Knowledge that Transforms

The compound growth rates of per capita output and Farrell-type efficiency measures for 115 market economies over the period 1960-80 were compared with measures of political, civil, and economic liberty. It was found that the institutional framework has significant and large effects on the efficiency and growth rate of economies. Politically open societies, which subscribe to the rule of law, to private property, and to the market allocation of resources, grow at three times the rate and are two and one-half times as efficient as societies in which these freedoms are abridged.

This paper models individual choice between two types of jobs as dependent on the difference in potential earnings and on preferences for nonpecuniary The model leads to simultaneous estimation of earnings and job choice functions in a manner that takes account of self-selection of individuals into the sector of highest utility. An application to lawyers choosing between private and "public-interest" law casts doubt on the notion that public-interest lawyers are accepting substantially lower earnings by virtue of their choice--an impression derived from estimation of earnings functions without accounting for self-selection. The estimation technique also takes proper account of the "choice-based" nature of the sample, which appears to be important.

In his well-known analysis of the national debt, Robert Barro introduced the notion of a "dynastic family." This notion has since become a standard research tool, particularly in the areas of public finance and macroeconomics. In this paper, we critique the assumptions on which the dynastic model is predicated and argue that this framework is not a suitable abstraction in contexts in which the objective is to analyze the effects of public policies. We reach this conclusion by formally considering a world in which each generation consists of a large number of distinct individuals as opposed to one representative individual. We point out that family linkages form complex networks, in which each individual may belong to many dynastic groupings. The resulting proliferation of linkages between families gives rise to a host of neutrality results, including the irrelevance of all public redistributions, distortionary taxes, and prices. Since these results are not at all descriptive of the real world, we conclude that, in some fundamental sense, the world is not even approximately dynastic. These observations call into question all policy- related results based on the dynastic framework, including the Ricardian equivalence hypothesis.

This paper analyzes a monopolist that markets successive generations of new and improving nondurable products. Prices, research intensity, and product innovations are derived as sequential equilibrium outcomes to a dynamic game with incomplete information. Asymmetric information is an important feature of the model. The monopolist is fully aware of the current product's quality, as are consumers who have tried it. However, the beliefs of other people are characterized by a probability distribution that depends on the monopolist's marketing strategy and the product's popularity. The analysis illustrates a new context in which price signaling might serve as a mechanism for ensuring that only high-quality products are marketed. More important, it shows how product life cycles are generated in the absence of signaling and how a reputation for producing high-quality goods becomes established in such cases.

The model developed here explains differences in the degree of the division of labor across local markets. For example, the typical doctor in one local market may treat a wider range of patients' problems than his counterpart in another local market. The extent of the division of labor depends on variables affecting the local demand for services. Two different forms of worker organization, cooperation and noncooperation, yield divergent results. For example, specialization increases with the local number of producers under cooperation but may decrease under noncooperation. With the number of producers constant, local demand variables affect individual specialization under noncooperation but not under cooperation.

[The paper presents a simple explanation of price dispersion by a monopolist assuming only that consumers arrive in a random order and are served on a first-come-first-served basis. A firm can sometimes increase its profits by charging two different prices for the same good and rationing sales at the lower price. However, it is never necessary to charge more than two prices, and a single price is sufficient as long as either the marginal revenue curve is everywhere downward sloping or the marginal cost of production is constant.]

The extension of economic analysis to problems beyond the domain of formal markets and explicit prices represents a major recent intellectual development. But "economic imperialism" is not new and was not invented in Chicago. Adam Smith, in his Wealth of Nations, extended economic reasoning to a variety of nonmarket exchange problems. One example is his analysis of religious behavior. Smith viewed participation in religion as a rational device by which individual enhanced the value of their human capital. He also explained the behavior of the clergy and other suppliers of religious services from an economic perspective.

[The capital asset pricing model provides a theoretical structure for the pricing of assets with uncertain returns. The premium to induce risk-averse investors to bear risk is proportional to the nondiversifiable risk, which is measured by the covariance of the asset return with the market portfolio return. In this paper a multivariate generalized autoregressive conditional heteroscedastic process is estimated for returns to bills, bonds, and stock where the expected return is proportional to the conditional convariance of each return with that of a fully diversified or market portfolio. It is found that the conditional covariances are quite variable over time and are a significant determinant of time-varying risk premia. The implied betas are also time-varying and forecastable. However, there is evidence that other variables including innovations in consumption should also be considered in the investor's information set when estimating the conditional distribution of returns.]

We analyze equilibrium in a labor market model wherein it takes time for the workers to contact firms. Workers, assumed identical, repeatedly sell their labor services all through their work lives, choosing their search intensity endogenously. Identical firms attempt to maximize their steady-state profit flow. We focus on the importance and consequences of balanced matching, in which workers are more likely to contact a larger firm. A unique equilibrium is shown to exist wherein all firms offer the same wage and select an employment level at which wage equals marginal product. The effect of traditional labor market policies and empirical implications are discussed.

This paper examines the interaction between union wages and the international pattern of production and trade. If union goods are heterogeneous in labor intensity, the introduction of an active union in the domestic country causes only the least labor-intensive range of union goods to be produced there, with goods of greatest labor intensity produced abroad because of the relatively high cost of domestic union labor. A narrowing of the scope of domestic union production will eliminate relatively labor-intensive goods, leading a rent-maximizing union to raise its union premium. The implications of this union behavior for comparative statics results are considered.