Knowledge that Transforms

Alternative methods of computing estimates of inequality measures from grouped data are critically examined in terms of their theoretical and empirical properties. The use of a simple “split-histogram” technique of interpolation is explained and supported. Theoretical and empirical support is also provided for the “⅓/⅔ rule”—a simple computational procedure for a point estimate of an inequality measure derived from its standard grouping bounds.

This paper provides a theoretical synthesis of recent discussions of "learning by doing" and "investment in training" as alternative forms of human capital accumulation. These theoretical notions relate to essentially different phenomena; in particular, pace Becker and Mincer, "investment in training" does not completely encompass "learning by doing". The paper then develops a model in which human capital accumulation occurs via both "training" and "learning by doing". The joint training-learning model, since it is more general then "pure" models in which all accumulation occurs via either training or learning, avoids certain restrictive and seemingly implausible implications of either kind of "pure" model. However, the joint model also has implications that, while compatible with stylized facts about the life cycle, are sharper than those of either kind of pure model. (For example, the joint model implies that market time and earnings must rise early in the life cycle, while neither pure model without "corners" does so.) Finally, the notion of learning by doing provides a rationale for an empirical finding that has recently received attention, to the effect that the rate of depreciation of human capital is not constant, but rather depends on the extent to which it is used in market activities.

This paper is concerned with measuring the true impact of certain human capital variables on an individual's occupational position. The particular variables which are analysed are training, qualifications and spells of sickness and unemployment. The longitudinal nature of the data enables us to control for all relevant individual attributes which remain fixed over the period of the sample. This is vitally important because these attributes are strongly correlated with the variables of interest and would seriously corrupt estimates derived from a single cross-section. A method of generating consistent estimates (as N → ∞, T fixed) for a dynamic model with fixed effects is also illustrated.

This paper studies a central aspect of optimal income taxation as modelled in Mirrlees' original paper on the topic (identical leisure/consumption preferences, qualitatively homogeneous "skills" in production), namely, whether given concave utilitarianism alone the optimal marginal income tax will be non-negative. A well-known positive answer to this question (in weak inequality form) was given in the said paper which, however, we show requires additive separability of individual utility (in the ordinal and cardinal senses). Our main result here is to derive the required (strict) positivity of the marginal tax under weak conditions, slightly wider than noninferiority of consumption and leisure, with preferences otherwise arbitrary.

This paper examines the relative importance of timing and persistence elements in explaining cyclical fluctuations in labour supply. Data from the natural experiment provided by World War II and cross-sectional data on American local labour markets, as well as aggregate time-series data are used in the empirical work. We find little evidence that timing effects play an important role in labour market dynamics. The evidence suggests that views emphasizing persistence are more accurate, and that previous employment tends to raise the probability of subsequent employment.

This paper provides a theoretical and empirical analysis of the effects of input price shocks on economic growth, with a focus on United Kingdom manufacturing in the 1970s. The theoretical model predicts a discrete decline in output and productivity after an input price rise, and a longer-run slowdown in productivity growth, real wage growth, and capital accumulation. These features characterize the United Kingdom and most other OECD economies after 1973. The empirical results confirm the important role of input prices in recent U.K. adjustment, but also point to an important role for other supply and demand factors.

This paper considers the use of imperfect information for risk sharing and incentive purposes when perfect observation of actions and outcomes is impossible, making complete contracting infeasible. The incentive-insurance problem is defined to consist of two parts: the choice of an information system and the design of a sharing rule based on the information system. A generalized agency model is formulated to analyse this problem. The agency models of Ross (1973a, b), Wilson (1968), Stiglitz (1974), Mirrlees (1976), Harris and Raviv (1979), Holmström (1979) a.o. appear as special cases of the generalized model. The analysis focuses on the value of information in the agency information problem. The set of information systems which are valuable—i.e. improve risk sharing and incentives in a Pareto sense—is characterized. A problem-independent ranking of information systems for the agency information problem is then characterized under the assumption that the agent's preferences are additive in money and actions. The ranking may be viewed as a generalization of Blackwell's ranking of information systems for decision problems, to this particular game. When the agent's risk preferences depend on his choice of action, on the other hand, it is shown that the Blackwell ranking may be invalid. Randomized incentive schemes are shown to be efficient when the incentive effect of risk is positive and sufficiently large relative to the absolute risk aversion of the partners.

The efficient estimation of econometric models with rational expectations by the substitution method usually entails the use of a non-linear simultaneous equations estimator and hence is not very attractive computationally. It is shown that for a wide class of problems efficient estimates can also be obtained with standard estimation methods if instead an errors in variables approach is used. For many other problems, although not providing fully efficient estimates because rationality is not imposed, the errors in variables method will still have a strong appeal because otherwise it uses all of the structural information in the model; unlike the substitution method, when an incomplete information set is used, it guarantees consistent estimates; and it is easy to compute.

This study proposes and implements a method of labour supply estimation which is appropriate when the sample contains unemployed and underemployed workers. The estimation method consists of excluding unemployed and underemployed workers from the sample and then using (to avoid selection bias) an extension of Heckman's approach to the case where two correlated selection rules generate the sample. Hausman's specification test is then used to determine whether ignoring constrained workers has led to biases in traditional labour supply estimates, and the empirical results suggest that previous estimates of several important parameters are biased. Since the biases go in the direction that would be predicted by the hypothesis that the unemployed and underemployed are constrained, the results support this hypothesis.

This paper analyses trade in manuf acutured goods that are produced via a vertical production structure with many stages, where some value is added at each to an intermediate product to yield a good-in-process ready for the next stage. We consider the stage at which a good is traded to be an economically endogenous variable, with comparative advantage determining the pattern of production specialization by stages across countries. We study how endowment changes and policy shifts move the margin of comparative advantage, which thus provides a channel for resource allocation adjustment that is additional to the usual ones of factor substitution and changes in the quantity of output.