Knowledge that Transforms

Economists are sometimes interested in explaining variation in parameters estimated from samples having different characteristics. In this REVIEW Russell (1967) has explained Houthakker's (1957) country income elasticity of demand estimates by regressing these estimates on such country characteristics as consumption per capita and relative prices. Similarly, Wachter (1970) demonstrates that high wage, noncompetitive industries (by contrast with low wage, competitive industries) have a positive relation between their relative wages and unemployment by regressing the estimated coefficient of the unemployment term in a relative wage regression on concentration ratios and unionization variables. Elsewhere, Williamson (1971) explains differences in the sectoral speed of adjustment parameter with a regression using sectoral elasticities, sectoral capital growth rates and a time dummy, while Lave and Lave (1970) account for differences in individual hospital cost function parameters by regressing these parameters on a variety of time-invariant characteristics of individual hospitals. Regression analyses such as these raise at least two issues. First, a kind of a priori information is available on the dependent variables in these regressions. How can this information best be incorporated into the estimation procedure? Second, what is the meaning of the two-step procedure implicitly adopted by the above authors? How does this approach compare with methods that would estimate the observations on the dependent variable and simultaneously provide an explanation of their variation?

DECENT years have witnessed an upswing in economists' interest in various aspects of the distnibution of income. The burgeoning of the size of econometric models has also led to inquiries into the distributional aspects of macroeconomic activity. How much do the poor gain from sustained growth, and who suffers relatively during slowdown and depression? Several attempts have been made to measure just what are the impacts of cyclical economic fluctuations on the distribution of income. Studies by Metcalf (1969), Mirer (1972), Schultz (1969), and Thurow (1970) have employed quite different approaches, and have reached differing conclusions on the cyclical sensitivity of income inequality. Clearly, a more general framework of analysis is needed to evaluate these findings in some perspective. One of the most frequently used approaches in such studies has been to characterize inequality in a distribution by a small number of summary measures (such as a Gini coefficient or an income share) and simply regress these inequality indices on such factors as an unemployment rate, a participation rate, and a per capita income measure. More preferable would be an that (i) explicitly lays out a model of the various channels by which macrofluctuations affect the distribution of income and (ii) examines the effects in a disaggregative fashion on individual income levels across a distribution. Such an approach, forwarded in Beach (1976), involved first modelling the behaviour of a set of individual quantile income levels and then expressing disaggregative income inequality measures in terms of these estimated income quantiles. One can then check the reasonableness of estimated inequality behaviour by examining the underlying behaviour of the individual quantile income levels. This article extends this disaggregative to an examination of implied aggregate inequality changes and compares the results with previous findings by Metcalf (1969) and Schultz (1969). It thus attempts to evaluate and integrate a number of disparate findings by building up summary measures of inequality from individual income quantiles. The outline of the paper is as follows. The next section reviews the indirect quantile approach followed here, and presents estimation results for the cyclical behaviour of a set of income quantiles. In section III the implied behaviour of relative mean incomes and income shares is discussed, and a comparison is presented with Metcalf's results. Section IV contains an aggregation of the results and a comparison with Schultz' findings. Then section V examines the behaviour of several alternative summary inequality measures. Section VI summarizes the principal findings and draws some implications.

James B. Hagerbaumer, The Gini Concentration Ratio and the Minor Concentration Ratio: A Two Parameter Index of Inequality, The Review of Economics and Statistics, Vol. 59, No. 3 (Aug., 1977), pp. 377-379

T HERE has been much theoretical work done on models of information and search beginning with the work of Stigler (1961, 1962) but there has been little empirical investigation of the implications of these models. With the importance these models have attained in describing macroeconomic phenomena such as the Phillips curve, this empirical work is necessary to guide any potential methods designed to reduce the unemployment rate. This paper examines the time path of wage demands of the unemployed as a test of some of the implications of the search models. Most of the theoretical work has been devoted to analyzing the optimal behavior of individuals who must make choices on the basis of incomplete information and of the equilibrium behavior of markets whose participants behave according to particular search rules. For labor markets it follows that it is not necessarily optimal for an individual to accept the first job offered to him, and thus, the equilibrium position will be characterized by positive unemployment. The search strategy of an unemployed individual usually takes the following form. Search until a wage offer is received that is above some reservation wage, this reservation wage being determined by maximizing expected returns. Since search is a sequential process, the sequence of reservation wages completely describes the behavior of the agents.1 Furthermore, it is derived in most of the theoretical work that this sequence of reservation wages is either constant or monotonically declining. People who remain in the market are willing to accept successively lower wages as time passes.2 This seems to be a paradoxical result about learning, i.e., time always makes one pessimistic. The models in which this monotonicity property is generally derived, do not consider learning as part of the mechanism generating behavior, but for any consistent model of both search and turnover (implicit in the search theories of the Phillips curve) it is required that individuals revise upward their expectations of the wage distribution with the state of the economy. In an economy that is constantly changing, learning should be an important determinant of search. It is hypothesized that when one is permitted or required to learn about the wage distribution through sampling, it seems reasonable to expect that initially pessimistic individuals will revise their wage demands upward before sampling terminates. This paper will argue that the above hypothesis is correct and that the sequence of reservation wages is not monotonically declining. The first part of the paper will present a heuristic formulation of a search and learning model where it can be seen that the sequence of reservation wages depends on the initial expectations of an individual and on the particular sequence of information (including wage offers) that an individual obtains. Although the particular search rule analyzed is not derived from optimization, it should help develop the intuition necessary for believing that reservation wages can and do rise in the course of search. The formulation could be considered as the study of behavior characterized by bounded rationality, but it is mainly presented to motivate the empirical work. The empirical evidence presented supports the hypothesis that a monotonically declining sequence of reservation wages is not an accurate description of actual search behavior of unemployed individuals looking for jobs. The sequence of reservation wages depends heavily on the perceived and actual wage distribution.

A jobseeker's attitudes towards risk and his perception of the risk inherent in the labor market he is searching have been shown to have a theoretical effect on his expected duration of search, when he is assumed to be searching for jobs in an optimal fashion.' However, no empirical research has adequately tested for these predicted effects.2 This article presents estimates of a reduced-form equation derived from the job search theory3 and tests the following two hypotheses: (1) as the standard deviation of the distribution of potential wage offers increases, an individual's expected duration of unemployment will increase, ceteris pariblis; (2) an individual who is more risk averse than another will have a shorter expected duration of unemployment, ceteris paribbls. The empirical results presented here tend to support both of these hypotheses. Both Kohn and Shavell (1974) and Pissarides (1974) prove, within models of optimal job search, that the more risk averse a job seeker, the lower he will set his minimum acceptable, or reservation, wage. The reservation wage is set to equate the marginal cost of an additional period of search with the expected marginal return from search; any job offer exceeding this wage is accepted and unemployment terminates.4 Determinants of the individual's reservation wage include costs of search, his risk preferences, and his view of the distribution of possible wage offers facing him. As an individual lowers his minimum acceptable wage he will shorten his expected spell of unemployment, given that the distribution of wage offers from which he draws is unchanged. Hence, the more risk averse jobseeker, by lowering his reservation wage, will have to search a shorter period of time, on average, to find an offer acceptable to him. The effect of wage dispersion on duration of unemployment (allowing for adjustment in the reservation wage) cannot be predicted in general from models of job search, despite the belief expressed (from Stigler (1962, p. 236) to Hall (1975, p. 324)) that this effect should be positive. However, when a rectangular wage offer distribution is posited, the intuitively appealing hypothesis (1) can be obtained from a static model of job search (for example, McCall's model (1970)). While the regression specification used in this study to test the two implications presented above was developed in the context of the job search theory, alternative theories could produce these results; hence, the empirical work discussed here is not seen as a test of the search theory.5 Instead, a negative relationship between risk aversion and duration of unemployment could reflect a tendency for individuals to choose occupations and industries with patterns of employment suiting their risk preferences. And a positive association between dispersion in potential wages and duration may

JN the literature on the macroeconomic aspects of R&D and technical change, several authors have emphasized the importance of technological opportunity as an influence on firms' innovative efforts. Phillips (1966, 1971) has been the leading proponent of a view that exogenous scientific progress is the key determinant of an industry's innovative effort and progressiveness. Scherer (1965) and Comanor (1967) have also used the concept of technological opportunity in their empirical work. The common empirical finding of these three authors is that their measures of technological opportunity exerted a strong positive influence on firms' and industries' R&D efforts. The present paper represents an effort both to extend the knowledge of the influence of opportunity on R&D and also to examine the relation among technological opportunity, R&D effort, and licensing of inventions. A license grants either the legal rights to, or the knowledge of, an invention' to the licensee and may require royalty payments in return. Licensing is a potentially important means of transferring technology2 and is also a strategic variable where firms are engaged in product rivalry based on the physical characteristics of their products. The emphasis of this paper is both conceptual and empirical. The first section below describes a framework for viewing the influence of technological environment on R&D effort and licensing. It is argued that there are two important dimensions of what other authors have referred to as technological opportunity. The second section then tests the implications of the conceptual arguments. Testing of these implications uses new data, collected for this study, on firms' R&D spending and license payments.

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The X-efficiency concept was developed in a landmark article by Harvey Leibenstein (1966). Essentially, the theory explains that, for a variety of reasons, neither organizations nor people work as efficiently or effectively as they could. Leibenstein points out that competition, in an important way, affects the intensity with which firms and people work; where competitive pressure is light, many people trade the disutility of greater effort, of search, and the control of other peoples' activities for the utility of feeling less pressure and of better interpersonal relations. The theory postulates the tendency for a firm's costs to be lower whenever it faces competition because of variable performance with a given level of inputs. The purpose of this article is to examine the competitive aspect of the X-efficiency theory and to assess its validity. This additional study is justified because in neither the studies cited by Leibenstein nor in subsequent studies was the impact of competition on firm costs evaluated empirically. This deficiency seems to be significant because Leibenstein emphasized the importance of the competitive effects in the theory of X-efficiency.