Knowledge that Transforms

This paper addresses the question of dynamic specification of empirical models of factor demand for annual U.S. manufacturing data from 1947 to 1981. Frequently used models that treat a subset of factors as variable are shown to be misspecified. An error-correction model is considered as an alternative specification. This model is shown to dominate several more parsimonious models in several respects. However, like the other models considered, the error-correction model is unable to generate satisfactory estimates of long-run elasticities. The issue of dynamic specification remains unresolved. Copyright 1992 by MIT Press.

This paper explores the relationship between a differentiated brand's market share and its price in the context of a model that recognizes the endogeneity of the brand's advertising behavior and pricing decisions. The empirical analysis suggests that General Foods charged higher prices for its regular-grind Maxwell House coffee in geographic areas where the brand's market share was relatively large. Available cross-sectional, time-series data and company documents suggest that this empirical relationship is attributable to the preference grocery retailers have for putting dominant coffee brands on special, rather than cross-sectional variations in costs, market concentration, or consumer tastes. Copyright 1992 by MIT Press.

Optimal designs for estimating model parameters and other characteristics such as mean and median willingness-to-pay are discussed.when a logistic or a probit regression model is used for analyzing a contingent valuation study with discrete questions. A numerical example, related to a study of the value of preserving some virgin forests in Sweden, illustrates the efficiencies of different designs and how a sequential procedure can be applied. Copyright 1992 by MIT Press.

Using Canadian data (1965-86), the author confirms and extends Thomas M. Stoker's (1986) results on the rule of distributional effects in demand systems. The confirmation consists of evidence from the linear expenditure system model showing that distributional effects are statistically significant and can displace AR(1) dynamics in the disturbances. The extension is made to the quadratic expenditure system model and an argument is advanced that standard habit formation dynamics may reflect omitted distributional effects. The evidence supports this conjecture. This suggests that the author may have been drawing the wrong conclusions from expenditure studies. Rather than inferring dynamic behavior, he should have been concluding that these models are misspecified. Copyright 1992 by MIT Press.

Previous models of public spending fail to explain why high inflation rates are distributed non-randomly across countries. In the switching-regime specification proposed here, governments tend to resort to inflationary debt monetarization when the spending level chosen by voters exceeds actual revenue capacity. The voter-choice and fiscal-capacity models of earlier studies are special cases of this framework. Using cross country data for 1970, 1975 and 1980, the authors find that the voter-choice specification applies to most industrialized countries, whereas fiscal capacity appears to constrain government spending in most developing countries. High inflation appears to result from shocks that alter a country's fiscal capacity relative to voters' expectations. Copyright 1992 by MIT Press.

Professional forecasts of aggregate U.S. consumption series strongly reject Robert E. Hall's (1978) random walk hypothesis. Band spectrum regressions show that low-frequency variations in growth ra tes of expenditures on nondurables and services, defined as cycles takin g more than two years to complete, primarily account for the rejection. Consumption growth and professional forecasts of GNP growth are also closely related at the low but not at the high frequencies. Liquidi ty constraints or durable characteristics of consumption goods may both explain the reported findings. Copyright 1992 by MIT Press.

Robert A. Pollak, Terence J. Wales, Price-Augmenting Returns to Scale: An Application to Nonseparable Two-Stage Technologies, The Review of Economics and Statistics, Vol. 74, No. 2 (May, 1992), pp. 213-220

A procedure is proposed to test for the existence of a fully causal relationship between two variables. The method involves contrasting the probabilistic forecasting performance of a univariate and bivariate specification for the same variable Y. If there exists some theory or belief that X causes Y, and the addition of a variable X to the information set of a prequential forecasting system for a variable Y reduces miscalibration and/or the level of forecast uncertainty with respect Y's distribution for the next period, then a fully causal effect running from X to Y may be inferred. Vector autoregression allows testing for feedback. The method is to be applied to the issue of causality between the live cattle futures market and a major slaughter cattle cash market. Copyright 1992 by MIT Press.

Evidence on costs and factor substitution is presented for a sample of local fire departments in New York State. The results suggest that fire service production does not fit either Leontief, Cobb-Douglas, or CES technology. In addition, exogenous socioeconomic variables are found to significantly affect public-sector costs and the estimates of factor price elasticities. The findings of relatively low factor demand and substitution elasticities suggest that local governments may have limited flexibility in adjusting their production of fire services to minimize the impact of rising factor prices. Copyright 1992 by MIT Press.