Knowledge that Transforms

A consumer faces list prices for commodities, but can buy one at a discount. Discounts vary randomly between sellers. The number of quotations sought depends on list prices, search costs and wealth. This function is homogeneous of degree zero, and, provided some sufficient conditions are satisfied, is; increasing in wealth; decreasing in search cost; independent of the list price of the discounted commodity if indirect utility is multiplicatively separable; increasing in the list price if the commodity is a necessity; increasing in the list price of substitutes. Slutsky's equation is generalized to include search.

This paper contains a generalization of the General Possibility Theorem to situations where choice over two-element (more generally, “small”) sets is not possible. The analysis is developed in terms of the social choice function formulation rather than the social welfare function approach. In this formulation, assumptions concerning the size of sets of feasible alternatives are explicit, allowing the role of these assumptions in inducing impossibility results to be explored.

A simple regression test of the null hypothesis of no sample selection bias has been suggested by J. J. Heckman. Because of its computational simplicity, this test is widely used by applied researchers. This paper shows that Heckman's test is equivalent to the Lagrange multiplier test of the null hypothesis. This allows us to readily deduce that the simple regression test also has desirable large sample properties.

This paper examines the interactions between market structure and resource allocation over time when there is endogenous technical progress. The structures considered are a planned economy, pure monopoly, and competition with patent rights. In an efficient allocation the date of invention coincides with the date of innovation (the date at which technology is used). This is also true with a pure monopoly, but monopoly retards technical progress relative to the efficient level. Competition for patents rights to a new technology results in excessively rapid technical progress if the resource endowment of the economy is sufficiently large. Also, competition may lead to “sleeping patents” where invention strictly precedes the date of innovation.

Accepting the hypothesis that the time-series “facts” of the aggregate labour market may be summarized by the linear autoregressive and moving average representations of wages, prices, unemployment, and interest rates implies that a useful theory ought to lead to predictions about these representations. Following this approach, this paper first catalogues many of the time-series facts about the aggregate labour market and then compares them against alternative models of the labour market based on the intertemporal substitution and staggered contract hypotheses.

In this paper we discuss several statistical techniques which may be used to test the validity of a possibly non-linear and multivariate regression model, using the information provided by estimating one or more alternative models on the same set of data. We first exposit, from a different perspective, the tests proposed by us in Davidson and MacKinnon (1981a), and discuss modified versions of these tests and extensions of them to the multivariate case. We then prove that all these tests, and also the tests previously proposed by Pesaran (1974) and Pesaran and Deaton (1978), based on the work of Cox (1961, 1962), are asymptotically equivalent under certain conditions. Finally, we present the results of a sampling experiment which shows that different tests can behave quite differently in small samples.

This paper extends the seminal work of Akerlof, and Salop and Stiglitz in two directions: (i) the sellers can select both the selling prices and quality levels of their good, and (ii) the buyers can acquire price/quality information about individual sellers at a cost. We observe multiple price/quality combinations in equilibrium, which depend upon the distribution of information costs of consumers and upon whether quality, or price, or both are costly observable. Welfare comparisons of equilibrium are considered. We show that welfare will be greater when price advertising is permitted.

Since 1975 labour slack has been unusually high in the OECD countries, and yet inflation has not diminished. The less favourable mix of unemployment and rate of change of inflation (which we call stagflation) is explained by a fall in the feasible rate of growth of real wages unmatched by a reduction in the constant term in Phillips curve. To investigate this mechanism, conventional wage and price equations are estimated for 19 countries and then used for simulation. Stagflation has been caused in roughly equal amounts by rising relative import prices and by the fall in the rate of productivity growth. In the basic model the Phillips curve is assumed not to adapt to falls in feasible real wage growth, but in a final section an adaptive wage equation is estimated, which confirms that the process of adaptation is slow.

The paper uses two approaches to study whether aggregate fluctuations in employment and unemployment may be explained within a market clearing framework as intertemporal substitution in labour supply. First, log-linear equations for labour supply and unemployment are estimated using a forecasting model to measure wage and price expectations. Second, a utility function is used to derive and estimate an equation for labour supply as a function of the current real wage and consumption. The influence of expected future real wages and interest rates is captured by the consumption variable. The empirical results do not support the intertemporal substitution model.

It has been alleged that, contrary to the assumptions in Pareto's Manual, the ability to compare first-differences of utility implies cardinality. It is shown here that the validity of this theorem hinges critically on the framework of analysis. In the framework of the thirties it is valid because of the implicit use of an ‘unrestricted domain’ assumption. In the modern choice-theoretic context it is not in general true but it becomes valid if utility functions are continuous and are defined on a connected topological space.