Knowledge that Transforms

Endogenous growth models have reignited interest in institutional and path dependencies in the economic growth process. One reason for the interest in endogenous growth models is that they may explain why countries consistently grow at different rates. In this vein, it has been recently proposed that greater economic inequality reduces future economic growth. An important paper in this literature is by Torsten Persson and Guido Tabellini (1994), who will be referred to as PT. PT's model shows why it is reasonable to expect a negative relationship between inequality and future economic growth. Moreover, their empirical evidence is consistent with their contention. If PT's findings are robust to other data sets, there would be important policy implications. For example, they imply that policy makers should not only be concerned with the distributional implications of government policies for political and social reasons, but also because income distribution has long-run effects on economic growth. This indicates that greater U.S. income inequality since the early 1970's may have resulted in lower subsequent economic growth. However, PT's results are somewhat fragile to various specifications, suggesting that they should be replicated with different data sets and over different time periods (PT p. 617). With these implications in mind, this study employs data from a panel of U.S. states to further explore the relationship between economic growth and income inequality. In what follows, Section I summarizes PT's study and discusses how this comment extends their findings. The empirical implementation and results in Section II directly examine the link between overall income inequality and growth. Section III expands the analysis to alternative measures of income distribution and government policy. One emphasis in Section III is the distinction between how the overall income distribution (especially at the tails) influences economic growth from how the relative well-being of the median voter affects economic growth. Section IV provides some concluding discussion.

The authors derive optimal insurance for patients and payment method for physicians when neither the input decided by the patient (quantity of treatment) nor the input decided by the physician (effort) are contractible. The equilibrium in this third-best regime may sometimes be second best, in which both the physician input and the report of treatment are verifiable. Otherwise, truthful reporting forces a third best, characterized by provider 'prospective payment' and suboptimal effort, while consumers' demand becomes excessive. The authors also analyze how 'professional ethics' alters the equilibrium. Finally, collusive reporting mechanisms imply more stringent constraints, while competition among physicians relaxes them.

For much of this century, sticky nominal wages have been considered a key reason that nominal shocks to the economy may have real effects. Historical explanations of sticky nominal wages often rely on money illusion, a concept unpopular with neoclassical economists because it implies irrationality. More modem explanations cite costs (for instance, George Akerlof and Janet Yellen, 1985) and imperfect information about the rate of inflation (for instance, Edmund S. Phelps, 1970). Tests of sticky nominal wages have looked at their indirect effects, particularly regarding the countercyclicality of real wages (for instance, see Gary Solon et al., 1994). There has been little direct empirical analysis. This paper addresses that shortcoming by examining longitudinal microeconomic data on the distribution of annual nominal wage and salary changes of workers who remain on the same job. This paper finds that there are some workers whose wages or salaries exhibit nominal stickiness. Specifically, it finds: (1) A significant fraction of workers remaining on the same job over a year receive the same nominal wage/salary in consecutive years. (2) When a given real wage/salary change requires a small nominal change, it is less likely to occur than when it requires a larger nominal change. Over the period studied, between 1 and 2 percent of workers would have received a small pay change in the absence of but instead received none. (3) There is also evidence of downward nominal wage stickiness, but with important differences between wage earners and salary earners. Wage earners receive nominal wage cuts less frequently than would be expected on the basis of distributions of real wage changes. In the period studied, approximately 9.4 percent of wage earners would have received a nominal wage reduction in the absence of downward wage rigidities, but instead do not.' In contrast, salary earners do not receive pay cuts less frequently than would be expected, particularly in later years. The frequency of zero nominal pay changes combined with the relative infrequency of small pay changes provide micro-level evidence of the presence of menu costs, which can lead firms to postpone small pay rate changes. Menu costs in pay rate adjustments may include the administrative costs of changing payrolls and the costs of performance appraisal and negotiations that generally accompany wage/salary changes. While there is considerable debate over whether costs can have a profound impact on aggregate fluctuations and create nonneutrality of money, this paper does not address the macroeconomic implications of costs in wage/salary adjustments.2 Instead, it asks whether the distribution of annual wage and salary adjustments shows microeconomic evidence of a necessary but not sufficient condition for macroeconomic effects. Menu costs are not enough to explain the sharp drop in wage distributions below nominal zero. The phenomenon strongly suggests that either workers or firms resist nominal pay cuts, as would be predicted by traditional Keynesians. Because of this resistance,

Our review of the evidence suggests that the claims of the advocates of standards and examination based reform of American secondary education may be right. The countries and Canadian provinces with such systems outperform other countries at comparable levels of development. In addition, New York State, the only state with a CBEEE, does remarkably well on the SAT test when student demography is held constant (Bishop 1996). CBEEEs are not, however, the most important determinant of achievement levels. CBEEEs are common in developing nations where achievement levels are often quite low [eg. Columbia and Iran]. Belgium, by contrast, has a top quality education system without having a CBEEE. More research on the effects of CBEEEs is clearly in order.

The authors evaluate some explanations of immigrants' family labor-supply behavior. Upon arrival, immigrant husbands work less than natives but immigrant wives work more. A conventional labor-supply model uses wage assimilation to explain these differences but is not supported by the data. More favorable results are obtained for the 'family investment model, ' in which wives in immigrant families take on 'dead-end' jobs to finance their husbands' investments in human capital. The authors conclude that family composition is an important correlate of immigrants' assimilation and the family investment model can account for many of the patterns in the data.