Suppose a consumer sets consumption equal to income each period, rather than following the optimal permanent income decision rule. How much utility does he lose? This paper finds that the answer is typically less than 10 cents-$1 per quarter in environments specified by popular tests on aggregate data. It includes calculations of the costs of excess sensitivity and excess smoothness to income and interest rate changes and the costs of ignoring information. It concludes that the theory does not make predictions for aggregate tests that are robust to small costs, such as information or transactions.
In this paper, the authors analyze the effects of commodity programs in which the government attempts to support and stabilize price through open market purchases and sales. Specifically, they as sess the effects of such programs on the U.S. soybean market using a rational-expectations model that allows for private storage, expected -price-responsive production, and arbitrary support and release price s. A salient feature of the model is that private storage and product ion behavior adjusts to changes in government policy. Stochastic simu lations of the market model demonstrate that price stabilization prog rams can reduce long-run market price and destabilize producer revenu e.
Why do parents make inter vivos transfers to their children and leave them postmortem bequests?1 Gary Becker's notions of altruism (1981, ch. 8)-by which he means that children's utilities are arguments of their parents' utility function-provides one explanation. Denoting the children's utility functions by U'(ci), where ci denotes consumption by child i, the preferences of parents with two children can be represented by a utility function of the form W[cp, U1(c1), U2(c2)] where cp is the parents' own consumption.2 In the altruistic model, parents' sole motive for intergenerational transfers is to increase their children's utility. In models, however, parents may have nonaltruistic as well as altruistic motives for transferring resources to their children. The literature on economic development emphasizes old-age support as a motive for fertility and, to a lesser degree, as a motive for providing children with capital as part of an explicit or implicit intergenerational contract. When capital is the primary focus of the analysis, as in discussions of education and earnings, it is useful to decompose inter vivos transfers into human capital formation and other inter vivos Such a decomposition can mislead in discussing intergenerational transfers, however, because it obscures the fact that the provision of capital by parents constitutes an intergenerational transfer. Laurence Kotlikoff and Avia Spivak (1981) analyze another old-age support model, one in which the family operates as an incomplete annuities market. In their model, children make regular transfers to their aging parents, and the share that each child contributes to the parents determines his or her share of the parental estate. Although the prospect of old-age support may be an important motive for intergenerational transfers (i.e., from parents to in some societies, in the United States today upstream transfers appear too small and too uncertain to make this motive credible. To explain downstream transfers in the United States today, economists have investigated models in which parents have selfish as well as selfless motives. For example, B. Douglas Bernheim, Andrei Shleifer, and Lawrence Summers propose a model in which parents use the prospect of bequests to exact from their children: we envision a testator who, though altruistic, is also affected by actions taken individually by a number of potential beneficiaries (he may, e.g., enjoy receiving attention from his children) (1985, p. 1046). Bernheim et al. assume that such actions increase parents' utility and decrease children's utilities. In their model the children's utility functions become U1(ai, ci), where ai denotes the ith child provides the parents, and the parents' utility function becomes W[cp, al, a2, Ul(al, c1),U2(a2, cA]. To measure these services, Bernheim et al. use frequency of contact (i.e., visits plus telephone calls) between parents and children. This approach expands the concept of child to include those provided by adult children who live outside the parents' household in an attempt to explain bequests and inter vivos transfers. Child services originally appeared in discussions of fertility and the allocation of resources to young children living with their parents, and thus tends to evoke the joys of young parenthood *University of Pennsylvania, Philadelphia, PA 19104, and University of Washington. I am grateful to the National Science Foundation and the National Institutes of Health for financial support, to Gary Becker, Samuel Preston, David Stapleton, and Paul Taubman for helpful comments, and to Judith Farnbach for editonal assistance. 1 Even if bequests are unplanned, as some versions of the life cycle savings model assume, inter vivos transfers must be intentional. 21 ignore the possible dependence of the children's utility on their own children's utility, etc., because it is not relevant to the issues discussed in this paper.
Best-price provisions guarantee buyers that the prices they pay are the lowest available. If the seller subsequently cuts price, then each previous buyer is entitled to a refund. A durable-good monopolist who offers certain forms of these provisions can construct a consistent plan yielding the same profits as rental agreements and contracts with explicit quantity commitments. The provisions require special circumstances to be practical, but they are simple and effective and appear in a variety of economic settings. Three applications are discussed: international commodity agreements, markets for electric turbogenerators, and markets for financial claims.
How changes in current and future income affect consumer spending is a perennial question in macroeconomics and public finance. Theoretical constructs such as the permanent income hypothesis are of limited assistance in resolving this issue, because they neglect borrowing constraints and other market imperfections that can significantly affect the marginal propensity to spend out of current income. Recent empirical work has also proven inconclusive, since whether consumption responds to income fluctuations by more or less than the permanent income hypothesis predicts turns critically upon whether disposable income follows a random walk or is stationary around a longrun trend (see John Campbell and Angus Deaton, 1987). This controversy is unlikely to be resolved conclusively, because it is notoriously difficult to distinguish a stationary but highly persistent time-series from one that is nonstationary. These difficulties suggest the importance of searching for natural experiments, income shocks with predictable and well-understood effects on future income, to test models of consumer behavior. Changes in federal tax and transfer policy during the last two decades provide several episodes of this type.' Analyzing the effects of these tax changes is also central to understanding the role of fiscal policy in affecting national saving. This paper examines two aspects of consumer response to tax changes. Section I argues that consumption responds to temporary income tax shocks by more than the permanent income hypothesis would suggest. Results from the 1975 tax rebate in particular suggest that a $1 increase in transitory income raises spending by about 20 cents. Section II examines consumption responses to tax announcements. Although the results are not conclusive, they suggest that some consumers do not adjust consumption in anticipation of tax changes. The final section sketches some implications for analyzing fiscal policy.
While modern economic theorists have produced a variety of explanations for the failure of wages to fall in the face of unemployment, Keynes emphasis on relative wages has not been reflected in most contemporary discussions. This short paper suggests that relative wage theories in which workers' productivity depends primarily on their relative wage provide the best available apparatus for understanding actual unemployment and its fluctuations. Such theories are very closely related to the efficiency wage theories that have received widespread attention in recent years.
Airlines are insured against most direct costs of an accident, but they cannot insure against demand loss. Some have argued that such consumer reaction will discipline unsafe operations. The authors' estimation of deviations from expected demand following accidents finds little or no effect prior to airline deregulation and weak indication of a response to recent crashes. These results are consistent with the changes the authors find in an airline's equity value following an accident, which are statistically significant, but quite small relative to the total social cost of the accident.
Early entry has the advantage of higher revenues per unit of output early on. Late entry has the benefit of learning from the experience of earlier entrants, and hence lower production costs. The advantages are balanced off in a continuous-time, perfect-foresight equilibrium. Competition generates S-shaped diffusion, and staggered entry and exit. A monopolist will innovate less than a competitive industry, but the innovation that he does do, he will do sooner.