Optimization of the part of consumers is shown to imply that the marginal utility of consumption evolves according to a random walk with trend. To a reasonable approximation, consumption itself should evolve in the same way. In particular, no variable apart from current consumption should be of any value in predicting future consumption. This implication is tested with time-series data for the postwar United States. It is confirmed for real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices. The paper concludes that the evidence supports a modified version of the life cycle-permanent income hypothesis.

Econometric models encounter difficulties in handling more than a single kind of output. The absence of data on the flows of intermediate goods makes it impossible to estimate separate production functions for more than one product. Within the unifying framework of the modern theory of cost functions, this paper considers two alternative specifications that can accommodate disaggregation on the output side without requiring data on intermediate goods. The economic implications of these specifications are discussed, and a general specification is proposed in which it is possible to test the two specifications.

derived and discussed by these authors, with the exception of Diewert, treats time as continuous; the index is an integral over time. Empirical work has proceeded by calculating discrete annual changes, which are then used to obtain an approximation to the continuous index. Even when the object of the calculation is the estimation of total factor productivity over a very long time, annual data on output, inputs, and factor shares are used. However, detailed data are frequently not available annually. For example, much of the detailed data on labor inputs are available only from the Census of Population, which is taken every 10 years. The question studied in this paper is whether or not a reasonable approximation to the continuous Divisia index can be calculated using data from only the beginning and end of a long period of time. Our answer is favorable. We derive a suitable approximation, calculate bounds on its errors, and suggest that in the usual cases these errors are likely to be small. We then calculate the growth in total factor productivity in the American economy from 1909 to 1958 using the conventional method based on annual changes and compare it to our approximation based on data for 1909 and 1958 only. The two calculations give almost exactly the same result. We conclude that in most cases the data for intervening years are superfluous. This conclusion makes it possible to make detailed and accurate calculations of the growth in total factor productivity from one decennial census

We investigate the stochastic relation between income and consumption (specifically, consumption of food) within a panel of about 2,000 households. Our major findings are: 1. Consumption responds much more strongly to permanent than to transitory movements of income. 2. The response to transitory income is nonetheless clearly positive. 3. A simple test, independent of our model of consumption, rejects a central implication of the pure life cycle-permanent income hypothesis. The observed covariation of income and consumption is compatible with pure life cycle-permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent. As a general matter, our findings support the view that families respond differently to different sources of income variations. In particular, temporary income tax policies have smaller effects on consumption than do other, more permanent changes in income of the same magnitude.

Interpretation of the distribution of occupational success depends crucially on an understanding of the process of mobility. If the holders of low-paying jobs this year are just as likely as anyone else to hold good jobs next year, then the lower tail of the earnings distribution is not a matter of great social concern. Further, if the distribution of success is primarily determined by a random process, the prospects for a significant reduction in the inequality of earnings are unfavorable. On the other hand, high mobility in the short run may conceal systematic stratification of the labor force-it may be that the same individuals spend most of their time in the worst jobs. If so, luck and random events may play a small role in the distribution of well being, inequality may be a major issue, and the elimination of stratification may hold out the promise of an important reduction in inequality. Simple tabulation of distributions of success and of mobility among categories of success cannot answer the basic question of the role of stratification. In this paper, we develop a model and statistical method for studying mobility and relating it to characteristics upon which stratification may be based. Our study rests on annual interviews conducted from 1966 through 1969 with about 3,000 white males born between 1942 and 1952.1 We find that mobility is closely related to personal characteristics, especially intelligence and education. Men with high IQs and extensive education are more likely to move to high-paying jobs and are more likely to remain in them. Nevertheless, random events dominate the distribution of occupational success in the short run. Our results strongly support the finding of Christopher Jencks and his collaborators that redistribution of the determinants of earnings would do almost nothing to reduce the observed inequality of annual earnings.

Mortgage loans are leading examples of transactions where experts on one side of the market take advantage of consumers' lack of knowledge and experience. We study the compensation that borrowers pay to mortgage brokers for assistance from application to closing. Two findings support the conclusion that confused borrowers overpay for brokers' services: (i) A model of effective shopping shows that borrowers sacrifice at least $1,000 by shopping from too few brokers. (ii) Borrowers who compensate their brokers with both cash and a commission from the lender pay twice as much as similar borrowers who pay no cash.

Consumer Confusion in the Mortgage Market: Evidence of Less Than a Perfectly Transparent and Competitive Market by Susan E. Woodward and Robert E. Hall. Published in volume 100, issue 2, pages 511-15 of American Economic Review, May 2010

Entrepreneurship is risky. We study the risk facing a well-documented and important class of entrepreneurs, those backed by venture capital. Using a dynamic program, we calculate the certainty-equivalent of the difference between the cash rewards that entrepreneurs actually received over the past 20 years and the cash that entrepreneurs would have received from a risk-free salaried job. The payoff to a venture-backed entrepreneur comprises a below-market salary and a share of the equity value of the company when it goes public or is acquired. We find that the typical venture-backed entrepreneur received an average of $5.8 million in exit cash. Almost three-quarters of entrepreneurs receive nothing at exit and a few receive over a billion dollars. Because of the extreme dispersion of payoffs, an entrepreneur with a coefficient of relative risk aversion of two places a certainty equivalent value only slightly greater than zero on the distribution of outcomes she faces at the time of her company's launch.

Microsoft stands accused of an illegal defense of its dominant position in the desktop operatingsystem market. According to the charge, exclusionary contracts and predatory conduct dealing primarily with the Internet browser prevented the browser from evolving into a rival for Microsoft’s operating system, Windows. Earlier, the government negotiated a consent decree with Microsoft limiting exclusionary terms in the company’s contracts with computer makers. Our purpose here is to investigate quantification of the effects of the challenged conduct. By how much will the computer purchaser gain from the elimination of artificial barriers to entry in the operating-system business? Or, to put the question the other way around, how much harm did the conduct cause before it was brought under control? We also discuss policies for controlling artificial barriers. A related more detailed paper, Hall (1999), develops a model to deal with these issues at a more general level. Here we will present a stripped-down version of the model and apply it to Microsoft.