Knowledge that Transforms

A slowly mean-reverting component of stock prices tends to induce negative autocorrelation in returns. The autocorrelation is weak for the daily and weekly holding periods common in market efficiency tests but stronger for long-horizon returns. In tests for the 1926-85 period, large negative autocorrelations for return horizons beyond a year suggest that predictable price variation due to mean reversion accounts for large fractions of 3-5-year return variances. Predictable variation is estimated to be about 40 percent of 3-5-year return variances for portfolios of small firms. The percentage falls to around 25 percent for portfolios of large firms.

This paper analyzes the strategic and intertemporal interaction between two economic agents who have "overlapping" concerns, such as altruistic concerns for each other's welfare. The agents may be two individuals, a social bureau and a client, or two units in an organization. We show how the presence of such common concerns may lead to socially inefficient outcomes, in which one economic agent "free rides" on the other's concern. We also briefly how this inefficiency and free-riding, in the context of interaction between individuals, might be mitigated by compulsory social security systems. As another example we interpret the inefficiency in terms of Kornai's "soft budget constraints" within organizations.

Throughout the 1930s and early 1940s, U.S. Treasury bonds and notes appeared to have negative nominal yields as they approached maturity. But negative nominal interest rates are impossible in a world in which one can always hold cash. The resolution to this puzzle is that Treasury securities, in addition to making coupon payments, gave the owner the right to buy a new security on a future date. This paper describes the institutional environment that led to the apparent negative nominal interest rates, develops a method for valuing the "exchange privilege," and computes accurate measures of the yield to the coupon-bearing component of these composite bond/options. These corrected bond and not yields are then used to calculate new estimates of the term structure of interest rates from 1929 to 1949.

The paper considers the question whether observed price differentials reflect perceived differences in quality, service agreements, or location or whether information imperfections can explain this phenomenon. It sets out theoretical arguments linking inflation to reductions in the information stock held by agents and thus to greater price dispersion. The hypothesis is tested using monthly price data for 13 uniquely defined goods sold in Israel between 1971 and 1984. Price dispersion is shown to be positively related to the rate of market price inflation. Since inflation is an unlikely proxy for changes in perceived characteristics, the findings support price dispersion theories based on "optimally imperfect" decision making

Unlike implicit contracts models, the nonuniform pricing model of unions assumes that firms can always shut down ex post to avoid any payments to the union. Under this restriction, employment can differ from a first-best even if both workers and firms are risk neutral. In general, the union chooses to offer quantity discounts on labor and needs to use a seniority rule that regulates the order in which workers are hired to implement these discounts. Unions lower (almost) all workers' employment probabilities and increase the cyclical volatility of employment, and the union-nonunion average wage differential will move countercyclically. Workers' preferences over union wage profiles, conditional on their seniority, exhibit (within limits) a convenient "unanimity" property.

One of the oldest questions in macroeconomics concerns the correlation between the business cycle and the real wage. We provide new evidence on this question by examining the possible bias that arises when (1) workers have unobserved characteristics that affect their wages and (2) those workers who move in and out of the work force over the cycle have unobserved characteristics systematically different from those who stay in. We distinguish as well between the bias that arises from those unobserved characteristics that are permanent components of wages and those that are transitory. We utilize micro, panel data, and maximum likelihood selectivity bias techniques to estimate both the extent of this selectivity-cum-aggregation bias and the true effect of the cycle on real wages. We find that selectivity bias is present: workers are more likely to lose employment during a recession if they have high wages, especially if they have a high transitory wage component. Overall, the effect of selectivity is to bias ordinary least squares estimates based only on workers in a procyclical direction. Our results show that the true effect of the cycle on wages is still procyclical but much smaller in magnitude than previous estimates using micro data have suggested.

[The causes and consequences of state maximum hours legislation for female workers, passed from 1848 to the 1920s, are found to differ from a recent interpretation. Although maximum hours legislation served to reduce scheduled hours in 1920, the impact was minimal. Curiously, the legislation appears to have operated equally for men. Legislation affecting only women was symptomatic of a general desire by labor for lower hours, and these lower hours were achieved in the tight, and otherwise special, World War I labor market. Most important, the restrictiveness of the legislation had no adverse effect on the employment share of women in manufacturing.]