This paper examines the power of statistical tests commonly used to evaluate the efficiency of speculative markets. It shows that these tests have very low power. Market valuations can differ substantially and persistently from the rational expectation of the present value of cash flows without leaving statistically discernible traces in the pattern of ex-post returns. This observation implies that speculation is unlikely to ensure rational valuations, since similar problems of identification plague both financial economists and would be speculators.

ABSTRACT This paper examines the power of statistical tests commonly used to evaluate the efficiency of speculative markets. It shows that these tests have very low power. Market valuations can differ substantially and persistently from the rational expectation of the present value of cash flows without leaving statistically discernible traces in the pattern of ex‐post returns. This observation implies that speculation is unlikely to ensure rational valuations, since similar problems of identification plague both financial economists and would be speculators.

This paper develops a model of dual labor markets based on employers' need to motivate workers. In order to elicit effort from their workers, employers may find it optimal to pay more than the going wage. This changes fundamentally the character of labor markets. The model is applied to a wide range of labor market phenomena. It provides a coherent framework for understanding the claims of industrial policy advocates. It also can provide the basis for a theory of occupational segregation and discrimination that will not be eroded by market forces. Finally, the model provides the basis for a theory of involuntary unemployment.

[This paper estimates the incidence of response errors in the Current Population Survey. It proposes a procedure for adjusting the Bureau of Labor Statistics' gross flows data on labor market transitions to account for these errors. Although the findings are not definitive because the procedure makes particular assumptions regarding the stochastic process generating response errors, they illustrate the potentially substantial effect of response errors on studies of labor market behavior. The adjustment procedure suggests that because measurement errors give rise to spurious transitions between labor market states, the labor market may be less dynamic than previously thought. The results imply that conventional measures may understate the duration of unemployment by as much as eighty per cent, and overstate the frequency of labor force entry and exit by even more.]

This paper uses John Taylor's model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing because of the Mundell effect. While lower prices increased output, the expectation of falling prices decreases output. Simulations based on realistic parameter values suggest that increases in price flexibility might well increase the cyclical variability of output in the United States.

Although recent research suggests that intergenerational transfers play an important role in aggregate capital accumulation, our understanding of bequest motives remains incomplete. We develop a simple model of strategic bequests in which a testator influences the decisions of his beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries' actions. The model generates falsifiable empirical predictions that are inconsistent with other theories of intergenerational transfers. We present econometric and other evidence that strongly suggests that bequests are often used as compensation for services rendered by beneficiaries.

In macroeconomic models with flexible wages and prices, whether a tax is levied on producers or consumers does not affect its ultimate incidence. This equivalence breaks down in the presence of short-run nominal rigidities. Using both British and American data, we provide evidence against complete wage and price flexibility.