Knowledge that Transforms

We develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices. The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models or traditional sticky-price Keynesian models. Our analysis leads to a novel perspective on the international welfare spillovers due to monetary and fiscal policies.

Regulatory programs that restrict output levels often impose restrictions on the transfer of rights to produce or to use particular inputs. In this paper, we use a unique cross-section, time-series data set from North Carolina to quantify the welfare effects of transfer restrictions for poundage quota under the U.S. flue-cured tobacco program. We find that the deadweight costs of such restrictions are small but that the distributional effects are substantial. We analyze congressional testimony on quota transfer legislation and conclude that our estimates of the distributional effects are consistent with expressed views of market participants.

This paper develops a model of small business failure and sale that is motivated by recent evidence concerning how the failure and sale of small businesses vary with the age of the business and the tenure of the manager. This evidence motivates two key features of the model: a match between the manager and the business, and characteristics of businesses that survive beyond the current match. The parameters of the model are estimated, and the properties of this parametric model are studied. This analysis results in a simple characterization of the workings of the small business sector.

This paper examines the congressional passage of the American minimum wage law, the Fair Labor Standards Act of 1938. Voting on the act is modeled as a function of the concentration of the constituencies for minimum wage legislation, North-South differentials, and legislator ideology. It is shown that the House radically altered the final content of the bill, abandoning a proposed Wages and Hours Board with discretionary powers to determine minimum wages in favor of a flat rate following the objections of several interest groups; North-South divisions over the bill had little influence over congressional voting; and the influence of constituent groups increased relative to legislators' ideology as the bill became an important election issue.

In standard durable-goods monopoly models, both the set of buyers and the set of prices are assumed to be continua. If the set of buyers is finite, the perfectly discriminating monopoly outcome is a unique subgame perfect equilibrium when the seller is sufficiently patient. Introducing instead a smallest unit of account yields the Coasian outcome as a generically unique subgame perfect equilibrium for patient enough buyers. A folk theorem is obtained if both sets are finite. These results reflect a strategic disadvantage of having to make moves with a large impact on other players' payoffs. The analysis is extended to durable-goods oligopoly.

This paper investigates the claim, often put forth by real business cycle proponents, that the poor performance of their models in matching real-world aggregate labor market behavior is due to the fact that observed real wage payments do not correspond to the actual marginal productivity of labor but contain an insurance component that cannot be accounted for by the Walrasian pricing mechanism. To test this idea, we dispense with the Walrasian description of the labor market and introduce contractual arrangements between employees and employers. Assuming that employees are prevented from accessing capital markets and are more risk averse than employers, we use the theory of optimal contracts to derive an equilibrium relation between aggregate states of the economy and wage-labor outcomes. This contractual arrangement is then embedded into a standard one-sector, stochastic neoclassical growth model in order to look at the business cycle implications of the contractual hypothesis. The resulting dynamic equilibrium relations are then parameterized and studied by means of standard numerical approximation techniques. The quantitative properties of our model appear to be somewhat encouraging. We have examined different contractual environments, and in all circumstances the contracts-based equilibrium performs better than standard ones with regard to the labor market variables and at least as well with regard to the other aggregate macroeconomic variables. The present paper reports only the simulation results relative to what we consider the most empirically relevant cases.

A market in which the owner of a durable good, X, contracts with an expert for diagnostic and treatment services is studied. Good X may be in one of three states: "health," "disease," or "failure." Only experts can determine whether X is healthy or diseased and perform treatment. The owner cannot tell whether recommended treatment is really needed. This creates an information-based demand for health insurance by risk-neutral consumers. Imperfections in the market for spot insurance may give rise to free diagnostic checks, strategic procrastination, and long-term health maintenance agreements.

This paper develops implications of the selection hypothesis of Priest and Klein for the relationship between trial rates and plaintiff win rates. I find strong evidence for the selection hypothesis in estimated relationships between trial rates and plaintiff win rates at trial across case types and judges. I then structurally estimate the model on judge data, yielding estimates of the model's major parameters (the decision standard, the degree of stake asymmetry, and the uncertainty parameter) for each of three major case types, contracts, property rights, and torts.

At the beginning of this century the Dutch government controlled the opium market in the Dutch East Indies--nowadays Indonesia--for several decades. This state monopoly was called the opiumregie. Using information gathered during the opiumregie, this paper estimates price elasticities of opium consumption. It appears that short-term price elasticities of opium use are about -0.7. Long-term price elasticities are about -1.0.

This paper examines the extent to which patterns of human capital convergence can account for observed patterns of income inequality between countries. To do this I decompose national income into three components: one due to education levels, one reflecting the return to education, and a residual component. I then examine in turn the contribution of each of them to changes in income dispersion. Among the developed countries, convergence in education levels has resulted in a reduction in income dispersion. However, for the world as a whole, incomes have diverged despite substantial convergence in education levels. This is a result of increases in the return to education that favor the developed countries at the expense of the less developed countries.