Knowledge that Transforms

This paper uses the Panel Study of Income Dynamics to study the intertemporal preferences of rich and poor households in the United States. Subjective rates of time preference, identified from estimation of consumption Euler equations, are three to five percentage points higher for households with low permanent incomes than for those with high permanent incomes. Controlling for race and education widens this difference. With age and family composition held constant, time preference rates vary from 12 percent for white, college-educated families in the top 5 percent of the labor income distribution to 19 percent for nonwhite families without a college education whose labor incomes are in the bottom fifth percentile. Such differences imply very different patterns of consumption over the life cycle and suggest one possible explanation for observed heterogeneity in savings behavior across socioeconomic classes.

This paper explores one possible explanation for the apparent excess volatility of production relative to sales: nonconvexities in the technology facing firms. It is shown that if firms operate in a region of declining marginal costs, then small shifts in demand can cause production to jump substantially. Estimates for six production-to-stock industries as well as the automobile industry suggest that all these industries behave as if they were operating in the region of nonconvex costs. The results have important implications not only for inventory investment but also for the cyclical behavior of productivity and prices.

On the basis of anthropologists' area-specific research of primogeniture, I propose a Becker-Barro type of dynastic model in which primogeniture may emerge as family heads' optimal policy to minimize their respective lineal extinction probability. I show that parents' bequest division will be affected by the intrinsic mobility structure of the society, contrary to previous causality conjecture. Although an unequal division of bequests widens the within-generation inequality, it may increase the intergenerational upward mobility for the well-endowed child, which in turn improves the originally rigid upward mobility of the poor and middle-income groups and, as a result, reduces the steady-state income inequality.

The ability of individuals to move freely from one jurisdiction to another is generally seen as a constraint on the amount of redistribution that each jurisdiction within a system of governments can undertake. In this paper, we look at this proposition by developing a positive analysis of income redistribution by local governments in a federal system. We ask how much redistribution occurs when only local governments can have tax/transfer instruments, individuals can move freely among jurisdictions, and voters in each jurisdiction are fully aware of the migration effects of redistributive policies. Local redistribution is shown to induce sorting of the population, with the poorest households located in the communities that provide the most redistribution. While the threat of out-migration affects the potential for redistribution, our results suggest that significant local redistribution is nonetheless feasible. Numerical computations indicate that the proportion of residents who are renters is a major factor affecting the local choice of level of redistribution.

Cigarette demand equations accounting for tolerance, reinforcement, and withdrawal are derived using the Becker-Murphy model of rational addiction and are estimated using data from the second National Health and Nutrition Examination Survey. Estimates imply that smoking is addictive, individuals are not myopic, and price increases would reduce demand. Implications concerning time preference and addiction are tested by estimating the demand separately for samples based on age and education. Less educated (younger) individuals are found to behave more myopically than more educated (older) individuals, whereas more addicted (myopic) individuals are found to respond more to price, in the long run, than less addicted (myopic) individuals.

Monetary models based on cash-in-advance constraints make strong predictions about the stochastic properties of endogeneous variables such as the velocity of circulation of money, the rate of inflation, and real and nominal interest rates. We develop numerical methods to understand these predictions because the models cannot be characterized analytically. We calibrate some cash-in-advance models using driving processes estimated from U. S. time-series data to generate model predictions that are compared to sample statistics. Formulations of the models that generate variability in velocity corresponding to the U.S. data typically fail along other dimensions.

A Beckerian model of household production is developed to study the cyclical allocation of capital and time between market and home activities. The adopted framework treats the business and household sectors symmetrically. In the market, labor interacts with business capital to produce market goods and services, and likewise at home the remaining time (leisure) is combined with household capital to produce home goods and services. The model presented is parameterized and simulated to see whether it can rationalize the observed allocation of capital and time, as well as other stylized facts, for the postwar U.S. economy.

This paper constructs a dynamic general equilibrium model in which economic growth is explained by the evolution of the division of labor. The relationships among the accumulation of human capital, the evolution of the division of labor, endogenous comparative advantage, trade dependence, the market structure, and economic growth are investigated.