Knowledge that Transforms

Robert C. Vogel, Robert P. Trost, The Response of State Government Receipts to Economic Fluctuations and the Allocation of Counter-Cyclical Revenue Sharing Grants, The Review of Economics and Statistics, Vol. 61, No. 3 (Aug., 1979), pp. 389-400

N his well-known review of the human capital approach to the study of income distribution Jacob Mincer makes the point that . . a better understanding of the relation between and earnings requires an understanding of the factors determining investment (1970, p. 18). The importance of this point has been lost somewhat in the past few years with the plethora of empirical examinations of the relationship between years of schooling (as the measure of human capital investment) and earnings. Nevertheless, it is clear that if schooling is itself the result of optimizing rather than random behavior, the typical earnings regression will overstate the contribution of schooling to earnings. A simple model that explains interpersonal differences in investments in formal schooling has been developed by Becker (1967, 1975) with more formal extensions of this model having been presented by Ben-Porath (1967) and Wallace and Ihnen (1975). Basically, Becker's model views the individual as maximizing the present value of his net earnings over the life cycle by investing in formal schooling up to the point at which the marginal rate of return from the equals the marginal financing costs. This may, in turn, be expressed in a conventional demand-supply framework. The demand for schooling is the product of two factors: the expectation of returns from a particular. level of schooling achievement and the probability that the particular individual will in fact succeed in attaining this level.' The first factor is largely determined by the exogenous forces of the labor market where individual differences arise because of imperfect knowledge. The second is largely a function of individual'capacities (ability), the schooling environment, and the extent to which the individual believes the schooling environment and curriculum will actually lead to an increase in his stock of human capital. The supply side of the model reflects the opportunity for which is determined, in large part, by the availability of financing funds. For youths enrolled in high school the major economic decision they face is whether to continue with the formal educational process. The primary alternatives to schooling are full-time participation in the labor force, service in the Armed Forces, marriage and work within the household. The data indicate that these alternatives are chosen, in varying degrees to the extent that only 75% of a schooling cohort that entered the fifth grade in 1964 graduated from high school in 1972 (U.S. Department of HEW, 1974, p. 14). A sizable proportion of young adults, therefore, terminate their educational before the completion of high school. This decision to drop out of high school has seemed to arouse considerable public and private concern. While there is now some evidence and concern regarding an overinvestment in college training (Freeman, 1975), the fact that young people drop out of high school usually raises the spectre of increased crime, drug usage, unemployment and a general alienation of youth from the adult community. The public result of this. concern has been a variety of dropout prevention programs which have been supported under Title VIII of the Elementary and Secondary Education Act together with a provision' of the Vocational Education Act. which directs Federal monies to areas of high need, including local areas with a high concentration of school dropouts. A variety of instructional methods have been supported in the dropReceived for publication May 9, 1977. Revision accepted for publication February 15, 1978. * University of South Carolina. The research reported herewas supported by the Office of the Assistant Secretary for Planning and Evaluation, Department of Health, Education and Welfare. That support, together with the comments of Caroline Clotfelter, Susan Cochrane, Elchanan Cohn, Linda Edwards, Robert Hauser and two anonymous referees, is gratefully acknowledged. The computational assistance of Jane Lee was also of great help. The conclusions expressed here do not necessarily reflect the position of the sponsoring agency. I This useful distinction is taken from Griliches (1973).

A recent paper in this REVIEW (LongRasmussen-Haworth, 1977) challenges the view that urban size is a source of income equality. L-R-H develop an econometric model that explains variation in the Gini coefficient of male incomes and family incomes. They conclude that urban size creates a more unequal distribution of urban income (as indicated by a significant negative sign on the SMSA population variable). This paper makes several contributions to our knowledge of urban income distribution. First, unlike previous papers, it develops a theoretical framework for separating the effects of urban size and level of development. Second, it provides a theoretical basis, as well as empirical justification, for the hypothesis that level of development (as measured by urban income level) bears a non-linear relationship to urban income inequality, becoming negative at high levels of income. Third, all authors except L-R-H anticipate to decline while moving up the urban hierarchy (size distribution of cities). This paper makes the point that the urban hierarchyequality hypothesis is partly supported but that the conclusion hinges on the choice of measure. Fourth, virtually all previous research on urban income distribution uses the Gini coefficient as the measure of income inequality. This paper uses three measures to test the sensitivity of conclusions to the choice of measure: the Gini coefficient, the incidence of poverty, and the percentile index. Despite the widespread belief by most economists that efficiency and equity do not go hand-in-hand, the urban size-equality view suggests there is no trade-off between the two. Richardson, for example (1973, p. 53), argues that inequality decreases as we move up the urban hierarchy.1 Most of the empirical work on state, county, and urban income distribution supports this view (Mattila and Thompson, 1968; Hoch, 1972; Farbman, 1974; Aigner and Heins, 1967; AlSumarrie and Miller, 1967; Conlisk, 1967; Murray, 1969; Frech and Burns, 1971; Burns, 1975; Danziger, 1975). Income inequality, as measured by the Gini coefficient, consistently declines with income level of the state, metropolitan area, or county. The incidence of poverty also appears to decline with urban income level (Omrati, 1968; Richardson, 1973). However, only three studies include both population and income level in their testing (Burns, 1975; Danziger, 1975; and Long-Rasmussen-Haworth, 1977), and only the L-R-H research finds both population and income to be significant variables. Both the theoretical argument and the empirical evidence presented in this paper point to the existence of an efficiency-equity trade-off. Previous research on urban income distribution seems to miss the trade-off because the various issues involved have not been clearly separated. Thus, several basic questions surrounding urban income distribution are investigated in this paper: 1. Does urban size, as measured by SMSA population, have a separate effect from level of development? A theoretical basis for a separate inequality-creating effect of urban size is an expected productivity-agglomeration effect which increases the productivity of skilled labor more rapidly than the productivity of unskilled labor. 2. Can we expect level of development, as measured by urban income level, to have a consistent equalizing effect on urban income distribution? A theoretical argument based on an expected amenity-compensation effect leads us

STUDIES of the term structure of interest rates have a long tradition in the literature of finance and economics. Two prominent examples are Roll (1970) and Nelson (1971).1 More recently, a parallel literature has evolved on the pricing of commodity contracts, spawned by the work of Dusak (1973) and Black (1976). With the advent of futures trading in Treasury bills on the Chicago Mercantile Exchange (CME) the direct relationship between the theory of the term structure of interest rates and the theory of commodity contract pricing has become apparent. Since arbitrage is possible between the spot and futures markets, appropriately defined returns in both markets should be identical. In this paper we compare the returns in the spot and futures markets over the first 30 months of trading in the CME Treasury bill futures market. Surprisingly, we find that rather large deviations between returns in the two markets have persisted throughout the sample period, i.e., the one price law is violated. For this result to be obtained, arbitrage costs must be large, differential risk must exist, or traders in the two markets must be distinct non-overlapping groups. In the next section an arbitrage condition connecting the two markets is derived. The condition specifies the relationship between returns in the spot and futures markets under the assumption of a perfect capital market. The third section presents the data and demonstrates that the arbitrage condition has not been satisfied. The fourth section offers a possible explanation for the failure of the arbitrage condition. The paper concludes with a summary of the results.

The nature of the relationship between land tenure and fertility in an important contemporary setting is examined. Examination of the institutional structure of the Mexican land tenure system reveals some features that could have a positive impact on fertility. The possible pronatalist bias of the system is identified and discussed and the hypothesis that the population in the land reform sector exhibits higher fertility than other comparable populations in Mexico is tested. Tests are performed over 2 data sets using various measures of fertility; results more or less uniformly reject the null hypothesis that the fertility of the land reform sector families does not differ from other families. The empirical evidence strongly suggests that the percentage of ejidatarios (people belonging to an agrarian community that has received and continues to hold land in accordance with the agrarian laws growing out of the Revolution of 1910; this structure embodies several possible pronatalist incentives because of attenuated property rights) in a given population affects both the number of children ever born to women and the stock of children per woman of prime bearing age. While this statistical evidence can be explained by many alternate hypotheses it does support an economic interpretation of the decision to bear children. The constant competition for better land within the ejido together with a desire to secure a legal renter or inheritor for the land may be factors that induce ejidatarios to have larger families than private farmers or paid agricultural workers. It is significant that the very rapid population growth in Mexico has coincided with extensive reallocations of land to the ejidos from the private sector.

l'Evolution de Coefficients Input-Output, Economic Applique 16 (1) (1963). Parikh, Ashok, and R. Edwards, Estimation of Gross Domestic Output and Employment by Sectors through Input-Output SSRC Report, unpublished, 1975. Theil, Henri, Applied Economic Forecasting (Amsterdam: North-Holland Publishing Company, 1966). Theil, Henri, and C. B. Tilanus, Demand for Production Factors and the Price Sensitivity of Input-Output Predictions, International Economic Review 5 (1964), 258-272. Tilanus, C. B., Input-Output Experiments, The Netherlands, 1918-61 (Rotterdam: Rotterdam University Press, 1966). United Nations, Input-Output Tables and Analysis, Studies in Methods, series F, no. 14, rev. o (New York: United Nations, 1973).

induced Unemployment in Canadian Journal of Economics 8 (May 1975), 174-191. Gujarati, Damodar, The Behaviour of Unemployment and Unfilled Vacancies: Great Britain, 1958-1971, Economic Journal 82 (Feb. 1972), 195-204. Hansen, Bent, Excess Demand, Unemployment, Vacancies, and Wages, Quarterly Journal of Economics 84 (Feb. 1970), 1-23. Meltz, Noah M., Information Requirements for Government Programs Directed toward the Labour Market (Ottawa: Economic Council of Canada, 1974). Perry, G. L., Changing Labor Markets and Inflation, Brookings Papers on Economic Activity (1970), 411448. Reid, Frank, Dummy Variables with a Transitional Phase, Canadian Journal of Economics 10 (May 1977), 326-329. Skolnik, M. L., and F. Siddiqui, The Paradox of Unemployment and Job Vacancies: Some Theories Confronted by Data, Relations Industrielles 31 (1976), 32-56. Wilton, D. A., Wage Determination Process in Canadian Manufacturing Industries, 1962-1975 (Ottawa: Labour Canada, 1977).

William G. Tyler, Lung-Fei Lee, On Estimating Stochastic Frontier Production Functions and Average Efficiency: An Empirical Analysis with Columbian Micro Data, The Review of Economics and Statistics, Vol. 61, No. 3 (Aug., 1979), pp. 436-438