Knowledge that Transforms

This paper examines equilibrium in a spot and futures market with both primary producers (growers) and intermediate producers (processors). For a commodity that is subject to output shocks, processors tend to hedge long, in contrast with Hick's theory of futures hedging. Nevertheless, if transaction costs are low, the two-stage production process brings about a downward futures price bias, consistent with Hick's pricing prediction. But if costs of trading futures are high, growers tend to be differentially driven from the futures market, reversing the direction of the bias. Futures trading may also affect the organization of industry; when demand is inelastic, futures trading can serve as a substitute for vertical integration as a means of diversifying risk because the risk positions of growers are complementary with those of processors.

Ricardo is shown to be right that machinery can hurt wages and reduce output. A dramatic robot example reveals Wicksell's error in believing that Pareto optimality calls for no drop in total output from a viable invention. Under Ricardo's axiom that labor supply adjusts to keep wages at the subsistence level, he can correctly deduce on a market-clearing basis a rise in his net product (rent plus interest), while the greater drop in population and total wages result in a reduction in his gross product (rent plus interest plus wages).

If an increase in the rate at which a criminal commits crimes lowers the expected time until detection, the income from crime (net of expected fines) must be discounted at a rate that varies with the crime rate. This paper models the criminal's choice of the optimal crime rate under such conditions. It is shown that, irrespective of the criminal's attitude toward risk, an increase in the probability of detection is more likely to deter crime than a comparable increase in penalties. Other implications of the model for the optimal enforcement of laws are also explored.

We develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time. Strong addiction to a good requires a big effect of past consumption of the good on current consumption. Such powerful complementarities cause some steady states to be unstable. They are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention. Our theory also implies that "cold turkey" is used to end strong addictions, that addicts often go on binges, that addicts respond more to permanent than to temporary changes in prices of addictive goods, and that anxiety and tensions can precipitate an addiction.

This paper models ancademic department as an internal labor market. The major problem facing the university administration is to ensure that members of its departments are willing to hire the best possible candidates. Academic tenure is seen to be a necessary condition for this. The analysis is also consistent with other aspects of the academic environment including "tenure-track" appointments, contract buy-outs, early retirement plans, and, when a budget crunch hits, the elimination of entire departments. The results extend in a simple way to other organizations in which members have an input into overall decisions.

The paper is concerned with economies in which agents find sellers and employers in a time-consuming search process while they simultaneously trade with their current partners. A symmetric steady-state equilibrium does not exist, but asymmetric steady-state equilibria exist and are such that larger firms offer higher wages and charge lower prices than smaller firms, but still make more profits. These profits can be seen as rents from a superior market position.

Adult equivalence scales are supposed to measure differences in the "needs" of households of different demographic composition. Formally, they purport to measure the change in the cost of attaining a certain welfare level when the family composition varies. This paper shows that the definition and the measurement of these scales depend crucially on the concept of welfare used. When welfare is the utility parents derive from their own consumption, one has to assume separability of parents' and children's consumption. This assumption implies that the only way of imputing the intrafamily allocation of resources is by observing the consumption patterns of adult goods. Regardless of the definition used, one cannot separate the factors reflecting home technology (i.e., "needs") from those determining the intrafamily distribution rule (i.e., "wants") out of consumption data.

We develop a two-sector general equilibrium model in which equilibrium unemployment arises endogenously because of trading frictions in the labor market of one sector. Externalities inherent in the search process lead to inefficient equilibria, and this has important implication for the basic structure of the economy. In particular, the relationship between factor rewards and commodity prices is fundamentally different from the analogous relationship in a frictionless economy. One implication is that the economy's relative supply curve may be downward sloping, especially when the search sector is small. We also present several applications of the analysis.