Knowledge that Transforms

Higher relative risk aversion is associated with higher risk premiums only if the riskiness of output is exogenous. When consumers can affect the variability of output, the market risk premium may well decrease as the relative risk aversion increases. With constant relative risk aversion and linear production functions, the ratio of the market risk premium to the standard deviation of the market is constant and independent of the relative risk aversion.

Rarely have economists been treated to an experiment comparable to the one of German reunification. In less than a year, a single political and entity is being fused from two economies with fundamentally different underlying principles of organization and substantially different levels of development. (See Horst Siebert, 1990, and David Begg et al., 1990.) Nonetheless, major regional disparities between western and eastern Germany (what were the Federal Republic of Germany (FRG) and German Democratic Republic (GDR)) will undoubtedly continue for many years. Since the fall of the Berlin Wall on November 9, 1989, both German Monetary Union (GMU) and political reunification were realized on July 1 and October 3, 1990, respectively. In this process, the advice of economists was often ignored in favor of political imperatives (see Roland Vaubel, 1990). Concerned with the potential impact of German Economic and Monetary Union (GEMU) on the process of European and political integration, many European Community (EC) policymakers have perceived German reunification as adding impetus to the 1992 program. Nonetheless, such initial reactions to GEMU have generally been formulated with only fragmentary information regarding the subsequent costs and policy measures, necessitated by the real resource transfer in order to achieve the German government's stated objective of equalizing living standards between western and eastern Germany. To the extent that GEMU generates positive or negative spillover effects to other EC countries, it presents challenges that can potentially influence the speed and degree of European integration. This paper examines implications of GEMU for the European integration process. In so doing, it makes reference to the burgeoning literature on the consequences of German reunification. Consideration of statistical information related to the performance of eastern and western Germany since June 1990 permits some evaluation of the validity of certain hypotheses underlying earlier studies of GEMU, as well as an assessment of likely consequences for EC policymaking and performance. Nonetheless, it is contended that the most provocative implications of GEMU result from the specific case it provides for analyzing the costs involved in integrating the fundamentally different centrally planned economies (CPE) of Eastern Europe within a viable European economic space. In this sense, the German reunification experiment offers not only the remarkable opportunity to measure the costs associated with the total reorganization and restructuring of a CPE to a free-market economy, but also to assess the contribution of government policy measures in this conversion process. Yet, certain unique characteristics of GEMU limit the validity of lessons from the German experience for understanding the adjustment processes in other Eastern European economies.

A central problem with organization of team production is that, if individual effort contributions are difficult to observe, feasible schemes for distributing net product among participants may suffer from poor work incentives. Thus, Armen Alchian and Harold Demsetz (1972) argue that efficiency commonly requires that there be an agent who monitors and disciplines other team members in exchange for right to retain team residual earnings, while Bengt Holmstrom (1982) shows that monitoring may in some cases be dispensed with, provided that there is a budget-breaking principal to perform an analogous disciplinary function. These arguments imply that production in residual-sharing cooperative teams will be beset by free-riding problems occasioned by inadequate reward discrimination due to absence either of monitoring incentives or of an agent with effective disciplinary powers. Such disadvantages are thought to be multiplied in agricultural cooperatives, because farm production is considered especially difficult to monitor (Michael Bradley and M. Gardner Clark, 1972; Joseph Stiglitz, 1974; Hans Binswanger and Mark Rosenzweig, 1986) and because scale economies, especially in labor-intensive systems, appear to be negligible (Putterman, 1989). The fact that restoration of householdbased farming in China during early 1980's led to a pronounced increase in output and productivity has been viewed as evidence in support of this thesis. To be sure, degree to which gains recorded during 1978-1984 reflected changes in farm-level organization as opposed to being a result of policy changes in such areas as crop specialization, pricing, and opening of free markets, remains a matter of some uncertainty (Dwight Perkins, 1988). A more subtle question, however, is that of extent to which any gains due to micro organizational change should be attributed to supervision problems of type mentioned above. A recent contribution by John McMillan, John Whalley, and Lijing Zhu (1989; hereafter MWZ), which attempts to answer first of these questions, gives rise to surprising implications regarding second. MWZ combine a simple model of incentives and utility maximization with standard growth-accounting techniques to reach conclusion that 78 percent of increase in agricultural productivity in China during period in question can be attributed to nonprice factors, principally the incentive effects of new responsibility (p. 782). Their model and estimates also imply that Chinese peasants supplied only a little over half (56 percent) as much effort under communal system as under succeeding household-based farming system and that this is attributable to fact that peasants expected to receive only about 30 percent of value product generated by incremental effort. Questions might be raised regarding study's methodology and, hence, numbers derived. The aim of present note, however, is to point out that, if findings of MWZ are to be believed, then although China's collective farms did indeed suffer from inadequate incentives, it may be wrong to attribute much of this to deficiencies in supervision. The MWZ model is not sufficiently microanalytic to distinguish between monitoring problems and other possible dampeners *Department of Economics, Brown University, Providence, RI 02912. Support from National Science Foundation Grant No. SES-8721382, comments and computational assistance from Si Joong Kim, and helpful suggestions of two referees are gratefully acknowledged.

Two key reforms underpin the moves toward more market-oriented economies in East-Central Europe (ECE): price reforms that allow a freer alignment of relative prices toward international norms; and industry reforms that increase competition, flexibility, and efficiency. These reforms are linked; only competitive firms responding to rational price signals can create an industrial structure able to withstand the rigors of international competition.

Burgeoning interest in understanding global environmental change has greatly increased demand for remote sensing of the earth from space.1 Over 60 percent of a $1 billion U.S. budget to study global change during fiscal year 1991 was allocated to space-based environmental data collection, including down payment on a $52 billion space data program, the Earth Observing System (EOS), planned for the next 15 years. This substantial expenditure, together with the huge technological scale of EOS (it will consist of large orbital platforms each carrying a multitude of sensors), have promoted considerable debate and alternative proposals for smaller-scale, modular spacecraft each carrying one or a few sensors. Proponents of the alternatives hold that the smaller-scale approach, in addition to being less expensive, foregoes few scale economies and avoids the eggs-in-one-basket risk of EOS, in which failure in launching a spacecraft or failure of one instrument on a multi-instrument spacecraft causes failure of the whole system. Advocates of EOS are concerned that the small-scale approach not only fails to exploit scale economies but may yield much lower information content, claiming that significant economies of scope are obtainable in operating and taking measurements from sensors aggregated on large spacecraft. In this paper we first ask whether scale and scope economies appear substantial enough, and risk small enough, to justify the large-scale approach presently envisioned.2 We then ask two separate but related questions about the organization of the project, namely whether these supply attributes require the technology to be an almost exclusively governmental activity. A dearth of information about remote sensing economics forces our approach to the production technology to be heuristic rather than empirical. Subject to this constraint, we fail to find evidence of significant scale and scope effects in large spacecraft and sensor manufacturing and launch, even after taking account of risk differentials among largerscale and smaller-scale systems (the former tDiscussants: Arthur DeVany, University of California-Irvine; Nancy Rose, MIT; James Dearden, Lehigh University.

Between 1950 and 1970 the labor force participation rate of southern black males aged 16-19 declined by 27 percentage points. This decline has been attributed to two demand-side shocks: the mechanization of cotton agriculture in the 1950s and extensions in the coverage of the federal minimum wage in the 1960s. We show, however, that participation rates of southern black teens fell continuously between 1900 and 1950. The proximate causes of the pre-1950 decline in black teen participation were increases in school enrollment rates and decreases in labor force participation by teens enrolled in school. Because the underlying causes of both effects had not run their course by mid-century, we conclude that about half of the post-1950 decline in black teen participation in the South would have occurred even if cotton agriculture had not mechanized in the 1950s or coverage of the minimum wage had not been extended in the 1960s.

During recent years much attention has been given to the role of bequests in explaining various aspects of economic behavior. For example, authors have studied the impact of bequests on physical wealth accumulation (Laurence Kotlikoff and Lawrence Summers, 1981), the interest elasticity of savings (Owen Evans, 1983), tax reform (Laurence Seidman, 1984), and the distribution of wealth (Alan Blinder, 1976a). More recently, economists have begun to distinguish between human and physical bequests (Gary Becker and Nigel Tomes, 1986). Acknowledging the presence of bequest in human form is important in analyzing each of the issues mentioned above. Outlays on children affect the shape of the family's labor supply and expenditure profiles, upon which the level of aggregate savings crucially depends. If these outlays are interest-sensitive substitutes for physical bequests, they will also influence the interest elasticity of savings. In the area of tax reform, the neutrality of the consumption tax depends on the ability of the government to identify human capital bequests from general consumption (Raymond Batina, 1987). If this is not possible, the portfolio-choice of investment in human versus physical capital may be distorted at the margin. Finally, the unequal transmission of wealth across generations may be explained by the lack of physical bequests and the inefficiently low levels of human bequests made by wealthconstrained households (Becker and Tomes, 1986). To distinguish clearly the behavior of constrained households from unconstrained households, who make sizeable physical bequests, both types of bequests must be recognized.' This paper introduces a model that makes explicit examination of these issues possible. It extends Lord's (1989) multiperiod model of life-cycle savings and adult human capital investment by adding altruistically motivated human and physical bequests.2 The model is calibrated using microeconomic data on earnings, time and goods expenditures on children's human capital, and physical bequests. We then use the model to examine the contribution of bequests to wealth accumulation and the level of savings. This topic is the source of an important but yet unresolved debate between Franco Modigliani (1988) and Kotlikoff (1988). Kotlikoff maintains that U.S. wealth accumulation is primarily the consequence of bequests, as opposed to life-cycle savings for retirement. One type of evidence cited by Kotlikoff comes from simulation results demonstrating the failure of realistically calibrated life-cycle models to generate sufficiently high saving rates and wealth:income ratios (Alan Auerbach and Kotlikoff, 1987). We show, however, that if a pure life-cycle