Knowledge that Transforms

THE presence or absence of comparative advantage is important to many fields of inquiry besides international trade. Recently, comparative advantage in the performance of tasks by individuals has been shown to be a minimum requirement for the distribution of labor earnings to be different in form from the distribution of abilities (Sattinger, 1975). In particular, skewness in the earnings distribution arises from comparative advantage. While many economists would take the existence of comparative advantage in individuals for granted, much economic analysis and empirical work depends on the absence of comparative advantage. Sherwin Rosen (1977) has recently analyzed the difficulties in labor aggregation introduced by the presence of comparative advantage. Also, the efficiency units assumption requires the absence of comparative advantage in individuals. In turn, the efficiency units assumption is necessary for empirical work relating the distribution of earnings solely to individual characteristics (Sattinger, 1977), as has often been done in the human capital literature. This paper uses data from mechanical aptitude tests (Paterson and Eliot et al., 1930) to investigate comparative advantage in the performance of tasks by individuals. Using both non-parametric and parametric tests, such comparative advantage is found to exist. The paper then presents a method for obtaining a measure of difficulty given a cardinal measure of abilities, and tests for the possibility of intransitive comparative advantage. Artificial economies are then constructed to reveal the effects of comparative advantage on the distribution of earnings. II. Sources of Comparative Advantage

A. ~ number of arguments have been ad1A,vanced by social scientists to explain criminal behavior. For example, some sociologists believe in a sickness (Horton and Leslie, 1970) while some psychologists look for subconscious roots of human motivation toward crimes (Halleck, 1967). An alternative approach pursued by most economists and subject to objective empirical investigation is to rely on the familiar economic maxim that people are rational and in general do respond to incentives whether they pursue legitimate or illegitimate activities. One of the earliest discussions of such an approach to criminal behavior is found in Bentham's Principles of Penal Law (1962) where he lays down the hypothesis that certainty and severity of punishment deter criminal behavior. Therefore, a reasonable general hypothesis that needs to be tested is that illegitimate behavior can be explained by opportunities as measured by potential gains from legitimate and illegitimate activities. In recent years a number of studies have attempted to investigate the relationship between crime and certain quantifiable opportunities, for example, Fleisher (1966), Ehrlich (1973), Sjoquist (1973), and Swimmer (1974). The works of Becker (1968) and Ehrlich establish the basic theoretical foundation for the empirical work pursued in this paper. We test the opportunity hypothesis and the notion that offenders do respond to incentives whether provided by the market conditions or by the legal system. In particular, we would be concerned primarily with the effect of various deterrent measures on criminal activity. An additional issue that is closely linked to the former hypothesis and needs closer empirical scrutiny is whether or not the various deterrent measures like certainty and severity of punishment are complementary. In other words, do certainty and severity go together or are they inversely related to each other for various crimes. This empirical work has certain unique features. It provides the most comprehensive investigation of the deterrent hypothesis and the certainty-severity trade-off, if any, for the cities of the United States. It covers two time periods, 1960 and 1970, which would help to evaluate the consistency of the results over time.

IN recent years there have been notable advances in the methodology used in empirical studies of state and local public spending. The rather ad hoc econometric studies of the mid-1960s are being replaced by more carefully specified models, e.g., Barr and Davis (1966), Ohls and Wales (1972), Borcherding and Deacon (1972), and Bergstrom and Goodman (1973). Most of these efforts share the common feature that expenditures are viewed as responses to collectively exercised demands. While these studies have yielded insights, all have been partial equilibrium in nature and none has incorporated the possibility of substitution among public services in response to changes in relative costs. A goal of the present paper is to fill this gap by directly modeling and estimating such substitution effects in collective consumption. To accomplish this, it is convenient to view expenditure decisions in the public sector as analogous to consumer choices in the private sector, i.e., as if generated by utility maximization subject to a budget constraint. Quite aside from any advantages this approach holds for empirical analysis, this view of the public decision-making process has been highly attractive to theoretical researchers. Although the utility maximization paradigm has never been subjected to a direct empirical test, it has been employed to predict the effects of intergovernmental grants and spillovers across jurisdictions, and to examine other topics. A second aim of this analysis, therefore, is to provide empirical evidence on the tenability of this view of the local public sector.

AN important question in contemporary 1AILeconomics is whether or not the real wage clears the labor market. Its answer has bearing on issues as diverse as the nature of unemployment, the efficacy of fiscal and monetary policies, and the incidence of income taxes. Unfortunately, consensus as to the correct answer seems to be lacking. While much of modern macroeconomic theory allows for the possibility that the real wage fails to equate the supply and demand of labor (Barro and Grossman, 1971; Korliras, 1975), much analysis is based on the assumption of equilibrium in the labor market (Patinkin, 1965). The purpose of the present paper is to carry out an econometric test for which view of the labor market is more appropriate. Although the model we build is very aggregative and much too crude to be used as a basis for policy, we believe that it provides a first step in making operational the theoretical literature on disequilibrium macro models. Our tentative conclusion is that the hypothesis of a labor market in continuous equilibrium must be rejected. In section II we describe briefly some earlier work on modelling the aggregate supply and demand for labor. It is shown that prior studies either assume equilibrium in the labor market, or deal with disequilibrium inadequately. In section III we specify the disequilibrium model. Section IV contains a discussion of estimation problems, an interpretation of the results, and a comparison with an equilibrium version of the model. A concluding section has a summary and an agenda for future research. II. Antecedents

IN an earlier work, a survey technique has been developed for collecting and analyzing a set of subjective economic data in order to investigate the income-leisure preferences of a group of workers (Dunn, 1975). The marginal rates of substitution of wage income for leisure were obtained for a sample of low-income workers without using the competitive assumptions to equate them to existing wage rates. In the present paper we use these data to obtain an explicit indifference function obeying the axioms of transitivity and convexity, which is capable of reproducing our previous results. We find that the resulting labor supply curves are negatively sloped throughout the entire range of realistic wage rates.

RECENTLY, significant research has been conducted on the functioning of the capital market. One thrust of this research (e.g., Fama, 1970) has demonstrated that the capital market is highly efficient, i.e., the prices of securities at a point in time seem to reflect available information, and security prices seem to adjust quickly over time to new information. Another thrust (e.g., Sharpe, 1964; Lintner, 1965; Mossin, 1966; Jensen, 1972) has been the theoretical development and empirical testing of a specific model, the Capital Asset Pricing Model (CAPM), which precisely defines risk and return, gives an economic justification for diversification, and under specific assumptions draws the equilibrium conditions between risk and return in the capital market. Not withstanding serious econometric difficulties of estimation, these studies picture a highly efficient capital market in which capital funds are allocated based only upon risk and return considerations as determined by a rigorous evaluation of relevant information. The capital market depicted in this recent capital market literature would seem to differ from the capital market depicted in the literature of industrial organization economics. For example, Baumol (1967) and Hall and Weiss (1967) have argued that the major barriers to entry are not in the structure of output markets, but in the capital market. The argument is that to enter and compete effectively in many basic industries, such as automobiles, chemicals, etc., a large sum of capital is necessary, and the capital market will not allocate a large sum to a new entrant. Basically the capital market fails in its allocative function because investment opportunities, albeit opportunities with high profit potential, are lumpy. That is, investment opportunities cannot be financed in small discrete amounts by new entrants, but can only be financed in large amounts by existing firms insuring basic industries marked by large firms with high market shares. Both the capital market literature and the industrial organization literature are valuable reference points for those who would hope to understand the allocation of capital in the economy and the effects it has upon the condition of entry, level of price and level of output found in industrial markets. The general purpose of this paper is to begin a reconciliation of these literatures with respect to their disparate views of the capital market. Since capital market theory relates capital costs to risk, our specific purpose is to determine if the market power of firms, as measured by size and seller concentration, seems to reduce the riskiness of firms and therefore their capital costs. In section II the difference between book profits and capital costs is stated. In section III, with the aid of the Capital Asset Pricing Model, the relationship between capital costs and risk is presented. In section IV the data and sample of firms are described, and in section V the data analysis is presented, which does in fact suggest that the risk and capital costs of powerful firms are lower than for other firms. Conclusions are presented in section VI.

An examination of two types of simple forecasting models using preliminary data compares the merits of optiml versus traditional predictors and indicates the relationship of delay in the availability of data revisions to forecasting accuracy. The Kalman filter approach is used in the first model, based on the optimal use of data containing errors in forecasting. Several suboptimal predictors, which ignore preliminary data, treat it as error-free, or adjust for bias and serial correlation, are then compared. A significant improvement in accuracy is demonstrated with the optimal use of forecasting models. Whether accuracy will improve with more complex models is not yet known. 10 references.

C LEARLY, one of the most significant institutional developments affecting the organization of American industry in recent years has been the trend toward diversification. Many important industries have been restructured as single product firms have been replaced (often by acquisition) by large conglomerates producing scores of diverse products. The rapid emergence of the conglomerate form of business organization has raised fundamental questions regarding the implications of this trend for the market system-a system in which interfirm competition is the basic regulating device.1 There has been a great deal of controversy within the economics and legal professions about the long-run implications of conglomerate firms for economic performance.2 This is due, in large part, to the fact that there is no theoretical framework and no general empirical evidence that is relevant to the intermarket relationships of multi-product firms. The shortcomings of theory arise from the fact that traditional microeconomic theory focuses only on the interrelationships of firms operating in the same market, while the lack of empirical evidence stems from the fact that appropriate micro level data for testing generally are not available. Although the lack of theoretical framework and data generally has precluded systematic analysis of the competitive effects of diversification,3 a number of intuitively appealing and workable hypotheses have been developed in connection with the conglomerate form of business organization. This study tests one of the major hypothesized consequences of conglomerate dominance-the development of mutual forbearance. The hypothesis holds that conglomerate firms that meet in many markets will develop a and let live philosophy since action initiated in any market may induce retaliation in other markets where they are more vulnerable.4 As a consequence, the prevalence of conglomerate firms will mean a reduction in rivalry even in markets with a relatively competitive structure based on traditional measures of market structure. This study uses a multiple regression model to analyze the relationship between market rivalry and intermarket contacts of dominant firms. The study develops a simple model that illustrates the implications of the mutual forbearance hypothesis and discusses the hypothesis in the context of commercial banking. It then sets out the estimating equation and develops a variable that is designed to capture the degree of intermarket contact among dominant firms. Additional variables are developed and used along with the intermarket contact variable in a regression analysis that covers a sample of 187 major banking markets. The study focuses upon the commercial banking industry because it is characterized by firms with relatively homogeneous product mixes that operate in a variety of relatively well defined geographic markets. Furthermore, and of particular importance, the necessary micro level data are available. Finally, the issue is highly relevant in banking today.5 However, by focusing upon the banking industry the results may be subject to question in two respects. First, it may be argued that the diversification subject to investigation in this study is Received for publication December 22, 1976. Revision accepted for publication June 7, 1977. * University of Florida and Board of Governors, Federal Reserve System, respectively. Support from the Center for Public Policy Research at the University of Florida and from the Board of Governors of the Federal Reserve System is gratefully acknowledged. The opinions are those of the authors and do not necessarily reflect the views of their respective institutions. I See Grabowski and Mueller (1970) and Grether (1970). 2 See, for example, Edwards (1955), Stocking (1955), Edwards (1964), Turner (1965), Federal Trade Commission (1969), St. John's Law Review (1970), Steiner (1975). 3 For a test of one consequence of conglomerate firms, see Rhoades (1973) and Rhoades (1974). 4 This hypothesis was first stated by Edwards (1955). In another context, Solomon (1970) suggested it may be important in the banking industry. 5 See, U.S. v. Marine Bancorporation, Inc., et al. (1974) and U.S. v. Connecticut National Bank et al. (1974).

W. Bradford Cornell, J. Kimball Dietrich, The Efficiency of the Market for Foreign Exchange Under Floating Exchange Rates, The Review of Economics and Statistics, Vol. 60, No. 1 (Feb., 1978), pp. 111-120