Knowledge that Transforms

We analyze data from experimental duopoly markets to assess the role information plays in facilitating collusion. In these markets, profitability can be common knowledge or private information. Market outputs are estimated in structures with symmetric and asymmetric costs under the two information conditions. Symmetric markets are more cooperative when profitability is common knowledge; asymmetric market outputs are unaffected by information differences. However, common knowledge in asymmetric markets increases the share of the output produced by the low-cost producer, and therefore increases industry efficiency.

This paper investigates the empirical effect of volatility on irreversible investments. We use a sample of chemical products in the United States and the European Union to test the impact of volatility on new investments in capacity. We distinguish among three sources of volatility: exchange rates, input prices, and product demand. We find that the effects of volatility on the amount of capacity investment differ depending on the source of volatility. Input prices and product demand volatility do not appear to have a material and statistically significant effect in either the United States or the European Union. In contrast, exchange rate volatility has a significant negative impact on investment by chemical manufacturers in the European Union.

Theoretical models of endogenous growth identify capital accumulation and returns as a potential stimulus to economic growth. Existing empirical studies, however, are based on a limited notion of these returns, which follows from the simple production function framework used for estimation. The purpose of this study is to examine growth issues using dynamic cost function estimation. This methodology enables us to broaden the concept of returns to include returns arising from short-run quasi-fixity of private capital, long-run (internal) scale economies, and external “knowledge” factors—overall investment in research (R&D), technology (high-tech capital), and education (human capital). Based on detailed industry-level data, we find evidence of increasing returns to scale arising from cost savings on variable inputs, although diminishing returns to capital are prevalent. Our results also show that knowledge factors augment growth. More importantly, they appear to explain a substantial proportion of measured scale economies.

This paper tests for the presence of adverse selection in thoroughbred yearling auction markets. Thoroughbred auctions consist of two seller types: sellers who breed horses to race and sell (racers) and sellers who take all their yearlings to auction (breeders). If racers use private information, keeping those yearlings with a higher probability of on-track success, they are likely to receive a lower price for similar yearlings as compared to breeders. Using data from Keeneland's 1994 September yearling sale, we find support for this hypothesis. We improve on previous studies by analyzing the distinction between seller types on a continuous scale.

The paper tests whether technological change has been neutral in Canadian manufacturing industries, using a system of translog cost share equations for 1962 through 1986. The model features two classes of labor treated as distinct inputs. Tests rejected homotheticity in all industries. Hicks neutrality was also rejected in 16 of 18 industries. The most common pattern of nonneutral technical change was a bias away from blue-collar workers. Formal tests for skill-neutral innovation rejected the hypothesis in ten industries in favor of skill-using technical change. The results suggest that in studies of Canadian manufacturing, aggregation across labor inputs is inappropriate.

In this paper, we examine the idea that a general model of consumption should allow for the direct effect of government expenditures in a two-good permanent-income model. We show, given an assumed preference specification, that there is a cointegration restriction implied by an intraperiod first-order condition of the model. This restriction leads to a linear deterministic cointegration relation between government spending, private consumption, and their relative price that is supported by the data. Using this restriction to recover the preference parameters, we estimate the intraperiod elasticity of substitution for both government and private consumption to be about 0.9. Overall, we find consistent empirical evidence in support of our model.

This note estimates the long-run demand for skilled and unskilled labor using panel data for Colombian manufacturing plants. Unobserved heterogeneity and measurement error problems that commonly arise in microdata production estimates are examined. Output measurement errors cause OLS estimators to underestimate the output and wage response of employment demand. Time-difference estimators exaggerate the measurement error biases. Instrumental-variable estimates of the output elasticities are 0.89 and 0.76 and own-wage elasticities are −0.42 and −0.65 for skilled and unskilled labor, respectively. The output elasticity is larger for skilled labor whereas the wage elasticity is larger for unskilled labor in virtually every industry.

The productivity slowdown of the early 1970s continues to puzzle economists. A frequent explanation of this puzzle is that mismeasurement of output has worsened enough to help account for the apparent shortfall of output growth. Griliches (1994) highlighted one channel through which this worsening measurement could occur. He raised the possibility that—because output growth in the service sector likely is undermeasured—the rising share of services has led to greater undermeasurement of overall economic growth. This paper demonstrates that this argument is of little quantitative significance. Even under assumptions most favorable to the hypothesis, the rising share of services has had only a small impact on measurement error. These results—along with evidence from Baily and Gordon (1988)—make mismeasurement of output an improbable explanation for the productivity slowdown in aggregate data.

The rate of time preference (RTP) and the intertemporal elasticity of substitution (IES) are two important factors shaping intertemporal consumption decisions. Models in which the RTP and/or the IES differ systematically between rich and poor households have different empirical and policy implications for economic development, growth, and the distribution of income and consumption from those of standard models in which these parameters are constant across households. In this paper, we estimate a model in which both RTP and IES are allowed to differ across rich and poor households using household-level panel data from India. Our empirical results are consistent with the view that the RTP is constant across poor and rich households, but the IES is larger for the rich than it is for the poor.

This paper reassesses a finding by Martin Prachowny (1993) that the value of the Okun coefficient for the United States (linking unemployment changes to output changes) is only around −0.67 rather than around the more typical value of −2.25. Using a cointegration framework, and the same data sets as Prachowny, we find, for one of the data sets, that the Okun coefficient is much closer to a value of −2.25, which supports previous research work.