Knowledge that Transforms

A general model of arbitrator behavior in conventional and final-offer arbitration is developed that is based on an underlying notion of an appropriate award in a particular case. This appropriate award is defined as a function of the facts of the case independently of the offers of the parties. In conventional arbitration the arbitration award is argued to be a function of both the offers of the parties and the appropriate award. The weight that the arbitrator puts on the appropriate award relative to the offers is hypothesized to be a function of the quality of the offers as measured by the difference between the offers. In final-offer arbitration it is argued that the arbitrator chooses the offer that is closest to the appropriate award. The model is implemented empirically using data gathered from practicing arbitrators regarding their decisions in twenty-five hypothetical cases. The estimates of the general model strongly support the characterizations of arbitrator behavior in the two schemes. In addition, no substantial differences were found in the determination of the appropriate award implicit in conventional arbitration decisions and the determination of the appropriate award implicit in the final-offer decisions.

The paper develops and estimates a theoretical model of wage determination and union-nonunion wage differentials. In order to overcome the institutional ctiticisms of the formal bargaining literature, the paper generalizes the Nash-Zeuthen-Harsanyi model by linking the solution to the institutional concepts of bargaining power and fear or cost of disagreement and by making the outcome depend not only on endogenous but also on exogenous factors. An operational specification of bargaining power and fear of disagreement allows the model to be estimated with data covering twelve companies and trade unions during the period from mid-1950's to the late 1970's. While giving limited support to the NashZeuthen-Harsanyi solution, the empirical analysis indicates that the bargaining outcome usually deviates from the Nash-Zeuthen-Harsanyi point and, in accordance with the institutionalist claim, that it varies significantly with exogenous factors. Contrary to the traditional labor economics view, the results do not support the general conclusion that the bargaining solution lies on the marginal revenue product curve of labor. Instead, the relevant coefficients suggest that for many firms and unions the outcome might be better characterized by the efficient contract (vertical contract curve).

ABSTRACT The effects of noise on the world, and on our views of the world, are profound. Noise in the sense of a large number of small events is often a causal factor much more powerful than a small number of large events can be. Noise makes trading in financial markets possible, and thus allows us to observe prices for financial assets. Noise causes markets to be somewhat inefficient, but often prevents us from taking advantage of inefficiencies. Noise in the form of uncertainty about future tastes and technology by sector causes business cycles, and makes them highly resistant to improvement through government intervention. Noise in the form of expectations that need not follow rational rules causes inflation to be what it is, at least in the absence of a gold standard or fixed exchange rates. Noise in the form of uncertainty about what relative prices would be with other exchange rates makes us think incorrectly that changes in exchange rates or inflation rates cause changes in trade or investment flows or economic activity. Most generally, noise makes it very difficult to test either practical or academic theories about the way that financial or economic markets work. We are forced to act largely in the dark.

ABSTRACT With the increasing use of adjustable‐rate mortgages for asset/liability management, there exists the need to properly evaluate their price sensitivity to interest rate changes. This paper provides a foundation by deriving the duration of an adjustable‐rate mortgage. The properties of this duration are unique and have some important differences from those of fixed‐rate securities. One important characteristic of an adjustable‐rate mortgage concerns the index used to adjust the mortgage rate. It was found that the index tended to be more important than the adjustment frequency in determining the duration of an adjustable‐rate mortgage.