Knowledge that Transforms

One of the most striking trends in the behavior of youth in the United States during the 1990's has been the increased incidence of smoking. After steadily declining over the previous 15 years, youth smoking began to rise precipitously in 1992. By 1997, smoking by teenagers in the United States had risen by one-third from its 1991 trough, before declining again somewhat in 1998 and 1999. This trend is particularly striking in light of the continuing steady decline in adult smoking in the United States. This striking time trend has motivated substantial public-policy interest in youth smoking, highlighted by the recent unsuccessful attempt of the Clinton Administration to pass a comprehensive tobacco-regulation bill that had the ostensible main pulpose of reducing youth smoking. This public-policy interest arises out of concern that youth are not appropriately recognizing the long-run implications of their smoking decisions. Indeed, young smokers clearly underestimate the likelihood that they will still be smoking in their early twenties and beyond. For example, among high-school seniors who smoke, 56 percent say that they will not be smoking five years later, but only 31 percent of them have in fact quit five years hence. Moreover, among those who smoke more than one pack per day, the smoking rate five years later among those who stated that they would not be smoking (74 percent) is actually higher than the smoking rate among those who stated that they would be smoking (72 percent) (Department of Health and Human Services, 1994). If youth smoking leads to adult smoking, particularly in a manner that is underappreciated by the youth smokers themselves, it can have drastic implications for the health of the U.S. population. Smoking-related illness is the leading preventable cause of death in the United States, and smokers on average live from 6.5 (males) to 5.7 (females) fewer years, relative to those who have never smoked (David Cutler et al., 1999). The notion that this increase in youth smoking will lead to a rise in adult smoking is supported by the fact that 75 percent of smokers begin before their 19th birthday (Gruber and Jonathan Zinman, 2001). But this fact does not prove that the curTent upswing in youth smoking will lead to higher long-run adult smoking rates, as it is difficult to distinguish causality from these intertemporal colTelations; smoking later in life may not be a consequence of youth smoking for adults in the past, but rather smoking at both points in life may simply arise from intertemporal correlation in tastes for this activity. In this paper, I first discuss the causes of the rise in youth smoking in the 1990's, then provide some evidence to help causally assess its long-run implications for smoking in the United States and the health of the U.S. population.

In this paper, I try to shed some new light on the “puzzle” of why the Lucas critique, believed to be important by most economists, seems to have received very little empirical support. I use a real-business-cycle model to verify that the Lucas critique is quantitatively important in theory, and to examine the properties of the super-exogeneity test, which is used to detect the applicability of the Lucas critique in practice. The results suggest that the superexogeneity test is not capable of detecting the relevance of the Lucas critique in practice in small samples. (JEL C52, C22, E41)

This paper develops microfoundations for the role that diversified cities play in fostering innovation. A simple model of process innovation is proposed, where firms learn about their ideal production process by making prototypes. We build around this a dynamic general-equilibrium model, and derive conditions under which diversified and specialized cities coexist. New products are developed in diversified cities, trying processes borrowed from different activities. On finding their ideal process, firms switch to mass production and relocate to specialized cities where production costs are lower. We find strong evidence of this pattern in establishment relocations across French employment areas 1993–1996. (JEL R30, O31, D83)

This paper introduces a new model of exchange: networks, rather than markets, of buyers and sellers. It begins with the empirically motivated premise that a buyer and seller must have a relationship, a “link,” to exchange goods. Networks—buyers, sellers, and the pattern of links connecting them—are common exchange environments. This paper develops a methodology to study network structures and explains why agents may form networks. In a model that captures characteristics of a variety of industries, the paper shows that buyers and sellers, acting strategically in their own self-interests, can form the network structures that maximize overall welfare. (JEL D00, L00)

E-commerce is a hot topic; however, little is known about the actual size and impact of ecommerce in the United States. In part this is because e-commerce is a recent and rapidly evolving phenomenon, but it is also because the measurement of e-commerce presents a number of challenges. Some of these challenges are essentially unique. Others are similar to, or extensions of, old economy measurement challenges.

Creating Modern Art: The Changing Careers of Painters in France from Impressionism to Cubism by David W. Galenson and Bruce A. Weinberg. Published in volume 91, issue 4, pages 1063-1071 of American Economic Review, September 2001

Why did the stock market decline so much in the early 1970's and remain low until the early 1980's? We argue that it was because information technology arrived on the scene and the stock-market incumbents of the day were not ready to implement it. Instead, new firms would bring in the new technology after the mid-1980's. Investors foresaw this in the early 1970's and stock prices fell right away. In our model, new capital destroys old capital, but with a lag. The prospect of this causes the value of the old capital to fall right away. (JEL G12, O16, O33)

Research in Economic Education: Five New Initiatives by Michael K. Salemi, John J. Siegfried, Kim Sosin, William B. Walstad and Michael Watts. Published in volume 91, issue 2, pages 440-445 of American Economic Review, May 2001

Recent studies have shown that the dynamics of firms (growth, job reallocation, and exit) are negatively correlated with the initial size of the firm and its age. In this paper we analyze whether financial factors, in addition to technological differences, are important in generating these dynamics. We introduce financial-market frictions in a basic model of industry dynamics with persistent shocks and show that the combination of persistent shocks and financial frictions can account for the simultaneous dependence of firm dynamics on size (once we control for age) and on age (once we control for size). (JEL D21, G3, L2)

As Edwin Leuven and Hessel Oosterbeek (2001) point out, rather than performing the comparative statics analysis on the effect of increasing uncertainty, my original study limited the analysis to degenerate cases and refrained from inferring a possible monotonic relationship between uncertainties and the share ratio (Hashimoto, 1981 pp. 479–80). Leuven and Oosterbeek do not dispute my conclusions for degenerate cases. Donald O. Parsons (1986 p. 826) later asserted such a monotonic relationship without reporting a comparative statics analysis. Leuven and Oosterbeek use a uniform distribution of productivity to dispute Parsons’ assertion. Hashimoto and Jeong-Geon Lee (1994) reached a similar conclusion to theirs. Given the Hashimoto-Lee comparative statics analysis, I view the most significant contribution of Leuven-Oosterbeek to be not so much their comparative statics as their explicit formulation to account for what has become known in the literature as enforceability of contracts. In the 1981 paper I was concerned with the enforceability issues, so I adopted a certaintyequivalent approach to the fixed-wage formulation in the face of double informational asymmetry between the employer and worker. I then focused on the Becker-type share determination of specific human-capital returns (Gary S. Becker, 1962). Leuven and Oosterbeek directly formulate the enforceability of employment contracts in terms of a fixed wage rather than in terms of the sharing ratio. By considering the enforceability (or the incentive compatibility) issues in a fuller perspective, I conclude that the certainty-equivalent formulation I adopted in my 1981 model has an internal infirmity. In my opinion, this infirmity is a point that a serious Comment on Hashimoto (1981) should underscore. I do not think that Leuven and Oosterbeek’s Comment (2001) is sufficiently articulate or structured to highlight this point. Space does not permit a full discussion, so let me remark briefly on an important point that Leuven and Oosterbeek should have highlighted, but did not. The explicit and direct determination of the incentive-compatible fixed wage w leads me to conclude that the joint maximand is not the unconditional expectation Ev (s) 2 Ey(s), as I originally formulated; rather it is the conditional expectation Estay(v (s) 2 y(s)), conditional on both parties not separating. In the latter formulation, the determination of the fixed wage w implies an ex ante determination of the share parameter to be a 5 {Estay(w 2 y(s))}/{Estay(v(s) 2 y(s))}, which is equivalent to Leuven and Oosterbeek’s definition of a. In spite of the difference in formulation between Leuven-Oosterbeek and Hashimoto-Lee, the two studies obtain essentially the same comparative statics results. This is because both formulations rely on incentive-compatibility conditions for separation decisions where the forces at work are basically the same. Thus, Leuven and Oosterbeek confirm the accuracy of the degenerate results reported in Hashimoto (1981). For nondegenerate cases, the comparative statics are generally ambiguous. Using a uniform distribution, Leuven and Oosterbeek do find that the optimal wage decreases with the uncertainty in the market and increases with the uncertainty in the firm (p. 345). These findings are equivalent to what Hashimoto and Lee (1994) found: that the optimal share ratio decreases with the uncertainty in the outside productivity and increases with the uncertainty in the inside productivity. The Leuven-Oosterbeek Comment contributes a technical advance, but it retains the essential economic logic * Department of Economics, 410 Arps Hall, Ohio State University, 1945 North High Street, Columbus, OH 43210. I am grateful to Hajime Miyazaki for extensive discussions that elucidated theoretical issues in modeling information asymmetric employment relations and for improving the exposition, and to Teresa Schoellner for her very competent research assistance. However, I bear full responsibility for any remaining shortcomings. 1 Further analytical details are available upon request.