Knowledge that Transforms

This paper focuses on the welfare effects of output instability and its elimination. Assuming Muthian rationality, risk neutrality, and lagged production response, I show how output instability affects the long-run production incentive. The gains and losses from the elimination of output disturbances ("ideal stabilization") are evaluated, and simple general conditions are derived which determine whether producers or consumers can expect to gain or lose from such stabilization. The distribution of the gains is generally more evenhanded than indicated in previous expectational models of price stabilization, which can be interpreted as special cases of this model.

This paper considers the choice of capital durability by competitive firms subject to a corporate income tax. We find that, with a positive rate of inflation, a historic cost depreciation rule biases the choice of asset life toward greater durability and lowers the market valuation of a firm's capital assets. Extending the familiar one-sector monetary growth model to incorporate this behavior, we explore the general equilibrium effects that the failure to index depreciation allowances for inflation may have on the long-run characteristics of the economy, including the capital-labor ratio and the rate of return received by investors.

This paper formulates and estimates a model of producer behavior for U.S. manufacturing 1947-71 that simultaneously identifies substitution elasticities, scale economies, and the rate and bias of technical change. A nonhomothetic, nonneutral generalized Box-Cox cost function is employed which takes on the generalized Leontief, generalized square-root quadratic, and translog cost functions as special or limiting cases. Total factor productivity is estimated parametrically rather than being computed as the residual of growth in outputs minus growth in inputs. We find substantial economies of scale and relatively little technological change.

This paper investigates the influence of wives' earnings on the distribution of family earnings. In the process, some differences in the manner in which family earnings are distributed within racial groups are highlighted. Earnings of wives equalize income distributions in white families but increase dispersion among blacks. Because they have conflicting effects, covariances between spouses in their wage rates and labor supply are isolated. Male and female wage functions are adjusted for sample censoring to fill out the true population variances and covariances in wages across all families. Due to the larger positive correlation in wages of black spouses, black family earnings would be distributed more unequally even if all individuals worked the same amount. Our labor supply analysis indicates that white families attempt to stabilize family earnings with some family members increasing their labor supply in response to a decline in participation of other family members. This compensatory function of wives' earnings is much less prevalent in black families.

The harp seal question is entirely emotional. We have to be logical. We have to aim our activity first to the endangered species. Those who are moved by the plight of the harp seal could also be moved by the plight of the pig--the way they are slaughtered is horrible. [Jacques Cousteau]

This paper presents a model of a market characterized by uncertainty and transaction costs. The uncertainty and transaction costs create incentives for firms to use both long- and short-term fixed-price contracts. The model sheds light on several puzzling empirical observations. I explain why long-term-contract prices can move by different magnitudes and even in different directions than short-term prices, why econometric price equations are likely to find costs, but not demand forces, mattering, and why "rigid" prices and delivery lags are not necessarily disequilibrium phenomena but, rather, can be perfectly understandable and predictable equilibrium phenomena.

This paper provides an empirically tractable version of a job-search model. The model is estimated using data on a sample of workers who were laid off when their plants closed. A generalization of the empirical model which allows for reservation wages to change over duration of unemployment is provided and estimated. Reservation wages are found to decline significantly with duration. Applications of the model and the estimates to explain diverse labor market phenomena are provided.