Knowledge that Transforms

We present a simple overlapping generations model of an asset market in which irrational noise traders with erroneous stochastic beliefs both affect prices and earn higher expected returns. The unpredictability of noise traders' beliefs creates a risk in the price of the asset that deters rational arbitrageurs from aggressively betting against them. As a result, prices can diverge significantly from fundamental values even in the absence of fundamental risk. Moreover, bearing a disproportionate amount of risk that they themselves create enables noise traders to earn a higher expected return than rational investors do. The model sheds light on a number of financial anomalies, including the excess volatility of asset prices, the mean reversion of stock returns, the underpricing of closed-end mutual funds, and the Mehra-Prescott equity premium puzzle.

The use of cost-benefit analysis by federal regulatory agencies has expanded greatly in scope and sophistication. Unfortunately, agencies continue to employ private cost rather than social cost to evaluate environmental quality regulations. Furthermore, general equilibrium impacts and intertemporal effects of regulations are typically not included in the evaluation. In this paper we estimate the social cost of environmental quality regulations mandated by the Clean Air and Clean Water acts. We construct an econometric general equilibrium model of the United States to demonstrate that social cost estimates diverge sharply from private cost estimates. We also demonstrate that general equilibrium impacts are significant and pervasive and that intertemporal effects of the regulations, heretofore ignored, are significant.

We formalize a view of entrepreneurship in the spirit of Theodore W. Schultz. In this view, entrepreneurs are those individuals who respond to the opportunities for creating new products (and the like) that arise because of technological progress, for example. The theory has implications for entry and exit, specialization of labor, and business transfers. These business transfers correspond to, among other things, individuals changing jobs an sales of firms. Transfers are seen as a mechanism facilitating division of labor. We also discuss evidence on business transfers that occur through sales of firms.

This paper analyzes theoretically and empirically the role and significance of occupational mobility in the labor market focusing on individuals' careers. It provides additional dimensions to the analysis of investment in human capital, wage differences across individuals, and the relationships among promotions, quits, and interfirm occupational mobility. It is shown that part of the returns to education is in the form of higher probabilities of occupational upgrading, within or across firms. Given an origin occupation, schooling increases the likelihood of occupational upgrading. Furthermore, workers who are not promoted despite a high probability of promotion are more likely to quit.

This paper analyzes the application of liability to large-scale, long-term hazards. The key features distinguishing such hazards are the long temporal separation between exposure to a hazard and disease and the large damages when injuries finally emerge. The large scale of damages creates a strong incentive to avoid liability payments, and the long temporal separation creates numerous avenues through which parties can avoid paying possible damage awards. The analysis focuses on the incentive to avoid paying damages by vertically divesting production tasks associated with serious occupational risks. Such divestiture can lower liability costs if the small firm operating the risky stage goes out of business before latent injuries emerge or has insufficient assets to pay damages and declares bankruptcy when suits are filed. The paper then presents an empirical regression analysis of small-firm entry into the U.S. economy between 1967 and 1980, the period in which liability laws were changing. The point estimate is that, ceteris paribus, liability changes appear to have led to a large increase in small corporations in hazardous sectors. Hence the empirical analysis shows widespread attempts to avoid liability by shielding assets through divestiture.

This paper makes contributions to the estimation of health production functions and the economics of fertility control. We present the first infant health production functions that simultaneously control for self-selection in the resolution of pregnancies as live births or induced abortions and in the use of prenatal medical care services. We also incorporate the decision of a pregnant woman to give birth.

Our aim in this paper is to exposit a convex model of equilibrium growth. The model has two features that distinguish it from most other work on the subject: first, that the model is convex on the technological side, and second, that fixed factors are explicitly included. Existence and characterization results are provided along with some preliminary analyses of taxation and international trade policies. It is shown that the long-run growth rate in per capita consumption depends, in the natural way, on the parameters describing tastes, technology, and policies. It is demonstrated that in a free-trade equilibrium with taxation, national growth rates of consumption and output need not converge.

This paper develops a model of sectoral labor mobility and tests its main implications. The model nests two distinct hypotheses on the origin of mobility: (a) sectoral shocks and (b) worker-employer mismatch. We estimate the relative importance of each hypothesis and find that the bulk of labor mobility is caused by mismatch rather than by sectoral shift. We then try to put a value on society's match-specific information. That is, we ask to what extent the availability of the option to change jobs raises GNP. We find that the mobility option raises expected earnings by roughly between 8.5 percent and 13 percent of labor earnings, which translates to an increase in GNP of between 6 percent and 9 percent.

This study investigates product safety choices in the airline industry, with particular attention to the role of financial conditions. The analysis uses data on 35 large scheduled passenger airlines over the 1957-86 period to estimate the effect of profitability and other aspects of financial health on accident and incident rates. The results indicate that lower profitability is correlated with higher accident and incident rates, particularly for smaller carriers. These findings support a broad class of theoretical models that suggest links between financial conditions and product quality and may have significant implications for the allocation of safety inspection and enforcement resources.