Knowledge that Transforms

In this paper, the authors examine the role of parental education in the human capital production function by estimating the effects of parental education on the education profile of wages. The analysis uses sibling pairs from the Panel Study of Income Dynamics and the National Longitudinal Surveys of Labor Market Experience of Young Men and Young Women. The authors obtained mixed evidence on whether parental education raises the return to education. Copyright 1996 by MIT Press.

James Heckman, Anne Layne-Farrar, Petra Todd, Human Capital Pricing Equations with an Application to Estimating the Effect of Schooling Quality on Earnings, The Review of Economics and Statistics, Vol. 78, No. 4 (Nov., 1996), pp. 562-610

The intraindustry trade literature emphasizes nonhomothetic preferences and incomes as important determinants of aggregate demand and trade patterns. The authors provide evidence for such preferences, particularly that the structure of income-driven demand shifts is related to indices of Linder-type product characteristics, and that income distribution is a significant factor in determining aggregate expenditures. These results imply that, as general income levels rise, the relative volume of trade in manufactured consumer goods should rise, and the total volume of trade should rise, independent of changes in the intercountry difference between income levels. Copyright 1996 by MIT Press.

Robert J. Shiller, Fumiko Kon-Ya, Yoshiro Tsutsui, Why Did the Nikkei Crash? Expanding the Scope of Expectations Data Collection, The Review of Economics and Statistics, Vol. 78, No. 1 (Feb., 1996), pp. 156-164

This paper investigates whether consumer durables are important for the generation and propagation of business cycles. The author constructs a two-sector model that succeeds in generating business cycles that mimic empirical patterns of cross-sector volatility and comovement. She finds that half the relatively higher volatility associated with the durable-goods sector is due to higher volatility of shocks hitting this sector, with the other half due to endogenous responses, notably the investment accelerator. Nevertheless, this model does not have stronger internal propagation than the one-sector model. Further, incorporating durable consumer goods has little effect on the behavior of other macroeconomic variables. Copyright 1996 by MIT Press.

This paper undertakes a cross-country analysis of the determinants of VAT compliance, using data from a sample of 17 OECD countries for 1987. An index of compliance is constructed and regressed against variables which represent characteristics of the countries and their VAT rates. It is found that (a) a higher VAT rate is associated with lower compliance, and this tradeoff limits the revenue-maximizing VAT rate to under 25%; (b) compliance is substantially lower with multiple VAT rates; and (c) an extra dollar spent on administration raises revenue by $12, and longer experience with administering a VAT also raises compliance. Several OECD countries are ranged along a frontier, collecting about 8% of GDP through a VAT, but with rates of 14% to 22% on bases between 60% and 40% of GDP. For these, the base could only be broadened if the tax rate were lowered. Copyright 1996 by MIT Press.

This paper constructs a theoretical model of foreign direct investment and examines the extent to which the model can explain the level of outward direct investment by U.S. companies over the last two decades. The authors find that market size and factor costs, both labor and capital, are important factors in the investment decision. Instrumental variable estimation is used to demonstrate that the expectation of short-run fluctuations in the dollar also influences the timing of investment. Copyright 1996 by MIT Press.

Flow of funds; Monetary policy

The authors assess the impact of college quality on women's earnings and the influence of family and individual endowments on college choice using new data from a survey of identical and nonidentical twins born in Minnesota. The estimates reject models that ignore school choice. The statistically preferred estimates suggest that Ph.D.-granting, private universities with well-paid senior faculty and smaller enrollments produce students who have significantly higher earnings later in life. Both the quantity of schooling and the quality of schooling resources are allocated to higher-endowed individuals, which exacerbates preexisting inequality in human capital and biases conventional estimates of school quality effects. Copyright 1996 by MIT Press.

Rakesh Basant, Brian Fikkert, The Effects of R&D, Foreign Technology Purchase, and Domestic and International Spillovers on Productivity in Indian Firms, The Review of Economics and Statistics, Vol. 78, No. 2 (May, 1996), pp. 187-199