Knowledge that Transforms

This paper studies the political-economic equilibrium of a two period model with overlapping generations. In each period the policy is chosen under majority rule by the generations currently alive. The paper identifies a "politically viable" set of values for public debt. Any amount of debt within this set is fully repaid in equilibrium, even without commitments. By issuing debt within this set, the first generation redistributes revenue in its favor and away from the second generation. The paper characterizes the determinants of the equilibrium intergenerational redistribution and identifies a difference between debt and social security as instruments of redistribution.

Optimal enforcement of law is examined in a model with specific enforcement effort--effort devoted toward apprehending individuals who have committed a single type of harmful act--and general enforcement effort--effort devoted toward apprehending individuals who have committed any of a range of harmful acts (a police officer on patrol, for instance, is able to apprehend many types of violators of law). If enforcement effort is specific, optimal sanctions are extreme for all acts. If enforcement effort is general, however, optimal sanctions rise with the harmfulness of acts and reach the extreme only for the most harmful acts.

A model of irreversible investment in a competitive industry under demand uncertainty is developed. In the absence of restrictions, investment by itself will keep the price from rising above a natural ceiling that exceeds the long-run average cost by an option value factor. When a lower ceiling is imposed, investment is triggered only by the observation of an even higher "shadow" price. As the imposed ceiling is reduced to the long-run average cost, this shadow price goes to infinity and investment ceases completely. Because investment is depressed, a tighter price ceiling generally leads to a higher long-run average price.

Empirical studies have overwhelmingly shown that a lower child mortality rate leads to lower fertility. Yet it has not been possible to satisfactorily analyze this relationship in even the simplest theoretical models. This paper attempts to bridge this gap between theory and the empirical literature. The paper also presents results on the effects of child mortality changes on parental welfare. The analysis captures the dynamic stochastic feature of fertility choice, subsumes other endogeneous choices (e.g., the quality of the children), and treats the number of children as a discrete variable (this added realism is important for the analysis).

We develop a model of vintage human capital in which each technology requires vintage-specific skills. We examine the properties of a stationary equilibrium for our economy. The stationary equilibrium is characterized by an endogenous distribution of skilled workers across vintages. The distribution is shown to be single-peaked. Under general conditions, there is a lag between the appearance of a technology and its peak usage, a phenomenon known as diffusion. An increase in the rate of exogenous technological change shifts the distribution of human capital to more recent vintages, thereby increasing the diffusion rate.

Intertemporal separability is an almost universal assumption in empirical work on household behavior, but a good deal of recent work on consumption and labor supply suggests that it may not be tenable. The traditional weakening of this assumption is to allow for habit formation. I propose an alternative structure for intertemporal preferences that nests intertemporal additivity in a simple way and yields closed-form solutions for demand functions. This structure includes the neoclassical durables model as a special case. I derive a demand system that nests the almost ideal system as its time-separable counterpart. This model is estimated on U.K. aggregate time-series data for seven goods. Time separability is decisively rejected. Moreover, I find that ignoring temporal dependencies leads to considerable bias in the estimates of elasticities. Of the seven goods, durables display the strongest nonseparable effect; the estimated reactions are consistent with the neoclassical durables model.

This paper proposes an empirical framework for measuring the effects of entry in concentrated markets. Building on models of entry in atomistically competitive markets, we show how the number of producers in an oligopolistic market varies with changes in demand and market competition. These analytical results structure our empirical analysis of competition in five retail and professional industries. Using data on geographically isolated monopolies, duopolies, and oligopolies, we study the relationship between the number of firms in a market, market size, and competition. Our empirical results suggest that competitive conduct changes quickly as the number of incumbents increases. In markets with five or fewer incumbents, almost all variation in competitive conduct occurs with the entry of the second or third firm. Surprisingly, once the market has between three and five firms, the next entrant has little effect on competitive conduct.

This paper tests implications of full consumption insurance. The object is to determine how much mileage can be obtained from a model with complete markets, with such features as private information or liquidity constraints omitted. The implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk. The test involves regressing the change in household consumption onto the change in aggregate consumption and other right-hand-side variables such as the change in household income and change in employment status. All variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption. With observations on consumption and income for 10,695 households from the Consumer Expenditure Survey, the results are mixed. The results for one specification (exponential utility) are mostly consistent with full consumption insurance; the results for the other specification (power utility) are not.

We develop a method to solve and simulate cash-in-advance models of money and asset prices. We calibrate the models to U.S. data spanning the period 1890-1987 and study some empirical regularities observed over this period. The phenomena of interest include the average level of stock returns and returns on nominal bonds, the covariation of realized real interest rates and real asset returns with inflation, and the ability of nominal interest rates to predict inflation and nominal stock returns.