Knowledge that Transforms

We examine how owners of productive resources (e.g., public enterprises or financial capital) optimally allocate their resources among wealth-constrained operators of unknown ability. Optimal allocations exhibit: (1) shared enterprise profit—the resource owner always shares the operator's profit; (2) dispersed enterprise ownership—resources are widely distributed among operators of varying ability; (3) limited benefits of competition—the owner may not benefit from increased competition for the resource; and, sometimes, (4) diluted incentives for the most capable—more capable operators receive smaller shares of the returns they generate. Implications for privatizations and venture capital arrangements are explored.

We ask whether the following observations may result from endogenously determined fluctuations in the money multiplier rather than a causal influence of money on output: (i) M1 is positively correlated with real output; (ii) the money multiplier and deposit-to-currency ratio are positively correlated with output; (iii) the price level is negatively correlated with output; (iv) the correlation of M1 with contemporaneous prices is substantially weaker than the correlation of M1 with real output; (v) correlations among real variables are essentially unchanged under different monetary-policy regimes; and (vi) real money balances are smoother than money-demand equations would predict.

This paper attempts to bring theoretical and empirical research on capital gains realization behavior closer together by considering whether investors who appear to engage more in strategic tax avoidance activity also respond differently to tax rates. We find that such investors exhibit significantly smaller responses to permanent tax rate changes than other investors. Put another way, a larger part of their response to capital gains tax rates reflects timing, consistent with their closer adherence to tax avoidance strategies emphasizing arbitrage based on tax rate differentials. This finding holds for two alternative specifications of realization behavior, one of which suggests larger permanent responses to capital gains tax rates than those of previous panel studies.

Aggregation Bias in the Factor Content of Trade: Evidence from U.S. Manufacturing by Robert C. Feenstra and Gordon H. Hanson. Published in volume 90, issue 2, pages 155-160 of American Economic Review, May 2000

Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment by David Neumark and William Wascher. Published in volume 90, issue 5, pages 1362-1396 of American Economic Review, December 2000

This paper develops a consumption-based asset pricing model in which attitudes towards risk are contingent upon the state of the world. For a low (high) level of consumption relative to a subjective metric, counter-cyclical (pro-cyclical) risk aversion implies that consumption shocks generate larger fluctuations in marginal utility, against which the agent will hedge in choosing his optimal portfolio. Asset prices are studied using two-state Markov preference regimes where bull and bear markets reflect alternating periods of low and high risk aversion. Joint estimation of bond and stock prices highlights moderate and infrequent movements in risk aversion, and a marked improvement on the model's ability to capture the cyclical nature of observed asset prices. Resume: Ce papier developpe un modele d'agent representatif de valorisation des actifs dans lequel les preferences sont contingentes a l'etat du monde. Lorsque la consommation est basse (elevee) par rapport a un niveau subjectif, une aversion contra- (pro-) cyclique implique que des chocs a la consommation se traduisent par des fluctuations accentuees de l'utilite marginale que l'agent desirera lisser lors de son choix du portefeuille optimal. Les prix des actifs sont etudies dans le cadre d'un modele markovien a deux etats ou les marches haussiers ou baissiers refletent des periodes alternatives de basse et de haute aversion pour le risque. L'estimation conjointe des prix des bons et des actions mettent en evidence des mouvements moderes et peu frequents dans l'aversion au risque ainsi qu'une amelioration nette du modele en ce qui a trait aux mouvements cycliques des prix.(This abstract was borrowed from another version of this item.)

This paper attempts to help explain the unforecasted, excess' personal income tax revenues of the last several years. Using panel data on executive compensation in the 1990s, it argues that because the gains on most stock options are treated as ordinary income for tax purposes, rising stock market valuations are directly tied to non-capital gains income. This blurred line between capital and wage income for has affected tax revenue in three ways, at least for these high-income people. First, stock performance has directly affected the amount of ordinary income that people report by influencing their stock option exercise decisions. Second, the presence of options gives executives more flexibility in changing the timing of their reported income and appears to make them much more sensitive to the short-run timing of tax changes, even accounting for the stock market changes of the period. Third, because of the tax rules on options, changing the capital gains tax rate, as the U.S. did in the late 1990s, can lead individuals to exercise their options early to convert the expected future gains into lower-taxed forms. The data show significant evidence of each of these effects and in all three cases, executives working in the new' economy and high-technology sectors(This abstract was borrowed from another version of this item.)

This paper uses general-equilibrium simulations to explore the role of residential mobility in shaping the impact of different private-school voucher policies. The simulations are derived from a three-district model of low-, middle-, and high-income school districts (calibrated to New York data) with housing stocks that vary within and across districts. In this model, it is demonstrated that school-district targeted vouchers are similar in their impact to nontargeted vouchers but vastly different from vouchers targeted to low-income households. Furthermore, strong migration effects are shown to significantly improve the likely equity consequences of voucher programs.

Robert A. Mundell held his Prize Lecture December 8, 1999, at Aula Magna, Stockholm University. He was presented by Lars E.O. Svensson, Chairman of the Prize Committee.(This abstract was borrowed from another version of this item.)

This paper presents nonparametric evidence on the effects of the expansion of the Old Age Pension program in South Africa on child health. Did this increase in household resources improve child health and nutrition? Does the gender of the recipient of the pension affect its impact? The answers to these questions have very important policy implications. There is evidence that inadequate nutrition during childhood (and even in utero) affects long-term physical development, as well as the development of cognitive skills. This in turn affects productivity later in life (see Partha Dasgupta, 1993; John Strauss and Duncan Thomas, 1998; T. Paul Schultz, 1999). In the United States, the evidence suggests that monetary transfers to the poor have very little impact on child welfare (Janet Currie, 1995; Susan Mayer, 1997). However, the effects of parental income and monetary transfers on child outcomes are likely to be of greater magnitude among poor households in developing countries. The South African Pension program provides an unusual opportunity to evaluate the possible effects of such a monetary transfer. This paper exploits the rapid increase in the coverage and benefits of the Old Age Pension program in South Africa which took place in the early 1990’s (Anne Case and Angus Deaton, 1998). At the end of the apartheid era, the government committed to achieving parity of benefits and eligibility requirements between whites and Africans. This was achieved mostly by increasing the benefits received by the Africans. In 1993, 80 percent of African women above age 60 and 77 percent of African men above 65 received the pension. The maximum benefit of 370 rands per month (aproximately $3 per day) was equal to half of the minimum wage, and about twice the median income per capita in rural areas. Due to living arrangements inherited from the apartheid era, close to onethird of African children under the age of 5 currently live with a pension recipient. Children who live with a pension recipient tend to come from relatively disadvantaged backgrounds. As a consequence, they tend to be smaller than other children their age. To estimate the effect of receiving a pension on the anthropometric status of children, this paper exploits the fact that height reflects accumulated investments in child nutrition. The larger the proportion of her life during which a child is well-nourished, the taller she will be, given her age. Due to the expansion of the program in the early 1990’s, individuals of qualified age became more likely to receive a pension, and the benefits became substantially larger. Thus, children born after the expansion of the program are more likely to have spent a larger fraction of their lives wellnourished, if they live with a pension recipient, to the extent that the pension resulted in improved nutrition. In this paper, I present nonparametric evidence of the program’s effect on nutrition based on this observation.