Department of Economics
Working Papers

       
  SUNY at Albany Discussion Papers  
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2009 Discussion Papers
  
     
  [09-01] Barış K. Yörük. "Do Fundraisers Select Charitable Donors Based on Gender and Race? Evidence from Survey Data"  
     
    Abstract: Recent studies document that people are much more likely to donate to charity and volunteer their time when they are asked to. Using household surveys of giving and volunteering in the United States conducted from 1992 to 2001, which contain questions on whether the respondent was personally asked to give or volunteer, this paper investigates the factors associated with the probability of receiving a charitable solicitation and presents substantial evidence that race and gender differences play key roles in the selection of potential donors. In particular, males, blacks, and Hispanics are less likely to be solicited compared with females and whites. Using non-linear decomposition techniques, I find that differences in observable characteristics of individuals explain most of the racial gap in the probability of being solicited for charitable causes, but they fail to explain the gender gap in the probability of being asked to volunteer. Furthermore, these results are robust to alternative specifications. I also discuss related policy implications and argue that the economic impact of selecting potential donors based on gender and race can be considerable.  
     
  [09-02] Barış K. Yörük. "The Effect of Media on Charitable Giving and Volunteering: Evidence from the `Give Five' Campaign"  
       
    Abstract: Fundraising campaigns advertised via mass media are common. To what extent such campaigns affect charitable behavior is mostly unknown, however. Using giving and volunteering surveys conducted biannually from 1988 to 1996, I investigate the e¤ect of a national fundraising campaign, "Give Five", on charitable giving and volunteering patterns. The widely advertised "Give Five" campaign was aimed to encourage people to give five percent of their income and volunteer five hours a week. After controlling for selection into being informed about the "Give Five", I find that people who were informed about the campaign increased their weekly volunteering activity on average by almost half an hour, but their giving behavior was not significantly affected. I discuss the policy implications associated with this result and argue that although the "Give Five" campaign did not achieve its goal, its economic impact was considerable.  
     
  [09-03] Kajal Lahiri (with Fushang Liu). "On the Use of Density Forecasts to Identify Asymmetry in Forecasters’ Loss Functions"  
       
    Abstract: We consider how to use information from reported density forecasts from surveys to identify asymmetry in forecasters’ loss functions. We show that, for the three common loss functions - Lin-Lin, Linex, and Quad-Quad - we can infer the direction of loss asymmetry by just comparing point forecasts and the central tendency (mean or median) of the underlying density forecasts. If we know the entire distribution of the density forecast, we can calculate the loss function parameters based on the first order condition of forecast optimality. This method is applied to forecasts for annual real output growth and inflation obtained from the Survey of Professional Forecasters (SPF). We find that forecasters treat underprediction of real output growth more dearly than overprediction,
reverse is true for inflation.		  
     
  [09-04] 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 17 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, Bronx County, and Richmond County 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.  
     
  [09-05] Kajal Lahiri (with Xuguang Sheng). "Learning and Heterogeneity in GDP and Inflation Forecasts"  
       
    Abstract: Using a Bayesian learning model with heterogeneity across agents, our study aims to identify the relative importance of alternative pathways through which professional forecasters disagree and reach consensus on the term structure of inflation and real GDP forecasts, resulting in different patterns of forecast accuracy. Forecast disagreement arises from two primary sources in our model: differences in the initial prior beliefs, and differences in the interpretation of new public information. Estimated model parameters, together with two separate case studies on (i) the dynamics of forecast disagreement in the aftermath of the 9/11 terrorist attack in the U.S. and (ii) the successful inflation targeting experience in Italy after 1997, firmly establish the importance of these two pathways to expert disagreement, and help to explain the relative forecasting accuracy of these two macroeconomic variables.  
     
  [09-06] Kajal Lahiri (with Xuguang Sheng). "Measuring Forecast Uncertainty by Disagreement: The Missing Link"  
       
    Abstract: Using a standard decomposition of forecasts errors into common and idiosyncratic shocks, we show that aggregate forecast uncertainty can be expressed as the disagreement among the forecasters plus the perceived variability of future aggregate shocks. Thus, the reliability of disagreement as a proxy for uncertainty will be determined by the stability of the forecasting environment, and the length of the forecast horizon. Using density forecasts from the Survey of Professional Forecasters, we find direct evidence in support of our hypothesis. Our results support the use of GARCH-type models, rather than the ex post squared errors in consensus forecasts, to estimate the ex ante variability of aggregate shocks as a component of aggregate uncertainty.  
     
  [09-07] George Monokroussos. "A Classical MCMC Approach to the Estimation of Limited Dependent Variable Models of Time Series"  
       
    Abstract: Estimating Limited Dependent Variable Time Series models through standard extremum methods can be a daunting computational task because of the need for integration of high order multiple integrals and/or numerical optimization of difficult objective functions. This paper proposes a classical Markov Chain Monte Carlo (MCMC) estimation technique with data augmentation that overcomes both of these problems. The asymptotic properties of the proposed estimator are established. Furthermore, a practical and flexible algorithmic framework for this class of models is proposed and is illustrated using simulated data, thus also offering some insight into the small-sample biases of such estimators. Finally, the versatility of the proposed framework is illustrated with an application of a dynamic tobit model for the Open Market Desk's Daily Reaction Function.  
     
2008 Discussion Papers
  
     
  [08-01] Fang (Annie) Yang. "Accounting for the Heterogeneity in Retirement Wealth"  
     
    Abstract: This paper studies a quantitative dynamic general equilibrium life-cycle model where parents and their children are linked by bequests, both voluntary and accidental, and by the transmission of earnings ability. This model is able to match very well the empirical observation that households with similar lifetime earnings hold very different amounts of wealth at retirement. Earnings heterogeneity and borrowing constraints are essential in generating the variation in wealth at retirement among low lifetime earnings households, while inheritance heterogeneity helps to generate the heterogeneity in wealth at retirement among high lifetime earnings households.  
     
  [08-02] Fang (Annie) Yang (with Suqin Ge). "Accounting for the Gender Gap in College Attainment"  
       
    Abstract:One striking phenomenon in the U.S. labor market is the reversal of the gender gap in college attainment. Females have outnumbered males in college attainment since 1987. We develop a discrete choice model of college entry decisions to study the effects of changes in relative earnings, changes in parental education, and changes in the marriage market on time series observations of college attainment by gender. We find that the increase in the relative earnings between college and high school individuals and the increasing parental education have important effects on the increase in college attainment for both genders but cannot explain the reversal of the gender gap. Declining marriage rates decrease returns to college for females less than those for males, and thus is crucial in explaining the reversal of the gender gap in college attainment.  
     
  [08-03] John Bailey Jones (with Sohini Sahu). "Transition Accounting for India in a Multi-Sector Dynamic General Equilibrium Model"  
       
    Abstract: Using a quantitative methodology designed specifically for emerging economies, we measure the components of India's economic growth over the period 1960-2005. Our approach accounts for time-varying parameters, transitional dynamics and non-linear trends. We find that increased productivity in the service sector, facilitated by a structural shift toward services, is the principal driver of India's economic growth. Our measures also suggest that the allocation of inputs across sectors has not improved over this period, and in the case of labor appears to have significantly worsened. We further find that fluctuations in output around its trend are due primarily to fluctuations in sector-specific total factor productivity, with fluctuations in labor market distortions and labor taxes also playing important roles. In the period 1960-1980, productivity fluctuations in the agricultural sector are the dominant source of cycles. Since then, productivity fluctuations in the manufacturing and service sectors have been more important.  
     
  [08-04] Illoong Kwon (with Eva Meyersson Milgrom and Seiwoon Hwang). "Cohort Effects in Promotions and Wages: Evidence from Sweden and US"  
       
    Abstract: This paper studies the long-term effect of the business cycle at the time workers enter the labor market on workers?future promotions and wages. Using the Swedish employer-employee matched data, we find that a cohort of workers entering the labor market during a boom gets promoted faster and reaches higher ranks. This pro-cyclical promotion cohort effect persists even after controlling for workers?initial jobs, and explains most of the wage cohort effects that previous studies have focused on. We repeat the same analyses using personnel records from a single US company, and show that the qualitative results do not change.  
     
  [08-05] Illoong Kwon. "Patent Portfolio Race and Secrecy"  
       
    Abstract: When firms can protect their innovations by secrecy or lead-time, the additional effect of patent protection is not obvious. This paper shows that when firms compete for a single innovation, patent protection still increases R&D investment but decreases social welfare due to over-investment. However, when firms compete for multiple complementary patents (called a patent portfolio), patent protection decreases R&D investment and decreases social welfare due to under-investment. If firms cannot rely on secrecy, patent protection increases investment regardless of whether firms compete for a single patent or for a patent portfolio.  
     
  [08-06] Illoong Kwon. "Separating the Roles of Chairman and CEO: A Model of Leadership and Authority"  
       
    Abstract: This paper provides a simple model of authority and leadership to discuss the issue of splitting the roles of CEO and Chairman. The board has the formal authority, but can delegate the leadership to the CEO by providing the title of chairman to the CEO. The paper shows that the optimal leadership structure differs depending on the board's independence. However, once we endogenize the board's indepence and the CEO's type, there exists a unique equilibrium where the board chooses the maximum independence without splitting the titles. The paper also considers the CEO's possible resistance and the agency problem with the board.  
     
  [08-07] Illoong Kwon (with Eunjung Yeo). "Overstatement and Rational Market Expectation"  
       
    Abstract: When an agent overstates his/her true performance, a rational market can simply discount the reported performance, and correctly guess the true performance. This paper shows, however, that such rational market discounting leads to less productive effort by the agent and less performance-pay by the principal. Therefore, a rational market and a profit-maximizing principal can exacerbate the lack of productive effort by the agent.  
     
  [08-08] Illoong Kwon (with Katherine Guthrie and Jan Sokolowsky). "On the Objective of Corporate Boards: Theory and Evidence"  
       
    Abstract: There are two views on board objectives: (i) boards act as monitors with the objective to maximize firms' long-term fundamental values; and (ii) boards act myopically with a focus on firms' short-term market values. We propose a principal-agent model linking CEO incentive pay to earnings overstatement that allows us to differentiate between these objectives empirically. In response to an increase in the cost of overstating earnings, the model predicts an increase in CEO incentives if boards act as monitors, but a decrease in CEO incentives if boards are myopic. We find strong evidence of a decrease in CEO incentives around the Sarbanes-Oxley Act of 2002. Moreover, the model predicts that capital market pressure makes boards more myopic. We document a positive relationship between capital market pressure and CEO incentives. Around SOX, CEO incentives also fall by more in firms with high capital market pressure, as predicted by the model. Our results strongly support the myopic board view.  
       
  [08-09] Betty Daniel. "Exchange Rate Crises and Fiscal Solvency"  
       
    Abstract: This paper combines insights from generation-one currency crisis models and the Fiscal Theory of the Price Level (FTPL) to create a new generation-one type model. Fiscal solvency is the fundamental generating crises, as in generation-one models. The initial fixed-exchange-rate policy entails risks, both to its sustainability and to the real value of government debt. The risks are due to stochastic surplus shocks and an upper bound on the present value of surpluses. Stochastic surplus shocks, changes in expectations of future fiscal commitments, and changes in the policy parameters can raise current desired debt or reduce expected future surpluses. Should the government's desired debt exceed the present-value of expected future surpluses, agents refuse to lend into this position of insolvency. The sudden stop of capital inflows creates a crisis. Equilibrium can be restored with some combination of policy switching and debt devaluation to restore fiscal solvency. The model can explain a wider variety of crises than generation one models, including those involving sovereign default. It is applied to explain crises in Argentina (2001), Mexico (1994-95), and Southeast Asia (1997), which did not fit the stylized facts of generation one models.  
       
  [08-10] Betty Daniel. "Private Sector Risk and Financial Crises in Emerging Markets"  
       
    Abstract: Investment necessary for growth is risky and often requires external financing. For an emerging market, access to international credit markets is volatile and interest rates reflect risk of default. We present a theoretical model in which emerging market agents have access to a profitable two-period investment project of fixed size greater than their endowment. Credit market imperfections can magnify a small solvency problem into a financial crisis with widespread default and/or currency devaluation. In equilibrium, creditors o¤er single-period debt up to a ceiling based on expected future output. News about a negative productivity shock reduces the debt ceiling imposed by creditors, creating a sudden stop of capital floows. The sudden stop can be severe enough to trigger a debt crisis, when agents prefer default over debt repayment, and/or a currency crisis, as agents attempt to maintain desired consumption by swapping domestic currency for foreign currency to purchase goods. We also show that there are critical thresholds for parameters governing credit market imperfections that separate countries into a safe credit club with low interest rates and steady access and a risky club with high interest rates and volatile access.  
       
  [08-11] Betty Daniel (with Christos Shiamptanis). "Fiscal Policy in the European Monetary Union"  
       
    Abstract: A country entering the EMU surrenders its monetary policy, and its debt becomes denominated in terms of a currency over which it has no direct control. A country's promise to uphold the fiscal limits in the Maastricht Treaty and the Stability and Growth Pact is implicitly a promise not to allow its fiscal stance to deteriorate to a position in which it places pressure on the central bank to forgo its price level target to finance fiscal deficits. Violation of these limits has raised questions about potential fiscal encroachment on the monetary authority's freedom to determine the price level. We specify a simple model of fiscal policy in which the fiscal authority faces an upper bound on the size of its primary surplus. Policy is determined by a fiscal rule, specified as an error correction model, in which the primary surplus responds to debt and a target variable. We show that for the monetary authority to have the freedom to control price, the primary surplus must respond strongly enough to lagged debt. Using panel techniques that allow for unit roots and for heterogeneity and cross-sectional dependence across countries, we estimate the coefficients of the error correction model for the primary surplus in a panel of ten EMU countries over the period 1970-2006. The group mean estimate for the coefficient on lagged debt is consistent with the hypothesis that the monetary authority can control the price level in the EMU, independent of fiscal influence.  
       
  [08-12] Betty Daniel (with Christos Shiamptanis). "Fiscal Risk in a Monetary Union"  
       
    Abstract: A country entering a monetary union gives up the right to determine its own monetary policy. Individual fiscal authorities promise passive fiscal policy, allowing the central monetary authority to use active monetary policy. Since a government, which can print its own money, can honor its nominal debt unconditionally, entrance into a monetary union raises new issues of potential fiscal insolvency. When there is an upper bound on the magnitude of the surplus and stochastic shocks to the surplus, a government can find itself in a position in which it cannot borrow to continue with its desired passive fiscal policy. This paper considers the risk of a fiscal financial crisis in a monetary union under alternative assumptions about how the fiscal authority would respond. The response affects the timing and probability of a crisis. We consider both outright default and policy switching, whereby the fiscal authority in crisis switches to active fiscal policy and the monetary authority switches to passive monetary policy. We apply the model to estimate fiscal risk in the European Monetary Union. Using panel estimates of the parameters in the surplus rule and initial values for government debt and the primary surplus, we simulate fiscal risk under the two alternative fiscal responses to a crisis. We find that countries with initial values bound by the Maastricht Treaty limits are safe, while countries like Italy and Greece, in which debt has strayed far above these limits, might not be.  
     
 
2007 Discussion Papers
  
     
  [07-01] Illoong Kwon (with Eva Meyersson Milgrom). "Status in the Workplace: Evidence from M&A"  
       
    Abstract: Using mergers and acquisitions as a natural experiment, this paper analyzes how changes in workers?status in the workplace affect their turnover decisions. The evidence suggests that workers have different preferences for status depending on reference group. When compared with co-workers in the same occupation, workers positively value their status. However, when compared with workers in other occupations in the same firm, workers negatively value their status. Workers seem to give up absolute wage increase for higher status within occupation, which suggests that preference for status stems from status?social value, not from its instrumental value for future income.  
     
 
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 inflation and in terms of its response to the (perceived) output gap: In the pre-Volcker era the Fed's response to inflation 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.
  
     
       
 
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.  
       
     
  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.

Keywords: 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.

Keywords: 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 Masters (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.  
     
 
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”  
   
    Abstract: This paper documents the relation between risk attitude and college attendance. A measure of the degree of risk aversion is constructed based upon the National Longitudinal Survey for Youth. Statistics and estimation results suggest that risk aversion may have a negative impact on the decision to attend college. Several potential endogeneity problems are discussed.

Keywords: Risk Aversion, Schooling Choice
JEL Classification: J310		  
     
  [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.

Keywords: 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.

Keywords: 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.

JEL Classification: D64, D60, A13		  
       
  [02-12] Laurence Kranich (with Joan Esteban) "Redistributive Taxation with Endogenous Sentiments". Figures  
     
    Abstract: In this paper we present a model in which an individual's sentiments toward others are affected by how they behave relative to the societal norm. This, in turn, affects the individual's own behavior and hence other agents' sentiments toward her. We focus on stationary patterns of utility interdependence. To demonstrate the effects of such endogeneity, we consider an example of a production economy with redistributive taxation. There are two types of stationary equilibria: one in which all agents conform to the societal norm, and a second involving social stratification on the basis of productivity into two or three groups. The main conclusion is that the tax structure, in that it affects behavior which in turn affects sentiments, plays a crucial role in determining which type of equilibrium occurs and its characteristics as well as the extent of altruism and social cohesion in society.

JEL Classification: D64, Z13, H23		  
     
  2001 Discussion Papers  
       
  [01-01] JoAnne Feeney (with Arye Hillman). "Trade Liberalization and Asset Markets"  
     
    Abstract: This paper identifies the liberalizing effect of financial market development on trade policy. We examine a small open economy which is characterized by stochastic productivity and populated by risk averse residents who use asset markets to acquire diversified portfolios. The composition of these portfolios influences individual incentives to seek trade intervention from government since the ownership structure reflected therein determines the resident’s interest in the returns generated by particular industries. Interests in protection for any one industry are diluted when individuals hold well-diversified portfolios. The model links the extensive trade liberalization in the second half of the twentieth century to development and globalization of financial markets, and also reveals that protectionist interests can persist due to nontradeability of some assets. The behavior by private agents and government in the model is consistent with trade liberalization trends in economies with developed domestic asset markets and access to global asset markets, and with observed historical trade-policy phenomena.

Keywords: Endogenous Trade Policy; Portfolio Diversification; International Financial Markets; Liberalization
JEL Classification: F13, F3, D52.		  
       
  [01-02] JoAnne Feeney. "Occupational Uncertainty, Growth and Trade Policy"  
     
    Abstract: Increases in a society's knowledge stock through educational investments, human capital accumulation, and learning by doing provide one foundation for achieving long-run growth. This paper examines the adverse influence of occupational risk on this foundation, and does so with specific attention paid to the role played by a country's trade policy regime. With occupational risk arising from stochastic productivity and a labor market search friction, the trade policy regime will influence the distribution of job opportunities for the talented segment of the population. These changes will affect individual education choices and the knowledge accumulated by society as a whole. In addition to determining the growth implications of alternative trade policy regimes, the paper provides further insight into the continuing debate regarding the impact of trade liberalization on employment opportunities.

Keywords: TradePolicy; Growth; Education; Uncertainty; Employment
JEL Classification: O4, F4, F13.		  
       
  [01-03] Gerald Marschke (with Jinyoung Kim). "Labor Mobility of Scientists, Technological Diffusion, and the Firm's Patenting Decision"  
     
    Abstract: We develop and test a model of the patenting and R&D decisions of an innovating firm whose researcher-employees sometime quit to join or start a rival. In our model, the innovating firm patents to protect itself from its workers. We show theoretically that the risk of a scientist's departure raises the firm's propensity to patent an innovation and reduces its research expenditures, which is confirmed in our empirical study of firm-level panel data. Our results suggest that the scientists' turnover partly explains cross-industry patenting variation, recent increases in patenting, and why small firms have high patent-R&D ratios.

Keywords: Labor market for scientists and engineers, patents, research and development, job turnover, mobility of scientists
JEL Classification: J63, O32, O34.		  
       
  [01-04] Betty Daniel and John Bailey Jones. "Financial Liberalization and Banking Crises in Emerging Economies"  
     
    Abstract: In this paper, we provide a theoretical explanation of why financial liberalization is likely to generate financial crises in emerging market economies. We first show that under financial repression the aggregate capital stock and bank net worth are both likely to be low. This leads a newly liberalized bank to be highly levered, because the marginal product of capital---and thus loan interest rates---are high. The high returns on capital, however, also make default unlikely, and they encourage the bank to retain all of its earnings. As the bank's net worth grows, aggregate capital rises, the marginal product of capital falls and a banking crisis becomes more likely. Although the bank faces conflicting incentives toward risk-taking, as net worth continues to grow the bank will become increasingly cautious. Numerical results suggest that the bank will reduce its risk, by reducing its leverage, before issuing dividends. We also find that government bailouts, which allow defaulting banks to continue running, induce significantly more risk-taking than the liability limits associated with standard bankruptcy.  
       
  [01-05] Kenneth Beauchemin. "Politico-economic Cycles in Fertility and Growth"  
     
    Abstract: This paper presents a political-economic growth model featuring endogenous fertility and human capital accumulation in which agents are finitely-lived and display "limited'' altruism toward their children, education is necessarily "public'' in that it always exploits social interactions, and community investments in human capital are determined democratically. Agents are fully rational in their private and political roles implying that they accurately forecast the future effects of present policy and use this information in the policy formation process. Fertility and growth cycles characterize two of three qualitatively distinct Markov-perfect political-economic equilibria displayed by the economy. One of these cyclical equilibria is also robust to myopic policy setting behavior.

Keywords: Fertility Cycles; Political-Economy; Economic Growth; Education.
JEL Classification: : 011, J13, E62.		  
       
  [01-06] Rui Zhao. "On Renegotiation-Proof Contracts in Repeated Agency". Figures  
     
    Abstract: In this paper I study ``renegotiation-proof" contracts in infinite-horizon principal-agent environment. A concept of renegotiation-proofness is adopted, which not only has the appeal of intuitively generalizing its counterpart in finite-horizon environment but proves to be a powerful device for characterizing the allocations that satisfy the notion. It is shown that renegotiation-proof contracts exist under broad conditions and admit simple characterizations.  
       
  [01-07] Rui Zhao. "Repeated Two-Sided Moral Hazard"  
     
    Abstract: In this paper I study a class of repeated two-sided moral hazard problems with discounting. I consider two agents who are involved in multiperiod, and possibly infinite-horizon, contractual relationships. In every period, the agents simultaneously take hidden actions, each of which independently affects the distribution of a separate random public signal. The realizations of the public signals jointly determine the output of a perishable final good, which the agents consume. This abstract framework can be used to analyze contractual relations within a variety of institutions, such as partnership firms, households, or cooperatives, in which bilateral moral hazard is an essential feature. I examine the nature of Pareto optimal contracts in this environment that respect both technological and informational constraints. After establishing the existence of optimal contracts, I show that every continuation contract of an optimal contract is itself optimal. Using this recursive property, next I derive a partial, but fairly general, characterization of optimal consumption allocations. It is an equation that links the ratio of marginal utilities of the agents in the current period to the same ratio in the next period. Moreover, optimal contracts imply that the sequence of ratios of marginal utilities in each period is a submartingale. I provide sufficient conditions for the submartingale to converge. Finally, using this result, I identify conditions under which one agent receives all surplus in the long run.  
       
  [01-08] Kwan Koo Yun (with Siu-kee Wong). "The Lens Condition with Two Factors"  
     
    Abstract: We give a simple, constructive proof that the lens condition implies the factor-price equalization condition, when there are only two factors. Taking stock of the sufficient conditions under which the lens condition implies the FPE condition, we have the conditions of two factors or two goods or two countries or the condition that the rank of the factor-use matrix is equal to the number of goods. We show that in an essential sense, there are no other such conditions.

Keywords: Lens Condition, Factor Price Equalization.
JEL Classification: F11.		  
     
  [01-09] Stacey Chen. "Is Investing in College Education Risky?"  
     
    Abstract: Attending college seems to be a profitable and affordable investment in the US. Nevertheless, a number of academically talented young people still hesitate to attend college. This puzzle motivates this paper to test for whether college education is a risky investment. To measure the riskiness of college attendance, I estimate the risk differential in earnings between college attendees and high school graduates. This paper copes with selection bias problems and distinguishes permanent earnings risk from transitory earnings risks. Evidence indicates that investing in a four-year college education is indeed risky, suggesting that, under certain circumstances, the riskiness of college attendance is an important factor in the schooling choice.

Keywords: Schooling, Risk Differential, Risk Premium, Selection Bias. JEL Classification: D81, C25, I2.		  
     
  [01-10] Michael Sattinger. "A Kaldor Matching Model of Real Wage Declines"  
     
    Abstract: A model linking macroeconomic phenomena 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 savings rates and production determined by a matching process between workers and jobs. Macroeconomic equilibrium (national savings equal to investment) determines the ratio of jobs to employment and the ratio of unemployed to vacancies. Competitive microeconomic behavior then determines the wage and interest rates. Changes in the ratio of national debt to employment have real effects on factor prices. Implications for effects of taxes and unemployment benefits are derived. The model explains recent declines in real wages relative to productivity.

Keywords: Kaldor, real wage, interest rate, national debt, unemployment benefits, efficient taxation, matching, factor prices.
JEL Classification: D33, E1, H2, J31.		  
     
  [01-11] Michael Jerison. "Demand Dispersion, Metonymy and Ideal Panel Data"  
     
    Abstract: In a generic competitive economy with constant returns production and "increasing dispersion," market demand satisfies the weak axiom of revealed preference and equilibrium is unique. Increasing dispersion requires, roughly, that when the households' incomes rise slightly their demand vectors move apart. We show how to test for it using panel data with fixed relative prices under a "structural stability" hypothesis due to Hildenbrand and Kneip (1999). We also show how to test for it using cross section data if the households' demand functions and incomes are independently distributed, or under a much weaker condition called "dispersion metonymy." We show that this weaker condition is untestable---even with ideal panel data that allow a direct test of increasing dispersion. Thus, cross section tests of increasing dispersion rely on an assumption that is not potentially falsifiable.

Keywords: Aggregation, Weak Axiom, Increasing Dispersion, Cross Section, Structural Stability.		  
     
  [01-12] Kajal Lahiri (with Chuanming Gao and B. Wixon). "Value of Sample Separation Information in a Sequential Probit Model: Another Look at SSA's Disability Determination Process"  
     
    Abstract: We have estimated a 4-step sequential probit model with and without sample separation information to characterize SSA's disability determination process. Under the program provisions, different criteria dictate the outcomes at different steps of the process. We used data on health, activity limitations, demographic traits, and work from 1990 SIPP exact matched to SSA administrative records on disability determinations. Using GHK Monte Carlo simulation technique, our estimation results suggest that the correlations in errors across equations that may arise due to unobserved individual heterogeneity are not statistically significant. In addition, we examined the value of administrative data on the basis for allow/deny determinations at each stage of the process. Following the marginal likelihood approach adopted by Benitez-Silva, Buchinsky, Chan, Rust, and Sheidvasser (1999), we also estimated the above sequential probit model without the sample separation information for the purpose of direct comparison. We found that without the detailed administrative information on outcomes at each stage of the screening process, we could not properly evaluate the importance of a large number of program-relevant survey-based explanatory variables. In terms of both in-sample and jackknife-type out-of-sample predictive analysis, the value of modeling the sequential structure of the determination process in generating correct eligibility probabilities is confirmed.

Keywords: Disability, Method of Simulated Movements, Multivariate Probit, Social Security.		  
     
  [01-13] Kajal Lahiri (with Guibo Xing). "An Econometric Analysis of Veterans Health Care Utilization Using Two-part Models"  
     
    Abstract: Based on 1992 US National Survey of Veterans, we analyzed the nature of veterans' inpatient and outpatient health care utilization by estimating a count data two-part hurdle model. We also identified factors that affect veterans' choices between VA and non- VA health care facilities, using a bivariate probit model. Not surprisingly, we found that health condition measurers are the most important factors in determining veterans' health care utilization. Gender, income and health insurance are also significant. Family income is the most important factor which affect veterans' health facility choice decision. Veterans with lower income, without health insurance coverage, or those living near VA health care facilities are more likely to use VA health care system than others. Most of the demographic characteristics are not significant.

Keywords: Veterans' Administration, National Survey of Veterans, Hurdle Model, Negative Binomial Count Data Model, Bivariate Probit, Inpatient and Outpatient Care.		  
     
  [01-14] Kajal Lahiri(with Jian Gao). "Bayesian Analysis of Nested Logit Model by Markov Chain Monte Carlo"  
     
    Abstract: We develop a Markov Chain Monte Carlo (MCMC) algorithm for estimating nested logit models in a Bayesian framework. Appropriate "heating target" and reparameterization techniques are adopted for fast mixing. For illustrative purposes, we have implemented the algorithm on two real-life examples involving 3-level structures. The first example involves Social Security's disability determination process, Lahiri et al. (1995). The second one is taken from Amemiya and Shimono's (1989) model of labor supply behavior of the aged. We applied a combination of various convergence criteria to ensure that the chain has converged to its target distribution.

Keywords: Discrete Choice, Random Utility Maximization, MCMC, Mixing Speed.		  
     
  [01-15] Kajal Lahiri (with Chuanming Gao). "A Comparison of Some Recent Bayesian and Classical Procedures for Simultaneous Equation Models with Weak Instruments"  
     
    Abstract: We compare the finite sample performance of a number of Bayesian and classical procedures for limited information simultaneous equations models with weak instruments by a Monte Carlo study. We consider recent Bayesian approaches developed by Chao and Phillips (1998, CP), Geweke (1996), Kleibergen and van Dijk (1998, KVD), and Zellner (1998). Amongst the sampling theory methods, OLS, 2SLS, LIML, Fuller's modified LIML, and the jackknife instrumental variable estimator (JIVE) due to Angrist, Imbens and Krueger (1999) and Blomquist and Dahlberg (1999) are also considered. Since the posterior densities and their conditionals in CP and KVD are non-standard, we propose a "Gibbs within Metropolis- Hastings" algorithm, which only requires the availability of the conditional densities from the candidate generating density. Our results show that in cases with very weak instruments, there is no single estimator that is superior to others in all cases. When endogeneity is weak, Zellner's MELO does the best. When the endogeneity is not weak and rw >0, where r is the correlation coefficient between the structural and reduced form errors, and w is the co-variance between the unrestricted reduced form errors, BMOM outperforms all other estimators by a wide margin. When the endogeneity is not weak and br < 0 (b being the structural parameter), KVD approach seems to work very well. Surprisingly, the performance of JIVE was disappointing in all our experiments.

Keywords: Limited Information Estimation, Metropolis-Hastings Algorithm, Gibbs Sampler, Monte Carlo Method.		  
     
  2000 Discussion Papers  
       
  [00-01] Kenneth Beauchemin and Betty Daniel. "Precautionary Saving, the Current Account, and the International Distribution of Wealth"  
     
    Abstract: This paper studies the interaction between time preference heterogeneity and precautionary saving in generating both persistent current account imbalance and a stationary equilibrium distribution of wealth across countries. We use numerical techniques to present two sets of results. First, when differences in discount factors are permanent and income is stochastic, the relatively patient country runs a current account surplus in transition to a steady state equilibrium. The impatient agent's precautionary motive to save yields an equilibrium distribution of wealth with no mass on the borrowing constraint. Second, when the difference in discount factors is stochastic, but highly persistent, persistent current account imbalance becomes a feature of equilibrium. Again, the precautionary motive keeps the economy out of corners. Together, stochastic discount factors and the precautionary motive imply an international distribution of wealth roughly consistent with data.

Keywords: current account, uncertainty, precautionary saving.
JEL Classification: F32, D91, E21.		  
       
[00-02] John Bailey Jones. "The Dynamic Effects of Firm Level Borrowing Constraints"  
   
  Abstract: The purpose of this paper is to develop a detailed dynamic model of firm behavior in order to see whether financial constraints are important propagation mechanisms. In addition, I consider whether the environments of individual firms affect the way in which financial constraints operate at the aggregate level. To do this, I develop a model of a firm that faces finance constraints, fixed costs and persistent idiosyncratic shocks. I find that persistent shocks can drive firms with similar financial endowments to adopt radically different financial policies. At the aggregate level, I find that financial constraints can affect the volatility and persistence of output, but that the sizes and even the directions of these effects are sensitive to firms' environments.

JEL Classification: E32, E62.		  
   
[00-03] Kenneth Beauchemin. " W(h)ither Public Capital?"  
   
  Abstract: This paper maintains that the commonly used measure of the aggregate stock of public capital is conceptually divergent from the "true" public capital input in private production technologies. Consequently, the published measure has the potential to misrepresent the historic growth profile of the public capital input and the productivity of government purchases in general. As a test of this hypothesis, the identifying assumption of a standard stochastic growth model is combined with observations on output, consumption, labor hours and government purchases to deduce public capital paths that are mutually consistent with observed flows and economic theory. It is found that the inferred series grows more rapidly than the published series during the 1973-1993 period thereby providing evidence that government under-investment is not an important source of declines in U.S. productivity growth.

Keywords: Public capital; Productivity; Growth.
JEL Classification: E62, 040.		  
   
[00-04] Traci Mach. "Measuring the Impact of Family Caps on Childbearing Decisions"  
   
  Abstract: Since 1992, twenty-two states have enacted family cap provisions into their welfare policies in an attempt to decrease out-of-wedlock childbearing. Using matched data from the March CPS between 1989 and 1998, I construct measures of whether or not a woman is affected and the size of effective penalty. My results suggest that being affected by a family cap has reduced fertility among welfare recipients by 19.5 percent. Results further suggest that the size of the effective penalty is also important; a $50 increase in the effective penalty corresponds to a 23 percent decrease in births among welfare recipients.

JEL Classification: I38, J13.		  
   
[00-05] Traci Mach. "Determinants of AFDC Caseloads: How Have Exit and Take-Up Rates Been Affected by Welfare Reform?"  
   
  Abstract: This paper examines AFDC participation and exit decisions in response to the recent changes in the welfare program. Different reform policies are identified separately and allowed to have varying impacts on current and potential recipients. Making use of the extended panel provided by the NLSY79, a monthly competing risks hazard model of eligibility and participation is estimated. Results show that while recipients are responsive to some provisions, the provisions retard rather than hasten exit. However, potential recipients are deterred from taking up benefits by the presence of time limits.

JEL Classification: I38, J2 		 
   
[00-06] Laurence Kranich (with Andres Perea and Hans Peters). "Dynamic Cooperative Games"  
   
  Abstract: The simplest and most common interpretation of a coalitional form game is that it pertains to a single interaction among the players. However, many if not most cooperative endeavors occur more than once or even repeatedly over time. In this paper we begin a systematic study of dynamic cooperative games. We argue that new tools are necessary to capture several important features of a dynamic analysis that are not adequately represented within the conventional (static) framework. These include the immutability of the sequence of play, the intertemporal evaluation of payoffs, intertemporal trading and/or borrowing or saving, and history dependent games and/or solutions. Here, we focus on the case in which a given set of players play a finite sequence of exogenously specified TU-games. We extend the notion of a cooperative solution to the intertemporal setting, and we discuss intertemporal extensions of the core and the Shapley value. We also discuss the role of intertemporal trade and borrowing/saving. The paper concludes with a blueprint for future work.

Keywords: Cooperative games, Dynamic games, Intertemporal solutions.
JEL Classification: C71, C73.		  
   
[00-07] Traci Mach. "The Welfare Magnate Debate Revisited in the Context of Welfare Reform"  
   
  Abstract: This paper re-examines the welfare magnet hypothesis in the context of welfare reform by redefining both migration and generosity. Due to the intrastate variation in program parameters, migration is defined at the county, rather than state level, and the typical definition of generosity is expanded to control for differences in time limits. Using data from the National Longitudinal Survey of Youth 1979 cohort (NLSY79), results indicate that time limits do play a significant role in cross-county migration decisions, although the effect is small and greatly diminished when the individual must travel at least 100 miles to avoid the time limit. Estimates also provide some evidence that benefit differentials also positively influence decisions.

JEL Classification: I38, J6 		 
   
[00-08] Traci Mach (with Catalina Amuedo-Dorantes). "It's Not How Much You Spend, It's How You Spend It: Preventing Juvenile Crime And Delinquency Through Innovative School Programs"  
   
  Abstract: The 1999 State of the Union Address included a "call to action" to improve school quality and provide citizens with safe streets, schools and neighborhoods through initiatives such as decreasing student-teacher ratios, enhancing teacher quality and offering innovative and after-school programs. This paper examines the relative efficacy of these initiatives on delinquency and juvenile crime. Juvenile criminal and delinquent participation respond favorably to smaller student-teacher ratios, increased instructional expenditures per pupil, and, especially, the implementation of after-school programs. These findings illustrate the potential of after-school programs to keep students safe and learning and, thus, provide valuable insight into how to most efficiently distribute educational spending.

JEL Classification: J0		  
     
  1999 Discussion Papers  
       
[99-01] Michael Jerison (with David Jerison). "Measuring Consumer Inconsistency: Real Income, Revealed Preference and the Slutsky Matrix"  
   
  Abstract: If a smooth consumer demand function violates the strong axiom of revealed preference, then income and prices can follow a cycle and return to their starting values even though real income has always risen. We show how real income growth along the "worst" revealed preference cycle depends on the range of price variation and on violations of the Slutsky conditions. We use this result to justify a new index of local demand inconsistency. We also relate the result to proposed reforms of the consumer price index, and we provide a bound on the number of observations required to form a revealed preference cycle.  
   
[99-02] Laurence Kranich. "Measuring Opportunity Inequality with Monetary Transfers"  
   
  Abstract: In this paper I consider the problem of measuring opportunity inequality when monetary transfers are possible. First, I consider the case in which agents have homogeneous preferences, as in the previous literature, and I then propose an extension to the heterogeneous case. In both, I identify an appropriate egalitarian benchmark relative to which inequality can be measured, and I establish that this yields a theory of measurement analogous to that of income inequality. This overcomes a difficulty recently reported Ok (1997). Finally, I discuss the benchmark notion of equal shadow wealth as a new concept of fairness. The results of the paper are immediately applicable to the measurement of multidimensional economic inequality including economies with indivisible goods.

Keywords: Opportunities, Inequality, Measurement
JEL Classification: D63, D71 		 
   
[99-03] John Bailey Jones. "Has Fiscal Policy Helped Stabilize the Postwar U.S. Economy?"  
   
  Abstract: In this paper, I consider whether postwar fiscal policy has helped stabilize the U.S. economy. I do this by adding fiscal policy feedback rules to the stochastic growth model. I estimate the feedback rules from postwar data with the generalized method of moments. These rules allow fiscal policies to respond to current and lagged output and labor hours. I use the estimated policy rules to see if postwar fiscal policy reduces output volatility and/or lengthens expansions and shortens recessions. I find that fiscal policy in general provides little stability on either count. I also find that the endogenous feedback rules, by themselves, are at best moderately stabilizing and are in some cases destabilizing.  
   
[99-04] Kwan Koo Yun. "Technological Comparative Advantage and Factor Prices Behavior With Trade"  
   
  Abstract: We introduce technological differences in a Heckscher-Ohlin model and study how the technology and endowment differences interact to determine the trade effects on factor prices. When the endowment effect is dominant in determining the autarky relative factor prices, the relative factor prices of trading countries adjust in converging directions with trade if and only if the capital rich country has a comparative advantage in the capital intensive sector. Adjustments in converging directions could be excessive. Relative factor prices tend to converge if the technological comparative advantage is small for given relative endowments or if the relative endowment difference is large for a given technological comparative advantage.  
   
[99-05] JoAnne Feeney (with Arye Hillman). "Privatization and The Political Economy of Strategic Trade Policy"  
   
  Abstract: This paper considers the interdependence between international financial markets, privatization, and strategic trade policies. We describe an economy where portfolio allocations are chosen by risk-averse agents who rationally forecast future trade policies. Assuming a government responsive to the policy preferences of voters, we show that ownership structure affects trade policy through the incentives for lobbying by private agents. Portfolios and trade policy are thus jointly determined in political-economic equilibrium. Privatization of state-owned industry exerts an important influence over the trade policies chosen by domestic and foreign governments by expanding the scope for individual diversification.  
   
[99-06] Kenneth Beauchemin. "Growth or Stagnation? The Role of Public Education"  
   
  Abstract: This paper presents a political-economic theory of growth and human capital accumulation. Age heterogeneity is put forth as the primary source of disagreement between individuals over various levels public education expenditures. An overlapping generations model with with two-period lived agents is constructed to capture the heterogeneity. With a growing population, the equilibrium quantity of public education reflects the preferences of youth and is therefore foward looking. As such, policy preferences are a function of intertemporal elasticities, utility discounting and population growth. Despite foward looking behavior, it is shown that sufficiently rapid population growth can trigger stagnation (zero growth) in the form of a corner solution to the public policy problem. The model therefore complements existing models that associate slow per capita output growth with high population growth.

Keywords: Economic Growth; Public Education; Political Economics
JEL Classification: O40; E62 		 
   
[99-07] Michael Sattinger. "The Market for Access to Trading Partners, Brokers, and Price Determination"  
   
  Abstract: This paper furthers a research program in which the price at any point in time is determined by the market for access to trading partners. In this paper, the market is implemented by competitive brokers in a matching model of trade. If a certain condition holds, brokers can make profits by entering the market and offering a different ratio of buyers to sellers. Brokers are shown to set fees that eliminate congestion externalities. The fees constitute the price adjustment, generating dynamic price paths.  
     
  1998 Discussion Papers  
       
[98-01] Kausik Chaudhuri and Ning S.Zhu. "External Debt Sustainability: Theory and Applications to Heavily Indebted Poor Countries"  
   
  Abstract: We present a conceptual framework for analyzing external debt sustainability in heavily indebted poor countries with predominantly concessional debt owed to official creditors. In the absence of a secondary market for official debt, the paper argues for the dynamic present value of debt as a proxy for assessing the real value of debt with below-market interest rates. It also models the current institutional mechanism of debt relief for low-income countries in the form of rescheduling on concessional terms. The analytical approach combines a stock analysis of external debt with a flow analysis of balance of payments in a parsimonious forward-looking framework suitable for projection of alternative scenarios and sensitivity analysis of key policy variables. Illustrative applications in two country cases show how the theory can be applied for policy formulation.  
   
[98-02] Betty C. Daniel. "Intertemporal Choice and Currency Crises"  
   
  Abstract: Exchange rate crises, in the absence of sustained monetary-financed fiscal deficits, can be explained with the neoclassical model. The characteristics of a crisis depend on the source of the shock and the government's response to it. Careful attention to intertemporal budget constraints highlights the role of exchange rate changes in reallocating public and private wealth and restoring equilibrium.  
   
[98-03] Michael Jerison. "Dispersed Excess Demands, the Weak Axiom and Uniqueness of Equilibrium"  
   
  Abstract: This paper introduces an economically interpretable hypothesis that implies that mean excess demand satisfies the weak axiom and that competitive equilibrium is unique. The hypothesis requires, roughly, that the consumers' excess demand vectors spread apart on average as their wealth increases. The hypothesis is potentially testable using cross section data on consumer expenditures and endowments. It is satisfied in a robust class of economies, including those with suitable types of consumer heterogeneity. However, it implies stringent restrictions on the consumers' Engel curves if it is required to hold for every distribution of collinear consumer endowments.  
   
[98-04] Laurence Kranich. "Equalizing Opportunities through Public Education when Innate Abilities are Unobservable"  
   
  Abstract: This paper considers the problem of equalizing opportunities among agents who differ in both their tastes and innate productive abilities when these characteristics are unobservable. The government specifically wishes to offset the effects of differences in innate talents by affording public education to those with lesser skills. First, I consider the benchmark case involving complete information where I observe that it is possible to fully equalize opportunities as defined axiomatically by Bossert and Fleurbaey. However, in the incomplete information case, while it is possible to implement any input progressive education policy, it is not possible to afford equal opportunities. I conclude with an example demonstrating the alternative, social welfare function approach, which I argue is more suitable for second-best analysis.  
   
[98-05] Laurence Kranich. "Altruism and the Political Economy of Income Taxation"  
   
  Abstract: In this paper, I develop a positive model in which altruistic agents vote over quadratic (progressive) income tax schedules. The agents have heterogeneous preferences and productivities, and the model incorporates the incentive effects of taxation. The main result of the paper is that, under standard assumptions, there exists a self-confirming majority rule equilibrium in which the agents' labor supply decisions are optimal given the tax policy, and the tax policy is a majority rule equilibrium given the labor supply decisions. Thus, the agents' equilibrium labor supply decisions confirm voter expectations, but such expectations may be incorrect out of equilibrium. In contrast to most of the literature on voting and taxes, the model generates majority rule voting equilibria which involve progressive taxation, the norm in all industrialized countries.  
   
[98-06] Laurence Kranich. "Equal Opportunity and the Currency of Compensation"  
   
  Abstract: I provide three very simple examples to demonstrate the point that the result by Bossert and Fleurbaey concerning the general impossibility of achieving equal opportunities is largely due to their particular framework and is not necessarily robust to consideration of alternative means of compensating for innate differences.  
   
[98-07] Laurence Kranich. "Manipulation of the Walrasian Mechanism in Production Economies with Short-Selling"  
   
  Abstract: Hurwicz and Otani and Sicilian characterized the Nash equilibrium allocations of the Walrasian demand manipulation game in successively more general exchange environments. In this paper, we extend the analysis to production economies with short-selling. First, we generalize Hurwicz's and Otani and Sicilian's theorem that any allocation at which each agent's consumption bundle lies above her true offer curve can be supported in Nash equilibrium. We then show that for all finite economies the set of such allocations is large in that it contains an open subset of the feasible set.  
   
[98-08] Michael Sattinger. "A Queuing Model of Price Determination in a Competitive Market"  
   
  Abstract: This paper addresses the question of how prices change in a competitive market if all agents are price takers. A queuing model of price determination is developed in which buyers and sellers face trade-offs between price and expected wait times. Sellers set prices but are competitive in the sense that they are "value takers" and cannot affect the value of the combination of price and wait time. The queuing market yields realistic outcomes of price dispersion and moderate price response to demand shocks. Disequilibrium has limited consequences for a queuing market.  
     
       
       
       

 

 


 

 

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