Knowledge that Transforms

Ricardo is shown to be right that machinery can hurt wages and reduce output. A dramatic robot example reveals Wicksell's error in believing that Pareto optimality calls for no drop in total output from a viable invention. Under Ricardo's axiom that labor supply adjusts to keep wages at the subsistence level, he can correctly deduce on a market-clearing basis a rise in his net product (rent plus interest), while the greater drop in population and total wages result in a reduction in his gross product (rent plus interest plus wages).

Many, but not all, firms have the freedom to choose liability rules. In some countries, service professions have unlimited liability rules imposed by government; historically, banks in some countries faced unlimited liability. Why do governments impose unlimited liability? This is the question the authors address. With a simple model, they illustrate the agency conflicts in firms. Limited liability solves these conflicts efficiently. Unlimited liability raises the cost of capital; inefficiently small firms result. But under some conditions, selectively-applied unlimited liability rules protect rents. The authors test several propositions with data on Scottish banking and U.S. law firms.

The classical economists engaged in a vigorous debate over whether Britain's tariff reductions in the 1840s should be made contingent on tariff liberalization abroad. Some, notably Robert Torrens, believed that a unilateral tariff reduction would so deteriorate British terms of trade as to outweigh efficiency gains and make the country worse off. In this paper, Britain's foreign trade elasticities are estimated for this period in a simultaneous equation model. They are used in a simple general equilibrium model that explicitly takes the terms of trade into account to assess the welfare impact of tariff reductions. The results indicate that Britain would have been made worse off from a unilateral tariff reduction. However, foreign tariff reductions mitigated the terms of trade deterioration and could easily have made Britain better off.

The paper considers the question whether observed price differentials reflect perceived differences in quality, service agreements, or location or whether information imperfections can explain this phenomenon. It sets out theoretical arguments linking inflation to reductions in the information stock held by agents and thus to greater price dispersion. The hypothesis is tested using monthly price data for 13 uniquely defined goods sold in Israel between 1971 and 1984. Price dispersion is shown to be positively related to the rate of market price inflation. Since inflation is an unlikely proxy for changes in perceived characteristics, the findings support price dispersion theories based on "optimally imperfect" decision making

This article examines interactions between markets and state commercial planning in the context of China's agricultural sector. It begins with a discussion of recent trends in agricultural planning and commerce in China and then presents a theoretical model that analyzes the way that a mixed commercial system of the sort observed in China functions. The theoretical analysis suggests that a mixed system is sustainable and can have desirable efficiency and distributional effects. Markets, however, limit the range of sustainable plans, and in the presence of markets, state planning may no longer directly influence production and consumption behavior.

Health concerns are thought by many to have shifted consumption away from red meats, though econometric evidence is mixed. Testing for structural change is difficult, especially when one time series is used for both estimating demand equations and testing their stability. Specification errors may suggest a shift where none has occurred. Using nonparametric demand analysis, we find that meat consumption patterns in the United States and Australia can be explained using only relative prices and expenditures. Only imposing particular functional forms can reverse the conclusion, suggesting that specification errors in econometric demand studies can account for findings of taste changes.

This paper analyzes a monopolist that markets successive generations of new and improving nondurable products. Prices, research intensity, and product innovations are derived as sequential equilibrium outcomes to a dynamic game with incomplete information. Asymmetric information is an important feature of the model. The monopolist is fully aware of the current product's quality, as are consumers who have tried it. However, the beliefs of other people are characterized by a probability distribution that depends on the monopolist's marketing strategy and the product's popularity. The analysis illustrates a new context in which price signaling might serve as a mechanism for ensuring that only high-quality products are marketed. More important, it shows how product life cycles are generated in the absence of signaling and how a reputation for producing high-quality goods becomes established in such cases.

The causes and consequences of state maximum hours legislation for female workers, passed from 1848 to the 1920s, are found to differ from a recent interpretation. Although maximum hours legislation served to reduce scheduled hours in 1920, the impact was minimal. Curiously, the legislation appears to have operated equally for men. Legislation affecting only women was symptomatic of a general desire by labor for lower hours, and these lower hours were achieved in the tight, and otherwise special, World War I labor market. Most important, the restrictiveness of the legislation had no adverse effect on the employment share of women in manufacturing.

This paper hypothesizes that value of time, and consequently labor force participation, can vary with circumstances specific to a marriage or a marriage market. Wives' traits valued in the marriage market are expected to be associated with lower labor force participation, whereas husbands' traits valued in the marriage market are expected to be associated with lower participation, rates on the part of wives. Evidence for these hypotheses is found on the basis of regressions of labor force participation for a sample of Israeli married women. Inclusion of traits valued in the marriage market and marital sorting patterns increases the explanatory power of the regressions.

This paper reports empirical evidence of systematic cross-locale variation in the degree of division of labor among physicians. A theoretical model--based on an individual producer's trade-off between increasing returns and falling marginal revenue within each activity--motivates the empirical tests. At two levels of aggregation, specialization is correlated with local demand shifters for medical services. At the individual level, I find systematic differences in the range of procedures performed within a specialty class. General practitioners working fewer hours, practicing in more populated counties, or practicing in countries with more elderly produce a narrower range of procedures.