Knowledge that Transforms

When current market price depends partly on the expected rate of market price change, it is possible that the market will launch itself onto a price bubble with price being driven by arbitrary, self-fulfilling elements in expectations. The purpose of this paper is to provide some tests of the proposition that bubbles were absent during the German hyperinflation, a proposition we are unable to reject. The test methodology that we propose is general enough to be applied to other historical or contemporary episodes.

The effect of vertical integration by an input monopolist on the price of the final product and the derived demands are examined when the production is of CES and the demand for the final product is of constant elasticity. The results are proved by analytical methods. Specifically, when the elasticity of substitution is less than one, the price of the final product can decrease but, regardless of any conditions, the derived demand for the nonmonopolized input decreases. However, that of monopolized input decreases if and only if the elasticity of substitution exceeds the elasticity of demand.

[Agents' beliefs in the imminent reform of a particular money supply process can have a powerful effect on their predictions of such variables as the rate of inflation. To find a criterion for monetary reform, we argue that any money supply process which does not provide a finite solution for price in a Cagan-type hyperinflationary money market will be rejected by the public. Such a process does not have the basic property of money which we call "process consistency," and we suggest that agents' subjective probabilities that their money is "process consistent" are identical to the probability that they attach to a currency reform. We compute agents' subjective probabilities that a particular money supply process is process consistent for the explosive part of the German hyperinflation, and we find that the probability of process consistency reached its lowest level in the very week in which the reform started.]

The paper investigates the Pareto efficiency of direct democracy and searches for the frequency with which the losing minority in referendum voting could compensate the majority and still be better off. A model is defined that permits the measuring of the intensity of preferences in a population, based on voting and abstention behavior. Using the model, an analysis of over 100 Swiss referenda reveals only a few instances in which the outcome of direct voting is inefficient. It seems that the political system evolves methods of trade-off that permit efficient outcomes in most cases. Criticism of direct democracy should therefore not rely on the primarily hypothetical objection of inefficiency.

Variance bounds are derived for general present-value relations involving the expected future values of any finite number of variables. The estimators of these bounds and the variance being bounded are then shown to have a joint distribution converging to that of the multivariate normal, with moments which can be consistently estimated from the data. As a special case of these results, it is shown that expectations models of the term structure imply upper and lower bounds on the variance of the long-term rate. These bounds are used to test a rational expectations model of long-term U.S. Treasury bond yields.

This paper investigates the effect of early twentieth-century state maximum-hours laws on the employment of women in manufacturing. Maximum-hours laws are found to have reduced not only women's hours of work in 1920 but their employment as well. Further, the effect was not uniform by race and nativity: While the employment of foreign-born women was significantly reduced--by as much as 30 percent in the most restrictive states--the employment of native white women was largely unaffected. This and other evidence adduced in the paper suggest that early support for maximum-hours legislation for women, especially by the emerging American labor movement, may have been motivated in part by the well-documented hostility to immigration during this period.

A model of the Treasury-bill futures market of the risk-premium augmented expectations variety is developed and estimated for the period March 1976 to July 1978. For that period we conclude that (1) futures interest rates deviate significantly from the corresponding forward rates implicit in the spot-market yield curve; (2) the hypothesis that expectations about the level of and trend in interest rates are formed adaptively from past spot rates fits the futures-market data significantly better than the hypothesis of perfect foresight; and (3) the risk-premium component of futures yields varies directly with time to delivery of the T-bills and negatively with the level of interest rates.

A unique feature of this study is its use of panel data to construct two measures of permanent income: An earnings function with unobserved individual differences suggests one measure, while a weighted average of past incomes yields another. These measures reject the accepted theories of savings behavior and suggest a nonlinear relationship between savings and permanent income. A new function incorporating this nonlinearity is successfully applied to the data for Indian farm households. The occurrence of this nonlinearity suggests that income redistribution policies in the less developed countries are likely to result in a reduced supply of household savings.

This paper attempts to explain how the separation of security ownership and control, typical of large corporations, can be an efficient form of economic organization. We first set aside the presumption that a corporation has owners in any meaningful sense. The entrepreneur is also laid to rest, at least for the purposes of the large modern corporation. The two functions usually attributed to the entrepreneur--management and risk bearing--are treated as naturally separate factors within the set of contracts called a firm. The firm is disciplined by competition from other firms, which forces the evolution of devides for efficiently monitoring the performance of the entire team and of its individual members. Individual participants in the firm, and in particular its managers, face both the discipline and opportunities provided by the markets for their services, both within and outside the firm.