Knowledge that Transforms

Throughout the 1930s and early 1940s, U.S. Treasury bonds and notes appeared to have negative nominal yields as they approached maturity. But negative nominal interest rates are impossible in a world in which one can always hold cash. The resolution to this puzzle is that Treasury securities, in addition to making coupon payments, gave the owner the right to buy a new security on a future date. This paper describes the institutional environment that led to the apparent negative nominal interest rates; develops a method for valuing the "exchange privilege"; and computes accurate measures of the yield to the coupon-bearing component of these composite bond/options.

A market composed of pairwise trading under incomplete information is modeled in order to analyze how resources are allocated among competing uses when information about trade gains is incomplete. Contrary to the results from studying a single such trade, sufficient homogeneity across potential trades guarantees that efficiency obtains. This is analogous to simple first-price auctions with homogeneous bidders, where bidders have a common bid function and, as a result, the high bidder also places the highest value on the auctioned object. With enough symmetry, the decentralized bilateral trades in the present model occur as if they were made in a first-price auction that occurs through time. The robustness of the efficiency result to heterogeneities among agents and to nontrivial search intensity decisions is then considered.

A self-interest explanation is presented for opposition by some farm groups to futures markets. During the twenties and thirties political opposition to futures markets was greater in the grain-producing states. The opposition was centered in Minnesota, North Dakota, South Dakota, Montana, and a few other states. The line elevator companies were prominent in these states and not others and used futures prices to facilitate a buying cartel. Futures prices were used to derive a suggested buying price for elevator purchases in each local market. The political opposition to futures by farmers was designed to raise the cost of operating local cartels. Political opposition was greater and gross profit margins of elevators were higher in states with line elevators.

This paper examines the interaction between union wages and the international pattern of production and trade. If union goods are heterogeneous in labor intensity, the introduction of an active union in the domestic country causes only the least labor-intensive range of union goods to be produced there, with goods of greatest labor intensity produced abroad because of the relatively high cost of domestic union labor. A narrowing of the scope of domestic union production will eliminate relatively labor-intensive goods, leading a rent-maximizing union to raise its union premium. The implications of this union behavior for comparative statics results are considered.

In his well-known analysis of the national debt, Robert Barro introduced the notion of a "dynastic family." This notion has since become a standard research tool, particularly in the areas of public finance and macroeconomics. In this paper, we critique the assumptions upon which the dynastic model is predicated, and argue that this framework is not a suitable abstraction In contexts where the objective is to analyze the effects of public policies. We reach this conclusion by formally considering a world in which each generation consists of a large number of distinct individuals, as opposed to one representative individual. We point out that family linkages form complex networks, in which each individual may belong to many dynastic groupings. The resulting proliferation of linkages between families gives rise to a host of neutrality results, including the irrelevance of all public redistributions, distortionary taxes, and prices. Since these results are not at all descriptive of the real world, we conclude that, in some fundamental sense, the world is not even approximately dynastic. These observations call into question all policy related results based on the dynastic framework, including the Ricardian equivalence hypothesis.

Unlike implicit contracts models, the nonuniform pricing model of unions assumes that firms can always shut down ex post to avoid any payments to the union. Under this restriction, employment can differ from a first-best even if both workers and firms are risk neutral. In general, the union chooses to offer quantity discounts on labor and needs to use a seniority rule that regulates the order in which workers are hired to implement these discounts. Unions lower (almost) all workers' employment probabilities and increase the cyclical volatility of employment, and the union-nonunion average wage differential will move countercyclically. Workers' preferences over union wage profiles, conditional on their seniority, exhibit (within limits) a convenient "unanimity" property.

In this paper, the characteristics model of Lancaster is reconsidered. It is shown by example that equilibrium prices need not be linearly decomposable. It does follow that equilibrium prices must be a convex function of characteristics, however. Further, it is shown that this fact holds independent of the form of firm competition (e.g., perfect or monopolistic). Finally, the predictions of the theory are discussed in the context of two empirical examples.