SUNY at Albany Discussion Papers  
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  You can search SUNY at Albany Economics Discussion Papers by author, title, keyword, JEL category, and abstract contents via IDEAS or EconPapers  
       
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2006 Discussion Papers
  
     
  [06-01] Fang(Annie) Yang. "Consumption Over Life Cycle: How Different is Housing? "  
     
    Abstract: Micro data over the life cycle shows different patterns of consumption for housing and non-housing goods: the consumption profile of non-housing goods is hump-shaped while the consumption profile for housing first increases monotonically and then flattens out. These patterns hold true at each consumption quartile. This paper develops aquantitative, dynamic general equilibrium model of life-cycle behavior, which generates consumption profiles consistent with the observed data. Borrowing constraints are essential in explaining the accumulation of housing assets early in life, while transaction costs are crucial in generating the slow downsizing of the housing assets later in life.  
     
  [06-02] George Monokroussos. "Dynamic Limited Dependent Variable Modeling and U.S. Monetary Policy"  
       
    Abstract: I estimate, using real-time data, a forward-looking, dynamic, discrete-choice monetary policy reaction function for the US economy, that accounts for the fact that there are substantial restrictions in the period-to-period changes of the Fed’s policy instrument (an issue which is however largely ignored in the existing literature). I overcome ensuing computational complications by estimating the model using Markov Chain Monte Carlo methods. I find a substantial contrast between the periods before and after Paul Volcker’s appointment as Fed Chairman in 1979, both in terms of the Fed’s response to expected in‡ation and in terms of its response to the (perceived) output gap: In the pre-Volcker era the Fed’s response to in‡ation was substantially weaker than in the Volcker-Greenspan era; conversely, the Fed seems to have been more responsive to (inaccurate real-time estimates of) the output gap in the pre-Volcker era than later. These results, which carry through a series of extensions and robustness checks, provide support for the "policy mistakes" hypothesis (according to which the pre-Volcker Fed made mistakes in its conduct of monetary policy, and starting with Volcker’s appointment the Fed avoided to a substantial extent mistaken practices of the past) as an explanation of the stark contrast in US macroeconomic performance between the pre-Volcker and the Volcker/Greenspan periods.  
     
  [06-03] Kajal Lahiri (with Zulkarnain Pulungan). "Health Inequality and Its Determinants in New York"  
       
    Abstract: Self-assessed health status conditioned by several objective measures of health and socio-demographic characteristics are used to measure health inequality. We compare the quality of health and health inequality among different racial/ethnic groups as well as across 10 economic development regions in New York State. In terms of average health and health inequality, American Indian/Alaskan Natives and Hispanics are found to be the worst, and North Country and Southern Tier regions lag behind the rest of the State. Three major contributing factors to health inequality are found to be employment status, education, and income. However, the contribution of each of these determinants varies significantly among racial/ethnic groups as well as across regions, suggesting targeted public health initiatives for vulnerable populations to eliminate overall health disparity.  
       
  [06-04] Kajal Lahiri (with Gultekin Isiklar). "How Far Ahead Can We Forecast? Evidence From Cross-country Surveys"  
     
    Abstract: Using monthly GDP forecasts from Consensus Economics Inc. for 18 developed countries reported over 24 different forecast horizons during 1989-2004, we find that the survey forecasts do not have much value when the horizon goes beyond 18 months. Using two alternative approaches to measure the flow of new information in fixed-target survey forecasts, we found that the biggest improvement in forecasting performance comes when the forecast horizon is around 14 months. The dynamics of information accumulation over forecast horizons can provide both the forecasters and their clients with an important clue in their selection of the timing and frequency in the use of forecasting services. The limits to forecasting that these private market forecasters exhibit are indicative of the current state of macroeconomic foresight.  
       
  [06-05] Kajal Lahiri (with Fushang Liu). "Modeling Multi-Period Inflation Uncertainty Using a Panel of Density Forcasts"  
     
    Abstract: This paper examines the determinants of inflation forecast uncertainty using a panel of density forecasts from the Survey of Professional Forecasters (SPF). Based on a dynamic heterogeneous panel data model, we find that the persistence in forecast uncertainty is much less than what the aggregate time series data would suggest. In addition, the strong link between past forecast errors and current forecast uncertainty, as often is noted in the ARCH literature, is largely lost in a multiperiod context with varying forecast horizons. We propose a novel way of estimating “news” and its variance using the Kullback-Leibler Information, and show that the latter is an important determinant of forecast uncertainty. Our evidence suggests a strong relationship of forecast uncertainty with level of inflation, but not with forecaster discord or with the volatility of a number of other macroeconomic indicators.  
     
  [06-06] Laurence Kranich (with Matteo Cervellati and Joan Esteban). "The Social Contract with Endogenous Sentiments"  
     
    Abstract: In this paper we present a model of rational voting over redistribution where individual self-esteem and relative esteem for others are endogenously determined. Individuals differ in their productivities, and their behaviour and political views are influenced by moral standards concerning work. Agents determine what they take to be proper behaviour and they judge others, and themselves, accordingly, increasing their esteem (or self-esteem) for those who perform in excess of the standard and decreasing their esteem for those who work less. The desired extent of redistribution depends both on individual income and on individual attitudes toward others. The model has two types of equilibria. In a “cohesive" equilibrium, all individuals conform to the standard of proper behaviour, income inequality is low and social esteem is not biased toward any particular type. Under these conditions equilibrium redistribution increases in response to larger inequality. In a “clustered" equilibrium skilled workers work above the mean while unskilled workers work below. In such an equilibrium, income inequality is large and sentiments are biased in favor of the industrious. As inequality increases, this bias may eventually overtake the egoistic demand for greater taxation and equilibrium redistribution decreases. The type of equilibrium to emerge crucially depends on inequality. We contrast the predictions of the model with data on inequality, redistribution, work values and attitudes toward work and toward the poor for a set of OECD countries.  
       
  [06-07] Michael Jerison (with John K.-H. Quah). "Law of Demand"  
     
    Abstract: We formulate several laws of individual and market demand and describe their relationship to neoclassical demand theory. The laws have implications for comparative statics and stability of competitive equilibrium. We survey results that offer interpretable sufficient conditions for the laws to hold and we refer to related empirical evidence. The laws for market demand are more likely to be satisfied if commodities are more substitutable. Certain kinds of heterogeneity across individuals make the laws more likely to hold in the aggregate even if they are violated by individuals.  
       
  [06-08] Michael Jerison. "Nonrepresentative Representative Consumers"  
     
    Abstract: Single consumer models are often used to focus attention on economic efficiency, leaving aside equity considerations. In general, these “representative consumer" models do not accurately portray the effects of changes in policies, endowments or technology in the multi-consumer economies they are meant to represent; but even when they do, they are not necessarily adequate for evaluating efficiency. The representative consumer can be Pareto inconsistent, preferring a situation B to A even though all the consumers in the represented economy prefer A to B. It is not clear from the literature how serious a defect this can be. The known examples of Pareto inconsistency are not robust. Small changes in the consumers' preferences remove the Pareto inconsistency. It has been an open question whether large robust Pareto inconsistencies are possible.
This paper shows that they are. In one example, the actual consumers require 56% more income than the representative consumer requires in order to be compensated for the doubling of a price. But such large Pareto inconsistencies require that there is a Giffen good for the representative consumer. We argue that the inconsistencies of representative consumers in most macroeconomic applications are likely to be small and we give conditions ruling out inconsistencies entirely.
  
     
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2005 Discussion Papers
  
     
  [05-01] Kenneth Beauchemin (with Murat Tasci). "On the Cyclicality of Labor Market Mismatch and Aggregate Employment Flows "  
     
    Abstract: This paper combines a discrete-time dynamic general equilibrium articulation of the standard model of labor market search with observed U.S. time series measures on employment, vacancies, and aggregate output to uncover the cyclical properties of three unobserved forcing variables that comprise the exogenous state of the aggregate labor market: labor productivity, the rate of job separation, and the allocational efficiency of the labor market. We posit the latter variable to be inversely related to the degree of mismatch in the pool of searching workers and vacancies, given numbers of each, and identify its movements as scalar shifts in the standard matching function. Given that the model exactly reconciles observed net employment changes, our procedure also implies measured time series of the flows into and out of employment. We find that labor productivity, the job separation rate and allocational efficiency are all procyclical with the latter two highly variable. These cyclical patterns lead to procyclical implied gross employment flows, thereby concentrating labor force reallocation during booms. We discuss the implications for conventional views of business cycle fluctuations and for the standard search theories of labor market behavior.  
       
  [05-02] Adrian Masters. "Directed Search without Wage Commitment and the Role of Labor Market Institutions"  
     
    Abstract: An urn-ball matching model of directed search is analyzed in which the usual assumption of commitment to posted wages is dropped. One-on-one matches lead to a Nash bargained wage but when multiple applicants arrive competition drives the workers down to their continuation value. A minimum wage can act as a commitment device when (as in the USA) willful underpayment carries a stiffer penalty than "inadvertent” underpayment. The theory sheds new light on why firms appear to voluntarily bind themselves into paying higher wages than they would otherwise pay. Robustness to various sources of heterogeneity is considered.  
       
  [05-03] Kajal Lahiri (with Gultekin Isiklar and Prakash Loungani). "How Quickly Do Forecasters Incorporate News? Evidence from Cross-country Surveys"  
     
    Abstract: Using forecasts from Consensus Economics Inc., we provide evidence on the efficiency of real GDP growth forecasts by testing if forecast revisions are uncorrelated. As the forecast data used are multi-dimensional—18 countries, 24 monthly forecasts for the current and the following year and 16 target years—the panel estimation takes into account the complex structure of the variance covariance matrix due to propagation of shocks across countries and economic linkages among them. Efficiency is rejected for all 18 countries: forecast revisions show a high degree of serial correlation. We then develop a framework for characterizing the nature of the inefficiency in forecasts. For a smaller set of countries, the G-7, we estimate a VAR model on forecast revisions. The degree of inefficiency, as manifested in the serial correlation of forecast revisions, tends to be smaller in forecasts of the US than in forecasts for European countries. Our framework also shows that one of the sources of the inefficiency in a country’s forecasts is resistance to utilizing foreign news. Thus the quality of forecasts for many of these countries can be significantly improved if forecasters pay more attention to news originating from outside their respective countries. This is particularly the case for Canadian and French forecasts, which would gain by paying greater attention than they do to news from the United States and Germany respectively.  
       
  [05-04] Kajal Lahiri (with Vincent Wenxiong Yao). "Economic Indicators For the US Transportation Sector"  
     
    Abstract: Since the transportation sector plays an important role in business cycle propagation, we develop indicators for this sector to identify its current state, and predict its future. We define the reference cycle, including both business and growth cycles, for this sector over the period from 1979 using both the conventional National Bureau of Economic Research (NBER) method and modern time series models. A one-to-one correspondence between cycles in the transportation sector and those in the aggregate economy is found; however, both business and growth cycles of transportation often start earlier and end later than those of the overall economy. We also construct an index of leading indicators for the transportation sector using rigorous statistical procedures, and is found to perform well as a forecasting tool.  
       
  [05-05] Kajal Lahiri (with Fushang Liu). "ARCH Models for Multi-period Forecast Uncertainty–A Reality Check Using a Panel of Density Forecasts"
  
     
    Abstract: We develop a theoretical model to compare forecast uncertainty estimated from time series models to those available from survey density forecasts. The sum of the average variance of individual densities and the disagreement is shown to approximate the predictive uncertainty from well-specified time series models when the variance of the aggregate shocks is relatively small compared to that of the idiosyncratic shocks. Due to grouping error problems and compositional heterogeneity in the panel, individual densities are used to estimate aggregate forecast uncertainty. During periods of regime change and structural break, ARCH estimates tend to diverge from survey measures.  
       
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  2004 Discussion Papers  
       
  [04-01] Nadav Levy. “The Organization of Supply: a Vertical Equilibrium Analysis"  
       
   

Abstract: In this paper I study how the make-or-buy decision of a firm depends on the organization of its peers. I consider a multi-firm framework in which firms choose whether to integrate into the supply of an intermediate input or to outsource its production, and choose the size of their supplier network if outsourcing. Firms find it optimal to share the same set of suppliers, as there are economies of scope in investment to suppliers taking multiple designs. These economies are due to spillovers of technical or operational know-how between projects and to savings in the setup costs on physical capital. The model admits multiple vertical equilibria that are Pareto-ranked, the one with the highest level of outsourcing being most efficient. Outsourcing is more likely in larger markets and when the economies of scope are stronger. The size of the optimal supplier network however typically decreases when the spillovers are stronger. These findings provide insight into the patterns of reorganization of vertical supply relations observed over the last two decades.

Keywords: Outsourcing, Vertical Integration, Spillovers, Supply relations

JEL Classification: L22, D23

  
     
  [04-02] John Bailey Jones. "Multiple Equilibria and Endogenous Persistence in a Dynamic Model of Employment"  
       
    Abstract. In this paper, I consider whether: (1) a dynamic forward-looking model with multiple equilibria can generate persistent fluctuations without persistent sunspots; and (2) indeterminacy is important for these persistent fluctuations. The answer to the first question is a tentative no. The answer to the second question is yes. Extending the approach of Howitt and McAfee (1988, 1992), I work with a dynamic model of long-term employment. In this framework, search externalities allow both hiring and not hiring to comprise symmetric Nash equilibria for some values of the i.i.d. hiring cost. Following Cooper (1994), firms implement the hiring strategy of the previous period unless the realized hiring cost makes a change in strategy the dominant strategy. Calibrating the model, I find that with plausible functional forms, the selection rule can lead to persistent economic episodes only if one uses counterfactual parameters. Turning to the second question, I estimate that the economy has multiple equilibria, in the sense that the current hiring decision depends on the previous hiring decision, around 41 percent of the time. Moreover, I find that without some indeterminacy, the model can not generate expansions and recessions that are both persistent.  
     
  [04-03] Gerald Marschke (with Pascal Courty). "Making Government Accountable: Lessons from a Federal Job Training Program"  
       
    Abstract: We describe the evolution of a performance measurement system in a government job-training program. In this program, a federal agency establishes performance measures and standards for sub-state agencies. We show that the performance measurement system’s evolution is at least partly explained as a process of trial-and-error, characterized by a feedback loop: the federal agency establishes performance measures, the local managers learn how to game them, the federal agency learns about gaming and reformulates the performance measures, leading to possibly new gaming, and so on. The dynamics suggest that implementing a performance measurement system in government is not a one-time challenge but benefits from careful monitoring and perhaps frequent revision.  
     
 

[04-04] Gerald Marschke (with Pascal Courty). "A General Test of Gaming"

  
     
   

Abstract : An important lesson from the incentive literature is that explicit incentives may elicit dysfunctional and unintended responses, also known as gaming responses. The existence of these responses, however, is difficult to demonstrate in practice because this behavior is typically hidden from the researcher. We present a simple model showing that one can identify gaming by estimating the correlation between a performance measure and the true goal of the organization before and after the measure has been activated. Our hypothesis is that gaming takes place if this correlation decreases with activation. Using data from a public sector organization, we find evidence consistent with our hypothesis. We draw implications for the selection of performance measures.

Keywords: Performance Incentive, Performance Measurement, Gaming, Multitasking, Government Organization.

JEL Classification H72, J33, L14

  
     
  [04-05] Gerald Marschke (with Jinyoung Kim and Sangjoon John Lee). "Relation of Firm Size to R&D Productivity"  
     
    Abstract:Many studies have shown that small firms generate more patents per R&D dollar than large firms. Does this mean that small firms are more efficient innovators than large firms? In this paper we exploit a unique data set to reexamine the firm size-innovation relationship. Because firm-reported R&D expenditures may be a biased measure of R&D activities due to under-reporting by small firms, we use the number of inventors in the firm’s employ as a measure of R&D inputs. We focus on the pharmaceutical and semiconductor industries, two industries that are prolific generators of homogenous innovations. As has been found elsewhere in the literature, we find that patents per R&D dollar decline with firm size for both industries. This contrasts with the relationship between patents per inventor and firm size. The average number of patents per inventor increases with size in the semiconductor industry. In the pharmaceutical industry, we show no relationship between the number of patents produced per inventor and firm size.

Key words: Patents; Innovation; Labor productivity; Research; Firm size

JEL Classification: O30, O32, O34, J21, J24

  
     
  [04-06] Gerald Marschke (with Jinyoung Kim and Sangjoon John Lee). "Research Scientist Productivity and Firm Size: Evidence from Panel Data on Investors"  
     
    Abstract: It has long been recognized that worker wages and possibly productivity are higher in large firms. Moreover, at least since Schumpeter (1942) economists have been interested in the relative efficiency of large firms in the research and development enterprise. This paper uses longitudinal worker-firm-matched data to examine the relationship between the productivity of workers specifically engaged in innovation and firm size in the pharmaceutical and semiconductor industries. In both industries, we find that inventors’ productivity increases with firm size. This result holds across different specifications and even after controlling for inventors’ experience, education, the quality of other inventors in the firm, and other firm characteristics. We find evidence in the pharmaceutical industry that this is partly accounted for by differences between how large and small firms organize R&D activities.

Key words: Patents; Innovation; Labor productivity; Research; Firm size

JEL Classification: O30, O32, O34, J21, J24

  
     
  [04-07] Ozgen Sayginsoy. "Powerful and Serial Correlation Robust Tests of the Economic Convergence Hypothesis "  
     
   

Abstract: In this paper, a likelihood ratio approach is taken to derive a test of the economic convergence hypothesis in the context of the linear deterministic trend model. The test is designed to directly address the nonstandard nature of the hypothesis, and is a systematic improvement over existing methods for testing convergence in the same context. The test is first derived under the assumption of Gaussian errors with known serial correlation. However, the normality assumption is then relaxed, and the results are naturally extended to the case of covariance stationary errors with unknown serial correlation. The test statistic is a continuous function of individual t-statistics on the intercept and slope parameters of the linear deterministic trend model, and therefore, standard heteroskedasticity and autocorrelation consistent estimators of the long-run variance can be directly implemented. Building upon the likelihood ratio framework, concrete and specific tests are recommended to be used in practice. The recommended tests do not require the knowledge of the form of serial correlation in the data, and they are robust to highly persistent serial correlation, including the case of a unit root in the errors. The recommended tests utilize the nonparametric kernel variance estimators, which are analyzed using the fixed bandwidth (fixed-b) asymptotic framework recently proposed by Kiefer and Vogelsang (2003). The fixed-b framework makes possible the choice of kernel and bandwidth that deliver tests with maximal asymptotic power within a specific class of tests. It is shown that when the Daniell kernel variance estimator is implemented with specific bandwidth choices, the recommended tests have asymptotic power close that of the known variance case, as well as good finite sample size and power properties. Finally, the newly developed tests are used to investigate economic convergence among eight regions of the United States (as defined by the Bureau of Economic Analysis) in the post-World-War-II period. Empirical evidence is found for convergence in three of the eight regions.

Keywords: Likelihood Ratio, Economic Convergence, β-convergence Hypothesis, Joint Inequality, HAC Estimator, Fixed-b Asymptotics, Power Envelope, Unit Root, Linear Trend, BEA Regions.

  
     
  [04-08] Ozgen Sayginsoy (with Tim Vogelsang). "Powerful Tests of Structural Change That are Robust to Strong Serial Correlation"  
     
   

Abstract: This paper proposes powerful and serial correlation robust test statistics that can be used to test for the presence of structural change in the trend function of a univariate time series. Four models are analyzed, each model corresponding to a different way in which a trend break might occur. Given a model, the proposed tests are designed to detect a single break at an unknown date. The tests do not require the knowledge of the form of serial correlation in the data, and they are made robust to the presence of highly persistent serial correlation and a unit root in the errors by using a more comprehensive version of the scaling factor approach of Vogelsang (1998b). The tests utilize the popular nonparametric kernel variance estimators. The fixed-bandwidth asymptotic framework, proposed by Kiefer and Vogelsang (2003), is used to approximate the effects of the variance estimators on the test statistics. The fixed-bandwidth framework makes possible the choice of kernel and bandwidth that deliver tests with maximal asymptotic power within a specific class of tests. For each of the proposed tests, concrete and specific recommendations are made for the bandwidth and kernel to be used in practice. The recommended tests are shown to have good finite sample size and power properties.

  
     
  [04-09] Adrian Masters (with Abhinay Muthoo). "Ex ante Price Commitment with Renegotation in a Dynamic Market Equilibrium"  
       
    Abstract: This paper studies the endogenous determination of the price formation procedure in markets characterized by match-specific heterogeneity. We study a model of a market in which, in each time period, agents on one side (e.g., sellers) choose whether or not to post a price before they encounter agents of the opposite type. After a pair of agents have encountered each other, their match-specific values from trading with each other are realized. If a price was not posted, then the terms of trade (and whether or not it occurs) are determined by bargaining. Otherwise, depending upon the agents' match-specific trading values, trade occurs (if it does) either on the posted price or at a renegotiated price. We analyze the symmetric Markov subgame perfect equilibria of this market game, and address a variety of issues such as the impact of market frictions on the equilibrium proportion of trades that occur at a posted price rather than at a negotiated price.  
       
  [04-10] Adrian Mastrers (with Melvyn Coles). "Duration Dependent Unemployment Insurance and Stabilisation Policy"  
       
    Abstract: In the context of a standard equilibrium matching framework, this paper shows how a duration dependent unemployment insurance (UI) system stabilises unemployment levels over the business cycle. It establishes that re-entitlement effects induced by a finite duration UI program generate intertemporal tranfers from firms that hire in future booms to firms that hire in current recessions. These transfers imply a net hiring subsidy in recessions which stabilises unemployment levels over the cycle.  
       
  [04-11] Adrian Masters. "Middlemen in Search Equilibrium"  
       
    Abstract: This paper shows how including divisibility of goods and productive heterogeneity leads to the emergence of middlemen in an equilibrium search environment. In the baseline model, middlemen are welfare reducing and their number increases as market frictions are reduced. When the model is extended to allow for time taken in production and increasing returns-to-scale in the market meeting technology, middlemen can be beneficial to society by speeding up the meeting process.  
       
  [04-12] Adrian Masters (with Melvyn Coles). "Optimal Unemployment Insurance in a Matching Equilibrium "  
       
    Abstract: This paper considers the optimal design of unemployment insurance (UI) within an equilibrium matching framework when wages are determined by strategic bargaining. Unlike the Nash bargaining approach, reducing UI payments with duration is welfare increasing. A co-ordinated policy approach, however, one that chooses job creation subsidies and UI optimally, implies a much greater welfare gain than one which considers optimal UI alone. Once job creation subsidies are chosen optimally, the welfare value of making UI payments duration dependent is small.  
       
  [04-13] Adrian Masters (with Luis-Raul Rodrigez). "Endogenous Credit-card Acceptance in a Model of Precautionary Demand for Money "  
       
    Abstract: A credit-card acceptance decision by retailers is embedded into a simple model of precautionary demand for money. The model gives a new explanation for how the use of credit-cards can differ so widely across countries. Retailers' propensity to accept cards reduces the need for buyers to hold cash as the chance of a stock-out (of cash) is reduced. When retailers make their decision with respect to credit-card acceptance they do not take into account the effect that decision has on other sellers. This externality generates multiple equilibria over some portions of the parameter space.  
       
  [04-14] Adrian Masters. "Firm level hiring policy with culturally biased testing"  
       
    Abstract: This paper explores the implications for labor market outcomes of systematic testing of applicants in the hiring process. A matching model in which productivity is a worker's private information is used. Both wages and hiring rates are endogenous. A minority is defined as a group for whom the test is less precise in identifying individual productivity. Welfare and employment outcomes across various hiring policies are compared. Simulations suggest that tests are typically too accurate so that in a laissez faire economy minority group members fair better than the majority group members. Rules requiring equity in hiring reverse this result.  
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2003 Discussion Papers
  
     
  [03-01] Stacey H. Chen. “Estimating the Variance of Wages in the Presence of Selection and Unobservable Heterogeneity”  (Previous Title: “Is Investing in College Education Risky?”)  
     
  [03-02] Stacey H. Chen. “Nonparametric Estimation of Average Volatility Differentials in Selection Models with an Application to Returns to Schooling” with Shakeeb Khan (University of Rochester)  
   
  [03-03] Stacey H. Chen. “Risk Aversion and College Attendance”  
   
  [03-04] Michael Sattinger. “A Kaldor Matching Model of Real Wage Declines”  
     
    Abstract: A model linking macroeconomic equilibrium and income distribution in balanced growth equilibria is developed as a variant to the Kaldor model of factor shares. It departs from the original Kaldor model in assuming equal saving rates and production determined by a matching process between workers and jobs. Macroeconomic equilibrium (national savings equal to investment) combines with competitive microeconomic behavior to determine the real wage and real interest rate. An increase in the ratio of national debt to employment reduces the real wage, explaining recent declines.  
     
  [03-05] Michael Sattinger. “Capital Intensity, Neutral Technological Change, and Earnings Inequality”  
   
    Abstract: The paper furthers the neoclassical theory of earnings inequality. The inequality multiplier is derived as the amount by which inequality in skills must be multiplied to yield earnings inequality. Neutral technological change and the real interest rate affect inequality by changing capital per worker. The effect of capital per worker on the inequality multiplier is related to skill differentials and capital-skill complementarity. The results explain increasing inequality from the mid 1970's into the 1990's.  
     
  [03-06] Michael Sattinger. “Overlapping Labour Markets”  
     
    Abstract: Overlapping labour markets arise when some types of workers do not meet employers with some types of jobs. For example, skilled workers could seek high-skill or low-skill jobs, but low skill workers could be limited to low-skill jobs. The paper derives conditions for equilibrium and efficiency, distinguishes reducible from irreducible overlapping labour markets, and describes distributional impacts of proportional demand shifts and technological change. Many labour models incorporate the structure of overlapping labour markets, so that the results have widespread applicability.  
     
  [03-07] Michael Sattinger. “The Employment-Productivity Relation with Employment Criteria,” joint with Prof. Sumati Srinivas  
     
    Abstract: This paper analyzes labor market responses to productivity shocks when firms set employment criteria on the basis of the likelihood of hiring high productivity or low productivity workers. In response to a positive productivity shock, firms do not raise the criterion as much as the shock, increasing the proportion of low productivity workers among the employed. The observed average productivity may respond negligibly even if employment changes substantially in response to the shock. Interest rate fluctuations can yield an opposite relation between productivity and employment, explaining the weak empirical relationship between the variables.  
     
  [03-08] Michael Sattinger. “A Search Version of the Roy Model”  
     
    Abstract: This paper considers the decisions of workers to search in different labor markets, in analogy to Roy’s model of sectoral selection. In the basic model, a worker can search in one labor market or another but not both. With non-pecuniary benefits, a worker chooses the labor market offering the highest reservation utility level. Conditions for simultaneous search in two markets are also derived under the assumption that workers suffer a reduction in wage offers. Decisions of where to search are relevant to self-selection into sectors and self-selection biases, the formation of interview networks, and generation of overlapping markets.  
     
  [03-09] Michael Sattinger. “Price Dispersion and Short Run Equilibrium in a Queuing Model”  
     
    Abstract: Price dispersion is analyzed in the context of a queuing market where customers enter queues to acquire a good or service and may experience delays. With menu costs, price dispersion arises and can persist in the medium and long run. The queuing market rations goods in the same way whether firm prices are optimal or not. Price dispersion reduces the rate at which customers get the good and reduces customer welfare.  
     
  [03-10] Michael Sattinger. “Price Dynamics and the Market for Access to Trading Partners”  
     
    Abstract: At each point in time, price dynamics in a market are determined by a market for access to trading partners, implemented by competitive profit-maximizing brokers. This mechanism is applied to a market in which the value of a good declines over time and buyers decide optimally when to reenter the market and buy a new unit. Price adjustment paths in response to increases and decreases in demand are then derived using the differential equations generated by the model.  
     
  [03-11] Michael Sattinger. “Brokers and the Equilibrium Price Function”  
     
    Abstract: This paper describes the equilibrium price function generated by brokers in a market in which heterogeneous buyers meet heterogeneous sellers through a matching process with frictions. The equilibrium price function relates the price to alternative ratios of buyers and sellers offered by different brokers. The paper shows how brokers can enter a matching market and charge fees that yield a profit while making both buyers and sellers better off. Computational methods for deriving the equilibrium price function are developed and the solution is related to the market for access to trading partners.  
     
  [03-12] Kajal Lahiri, Herman O. Stekler, Wenxiong Yao, and Peg Young. “Monthly Output Index for the U.S. Transportation Sector”  
     
    Abstract: We develop a monthly output index of the U.S. Transportation sector over 1980:1-2002:4 covering air, rail, water, truck, transit and pipeline activities. Separate indexes for freight and passenger are also constructed. Our total transportation output index matches very well with the annual transportation output figures produced by the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA). The strong cyclical movements in the transportation output appear to be more synchronized with the growth slowdowns rather than full-fledged recessions of the U.S. economy. The index has led the turning points of the six NBER-defined growth cycles over the period with an average lead-time of 6 months at peaks and 5 months at troughs.  
     
  [03-13] Nadav Levy. “The Boundary of the Firm in a Model of Trade Within a Hierarchy"  
     
    Abstract: In this paper I present a theory of the boundary of the firm that accounts for some important characteristics of real-world multidivisional firms: Operative decisions are in the hands of middle managers who are rewarded with incentive contracts based on the performance of their units; Managers' decisions are subject to approval and intervention by the top management of the firm; and managers are better informed regarding the affairs of their divisions than their superiors in the firm's hierarchy. In this setup, the integration of a producer of an intermediate input and its buyer as separate divisions within a single firm is unambiguously desirable, as long as the choice of trading partners can be credibly delegated to the divisions' managers. I show that this is satisfied not only under the assumption of full commitment by the general office of the firm, but also interestingly, if it has no commitment power at all. At the time of trade, the uninformed general office prefers to delegate the choice of trading partners to the divisions whose decision is ex-post optimal. An explanation of the boundaries of the firm emerges only if we assume that the general office retains some limited commitment power. The general office may then mandate internal trade in order to encourage the divisions to specialize towards one another before the trade. In the context examined, I show that the general office faces a 'time-consistency' problem. It tends to mandate internal trades in more instances than would have been optimal with full commitment, adversely affecting the levels of investment taken by the divisions' managers. Whenever such inconsistency arises, it may be optimal to have the trade conducted between independent, non-integrated parties.  
     
  [03-14] Kajal Lahiri, Wenxiong Yao, and Peg Young. “Cycles in the Transportation Sector and the Aggregate Economy”  
     
    Abstract: Transportation plays a central role in facilitating economic activities across sectors and between regions, and is thus essential to business cycle research. Using four coincident indicators representing different aspects of the transportation sector that include an index of transportation output, payroll, personal consumption and employment, we define the classical business cycle and growth cycle chronologies for this sector. We find that, relative to the economy, business cycles in the transportation sector have an average lead of nearly 6 months at peaks and an average lag of 2 months at troughs. Similar to transportation business cycles, growth slowdowns in this sector also last longer than the economy-wide slowdowns by a few months. This study underscores the importance of transportation indicators in monitoring cyclical movements in the aggregate economy. (Keywords: Business cycle, Composite coincident index, Dynamic factor model, Regime switching, Growth cycle)  
  __________________________________________________________________________________  
     
  2002 Discussion Papers  
     
  [02-01] Kajal Lahiri (with Guibo Xing). "An Empirical Analysis of Medicare-eligible Veterans' Demand for Outpatient Health Care Services"  
 

 
    Abstract: Using data from the 1992 US National Survey of Veterans, we analyze Medicare-eligible veterans' use of VA and non-VA outpatient health care services. We apply a utility consistent, combined multinomial choice and count data model to identify factors that affect these veterans' outpatient health care usage and facility choices, with special reference to the effect of out-of-pocket cost, distance to the medical facility, and supplemental private medical insurance coverage. Our first stage count data regression shows that the out-of-pocket cost index calculated from the second stage multinomial choice model is significant in determining the Medicare-eligible veterans' demand of outpatient health care services. The calculated cost index elasticity of outpatient visits is about -0.65. In the second stage, we specify a multinomial choice model to study veterans' allocation of outpatient visits between VA and non-VA health care facilities, and we find that veterans' out-of-pocket cost and the distance to the health care facility have significantly negative effects on the probability of choosing the alternative. A number of other factors including family income, insurance status, means of transportation, home ownership, race, employment, health, disability status and diagnostic conditions were also found to be important at various stages of the decision making. We find no evidence of adverse selection in the market for supplemental private health insurance. The model is used to simulate the impact of alternative copayment policies on the demand for VA outpatient health care services.

Key words: National Survey of Veterans, Health Care Demand, Two Stage Count Data Model, Nested Logit, Copayments, Shadow Cost, Consumer Surplus, CBOCs.

JEL classification: I12, I28, C35.

  
       
  [02-02] John Bailey Jones (with Duc T. Le). "Optimal Investment with Lumpy Costs"  
     
   

Abstract: In this paper we solve a continuous-time model of investment with uncertainty, irreversibility and a broad class of lumpy adjustment costs. In addition to being general, our solution is quite tractable and intuitive. We show that, in contrast to standard results, the marginal value of capital jumps when investment is undertaken. We also find that firms facing higher uncertainty let their capital stock depreciate further before they invest, but increase their capital by a similar proportion once they do invest. We extend both the user cost and q theories of investment to incorporate lumpy investment. We confirm that with lumpy investment, a variant of Tobin's q can be a better predictor of investment than marginal q.

  
       
  [02-03] John Bailey Jones (with Eric French). "On the Distribution and Dynamics of Health Costs"  
     
   

Abstract: Using data from the Health and Retirement Survey (HRS) and Assets and Health Dynamics of the Oldest Old (AHEAD), this paper presents estimates of the stochastic process that determines both the distribution and dynamics of health costs. We find that the data generating process for health costs is well represented by an ARMA(1,1). Furthermore, innovations to this process are close to lognormally distributed. In any given year, .1% of our sample receives a health cost shock that costs at least $80,000 in present value. Lastly, we discuss the accuracy of numerical solutions when integrating over health costs. Assuming lognormality, simple approximation rules work well.

  
     
  [02-04] Traci Mach (with Patricia Reagan). "The Role of Access to Childcare in the Successful Transitions from Welfare to Work"  
     
   

Abstract: In August 1996, Congress passed the Personal Responsibility Work Opportunities Reconciliation Act (PRWORA). This act eliminated Aid to Families with Dependent Children (AFDC), the largest source of cash assistance available to needy families, and replaced it with Temporary Assistance to Needy Families (TANF), a time-limited program with stringent work requirements. Because one of the elements vital to the success of welfare reform is the ability of mothers to transition from the welfare rolls into the labor market, states are investing a great deal of money in childcare. In this paper, we find that the decision to participate in covered-sector jobs of former welfare recipients is responsive to both the cost of childcare as well as the density of available childcare. The elasticity with respect to density is around 0.5, whereas the elasticity with respect to the price paid is about -0.4. There is no statistically significant impact of childcare variables on the decision to participate in jobs that are not covered by unemployment insurance (UI). Since jobs not covered by UI are likely to be lower paid and less durable than jobs in the covered sector, our results suggest that both the price and availability of childcare are important determinant of transitions from welfare to stable employment.

Keywords: Childcare availability, childcare elasticity, welfare reform

JEL Classification: I38, J22

  
     
  [02-05] Traci Mach. "A Cross-Cohort Examination of Nonmarital Teenage Childbearing"  
     
   

Abstract: The current paper looks at the nonmarital teenage childbearing behavior of two cohorts of NLSY women. It constructs a monthly panel of information for the teens from the time they are twelve years old until they have a nonmarital birth, reach the end of their third survey without giving birth, get married, or reach age 18. The research attempts to identify the factors that have contributed to the differences in teenage childbearing behavior that we observe across the cohorts of women by estimating a Cox proportional hazard model, stratified on race, age of mother a the birth of her first child, and the rate of marriage in the state. The model identifies education, living situations, religion, and welfare policy as factors. Specifically, for the youths of the 1990s, the introduction of restrictions on living conditions, the so-called minor parent provisions, act as a retardant to nonmarital childbearing. The model also shows that higher education for the youth and her mother delay childbearing for both cohorts of women. Finally, living with one's biological father at age 14 is linked with delayed childbearing, with hazard rates nearly 60 and 40 percent lower for teens of the two cohorts.

Keywords: Nonmarital childbearing, NLSY79, NLSY97

JEL Classification: J13, I38

  
     
  [02-06] Gerald Marschke (with Pascal Courty). "An Empirical Investigation of Gaming Responses to Explicit Performance Incentives"  
     
   

Abstract: This paper studies a particular kind of gaming responses to explicit incentives in a large government organization. The gaming responses we consider occur when agents strategically report their performance outcomes to maximize their awards. An important contribution of this work is to examine whether this behavior diverts resources (e.g. agents' time) from productive activities or whether it simply reflects an accounting phenomenon. We evaluate the efficiency impact of the behavior we identify and find that it has a negative impact on the true goal of the organization.

JEL Classification: J33, L14

  
       
[02-07] Gerald Marschke. "Performance Incentives and Bureaucratic Behavior: Evidence from a Federal Bureaucracy"
     
 

Abstact: This paper examines the effects of performance incentives in a federal job training program for the economically disadvantaged. I find that job training bureaucrats respond to incentives in ways that are consistent with a simple model of bureaucratic behavior. Additionally I am able to test whether attempts by the program's incentive designers to improve the precision of performance measures in the late 1980s increased or decreased efficiency. I discuss my results in the context of the greater incentive literature, as well as the literature on incentives in job training programs.

JEL Classification: J41, J33, D73, I38
 
[02-08] Gerald Marschke (with Pascal Courty). "The Challenge of Measuring Productivity: A Case Study of Performance Measurement in a Job Training Program"
     
 

Abstract: Despite the broad interest in performance measurement during the past 20 years, few state and local governments actually use performance measures as a management tool. A possible reason for this puzzle is that performance measurement systems are difficult to successfully implement. In this paper we consider a case study of a public organization that uses performance measurement to influence decision making, and we analyze local decision makers' responses. We identify a dynamic process by which local decision makers respond in unanticipated and unintended ways, and the designer has to adapt the system to try to eliminate these responses. These results show that performance measurement systems have to be continuously monitored. We argue that this need for constant monitoring may make the use of performance measures uneconomical because they may generate more management problems than they actually solve.

JEL Classification: J41, J33, D73
 
[02-09] Gerald Marschke (with Pascal Courty). "Dynamics of Performance Measurement Systems"
     
 

Abstract: We present a model of how organizations manage performance measures when gaming is revealed over time. The incentive designer does not know when it selects a performance measure whether it will communicate the right behavior. Only over time does the principal find out the agent's responses and then uses this additional information to update and finetune the incentive system. Using data from a government organization, we test the model's main prediction that the correlation between the performance measure and the true goal of the organization should change after the performance measure is included in the incentive system and we find some evidence consistent with this hypothesis.

Keywords: Performance Incentive, Performance Measurement, Gaming, Multitasking, Government Organization.

JEL Classification: H72, J33, L14
 
[02-10] Gerald Marschke (with Jinyoung Kim). "Accounting for the recent surge in U.S. patenting: Changes in R&D expenditures, patent yields, and the high tech sector"
     
   

Abstract: We present a model of how organizations manage performance measures when gaming is revealed over time. The incentive designer does not know when it selects a performance measure whether it will communicate the right behavior. Only over time does the principal find out the agent's responses and then uses this additional information to update and finetune the incentive system. Using data from a government organization, we test the model's main prediction that the correlation between the performance measure and the true goal of the organization should change after the performance measure is included in the incentive system and we find some evidence consistent with this hypothesis.

Key words: Patents; Innovation; Technology, Research productivity

JEL Classification: O30, O32, O34

  
       
  [02-11] Laurence Kranich (with Joan Esteban). "A Theory of Endogenous Sentiments"  
     
   

Abstract: We introduce a model in which agents' sentiments toward others are determined endogenously on the basis of how they perform relative to a standard of appropriate behavior. As sentiments change, so too does the optimal behavior of each individual, which in turn affects other agents' sentiments toward them. We focus on fixed points of this reciprocal adjustment process. To demonstrate the potential use and implications of such a model, we present an extended example involving team production. We consider various standards of behavior, and we examine stationary patterns of behavior and sentiments under each.