints are taken into consideration. The substantial difference suggests the importance of reexamining the proportional payroll tax finance of social security.

The authors reply to the comment by D. R. Kamerschen and J. Park on their 1988 paper published in this Review. They find that the econometric point raised by these authors is flawed, because differences in model structure and data are ignored. In particular, the importance of materials input in assessing price-cost margins is reiterated here and illustrated with the 1988 paper's original table. Other points of the comment are refuted by direct reference to statistical results and inferred conclusions in the 1988 paper.