Knowledge that Transforms

A paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined. Financial intermediation promotes growth because it allows a higher rate of return to be earned on capital, and growth in turn provides the means to implement costly financial structures. Thus financial intermediation and economic growth are inextricably linked in accord with the Goldsmith-McKinnon-Shaw view on economic development. The model also generates a development cycle reminiscent of the Kuznet hypothesis. In particular, in the transition from a primitive slow-growing economy to a developed fast-growing one, a nation passes through a stage in which the distribution of wealth across the rich and poor widens.

Our estimates of the pay-performance relation (including pay, options, stockholdings, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. Although the incentives generated by stock ownership are large relative to pay and dismissal incentives, most CEOs hold trivial fractions of their firm's stock, and ownership levels have declined over the past 50 years. We hypothesize that public and private political forces impose constraints that reduce the pay-performance sensitivity. Declines in both the pay-performance relation and the level of CEO pay since the 1930s are consistent with this hypothesis.

Historical evidence indicates that hyperinflations can disrupt individuals' normal trading patterns and impede the orderly functioning of markets. To explore these issues, we construct a theoretical model of hyperinflation that focuses on individuals and their process of economic exchange. In our model buyers must carry cash while shopping, and some transactions take place in a decentralized setting in which buyer and seller negotiate over the terms of trade of an indivisible good. Since buyers face the constant threat of incoming younger (hence richer) customers, their bargaining position is weakened by inflation, allowing sellers to extract a higher real price. However, we show that higher inflation also reduces buyers' search, increasing sellers' wait for customers. As a result, the volume of transactions concluded in the decentralized sector falls. At high enough rates of inflation, all agents suffer a welfare loss.

This paper uses a national survey of 3,119 individuals to examine the effect of lung cancer risk perceptions on smoking activity. Both smokers and nonsmokers greatly overestimate the lung cancer risk of cigarette smoking, and the extent of the overestimation is much greater than the extent of underestimation. These risk perceptions in turn significantly reduce the probability of smoking, as suggested by an economic model of risky consumption decisions. Cigarette excise taxes in effect endow individuals with additional risk perceptions comparable to their current assessed lung cancer risks.

This paper presents a simple general equilibrium model in which unemployed workers search for jobs and vacant firms search for employees. Formally, I develop a two-sector, constrained efficient version of the Diamond-Mortensen-Pissarides matching model of trade coordination. This approach to modeling factor market search appears promising since its algebraic development parallels Jones's treatment of the two-sector model of production, and the latter framework underlies most applied general equilibrium analyses. Some illustrative short-run and steady-state results are presented concerning the behavior of open and closed economies that exhibit unemployment and vacancies.

A model of equilibrium unemployment and vacancies is presented in which the absence of a market for interviews can yield externalities and inefficiency. Inefficiency results in market forces that lead firms to charge fees for interviews or to change the wage rate. These market forces require substantial information and may not operate. A graphical analysis shows how such forces would cause wages to adjust to shifts in supply, taxes, and transfers between workers and firms. With excessive unemployment, efficiency requires a transfer of income from workers to firms.

Much attention has been devoted to studying models of tournaments or situations in which an individual's payment depends only on his or her output or rank relative to that of other competitors. Academic interest derives from the fact that under certain sets of assumptions, tournaments have desirable normative properties because of the incentive structures they provide. Our paper uses nonexperimental data to test whether tournaments actually elicit effort responses. We focus on professional golf tournaments because information on the incentive structure (prize distribution) and measures of individual output (players' scores) are both available. We find strong support for the proposition that the level and structure of prizes in PGA tournaments influence players' performance.

Does the termination probability of a business expansion or contraction increase with age? This question may be formally addressed by analyzing the nature of duration dependence in aggregate economic activity. Our null hypothesis is that there is no duration dependence, which we test via intentionally nonparametric procedures. We also argue that common notion of business cycle periodicity can be usefully interpreted in terms of whole-cycle duration dependence. We find some evidence for duration dependence in whole cycles and in prewar expansions, but little evidence elsewhere.

We specify a demand function for longevity, or "quantity of life," along with corresponding demand functions for indicators of "quality of life" and a value-of-health and life extension function. We show that the demand for health must be derived in conjunction with that for longevity and the related consumption plan, and that all choices depend on initial individual endowments and terminal conditions. Our comparative dynamics predictions indicate that optimal health and longevity are increasing functions of endowed wealth rather than, necessarily, current income; that improvements in opportunities to produce health can accentuate the differences between endowed health and attained longevity levels; and that the value individuals ascribe to their health may be increasing over a good portion of their life cycle. We use this model to analyze observed empirical variations in levels and trends of life expectancy and in exposure to health risks across different population groups.