Knowledge that Transforms

In addition to generating housing services, owner-occupied housing units constitute a lumpy, risky asset in household portfolios. Analysis of these dual consumption/investment roles suggests the permanent wealth budget constraint in housing demand models should be decomposed into permanent returns from human capital and current net worth. For young owners, current net worth is hypothesized to be the dominant wealth component determining the quantity of housing demanded. Using a Canadian microdata base, evidence is found that net worth does provide both greater explanatory power and higher elasticities than labor earnings. Copyright 1990 by MIT Press.

The authors examine the premium consequences of alternative health insurance provisions by estimating pricing regressions for group insurance with data on 9, 019 fee-for-service plans offered by larger firms in the private sector. They find that cost-sharing at the point of purchase, especially for hospital care, significantly lowers fee-for-service premiums. However, some aspects of plan design that are often touted as cost-reducing, such as self-insuring or offering employees the option to join a health maintenance organization, are found to increase premiums. Coverage of alcoholism/chemical dependency treatments, inpatient mental health care, and psychologists' services, which are mandated in many states, are found to be expensive. Copyright 1990 by MIT Press.

Arie Kapteyn, Peter Kooreman, Arthur van Soest, Quantity Rationing and Concavity in a Flexible Household Labor Supply Model, The Review of Economics and Statistics, Vol. 72, No. 1 (Feb., 1990), pp. 55-62

This paper examines the impact of bank adoptions of automated teller machines (ATMS) on subsequent levels of concentration in local banking markets. The findings suggest that banks have had some success in using ATMs to attract customers from competitors. As a consequence, technology adoption's impact on market structure depends upon whether it is the larger or smaller firms within the market that adopt the new technology. Large firm adoptions increase concentration levels, while small firm adoptions tend to reduce them. The evidence also suggest that a state of structural disequilibrium seems to be characteristic of banking markets. Copyright 1990 by MIT Press.

Using a new and unique data set, this paper applies a systems approach to the study of potential competition, prices, and entry relations in airline city-pair markets. Consistent with limit pricing models, future entry is directly influenced by current prices. Current prices thus appear to provide an important signal to potential entrants about the probability of profitable entry. While results indicate the existence of barriers to entry, these barriers appear to have no independent effects on price beyond there effect on actual competition through increases in concentration. Copyright 1990 by MIT Press.

Previous analyses of depreciation have resulted in conflicting claims and evidence concerning the depreciation patterns of durable assets. We demonstrate that heterogeneity in asset quality and usage rates can reconcile disparate results. Specifically, we add both usage and care to the flexible estimation model of Hulten and Wykoff (1981a). By accounting for systematic changes in these additional dimensions and controlling for sample bias and scrappage value, a near-geometric pattern emerges which can otherwise be obscured. The impact of usage (as distinct from age) has implications for the measurement of cost (and hence productivity) and for modeling replacement decisions. Studies measuring the total capital stock and its implied service flows are numerous in the economic literature (Jorgenson, 1971). An accurate measurement of the aggregate capital stock is often essential in analyses of investment. consumption. and productivity at the firm, regional and national levels. But measurement of the stock is difficult, owing to heterogeneity of both the capital stock and how it is used. Also critical is measuring how the capital depreciates as it ages. Despite its importance and the amount of research conducted on depreciation, no clear consensus exists about the depreciation patterns followed by different types of capital goods. Jorgenson and his associates have advocated the use of a geometric depreciation pattern in studies of investment behavior. In addition, several analyses of market data for used capital assets appear to support the geometric pattern, which implies a constant depreciation rate (see Hulten and Wykoff (1981a, b); Wykoff (1989); Hall (1971)). A number of articles have been written challenging the constant rate assumption as both implausible and misleading. Feldstein and Rothschild (1974), for example, point to the unrealistic requirements for asset decay and replacement that are necessary for a geometric pattern. Penson, Hughes, and Nelson (1977) suggest that the rapid decline in productive capacity immediately after purchase is inconsistent with the physical capacity of individual assets. These authors and others (e.g., Taubman and Rasche, 1969) have Received for publication August 2, 1988. Revision accepted for publication August 23, 1989. * Oregon State University and Laurits R. Christensen Associates, respectively. Special thanks go to Moshe Kim, Frank Wykoff, Wes Musser, Michael Kuehlwein and two anonymous reviewers for helpful comments on earlier versions of this paper and to Bette Bamford for typing assistance. Oregon Agricultural Experiment Station Technical Paper No. 9009.

This study tests the hypothesis that price expectations differ across individuals because they acquire different information about inflation. If price information is a normal good, then the amount of price information acquired will vary across individuals according to income, education, and other demand-specific variables, causing price expectations to be heteroscedastic with respect to these variables. Utilizing monthly household survey data, the authors test the heteroscedasticity hypothesis and find support for the differential information model. In addition, they develop a novel method of incorporating the "don't know" response to questions about inflation into the estimation of price expectations. Copyright 1990 by MIT Press.

Factor demand studies of Komiya, Ozaki, Lau and Tamura based upon detailed cross-section data on individual production units have found that the nonhomothetic factor limitational ( NHT-FL) demand system, a nonhomothetic version of the Leontief fixed coefficient model, well explains the data. These results, however, have mostly been ignored in the current literature on flexible functional forms, and in fact none of the well-known nonhomothetic flexible cost function forms includes the NHT-FL model. I introduce a new nonhomothetic form of the Generalized Leontief (GL) cost function, which includes the NHT-FL model as a special case. Empirical application to a pooled data set of the Japanese iron & steel industry indicates that his form is superior to the translog, Diewert-Wales GL, and Berndt-Khaled GL forms. Copyright 1990 by MIT Press.

Lumber industry production behavior is modeled using pooled microdata. Explicit recognition of the crucial role of capacity utilization at the mill level is used to generate information concerning product supply and factor demands. To exploit optimally the panel structure of the data base, fixed effects and error components models are estimated, along with the ordinary least squares model. Results for key elasticities are robust and highly significant. Furthermore, the results are more plausible than those from previous studies that rely on aggregate data and flexible functional forms. Copyright 1990 by MIT Press.

We applied the VARMA test to examine the dynamic relation between prices and interest rates. The dynamic relation, which is important to characterize the nature of the Gibson paradox, provides economists new insight in discriminating against competing theories. In light of our empirical findings, all theories in the literature lose their persuasiveness. We found some evidence of unidirectional relation from prices to interest rates, but we found no evidence of unidirectional relation from interest rates to prices. Hence, the business cycle explanations advanced by Wicksell (1907), Keynes (1930), Lee and Petruzzi (1986), and Barsky and Summers (1988) are especially in jeopardy. A century and a half after its birth, this paradox is more puzzling than ever. Copyright 1990 by MIT Press.