Knowledge that Transforms

It has been argued recently by Friedman that the whole term structure of interest rates rather than any single rate represents the relevant opportunity cost of holding money. The purpose of this paper is to present a way to incorporate the term structure in the demand-for-money function compactly with a few parameters and offer empirical evidence for the United States over the period 1960-76 supporting the validity of such an approach. Furthermore, we establish that this function appeared to be stable during a period (1972-74) when standard functions using only one interest rate display significant shifts in parameters.

The objective of the paper is to test the hypothesis that the structure of the economy is recursive with disturbances flowing from income to prices, but not back to income. Under this hypothesis, inflation shocks result in corresponding changes in output of the opposite sign. Tests are based on analysis of the vector stochastic process of GNP, the price deflator, and real GNP for the United States from 1954 to 1970. The results are consistent with the recursive structure hypothesis and would seem to reinforce evidence that stock prices and real interest rates vary inversely with inflation.

This paper focuses on the typical individual's value of a small change in the probability of his survival. With a simple life-cycle model, the value is shown to be implied by consumption activity which affects risk. The premium an individual is willing to pay to reduce risk is estimated using probit analysis of automobile seat-belt use. The "value of life" is found to be about $370,000. This estimate is contrasted with the foregone-earnings approach by showing that a surplus value above earnings exists and the elasticity of the value with respect to earnings is less than one.

It is hypothesized that constant payment mortgages (imposed, in part, by regulation) lead to distortions in the housing market in the face of anticipated inflation. The nature of this distortion is specified within a model of the housing market. Evidence is presented supporting the existence of the distortion. Moreover, this evidence is found to be robust to various structural and reduced form specifications of the model. A concluding section uses simulation to estimate the total loss to the housing stock up to 1974 attributable to the distortion. It is also shown that the production mix is affected by the inflation-induced distortion.

[Explaining economic fluctuations by the existence of imperfect wage rules begs the question of why such rules are chosen in labor contracts. The form of wage rules is not exogenous but determined by cost and efficiency considerations. Fully contingent rules preserve efficiency but are costly to write and enforce. Noncontingent rules may lead to large inefficiencies. Actual rules, which index the wage only to the price level, may be the optimal compromise. This paper characterizes the equilibrium of an economy in which the form of wage rules is endogenous. It shows the effects of the distributions of exogenous shocks on the equilibrium distribution of output and the form of the rule. It then studies the role of policy in such an economy.]

Much of the information available to participants in speculative markets is in the nature of expert opinion, analysis, professional advice, and so on. Markets discount widely held factual information very well; this paper studies market efficiency with respect to subjective information. We examine the "market" for bets on thoroughbred horse races to determine whether the published forecasts of professional handicappers are completely discounted. A multinomial logit probability model is used to measure the information content of the forecasts, and we find that they do contain considerable information but that the track odds generated by betting discount almost all of it. Within the population of bettors, those betting at the track appear to discount the handicapper information fully, but those betting through New York's off-track betting system do not.

This paper considers a model of earnings over time which incorporates individual effects and time effects without assuming that these effects are orthogonal to the variable of primary interest. The central coefficient is the effect of participation in a Manpower Development and Training Act training program on the earnings of trainees. Since the training status of (some) individuals in the sample changes during the period of the sample, both pre- and posttraining contrasts and trainee-nontrainee contrasts in earnings can be made. An estimate of the cross-section bias in a training coefficient can be made directly. The extent of the analogous bias in the education coefficient in regression studies is a point of current debate. The cross-section bias in the sample analyzed is large, and the estimated effect of training is small and positive.

In a variety of contexts, individuals must be allocated to positions with limited capacities. Legislators must be assigned to committees, college students to dormitories, and urban homesteaders to dwellings. (A general class of fair division problems would have the positions represent goods.) This paper examines the general problem of achieving efficient allocations when individuals' preferences are unknown and where (as with a growing number of nonmarket allocation schemes) there is no facilitating external medium of exchange such as money. An implicit market procedure is developed that elicits honest preferences, that assigns individuals efficiently, and that is adaptable to a variety of distributional objectives.