Knowledge that Transforms

This paper develops a simple general-equilibrium model of product cycle trade. There are two countries, innovating North and noninnovating South. Innovation consists of the development of new products. These can be produced at first only in North, but eventually the technology of production becomes available to South. This technological lag gives rise to trade, with North exporting new products and importing old products. Higher Northern per capita income depends on the quasi rents from the Northern monopoly of new products, so that North must continually innovate not only to maintain its relative position but even to maintain its real income in absolute terms.

A long-run equilibrium theory of turnover is presented and is shown to explain the important regularities that have been observed by empirical investigators. A worker's productivity in a particular job is not known ex ante and becomes known more precisely as the worker's job tenure increases. Turnover is generated by the existence of a nondegenerate distribution of the worker's productivity across different. The nondegeneracy is caused by the assumed variation in the quality of the worker-employer match.

The coexistence of money and default-free interest-bearing government bonds is explained by transaction costs; the private sector absorbs money with less real difficulty than it absorbs bonds. Under the assumption that the costs of issuing money and issuing bonds are identical, it follows that the presence of government bonds is inefficient. Further, the steady-state inflation rate is higher with bond financing of a given real deficit because there is less net output, less real saving, and hence the need for the government to inflate faster. This is demonstrated in a version of Samuelson's pure consumption-loans model.

[This paper revisits the analysis of risk taking and income distribution pioneered by Friedman, but in an extended--general equilibrium--framework. The results of this paper cast doubt on the generality of many of Friedman's strong propositions. In particular, we find that the relationship between inequality and liking for risk is not necessarily monotonic. Nor is it the case that greater diversity in tastes for risk necessarily contributes to greater inequality. The paper also analyzes the effect of progressive taxation on national income and inequality in the context of risk taking.]

This paper studies the settlements generated by several variants of a compulsory-arbitration scheme called ``final-offer arbitration'' (FOA). Some of these are now in use in several states, and one has been recommended by Clifford Donn as an improvement on existing schemes. Under reasonable economic assumptions, two versions of FOA now being used are equivalent to imposing z̄, the settlement the arbitrator would impose in conventional compulsory arbitration would impose in conventional compulsory arbitration, a result contrary to the intent of the FOA statues. However, a simple modification of Donn's proposal leads to a scheme that generates Pareto-efficient settlements that are at least as good for each agent as z̄. This suggests that substantial gains in welfare could be realized by a simple change in existing FOA statues and possibly also by using the new procedure in situations where compulsory arbitration is not now prescribed by law.

A structural model of the demand for college attendance is derived from the theory of comparative advantage and recent statistical models of self-selection and unobserved components. Estimates from NBEr-Thorndike data strongly support the theory. First, expected lifetime earnings gains influence the decision to attend college. Second, those who did not attend college would have earned less than measurably similar people who did attend, while those who attended college would have earned less as high school graduates than measurably similar people who stopped after high school. Positive selection in both groups implies no "ability bias" in these data.