The paper examines the trajectories of the economic variables when government expenditures are financed by changes in the money stock. It is shown that government budget balance is not a condition for equilibrium. If the nominal rate of interest changes by about as much as the expected rate of inflation, a rise in real government purchases per capita has the following effects: There will be a positive impact upon output per capita but steady-state output per capita and the capital intensity will decline, and there will be a rise in the inflation tax on real balances and steady-state rate of inflation.
The traditional explanation for the pattern of commodity price adjustment to monetary change, which stresses factors affecting the short-run elasticities of supply and demand in different markets, does not take into account price flexibility. This paper offers an explanation for the pattern of commodity price adjustment to monetary change based on differing degrees of price flexibility across industries, where price flexibility is determined by contract length. An extension to product markets of the theory of implicit long-term wage contracts leads to a simple hypothesis which explains the pattern of industry and sectoral price response to monetary change by implicit contract length, the latter being determined by relative price variability. Tests of this hypothesis across broad sectors and industries using postwar U.S. data produce favorable results. Also confirmed by the empirical evidence is the pattern of industry and sectoral price response to monetary change suggested by the tradition approach.
This paper examines empirically the relationship between innovative activity, as measured by the rate of return to research-and-development expenditures, and firm size using a sample of firms from the chemicals and allied products industry (SIC 28). We find that size is a prerequisite for successful innovative activity. The estimated rate of return to research and development for the smaller firms is 30 percent, while for the larger size firms it is 78 percent. Statistical tests for structural stability were used to divide the sample into these two behavioral regimes.
The advance of economics into the traditional domains of other social sciences has thus far largely overlooked anthropology. In this review article on Frederic Pryor's The Origins of the Economy I argue that economics has many fruitful applications to the study of primitive society. I fault Pryor's book for its lack of a theoretical framework and argue that such a framework can be derived from the economics of information and uncertainty. In particular, it can be argued that many primitive social institutions are substitutes for formal markets in insurance.
Poor people in low-income countries are no less concerned about improving their lot and that of their children than those of us who have incomparably more income. They are also competent in using their meager resources. Many low-income countries have advanced substantially in recent decades in improving the quality of their population and in acquiring useful knowledge. These achievements imply favorable economic prospects, provided they are not dissipated by politics.
[Puzzle 1: Was Judge Hand correct in his celebrated judicial opinion that Alcoa's monopoly in "virgin" aluminum provided indirect control over "secondary" production? Answer: Estimates based on three models suggest that the "procompetitive" effect of recycling was largely offset by a reduction in virgin production in anticipation of future conversion into secondary. Thus, Hand's judgment appears sound. Puzzle 2: Is it in Alcoa's own interests to suppress recycling of scrap aluminum if feasible? Answer: If current users show that they value the future use of the product by selling scrap to merchants, then Alcoa is likely to value the recycling market also. If users discard scrap which is subsequently scavenged, then Alcoa is likely to be harmed by such activity.]
Analyses of strike behavior rarely take account of prior learning and experience of bargainers. We show that experienced bargainers have fewer strikes than others and that differences in strike activity across U.S. manufacturing industries vary inversely with the estimated cost of striking. The cost of striking is measured as an inverse function of the ease of substituting pre- and poststrike production for strike-inhibited output. The occurrence of strikes, among rational and experienced bargainers, is attributed to the cost of designing contingent contracts applicable to unlikely circumstances, relative to the expected cost of strikes in such circumstances, absent contingent contracts.
This paper tests the fundamental implication of classical stochastic macroeconomic models à la Sargent-Lucas, namely, that conditional means of real variables are invariant with respect to monetary and fiscal policy. Using a multiple-equations technique to examine U.S. data from 1952:II to 1972:III, the classical hypothesis (which includes the natural-rate hypothesis) is rejected. While such evidence does not completely rule out the possibility of classical behavior by the economy, it provides some reassurance for those predisposed toward policy activism.
Using a Bayesian framework, this paper considers a risk-neutral firm which has to pick an investment project out of many that are available. It is shown that, if the firm is allowed to collect information, it will usually devote some time to information gathering before choosing. The main result is that, when uncertainty increases, the firm finds it profitable to delay investment decisions even further in order to collect more information. Thus increased uncertainty decreases the current level of investment even under risk neutrality. Another implication is that increased uncertainties cause an increase in the demand for liquid assets.