The authors extend the ''Coase Theorem'' by analyzing the effects of one firm's activities on another firm in cases of uncertain externality, legal liability, and resource allocation. A mathematical model is used to examine, in terms of risk acceptance and profit maximizing, a merger of two firms and the ensuing bargaining over one firm's pollution output. This costless bargaining is generally accepted as determining the socially optimal level of resource allocation and is independent of liability assignment. However, the authors conclude that liability rules in an uncertain world can determine resource allocation as much as bargaining skills. Government intervention in the form of tax and subsidy incentives can intervene in favor of increased output. 14 references.
In 1971 the California Supreme Court opened the door to a major reform movement to restructure the present system of decentralized school finance. With the exception of Hawaii, elementary and secondary education in the United States is supported primarily by local property taxation supplemented in part by state funded grants-in-aid. The California Supreme Court, in the now famous Serrano rulings, declared the California system in violation of the state constitution's equal protection clause. Similar rulings have also been handed down by the New Jersey Supreme Court (Robinson vs. Cahill) and the Superior Court of Hartford, Connecticut (Horton vs. Meskill). In addition, ten states have recently enacted major reform bills, and legislation is under consideration in several others. The pressure for reform is strong and continuing. As a review of the recent reform proposals indicates, the legislative search for new means of financing local schools is not simply an incremental tinkering with existing laws.' Major changes, often court required, are at issue. Long-run outcomes are uncertain; each proposal has new winners and new losers. When planning a major reform of local school finance, therefore, past experience from incremental policymaking may not be an adequate guide to choice. Long-run general equilibrium predictive models and a clearly specified evaluation rule will be needed. It is the purpose of this paper to develop such a policy framework and to apply the analysis to one region currently in the midst of school reform, the New York metropolitan area. Six alternative reform proposals are considered: foundation aid, two district power equalization plans, property tax credits, expanded Title I assistance under the Elementary and Secondary Education Act, and centralized financing and spending controls. Preferred reforms are selected under utilitarian (promiddle class), Rawlsian (pro-poor), and equal school spending (Serrano) criteria.
Second-best pricing rules are developed for a monopoly firm facing random demands and using the welfare function. Situations of uncertain demand when prices are set before the demand level is known can result in an excess of demand and require service to be rationed. Customer behavior in specific cases is examined. Customers who value service most are found to be served first under both second-best optimal prices and the monopolistic rule. Random rationing by price and inefficient nonprice rationing, however, are shown to result in inefficient distribution of service. 21 references.
For many years there has been interest in replacing the existing complex transfer system in the United States with a nationwide negative income tax (NIT) program.' The feasibility and desirability of an NIT, however, depend on its effects on aggregate labor supply (and its cost). Interest in predicting these aggregate effects has motivated considerable empirical research on labor supply. The first studies used existing data, usually cross-sectional, to estimate the parameters of labor supply functions.2 Unfortunately, the range of estimates in these studies is disturbingly large and of limited usefulness to policymakers.3 Consequently, a new approach to labor supply research has been followed social experimentation.4 Several experiments have been funded by the federal government to test the effects of alternative NIT programs on labor supply. The first experiment, the New Jersey Experiment, was conducted in New Jersey and Pennsylvania from 1968 to 1972.5 Other experiments have taken place in Gary, Indiana from 1970 to 1974, and in rural areas of Iowa and North Carolina from 1969 to 1973. The largest and most comprehensive of these experiments began in 1971 in Seattle, Washington and Denver, Colorado and is still taking place. In principle, a controlled experiment affords the opportunity to overcome most of the problems inherent in nonexperimental research, because in an experiment, the budget constraints of individuals are exogenously shifted in a measurable way. In practice, however, the experiments have been beset with their own unique set of econometric problems. These problems include the nonrandom assignment of experimental treatment, small samples, truncation of response, limited duration, participation in other welfare programs both before and during the experiment by sample members, and the selection of nonrepresentative samples.6 In this paper, a methodology is presented that attempts to deal with these problems. Experimental data from the Seattle and *Economists, SRI International. The research reported in this paper was performed under contracts with the states of Washington and Colorado, prime contractors for the Department of Health, Education, and Welfare, under contract numbers SRS-70-53 and SRS-71-18, respectively. The opinions expressed in the paper are our own and should not be construed as representing the opinions or policies of the states of Washington or Colorado, or any agency of the U.S. government. An earlier version of this paper was presented at the Summer 1976 meetings of the Econometric Society and in seminars at the National Bureau of Economic Research and Mathematica Policy Research. Jodie Allen, Yoram Barzel, David Betson, Michael Boskin, Glen Cain, Joseph Corbett, Irwin Garfinkel, David Greenberg, Terry Johnson, Richard Kaluzny, Richard Kasten, Robert Lerman, Stanley Masters, Myles Maxfield, Robert Moffit, Larry Orr, Harold Watts, and Robert Willis provided valuable comments on various drafts of this paper. We are, of course, solely responsible for the views presented and for any remaining errors. Helen Cohn, Diane Hollenbeck, Paul McElherne, Gary Stieger, and Steven Spickard provided expert programming assistance. I Milton Friedman is usually credited with developing the concept of a negative income tax. Robert Lampman and James Tobin (1965) among others also made early contributions to the concept. 2An excellent collection of such studies is presented in Glen Cain and Harold Watts. 3See Keeley for a survey of these studies and a discussion of some of the econometric difficulties that lead to such a wide range of estimates. 4Heather Ross (1966) is credited with first conceiving the idea of an NIT experiment. Guy Orcutt and Alice Orcutt (1968) first published a paper outlining an experimental design. 5The New Jersey Experiment is described in David Kershaw and Jerilyn Fair. Watts and Albert Rees (1977a, b) and Joseph Pechman and P. Michael Timpane present the results from this experiment. 6See Henry Aaron, Keeley, and Keeley and Robins for a critical discussion of many of these problems.
Much recent thought has been devoted to the macroeconomic importance of the existence of wage contracts. Still, some puzzling features of the most conspicuous form of wage bargaining, that done formally by employers and labor unions, deserve further theoretical attention. Among these important features are: 1. Collective bargaining agreements are rarely contingent on outside events even though the parties have very imperfect knowledge of prospective economic conditions during the period of the contract. The only important exception is the indexing of wages to the cost of living. 2. Employers are permitted wide discretion in determining the level of employment when demand shifts unexpectedly. As employment varies, total compensation varies according to a formula established in the agreement. 3. Agreements are not permanent but are renegotiated on a regular cycle. 4. In the process of renegotiation, the current state of demand has little impact on the new wage schedule. On the other hand, current wages in other industries have an important influence. This feature especially has been denied or ignored by economic theorists even though it is a prominent part of the thinking of labor economists on wage determination.