National Money as a Barrier to International Trade: The Real Case for Currency Union by Andrew K. Rose and Eric van Wincoop. Published in volume 91, issue 2, pages 386-390 of American Economic Review, May 2001
This paper uses a new, large-scale, dynamic life-cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the U.S. federal income tax, including a proportional consumption tax and a flat tax. The model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems. Simulation results project significant long-run increases in output for some reforms. For other reforms, namely those that seek to insulate the poor and initial older generations from adverse welfare changes, long-run output gains are modest. (JEL H20, C68)
Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach by Richard Clarida, Jordi Gali and Mark Gertler. Published in volume 91, issue 2, pages 248-252 of American Economic Review, May 2001
We use data from classic professional tennis matches to provide an empirical test of the theory of mixed strategy equilibrium. We Þnd that the serve-and-return play of John McEnroe, Bjorn Borg, Boris Becker, Pete Sampras and others is consistent with equilibrium play. The same statistical tests soundly reject the assumption of equilibrium play in experimental data, including the data from Barry ONeills celebrated experiment. ∗We are indebted to many people for helpful comments and discussions, but especially to Robert Aumann, Bruno Broseta, Bill Horrace, Tom Palfrey, Robert Rosenthal, Jason Shachat, and Vernon Smith, and to an anonymous referee for the Review. Ed Agranowitz provided indispensable assis-tance in obtaining data, and Barry ONeill graciously provided us with the data from his experiment.
There is abundant evidence that the production process of firms is becoming increasingly fragmented internationally, in the sense that a final manufactured good will consist of parts that have been manufactured in a variety of different countries. Studies of manufacturing industries suggest that the share of imported inputs in international trade rose significantly in the 1970's and 1980's, and that the fragmentation of the production process has been particularly pronounced in industries such as transportation equipment and electrical machinery.1 What difference does it make if trade reflects a fragmentation of the production process, rather than the traditional horizontal specialization in final goods? In this paper I focus on the implications of fragmentation for the analysis of commercial policy and emphasize two features of vertical relationships.2 The first is the market linkages that are introduced in models of fragmentation due to the interaction between tariffs on final goods and tariffs on intermediate goods. The incentives of countries regarding tariff reduction can vary significantly depending on the pattern of trade. The second feature of vertical specialization is that producers of final goods often require inputs that are specialized to their particular needs, so that vertical relationships may create contracting problems because of the possibility for opportunistic behavior. Commercial policy may play a role in altering the form of these vertical relationships.
Comparing Apples to Oranges: Productivity Convergence and Measurement across Industries and Countries: Comment by Anders Sorensen. Published in volume 91, issue 4, pages 1160-1167 of American Economic Review, September 2001
As the Indonesian economy went into a downward spiral in the latter half of 1997, there was much speculation and debate as to the reasons behind the sudden decline. Most explanations gave at least some role to investor panic, which had led to a massive outflow of foreign capital. At the root of this hysteria, however, were concerns that the capital that had flowed into Indonesia and elsewhere in Southeast Asia had not been used for productive investments. Much of this discussion focused on the role of political connections in driving investment. The claim was that in Southeast Asia, political connectedness, rather than fundamentals such as productivity, was the primary determinant of profitability and that this had led to distorted investment decisions. Obviously, the degree to which this type of problem was truly responsible for the Asian collapse depends very much on the extent to which connectedness really was a primary determinant of firm value. In making the argument that this was in fact the case, anecdotes about the business dealings of President Suharto’s children were often cited as evidence. Such stories suggest that the value of some firms may have been highly dependent on their political connections. However, investigations in this area have not progressed beyond the level of case study and anecdote. That is, there has been no attempt to estimate the degree to which firms rely on connections for their profitability. There are numerous difficulties that would
Survey data suggest that cropsharing contracts exhibit a much higher degree of uniformity than is warranted by economic fundamentals. We propose a dynamic model of contract choice to explain this phenomenon. Landowners and tenants recontract periodically, taking into account expected returns as well as conformity with local practice. The resulting stochastic dynamical system is studied using techniques from statistical mechanics. The most likely states consist of patches where contractual terms are nearly uniform, separated by boundaries where the terms shift abruptly. These and other predictions of the model are borne out by survey data on agricultural contracts in Illinois. (JEL J43, C73)
Firms that entered the stock market in the 1990s were younger than any earlier cohort since World War I. Surprisingly, however, firms that IPO'd at the close of the 19th century were just as young as the companies that are entering today. We argue here that the electrification-era and the IT-era firms came in young because the technologies that they brought in were too productive to be kept out very long. The model assumes that the stage before IPO is a learning period during which the firm refines the idea before committing to it at the IPO stage. The better the idea, the higher is the opportunity cost of a delay in its implementation, and the earlier the firm will have its IPO.