Knowledge that Transforms

In this paper, I show the existence of stationary rational expectations equilibria in a simple two-island, overlapping generations model of the type first considered by Lucas, in which all uncertainty is endogenous. The result is obtained by first constructing "sunspot" equilibria on each island separately and then using the equilibrium pricing equations to eliminate the sunspot variable. In the resulting equilibrium, each island's prices serve as the sunspot for the other island. The constructed equilibrium is nontrivially stochastic.

This paper discusses the implications of rationing by waiting when consumers have different time costs and personal valuations. The joint distribution function of time costs and personal valuations is used to characterize market equilibrium. It is argued that, under certain conditions, an increase in the variance of time costs will reduce the dissipation of rent. Furthermore, it is shown that introducing a secondary market for a rationed good does not necessarily improve welfare because total surplus under rationing by waiting depends more on the variance than on the level of time costs and personal valuations. The model is also used to discuss other institutions that involve rent-seeking activities, such as the patent system and import quotas.

One difficulty confronting Harberger's celebrated model of the corporate income tax is how to treat noncorporate production in primarily corporate sectors and corporate production in primarily noncorporate sectors. The paper presents a two-good model with corporate and noncorporate production of both goods. The incidence of corporate tax in our mutual production model can differ markedly from that in the Harberger model. The difference between the two models in deadweight loss is also striking, with losses in the mutual production model many times larger than those in the Harberger model.

The main result of this paper is that the multiple equilibrium problem in mechanism design can be avoided in private-value models if agents do not use weakly dominated strategies in equilibrium. We show that in such settings, any incentive-compatible allocation rule can be made the unique equilibrium outcome to a mechanism. We derive a general necessary condition for unique implementation that implies that the positive result for private-value models applies with considerably less generality to common-value settings.

Interest-bearing checkable deposits are examined to test whether they should be included in measures of the U.S. money stock. Both Divisia and traditional simple-sum aggregates are constructed on the basis of tests for weak separability in a model of the demand for financial assets. Using nonparametric demand analysis, we find that several groups of assets are compatible with aggregation theory. We find empirical support for a narrow measure consisting of the components of current MIA. In tests based on a St. Louis equation and in terms of controllability, a Divisia aggregate performs better than the simple-sum MIA measure.

The payment of child allowances to laborers with large families was widespread in early nineteenth-century England. This paper tests Thomas Malthus's hypothesis that child allowances caused the birth rate to increase. A cross-sectional regression model is estimated to explain variations in birth rates across parishes in 1826-30. Birth rates are found to be related to child allowances, income, and the availability of housing, as Malthus contended. The paper concludes by examining the role played by the adoption of child allowances after 1795 in the fertility increase of the early nineteenth century.

This paper argues that regulatory institutions in defense procurement are (and necessarily must be) organized to create prizes for innovation in the form of positive economic profit on production contracts. This has a number of important policy implications. The values of the prizes on 12 major aerospace projects are estimated using stock market data and shown to be large.

Unequal access to financing for education may be an important source of educational differences. We develop a model relating sib schooling and earnings similarities to sibship size with and without equal access and estimate it for the education of veterans, for whom the GI Bill assured equal access, and for their children, who had no such government assistance. We find an inverse relationship between sibship size and sib schooling and earnings similarities for the children, but not for the veterans; we conclude that, in the absence of equal access policies, unequal access is an important source of educational differences.

We analyze a model of a hostile takeover attempt in which shareholders are free to sell common-share voting rights as well as the shares themselves. Without taxation, only welfare-improving take-overs succeed. Allowing vote sales has no effect on the success of attempted takeovers or the profits of incumbent management or raiders. When taxes are levied, however, an inefficiently small number of value-increasing takeovers succeed if vote sales are prohibited. Allowing vote sales facilitates such takeovers and raises welfare. With taxation, incumbents would never prefer to defend against take-overs by purchasing votes, but raiders might well prefer this method.