Knowledge that Transforms

This paper develops a methodology that uses microeconomic data from individual tax returns to test for the presence of tax evasion. The test is then applied to a large sample of taxpayers drawn from the U.S. Treasury tax file for 1977. The frequency of evasion indicated by the test is significantly greater than zero and within the wide range that other evidence suggests is the extent of evasion. The associations between evasion and characteristics of the taxpayer such as marginal tax rate, income, age, and marital status are also investigated and compared to the findings of earlier studies.

Jere Behrman, Paul Taubman, Intergenerational Earnings Mobility in the United States: Some Estimates and a Test of Becker's Intergenerational Endowments Model, The Review of Economics and Statistics, Vol. 67, No. 1 (Feb., 1985), pp. 144-151

A bstract-Residential electricity consumption is an example of a good for which it is costly to determine marginal price, since price changes with the quantity purchased according to multistep block rate schedules. This paper investigates the effect of the price information problem on consumers' price perceptions. An alternative hypothesis of average price perception is tested against the marginal price postulate which assumes wellinformed consumers. The model, which includes a price perception variable, allows the estimation of the price to which consumers actually respond. The empirical results support the hypothesis that consumers respond to average price perceived from the electricity bill.

The transactions cost approach developed by Coase and Williamson provides a coherent framework for investigating determinants of vertical integration in different industries. Empirical implications are developed and then tested using a cross section of firm level data pooled over different time periods. The results tend to confirm hypotheses regarding internal costs of management, small numbers bargaining problems and notion of firm as suited to adaptive sequential decision making under conditions of uncertainty. IT rHILE there exists an extensive literature on VY theoretical rationales for vertical integration, surprisingly little is known about importance of different theories.' The empirical literature includes two types of studies. Case studies test applicability of a particular theory to a single firm or industry (e.g., Armour and Teece (1980), Perry (1980) or Monteverde and Teece (1982a)). They are susceptible to bias in their choice of industry and generality of their results cannot be established. Another category of studies examines a broad base of industries to determine relationship between vertical integration and such variables as industry concentration, average firm size and sales growth (e.g., Adelman (1955), Gort (1962) and Tucker and Wilder (1977)). The link between these studies and theories of vertical integration is generally left unclear.2 This study will adopt strategy of investigating a broad base of industries, but, unlike earlier studies of this type, will test empirical implications following from transactions cost approach.3 This approach as developed by Coase (1937) and Williamson (1975, 1979) provides a coherent framework for investigating determinants of vertical integration over different industries. Furthermore, Williamson has persuasively argued that transactions cost considerations underlie such prominent reasons for vertical integration as elimination of monopoly distortions, technical complementarities, supply reliability and economies in acquisition of information. The transactions cost approach is summarized and implications are developed in first section of this paper. The implications are tested using firm level data pooled over time. The empirical model is presented in second section and results are presented in third section. The model incorporates variables not included in previous studies of vertical integration, such as measures of market risk and organizational structure. The results tend to confirm hypotheses regarding internal costs of management, small numbers bargaining problems and notion of firm as an institution suited to adaptive sequential decision making. A summary of results and conclusions are contained in final section. I. The Transactions Cost Approach Arrow (1969) has defined transactions costs as the cost of organizing economic system. In attempting to translate this idea into a framework for explaining organization of economic activity, Williamson and others have focused on role of opportunism and limited capability of individuals in processing information. The choice of institutional alternative depends on minimizing costs which arise in presence of transaction-specific investments and uncertainty. While a wide variety of institutional alternatives exist, a simple dichotomy is adopted here for sake of tractability. Following Coase, transactions are classified according to whether they take place in firm or across markets. Market alternatives become hazardous in recurring exchanges involving transaction-specific capital and efficient information processing. The firm then provides a Received for publication November 21, 1983. Revision accepted for publication December 3, 1984. *Rutgers University. This paper is based on my dissertation. I would like to thank my committee, Armen Alchian, Harold Demsetz, David Mayers, Fred Weston and my chairman, Benjamin Klein, for their helpful comments. Recent versions of paper also benefited from comments made by K. Chung, D. Carlton, D. Kaserman and anonymous referees. I would also like to thank participants of Transactions Cost Workshop at University of Pennsylvania. The usual disclaimer applies. 1 Recent summaries of theoretical literature on vertical integration are in Warren-Boulton (1978) and Kaserman (1978). See Levy (1981, 1984) for discussion of this problem. 3Earlier studies by Armour and Teece (1980) and Monteverde and Teece (1982(a, b)) have successfully employed transactions cost approach to examine vertical integration in particular industries. This study differs in that it adopts transactions cost approach to test implications across industries.

Within the international trade literature it is not uncommon to find arguments about whether devaluation will improve the trade balance. It is argued that the flows of goods respond only with time lags to changes in the exchange rate. The terrn is used to describe the movement over time of the trade balance: it may deteriorate at first and improvement may come later. This paper presents a method by which one could detect the existence of the J-Curve. The method is applied to four developing countries. The empirical evidence supports the pattern of movemnent described by the J-Curve. A major policy option for a country facing a persistent balance of payments deficit is said to be devaluation of its currency. Within the international trade literature it is not uncommon to find arguments about whether devaluation will improve the trade balance or the balance of payments. For example, proponents of the elasticities approach describe the necessary and sufficient conditions for an improvement in the trade balance in terms of elasticities of demand and supply referred to as the Marshall-Lerner condition.' While there is abundant empirical evidence to suggest that these conditions are indeed met (at least for industrial countries), there have been circumstances under which 2 devaluation has not been successful. For example, one might wonder why the U.S. trade balance deteriorated so much in 1972 despite the devaluation of the dollar in 1971. This unfavorable effect of devaluation on the trade balance is termed the J-Curve phenomenon Received for publication August 23, 1984. Revision accepted for publication November 26, 1984. *The University of Wisconsin-Milwaukee. I would like to thank two anonymous referees for their valuable comments on the initial draft of this paper. 1 Proponents of the absorption approach (e.g., Alexander, 1952) describe how devaluation may change the terms of trade, increase production, and switch expenditures from foreign to domestic goods, thus improving the trade balance. International monetarists argue that devaluation reduces the real value of cash balances and/or changes the relative price of traded and nontraded goods, thus improving both the trade balance and the balance of payments. 2 For an cstimate of the elasticities, see Houthakker and Magee (1969) and Warner and Kreinin (1983). The former study provides the elasticities estimates under fixed exchange rates and the latter under floating rates. This content downloaded from 157.55.39.17 on Wed, 31 Aug 2016 04:39:37 UTC All use subject to http://about.jstor.org/terms