Knowledge that Transforms

This paper applies a model of the demand for public goods to explain cross-sectional differences in public allocations to agricultural research in the United States. The model postulates that demanders of agricultural research on the state level--primarily farmers and firms producing agricultural inputs--contribute voluntarily to lobbying activity either by voting or by making campaign contributions in order to induce research allocations. A "concentration effect" is derived, in which political participation by the relatively large demanders increases relative to participation by the relatively small demanders, as group size becomes large. The implications of the model are found to be consistent with American data on agricultural research allocations in 1969.

In a Samuelson overlapping-generations model, conditions for an operative interegenerational transfer motive are derived without special assumptions about the form of the utility function. Crucial in determining if transfers will be positive is the rate at which individuals discount heirs' utility relative to the market interest rate. It is also shown that transfers of human capital (such as investment in education) are not equivalent to ordinary bequests for the bonds-as-net-wealth controversy. If intergenerational transfers take the form of human capital, issuance of government bonds or social security can affect the equilibrium solution, even if the transfer motive is fully operative.

The problem of optimal exchange intervention is approached using the techniques derived in the "targets, instruments, and indicators" literature. The optimal exchange-rate policy is one of permitting the appropriate degree of exchange-rate flexibility rather than one of complete fixity or complete flexibility of the exchange rate. Although the problem of the optimal exchange-rate regime has been analyzed in these terms before, criteria previously employed, emphasizing the geographical or functional location of disturbances, are seen to be inappropriate for a portfolio balance model with some degree of capital mobility.

Estimates of a rational expectations version of Friedman's time-series consumption model are obtained by imposing the pertinent restrictions across the stochastic processes for consumption and income. A likelihood ratio test is used to test the adequacy of three joint hypotheses: namely, Friedman's model, rational expectations, and some arbitrary conditions on the disturbance process in the consumption function. The paper treats both the cases in which income is econometrically exogenous with respect to consumption and those in which it is not. The macroeconomics of this exogeneity condition are briefly discussed.

Applied tax incidence studies have concluded that the burden of the entire tax system is approximately proportional to income, a conclusion that depends critically on the assumption that sales and excise taxes are regressive. This paper shows that sales and excise taxes are progressive elements in the tax system when analyzed in a general-equilibrium model where government transfers are an important source of income. Consequently, the entire tax system is highly progressive under competitive assumptions about tax incidence. Moreover, the degree of progressivity is virtually unaffected when noncompetitive assumptions about tax incidence are employed.

Gould and Segall argued that the introduction of a third, composite good vitiates the Alchian and Allen (A-A) theorem that a common charge on two substitute goods leads, real income held constant, to a relative increase in the consumption of the higher to lower quality commodity. Using Hicks's third law, however, it is demonstrated that the direct substitution effect tends to dominate the interaction effect with the third good, if the two substitutes are close. Absolute changes are also investigated and some operational propositions offered with casual supporting observations. A-A's proposition is shown to be a useful price-theoretic construction, though not a direct implication of the law of demand.

It is commonly felt that a financial market achieves informational efficiency as traders with the best information and the most skill make profits at the expense of those with inferior information or ability and come to dominate the market. This paper develops a model of a speculative market in which this redistribution of wealth among traders with different information and ability can be studied. In the short run the market tends toward increased efficiency, but in neither the short nor the long run is full efficiency likely. The average deviation from efficiency is shown to depend on traders' characteristics such as the quality and diversity of their information and their risk aversion.

In this paper, the theory of covariance-stationary stochastic processes is used in order to investigate the sign and the significance of the relationship between employment and real wages. It is shown that when appropriate distributed lags are estimated the data suggest that employment and real wages are negatively correlated. The response appears to be non-contemporaneous and statistically significant.

In order to investigate the preferences of union members and the formation of union bargaining goals, a model of union behavior applicable to the United Mine Workers (UMW) and based on maximization of the expected utility of the median-aged member of the union is developed. The relationships determining the optimal wage-ton tax policy of the UMW are estimated over the 1948-73 period. It is found that (1) union members are quite risk averse with a coefficient of relative risk aversion greater than 2.5; (2) union members discount future benefits at the relatively low rate of 3.5-4.5 percent annually; and (3) union members value a dollar spent on fixed fringe benefits almost 40 percent more than a dollar spent on discretionary income. The latter result suggests that the income tax makes nontaxable fringe benefits a relatively attractive method of compensation. Another result which may be important for national energy policy is that the bargaining goals of the UMW are not very responsive to shifts in the demand for coal.