Knowledge that Transforms

This paper investigates second-best (transfers in kind) and third-best (subsidies and taxes) Pare to optima in a simple model were government lacks full information ab out consumer types (who is able, who is infirm). These Pareto optima rely on self-selection. The authors show that those second-best Paret o optima which are not also first-best (some do exist) can only be su pported by rationing. They also show that every third-best optimum, o ther than the equal-income Walrasian equilibrium, is Pareto-dominated by some second-best optimum. In addition, standard "willingness-to- pay" cost-benefit tests are inappropriate in this environment.

Franchising is an important and controversial form of vertical integration. Allegations of opportunistic behavior by franchisors have led to calls for public regulation and in some states "fairness in franchising" laws. The advisability of such regulation depends on the long-run incentives to franchise. If franchising is a temporary step on the path to complete ownership integration, regulation may be called for. Alternatively, if complete or partial franchising is a permanen t market solution, regulation is at least contestable. This paper offer s new evidence on the incentives to franchise.

This paper examines federal auctions for drain age leases on the Outer Continental Shelf from 1959 to 1969. These are leases that are adjacent to tracts on which a deposit has been discovered. The authors find that the data strongly support the hypotheses that neighbor firms are better informed about the value of a lease than nonneighbor firms; that neighbor firms coordinate their bidding decisions; and that both types of firms bid strategically in accordance with the Bayesian-Nash equilibrium model for first-price, sealed-bid auctions with asymmetric information.

This paper shows that temporary real exchange rate fluctuations can have persistent (hysteretic) effects on trade. Specifically, when market-entry costs are sunk, sufficiently large exchange rate shocks alter domestic market structure and thereby induce hysteresis. This simple result has strong implications for exchange rate theory, t rade policy, and estimation of trade equations. Empirical evidence su ggests that the recent dollar overvaluation induced hysteresis in U.S. import prices. Namely, the aggregate pass-through equation (of exchange rates to import prices) shifted in the 1980s. The shift's nature and timing is broadly consistent with the hysteresis hypothesis.

A number of recent studies address the problem of assessing the contributions of market fundamentals and rational bubbles to stock-price fluctuations-see, for example, Olivier Blanchard and Mark Watson, 1982; Robert Flood, Robert Hodrick, and Paul Kaplan, 1986; and Kenneth West, 1986, 1987. A rational bubble reflects a self-confirming belief that an asset's price depends on a variable (or a combination of variables) that is intrinsically irrelevant-that is, not part of market fundamentals-or on truly relevant variables in a way that involves parameters that are not part of market fundamentals. A basic difficulty involved in testing for the existence of rational bubbles, pointed out by Flood and Peter Garber, 1980, and emphasized by James Hamilton and Charles Whiteman, 1985, is that the contribution of hypothetical rational bubbles to asset prices would not be directly distinguishable from the contribution to market fundamentals of variables that the researcher cannot observe. For example, as Hamilton, 1986, shows, a researcher who is unable to observe or to infer changes in the expectations of market participants, especially if they involve the probable future occurrence of relevant events that are infrequent and discrete, might falsely conclude that rational bubbles exist. In the present context, the probabilities that investors attach to possibilities for future tax treatment of dividend income could act like such an unobservable variable. Diba and Grossman, 1984, and Hamilton and Whiteman, 1985, propose an empirical strategy based on stationarity tests for obtaining evidence against the existence of explosive rational bubbles without precluding the possible effect of unobservable variables on market fundamentals. The present paper implements such tests for explosive rational bubbles in stock prices using a model that assumes a constant discount rate, but that allows unobservable variables to affect market fundamentals and also allows different valuations of expected capital gains and expected dividends. If the first differences of the unobservable variables and the first differences of dividends are stationary (in the mean) and if rational bubbles do not exist, then the model implies that first differences of stock prices are stationary. The model also implies, using an argument adapted from John Campbell and Robert Shiller, 1987, that, if the levels of the unobservable variables and the first differences of dividends are stationary, and if rational bubbles do not exist, then stock prices and dividends are cointegrated of order (1,1). These theoretical results do not imply that the finding that first differences of stock prices are nonstationary, or that stock prices and dividends are not cointegrated, would establish the existence of rational bubbles. A finding that stock prices and dividends are not cointegrated could result from the nonstationarity of the unobservable variables in market fundamentals, and a finding that stock-price changes are nonstationary could result from the nonstationarity of changes in these unobservable variables. Such findings also could arise from the inappropriateness of the implicit assumption that dividends are generated by an ARIMA process. The converse inference, however, is possible. That is, evidence that first differences of stock prices have a stationary mean and/or evidence that stock prices are cointegrated with dividends would be evidence against *Research Department, Federal Reserve Bank of Philadelphia, Philadelphia, PA 19106, and Department of Economics, Brown University, Providence, RI 02912, respectively. The views expressed are solely those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or of the Federal Reserve System. We thank John Campbell, Robert Shiller, and anonymous referees for helpful comments on earlier versions of this paper.

Implicit markets capture compensation for intraurban and interregional differe nces in amenities and yield differences in housing prices and wages. These pecuniary differences become preference-based weights in a qual ity-of-life index. Hedonic equations are estimated using microdata fr om the 1980 Census and assembled county-based amenity data on climati c, environmental, and urban conditions. Ranking of 253 urban counties reveals substantial variation within, as well as among, the 185 urba n areas. The quality-of-life differences across counties within one S MSA is almost one-half of the difference between the top- and bottom- ranked counties in the nation.

The traditional approach to modeling political parties' behavior, based upon the contribution of Anthony Downs (1957), assumes that the parties' unique objective is to win elections: thus, they maximize their popularity. The crucial implication of this assumption for a two-party system is that if the two parties have the same information about voters' preferences, full convergence of policies results from electoral competition. This is the crucial implication of the median voter theorem. ' More generally, it may be argued that different parties are differently because they represent different constituencies. Parties may not care only about winning elections per se, but also about the quality of the policies resulting from an election. In this case the candidates of the two parties view winning an election not only as a goal per se, but also as a means of implementing a better policy for their respective constituencies. This paper shows that electoral competitions imply dynamic inconsistency if the voters are modeled as rational and forwardlooking agents and parties do not care exclusively about being elected, but also about which policy to implement, once elected. The dynamic inconsistency arises as follows: the parties have an incentive to announce convergent platforms to increase their chances of election. However, if the elected party is not committed to its electoral platform, it has an incentive to follow its most preferred policy rather than the policy announced in its platform. If voters are rational, they account for this incentive. Thus, in general, in a one-shot electoral game the only timeconsistent equilibrium is one in which no convergence is possible, the two parties follow their most preferred policies, and the voters rationally expect this outcome. Full convergence of parties' platforms results only as a limiting case when the parties are completely indifferent with respect to the quality of the policies resulting from the election. Thus, these results differ from the existing literature on ideologically motivated politicians (for instance, Donald Wittman, 1977, 1983; Randall Calvert, 1985), which implicitly assumes the possibility of binding commitments to electoral platforms. Complete or partial policy convergence can be the outcome of political competition if the interaction between the parties and the voters is modeled as an infinitely repeated game. In fact, if the candidates have concave objective functions, the welfare-maximizing policy rule implies a complete convergence of parties' policies. However, this cooperative, and agreed-upon policy, may or may not be sustainable as a subgame-perfect equilibrium depending on parameter values; in particular it depends on the discount rates of the two parties, the degree of polarization of their preferences, and the relative popu*Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, PA 15213, and National Bureau of Economic Research, Cambridge MA, 02138. This paper is based upon a chapter of my unpublished doctoral dissertation at Harvard University. I am greatly indebted to Jeffrey Sachs for directing my attention toward these issues and for many conversations. I also wish to thank Andrew Abel, Dilip Abreu, Olivier Blanchard, Ramon Caminal, Andrew Caplin, Alex Cukierman, Morris Fiorina, Benjamin Friedman, Herschel Grossman, Howard Rosenthal, and the referees for very useful comments. The responsibilitv. Af anv n mtnkieis Af cAlrirp nfnlv mine The result of policy convergence in a two-party system is more general than the median voter theorem. For discussions of convergence results not at the median, see John Ledyard, 1984; Peter Coughlin, 1984; Coughlin and Shmuel Nitzan, 1981; Melvin Hinich, 1977. For earlier work on spatial competition see Richard McKelvey, 1975; Hinich, Ledyard, and Peter Ordeshook, 1972, 1973, and the references quoted therein. The present paper focuses on the result of convergence rather than on the median voter theorem per se.

Данная статья построена на критике подхода к анализу проблемы конвергенции, изложенному в статье Baumol (1986). Productivity Growth, Convergence and Welfare: What the Long-Run Data Show. American Economic Review, Vol. 76(5): 1072-1085. Де Лонг подвергает сомнению методологию Баумоля и предлагает свой вариант исследования.