Knowledge that Transforms

In recent years, several countries have experienced extremely rapid inflations, but without total collapses of the national currencies. Argentina was one of those cases. By mid-1985, the rate of price increase exceeded 30 percent per month; however, prices continued to be set in pesos and there remained a sizeable volume of (short-term) nominal contracts. The treatment of such inflations poses several questions: What is the desirable speed of disinflation? What mix of instruments can effectively act on prices without causing an excessive fall in real income? How can prices be kept on a stable or moderately rising trend? The Austral Plan, announced in June 1985, combined fiscal measures with a price-wage freeze and a monetary reform, linked to a system for the conversion of debt contracts. The program quite successfully managed the transition to a much lower inflation rate, while real output recovered rapidly after an initial contraction. Still, inflationary forces remained strong: the problem of achieving a sustained stabilization proved quite difficult to solve. This paper briefly describes the program and its effects, with some references to current debates on stabilization policies. (See my 1986 study for full discussion and details.)

The familiar model of free-entry, competitive equilibrium has long played a central role in applied analysis of product markets. Among its stylizations is the restriction that firms produce a single output. For many situations, however, it is necessary to relax this assumption. While models permitting multiproduct firms exist, so far there is no framework that begins to rival the singleproduct analysis in terms of the ease with which it may be manipulated and extended to deal with specific applications. This paper develops such a model.' Specifically, in Section I a two-good model is set out that parallels the classic singleproduct analysis very closely. The sole difference is that alongside the single-product (specialized) technologies, which would usually be permitted, a multiproduct (diversified) technology is available. The model's competitive equilibrium is then characterized, and it is shown that this equilibrium may take one of three forms. Obviously, if diversification offers large cost advantages, no specialized firms can operate in equilibrium, and conversely if there are sizable disadvantages. The only other possibility is that diversified firms and exactly one type of specialized firm operate contiguously. Section II shows that the model is easy to manipulate, extends straightforwardly, and simple as it is, offers some new propositions. This demonstration involves examining the predictions the model offers in both its most general form and several extensions. To illustrate, basic features of equilibrium in the standard single-product environment are that price is determined by the cost of production with all operating firms producing the same level of output. Also, demand variation has no effect on either price or the actions of these firms. In contrast, in any equilibrium *Centre for Decision Sciences and Econometrics, Social Science Centre, University of Western Ontario, London, Ontario, N6A 5C2. Comments from David Donaldson, Ignatius Horstmann, Boyan Jovanovic, Peter Lloyd, Michael Parkin, Charles Plott, Edward Prescott, Sherwin Rosen, Christopher Robinson, Hugo Sonnenschein, and the referees are gratefully acknowledged. 'Research allowing multiproduct firms comes in a variety of forms. Early work by Roy G. D. Allen, 1938; John Hicks, 1939; Paul Samuelson, 1947; as well as more recent efforts by Keith Laitinen, 1980, analyzed in detail the isolated behavior of firms having access to an m-input/n-output production technology. Also, the Arrow-Debreu-McKenzie general-equilibrium model allows each producer a distinct production set, so that firms might choose to produce many goods. More recently, the literature (surveyed by Elizabeth Bailey and Ann Friedlander, 1982) analyzes a setting in which firms produce more than one good. Of all the contestability material, the work of William Baumol et al., 1982, Ch. 9, is the most closely related to the present analysis. Therein firms are permitted to choose a set of goods to produce, and a condition is provided that is necessary and sufficient for the (otherwise exogenously imposed) symmetric outcome to be supported in equilibrium. That this condition is indeed a relevant restriction is shown by means of a two-good numerical example in which the condition fails and the equilibrium is asymmetric. Finally, there is what might be termed the where there is sawdust there may be ' pressed logs' approach, dating back at least to Alfred Marshall, 1920, pp. 321-22, in which joint products are the result of unstructured technological complementarities.

Traditionally, restrictive licensing is assumed to create monopoly profits by restricting output, and therefore to produce two kinds of social costs: the deadweight loss due to reduced output and the resources devoted to rent seeking. However, the fact that nonsalvagable resources spent on rent seeking create their own barriers to entry has not been recognized. By increasing nontransferable rents, licensing prevents the least costly producers from entering, and thus produces a third kind of social cost. While Harold Demsetz' (1982) dismissal of the traditional notion of entry barriers is correct when assets are transferable, the idea of entry barriers is still useful when assets are nontransferable, as this note shows in the case of professional licensing.'

In an interesting paper, Julio Rotemberg (1983) extends the works of Eitan Sheshinski and Yoram Weiss (1977) and Michael Mussa (1981) to examine the aggregate consequences of monetary growth in an economy in which sellers incur a fixed cost of price adjustment. The fixed cost prevents a continual adjustment of individual prices, so each seller keeps his price constant in periods of discrete length, increasing his price in discrete jumps at the end of these periods. A central feature of the inflationary process is therefore that relative prices become dispersed around their means, and the theory predicts that even a fully anticipated inflation increases the variability of relative prices.' The empirical evidence on this point does, however, appear to be mixed. On the one hand, Richard Parks (1978) and Stanley Fischer (1981a,b; 1982) conclude that anticipated inflation does increase relative-price variability (which Fischer interprets as providing empirical support for the theory); on the other hand, Mario Blejer (1981, 1983) and Blejer and Leonardo Leiderman (1982) find that anticipated inflation has no effect, or only a very weak effect on relative-price variability (which makes John Taylor, 1981, doubt the quantitative significance of the theory).2 This paper uses Rotemberg's theoretical framework to demonstrate that the proxy for relative-price variability adopted in the empirical literature does not properly capture the relative-price variability that is caused by a fixed cost of price adjustment. The methodology of the above cited studies is therefore not appropriate for evaluating the empirical relevance of the fixed-cost theory, and the divergence of their results is not surprising. Specifically, the proxy which consists of the variance of the rates of price change between successive observations does not always increase with the anticipated inflation. Even with disaggregate data,3 the proxy decreases with the anticipated inflation in approximately half of any interval of inflation rates for which a seller adjusts his price no more than a given number of times between successive observations. Moreover, the relationship between the anticipated inflation and the proxy depends on such extraneous factors as the timing of the observations. A change in the timing may change a positive relationship between the anticipated inflation and the proxy to a negative one, and vice versa. The paper also proposes alternative, more satisfactory measures of relative-price variability and provides empirical support for the theoretical conclusions.

There are two competing explanations of why women workers earn less than men with equivalent education, work experience, and job tenure: the human capital explanation and the discrimination explanation. The human capital explanation argues that sex differences in human capital investment which arise from sex differences in expectations surrounding labor force participation account for the wage differential. Women workers are expected to invest less in jobspecific human capital than otherwise comparable men workers because women expect to spend less time on the job. Furthermore, even for men and women workers with equal ex post levels of job tenure and/or work experience, women have invested less in onthe-job training because their a priori expectations of job tenure and/or work experience were less than those of men who now have the same tenure and/or experience. Therefore, in this view, women workers earn less than comparable men because they have invested less in specific human capital. Women earn less because they are less productive; the sex-wage differential is economically efficient. The discrimination explanation argues that sex differences in labor market opportunities, that is, sex discrimination in the labor market, account for the sex-wage differential. In this view, women workers earn less than comparable men because they are the victims of sex discrimination in the labor market. Women do not earn less because they are less productive; the sex-wage differential is economically inefficient. While the economic implications of these two explanations of the sex-wage differential are enormously different, both explanations are consistent with empirical studies simply because both resort to nonmeasurables to explain the sex-wage differential: empirical studies cannot measure directly either discrimination or job-specific human capital. Therefore, the problem with these two competing explanations of the sex-wage differential is that neither has been empirically sorted from the other. Both explanations are consistent with data which show a wage differential by sex after controlling for education, work experience, and job tenure. Newly available data on displaced workers provide an opportunity to empirically disentangle these two competing explanations of the sex-wage differential. Displaced workers are workers who have lost their jobs either because their workplaces have closed or because they were permanently laid off due to slack demand for the outputs of their firms. Displaced workers represent a special case of worker mobility. Unlike voluntary job movers, that is, workers who have voluntarily quit their prior jobs, the job mobility of displaced workers is not the result of their own expectations that better jobs are available. A worker who voluntarily changes jobs does so because there is another job which offers higher wages (or other improvements in the conditions of employment). The worker moves precisely because his or her productivity (and wages) is higher on the subsequent job. The wage change is endogenous. Unlike workers who are fired or involuntarily laid off because their personal productivity is lower than that of other tDiscussants: Rebecca Blank, Princeton University; Elyce Rotella, Indiana University.

This paper developes a theory of the international trade pattern in risky assets by applying the law of comparative advantage to asset trade. According to this law there is a tendency for a country to import assets that have relatively high autarky prices. The Autarky price of an asset is high if the autarky real interest rate is low, or if the asset's autarky risk measure (the product of the risk premium and the asset price) is low. It is examined how autarky interest rates and risk measures are affected by international differences in (i) stochastic properties of output/endowments, (ii) the rate of time preference, (iii) the degree of risk aversion, and (iv) subjective beliefs, and how such differences predict overall capital account deficits or surpluses as well as the composition of the capital account into trade in arbitrary risky assets and the special cases of sure indexed bonds, stocks (claims to output), and Arrow-Debreu securities.