Knowledge that Transforms

We examine the rational expectations equilibrium paths of the model of search and barter in Diamond's "Aggregate Demand Management in Search Equilibrium." For some initial positions, there are two equilibrium paths converging to different steady states, with the high-activity path Pareto-dominating the low-activity path. With some parameters there is also a continuum of equilibrium paths converging to another steady state. Moreover, there can be cycles that are equilibrium paths, even though the environment is stationary.

A concept of demographic separability is proposed that formalizes the notion that there are groups of goods (adult goods) that have little or no relationship to specific classes of household demographics (the numbers or ages of children).That there exist adult goods demographically separable from children is a necessary but not sufficient condition for the validity of Rothbarth's method for measuring child costs. We propose two different methods for testing demographic separability and present results from a 1981 survey of Spain. The econometric evidence is in fair agreement with the theoretical presuppositions.

This paper studies reputation formation and the evolution over time of the incentive effects of reputation to mitigate conflicts of interest between borrowers and lenders. Borrowers use the proceeds of their loans to fund projects. In the absence of reputation effects, borrowers have incentives to select excessively risky projects. If there is sufficient adverse selection, reputation will not initially provide improved incentives to borrowers with short credit histories. Over time, if a good reputation is acquired, reputation will provide improved incentives. General characteristics of markets in which reputation takes time to work are identified. Copyright 1989 by University of Chicago Press.

This paper defines a concept, a worker's trust fund, which is useful in analyzing optimal age-earnings profiles. The trust fund represents what a worker loses if dismissed from a job for shirking. In considering whether to work or shirk, a worker weighs the potential loss due to forfeiture of the trust fund if caught shirking against the benefits from reduced effort. This concept is used to show that the implicit bonding in upward sloping age-earnings profiles is not a perfect substitute for an explicit up-front performance bond (or employment fee). It is also shown that the second-best optimal earnings profile in the absence of an up-front employment fee pays total compensation in excess of market clearing in a variety of stylized cases.

Rosa Barbolla, Luis C. Corchón; An Elementary Proof of the Existence of a Competitive Equilibrium in a Special Case*, The Quarterly Journal of Economics, V

A recent literature has shown that asymmetric information about a firm's profitability does not by itself explain strikes of substantial length if the firm and workers can bargain very frequently without commitment. In this paper we show that substantial strikes are possible if (a) there is a small (but not insignificant) delay between offers; and (b) a strike-bound firm may experience a decline in profitability after a certain point. A brief discussion of the ability of the theory to explain the data on strikes is included.

In the economic modeling of bargaining, outside options have often been naively treated by taking them as the disagreement payoffs in an application of the Nash bargaining solution. The paper contrasts this method of predicting outcomes with that obtained from an analysis of optimal strategic behavior in a natural game-theoretic model of the bargaining process. The strategic analysis predicts that the outside options will be irrelevant to the final deal unless a bargainer would then go elsewhere. An experiment is reported which indicates that this prediction performs well in comparison with the conventional predictor.

Abstract ABSTRACT: Considerable evidence exists that governmental accounting numbers are related empirically to bond risk and return measures. However, prior research does not preclude the possibility that accounting numbers merely reflect unobserved factors such as economic and political attributes impounded in bond measures. This study considers whether governmental annual financial reports convey new information directly to the bond market. Changes in bond prices during the period around the release date of governmental annual reports were examined to assess market responses to the reports. No significant evidence was obtained to suggest that municipal bond investors use the information in the annual report at the time of its release to adjust bond prices. In contrast, new bond issues and bond rating announcements were associated with significant market reactions. Thus, these results indicate that, while issuer-specific accounting information may be used by bond investors in conjunction with decisions involving new issues and rating evaluations, investors do not appear to impound the information directly into secondary market prices at the time the information is released.

We investigate several asset pricing models in an international setting. We use data on a large number of assets traded in the United States, Japan, the United Kingdom, and France. The model together with the hypothesis of capital market integration imply testable restrictions on multivariate regressions relating asset returns to various benchmark portfolios. We find that multifactor models tend to outperform single-index models in both domestic and international forms especially in their ability to explain seasonality in asset returns. We also find that the behavior of the models is affected by change in the regulatory environment in international markets.