Knowledge that Transforms

The effects of seat-belt regulations on automobile-related fatality and injury rates have been of great interest to economists and policy-makers over the past few years.' The effects of the laws have been evaluated by various statistical techniques using timeseries data for particular states and pooled time-series data for national models.2 The results of these studies provide some evidence that seat-belt laws (SBL) reduce injury and fatality rates. However, the effects of seat-belt laws vary across states and time periods as well as across the levels of injuries. This study assesses the effects of the Texas seat-belt law on injury rates using policereported accident data. The data are from the U.S. Department of Transportation State Traffic Accident Files and are compiled monthly for the period 1982-1987 for driver-involved accidents. Furthermore, the data comprise singleand multiple-vehicle accidents. Only accidents involving towed vehicles are used in the analysis so as to normalize for changes in accident-reporting thresholds over time.3 The analysis was conducted for several sets of injury classifications using the KABCO scale, which indicates the numbers of fatalities (K), severe injuries (A), moderate injuries (B), complaints of injuries (C), and no injuries (0).

A countertrade contract ties an export to an import. Usually, countertrade is criticized as a form of bilateralism and reciprocity and, thus, as an inefficient form of international exchange. In this paper, the authors argue that there are circumstances in which the tying of two technologically unrelated trade flows may be efficiency-enhancing. They show that countertrade can be an efficient institution in international trade that solves moral-hazard problems and restores creditworthiness of highly indebted countries. The authors test the implications of their model using a sample of 230 countertrade contracts. Copyright 1995 by American Economic Association.

Investigates the effecto of the North American Free Trade Agreement on agriculture in Mexico. Implications on policy design for the absence of efficient capital markets, on the welfare costs of reforming gradually, on incentive problems created by trade adjustement policies and on the redistribution aspects of policy reform.

In September 1990, the city of Philadelphia went to the municipal-bond market to borrow $375 million dollars for one year, a not unusual event for a large city needing cash to cover weekly expenditures until the quarterly or annual tax revenues are collected. What was unusual for Philadelphia was the size of the loan request; the 1990 proposed borrowing was $187 million larger than the previous year's request of $188 million. Investors rightly suspected that Philadelphia needed money for more than just the typical cover of a few month's cash shortfall. A closer look at the city's books revealed over $73.8 million in accumulated deficits from the previous six budgets. The extra $187 million of short-term borrowing was necessary to help cover the $73.8 accumulated debt and fiscal year (FY) 1991's expected deficit of $132.6 million. Investors rejected Philadelphia's request for the additional borrowing, and the city fell into a three-year fiscal crisis. The city emerged from the crisis with city residents and shoppers paying an additional 1-percent sales tax, city workers facing a two-year wage freeze and a reduction in employee benefits, and residents living with reduced public services. The long-run effects on city employment and property values are sure to be damaging. How does a city get into such a fiscal mess? This paper seeks to provide one answer to this question using the recent (FY 1963-1990) fiscal history of Philadelphia as a case study. I. Accounting for a Fiscal Crisis

Roger Kormendi (1983) presents apparently strong evidence that, in contrast to the standard view, consumption is not reduced by taxes but is reduced by government expenditure. He interprets his results as supporting a consolidated approach to private sector behavior in which consumers effectively internalize the government budget constraint. Specifically, he claims that consumers regard government spending as the true measure of the government's claim on private resources, and so do not respond to changes in taxes, given spending. This is basically the approach advocated by Robert Barro (1974) and known also as the Ricardian Equivalence Proposition (hereafter REP). Kormendi's results appears to contradict other empirical work based on the Life Cycle Hypothesis (for example, Martin Feldstein, 1982; Modigliani 1984a; Sterling, 1985) although results similar to his have been reported (see David Aschauer, 1985; John Seater and Roberto Mariano, 1985 and the references in Kormendi). In our view, Kormendi's analysis is seriously flawed. His heuristic derivation of the consumption function leads him to a specification of the aggregate consumption function, which is not consistent with the Life Cycle Hypothesis (LCH) or with REP, and to questionable methods of estimation. Once his conceptual and methodological errors are corrected, his formulation and, more generally, the REP hypothesis are found to receive little empirical support. In the next section we rely on the LCH to derive an aggregate consumption function which shows explicitly how government expenditure and taxes should effect private consumption. This derivation helps to bring out the observable implications of REP, which are shown to be equivalent to a limiting form of the LCH in which the planning horizon is infinite. It also serves to clarify the appropriate specification of the variables appearing in the consumption function. Next, Section II reports our empirical estimates and tests. Section III compares our results with Kormendi's. Finally, Section IV reports the results of endeavors to improve the specification of fiscal variables, notably by distinguishing between permanent and transitory tax changes.