Knowledge that Transforms

This paper examines how four components of the job search process--the choice of search methods, the choice of how many firms to contact, the rate at which offers are received, and the acceptance or rejection of an offer--influence the job-finding rate. A reduced-form model of job search is estimated that takes account of the fact that users of a particular method of job search are not a random subset of all searchers. The empirical analysis focuses on differences in search behavior between the employed and unemployed. A key finding of the analysis is that the offer rate per contact is greater for employed searchers than for unemployed searchers. This may be due to differences in the effectiveness of search while employed versus unemployed or to unobserved differences in search effort. Further research on this issue is needed because many models of job search behavior are based on the assumption that job search is more effective when one is unemployed.

This paper provides a framework for addressing the question of when transactions should be carried out within a firm and when through the market. Following Grossman and Hart, we identify a firm with the assets that its owners control. We argue that the crucial difference for party 1 between owning a firm (integration) and contracting for a service from another party 2 who owns this firm (nonintegration) is that, under integration, party 1 can selectively fire the workers of the firm (including party 2), whereas under nonintegration he can "fire" (i.e., stop dealing with) only the entire firm: the combination of party 2, the workers, and the firm's assets. We use this idea to study how changes in ownership affect the incentives of employees as well as those of owner-managers. Our framework is broad enough to encompass more general control structures than simple ownership: for example, partnerships and worker and consumer cooperatives all emerge as speical cases.

This paper provides a unique opportunity to observe how a public policy affected the earnings of various interest groups at different stages of implementation. Specifically, we examine how the earnings of women, union members, and supervisory and professional staff were affected by various proposed and implemented comparable worth pay plans in Iowa. We find that large relative gains to women in the original proposed plans were reduced as the process evolved. As a result, some of the original gains to women were redistributed to union members, supervisors, and professionals.

Only a tiny fraction of the nonpoor population currently purchases private insurance coverage against long-term-care (LTC) costs. Studies generally attribute the failure to purchase private coverage to "unawareness" by potential purchasers of the benefits of coverage and a misperception that Medicare currently covers long-term care. I explore alternative reasons for failure to purchase coverage by well-informed, expected utility-maximizing risk-averse individuals for whom LTC is associated with a large increase in mortality and for whom family members represent an alternative source of care. There may be no demand for LTC insurance even if it is made available at actuarially fair premiums because the main consequence of coverage is to enhance the expected value of one's estate.

Many have argued that if labor income is difference stationary, the permanent income hypothesis predicts that consumption should be relatively volatile. In U.S. aggregate data, labor income is well characterized as having a unit root; however, consumption turns out to be relatively smooth. This anomaly is known as Deaton's paradox. I resolve Deaton's paradox by providing decompositions of labor income into permanent and transitory components. These preserve the univariate dynamic properties of labor income. However, when agents distinguish permanent and transitory movements in their labor income--as the rational expectations hypothesis asserts they should--the permanent income hypothesis correctly predicts the observed smoothness in consumption.

A model analyzing the choice of shift is developed and estimated using data from two supplements to the Current Population Survey. The findings show a positive wage premium for shift work that varies with personal characteristics, and there is strong evidence showing the importance of self-selection, as workers with low potential daytime earnings are more likely to choose night work and supplement their earnings. The findings demonstrate that cross-section estimates of wage premiums for union membership and firm size are biased upward because they pick up some of the compensating differential for shift work.

The equity premium puzzle, identified by Mehra and Prescott, states that, for plausible values of the risk aversion coefficient, the difference of the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance of the growth rate in per capita consumption. The puzzle is resolved in the context of an economy with rational expectations once the time separability of von Neumann-Morgenstern preferences is relaxed to allow for adjacent complementarity in consumption, a property known as habit persistence. Essentially habit persistence drives a wedge between the relative risk aversion of the representative agent and the intertemporal elasticity of substitution in consumption.

We propose a definition of time-consistent policy for infinite-horizon economies with competitive private agents. Allocations and policies are defined as functions of the history of past policies. A sustainable equilibrium is a sequence of history-contingent policies and allocations that satisfy certain sequential optimality conditions for the government and for private agents. We provide a complete characterization of the sustainable equilibrium outcomes for a variant of Fischer's model of capital taxation. We also relate our work to recent developments in the theory of repeated games.

This article assesses the significance of sanctions against employers of illegal aliens for resource allocation and income distribution in the United States. Data from the 1980 Census of Population are used to identify the industries likely to be monitored most closely by the immigration authorities. A general equilibrium incidence analysis then is carried out using alternative assumptions about the overall level of enforcement. Estimates are made of the effects sanctions will have on the real wages of legal U.S. workers.

We argue that although decentralization has advantages in finding low-cost solutions, these advantages are accompanied by coordination problems, which lead to delay or duplication of effort or both. Consequently, decentralization is desirable when there is little urgency or a great deal of private information, but it is strictly undesirable in urgent problems when private information is less important. We also examine the effect of large numbers and find that coordination problems disappear in the limit if distributions are common knowledge.