Knowledge that Transforms

The positive correlation between schooling and good health is well documented. One explanation is that schooling helps people choose healthier life-styles by improving their knowledge of the relationship between health behaviors and health outcomes. That is, schooling improves the household's allocative efficiency in producing health. This empirical study uses direct measures of health knowledge to test this explanation. Part of the relationship between schooling and the consumption of cigarettes, alcohol, and exercise is explained by differences in health knowledge. However, most of schooling's effects on health behavior remain after differences in knowledge are controlled for.

The idea that wages rise relative to alternatives as job seniority accumulates is the foundation of the theory of specific human capital, as well as other widely accepted theories of compensation. The fact that persons with longer job tenures typically earn higher wages tends to support these views, yet this evidence ignores the decisions that have brought individuals to the combination of wages, job tenure, and experience that are observed in survey data. Allowing for sources of bias generated by these decisions, this paper uses longitudinal data to estimate a lower bound on the average return to job seniority among adult men. I find that 10 years of current job seniority raise the wage of the typical male worker in the United States by over 25 percent. This is an estimate of what the typical worker would lose if his job were to end exogenously. Overall, the evidence implies that accumulation of specific capital is an important ingredient of the typical employment relationship and of life cycle earnings and productivity as well. Continuation of these relationships has substantial specific value for workers.

This note tries to explain why many successful restaurants, plays, sporting events, and other activities do not raise prices even with persistent excess demand. My approach assumes that demand by a typical consumer is positively related to quantities demanded by other consumers. This can explain not only the puzzle about prices but also why consumer demand is often fickle, why it is much easier to go from being "in" to being "out" than from "out" to "in," and why supply does not increase to reduce the excess demand.

We reconsider the paradox that the variance of production often exceeds the variance of shipments, a result that casts doubt on the production smoothing model of inventory behavior. Most studies of production smoothing have analyzed two-digit SIC dollar-value data from Commerce Department surveys. In contrast, this paper examines disaggregated physical-product data and finds that production is smoother than shipments in about two-thirds of the 38 industry or product groupings considered. However, doubts about the model persist; most notably, Euler equation estimates of the model's cost parameters are usually imprecise and often do not have the signs postulated by production smoothing models.

An endogeneous growth model is developed that produces convergence in per capita income and growth rates of output. Agents have identical preferences and access to identical technologies of production and investment, but differing levels of initial human capital. A spillover effect of human capital in the investment technology provides below-average human capital agents with a higher rate of return on investment than above-average human capital agents. Thus below-average human capital agents grow faster than above-average human capital agents. This model explains income convergence of the developed world, regional income convergence within the United States, and intergenerational mobility.

We study the phenomenon of short-run increasing returns to labor (SRIRL) in a sample of 10 interwar U.S. manufacturing industries. Our main findings are that SRIRL was common in the interwar period and that the pattern of SRIRL across industries was similar to that observed in the postwar period. We argue that, since presumably the Depression was not caused by technical regress, these findings are inconsistent with the claim of real business cycle theorists that SRIRL is in general due to procyclical technical shocks. We propose tests for discriminating between two other leading explanations of SRIRL but find that our conclusions differ by industry.

The empirical results presented suggest that imperfect information is present in the Treasury bill market. The mean auction price for 3-month bills is, on average, four basis points below the comparable secondary market price for the 1973-84 period. This "downward biasing" is positively related to the anticipated amount of dispersion of auction bids. This suggests that auction bidders use a bidding strategy that accounts for their lack of agreement about the value of the bill. Further, the secondary bill market learns from the bill auction, implying that these two markets aggregate traders' private information differently.