Knowledge that Transforms

David Stern, Effects of Alternative State Aid Formulas on the Distribution of Public School Expenditures in Massachusetts, The Review of Economics and Statistics, Vol. 55, No. 1 (Feb., 1973), pp. 91-97

The supply curve of labor is now accepted as a matter of course by most economists. It has no doubt been perplexing to observe that the most commonly employed types of utility functions do not yield such curves under the usual textbook analysis of the problem.1 Particular preference maps have been found that generate backward bending curves;2 however, they are nonparametric, leading to difficulties of estimation, and upon closer examination seem to imply counter-intuitive results. We will show that taking into account the wealth position of an individual on the one hand and survival consideration on the other greatly expands the variety of shapes that can be derived for the supply curve from some simple utility functions. The use of a specific simple utility function also implies some severe restrictions on the form the supply curve can take, rendering it testable. Empirical evidence is shown to support the conclusion that the supply curve is monotonic. We will also show that the notion that the aggregate supply curve of labor slopes down rests, in part, on an error of aggregation, and that the empirical evidence usually cited in support of the negative slope, when correctly interpreted, cannot be so construed.

This paper highlights results of the National Bureau of Economic Research's (NBER) research project on exchange control, liberalization and economic development from 1970-1973. Initial adoption of exchange controls was generally an ad hoc response to external events. The optimal resource allocation dictum--that the marginal cost of earning foreign exchange should be equated with the marginal cost of saving foreign exchange--was generally abandoned in favor of saving foreign exchange at all costs. An export-oriented development strategy generally entails relatively greater use of indirect, rather than direct, interventions. There is considerable evidence from the individual country studies that direct intervention may be considerably more costly than is generally recognized. Export rebates, tariffs, surcharges, import entitlement schemes, and a host of other devices are generally employed under quantitative restrictions regimes, and they lead to a wide dispersion in effective exchange rates by commodity categories. The effect of liberalization is often to induce a recessionary tendency rather than the traditionally feared inflationary impact. Even when there is a single domestic price for the imported good, the method of license allocation makes an important difference to resource allocation and income distribution.

This note was inspired by a 1970 JPE paper by Robin Barlow, who claimed that if the ratio of income elasticity to price elasticity of a public good exceeded the elasticity of tax rate with respect to income, then too little public goods would be supplied under majority voting. This note shows that Barlow's claim is not true in general, but also shows that with some fairly plausible additional assumptions it is true.

Joseph Schumpeter argued that there are increasing returns in R & D both to size of R & D establishment and to firm size. This has been taken to imply that the combination of small firms into big ones would increase R & D output. Tests have been attempted in the literature looking at the relation between scale and R & D input. The present paper shows that these tests are inappropriate. Moreover, the stated conclusion as to R & D output does not follow from Schumpeter's hypothesis. Indeed, it is very nearly true that none of these propositions can be derived from any other.