Knowledge that Transforms

In this paper, the authors show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. They propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. The authors estimate preference parameters using the only U.S. micro data set with complete consumption information. They show that previous rejections can be explained by the simplifying assumptions made in previous studies. The authors also show that results obtained using good consumption or aggregate data can be misleading.

This paper develops a general equilibrium model of the allocation of resources among appropriative and productive activities. The model emphasizes the distinction between offensive weapons, which are the instruments of predation, and fortifications, which provide defense against predation. The analysis of this model shows how the equilibrium security of claims to property is determined. The analysis focuses on the possibility of a nonaggressive equilibrium in which no resources are allocated to offensive weapons and claims to property are fully secure. The authors also analyze the complex relation between economic welfare and the security of claims to property.

This paper demonstrates that, in a simple setting with managerial concern for reputation and asymmetric information on ability, most managers may refrain from undertaking innovations that stochastically dominate an industry standard. Common components of uncertainty lead to market inferences of managerial ability based on relative performance. Managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating. Discontinuities in compensation when performance is low lead managers to have differing valuations of an accurate benchmark, depending on type. In particular, very high and very low ability managers are more likely to undertake superior innovations than those of average ability.

Anarchy, defined as a system in which participants can seize and defend resources without regulation from above, is not chaos but rather a spontaneous order. However, anarchy is fragile and may dissolve either into formless 'amorphy' or into a more organized system such as hierarchy. Under anarchy, each contestant balances between productive exploitation of the current resource base and fighting to acquire or defend resources. Anarchy is sustainable only when there are strongly diminishing returns to fighting effort (the decisiveness parameter is sufficiently low) and incomes exceed the viability minimum. These considerations explain many features of animal and human conflict.

Whether governments clash in trade disputes or negotiate over trade agreements, their actions in the international arena reflect political conditions back home. Previous studies of cooperative and noncooperative trade relations have focused on governments that are immune from political pressures and that act as benevolent servants of the public interest. Here we take a first step toward introducing domestic politics into the analysis of international economic relations. We study the interactions between national leaders who are concerned both with providing a high standard of living to the general electorate and collecting campaign contributions from special interest groups. The analysis reveals the determinants of the structure of protection in a noncooperative trade war and in a cooperative trade agreement.

"Income smoothing" is the process of manipulating the time profile of earnings or earnings reports to make the reported income stream less variable. This paper builds a theory of income smoothing based on the managers' concern about keeping their position or avoiding interference, and on the idea that current performance receives more weight than past performance when one is assessing the future. When investment is added to the model, so that income reports and dividends can be set independently, we find that both dividends and income reports may be smoothed and that dividends may convey information not present in the income report.

This paper argues that a life cycle model can replicate observed patterns in household wealth accumulation after counting explicitly for precautionary saving and asset-based, means-tested social insurance. The authors demonstrate that social insurance programs with means tests based on assets discourage saving by households with low expected lifetime income. In addition, they evaluate the model using a dynamic programming model. Assuming common preference parameters across lifetime income groups, the authors are able to replicate the empirical pattern that low-income households are more likely than high-income households to hold virtually no wealth.

Most models of trade in speculative markets assume that agents interpret public information identically. The authors provide empirical evidence on the relation between the volume of trade and stock returns around public announcements, and they argue that the evidence is inconsistent with this assumption. They then develop a model of trade around public announcements that incorporates differential interpretations and is consistent with the observed volume-return relation. Then the authors test the standard model of belief revision underlying most models of trade using stock brokerage research analysts' earnings forecasts. The hypothesis of identical interpretations seems inconsistent with the forecast revisions in these data.

This paper uses data for eight manufacturing industries to test for and characterize dynamic production externalities in cities. The authors find evidence of both Marshall-Arrow-Romer (MAR) externalities, which are associated with past own industry employment concentration, and Jacobs externalities, which are associated with past diversity of local total employment. For mature capital goods industries, there is evidence of MAR externalities but none of Jacobs externalities. For new high-tech industries, there is evidence of Jacobs and MAR externalities. These findings are consistent with the notion that new industries prosper in large, diverse metropolitan areas but, with maturity, production decentralizes to smaller, more specialized cities.

This paper examines the link between property rights and investment incentives. The author develops three theoretical arguments based on security of tenure, using land as collateral and obtaining gains from trade. The paper then presents empirical evidence from two regions in Ghana. The author investigates the possibility that rights are endogenous, with farmers making improvements to enhance their land rights. Finally, he suggests tests for which of the theories might explain the results.