Research Database

This paper develops a model of firm location where communities differ by exogenous endowments of a factor of production. Firms choose to locate based on local subsidies to production. Community and firm optimal strategies are then examined. Through the introduction of information asymmetries about the communities' endowments, equilibrium bidding strategies for communities are found. The results show that auction institutions used by firms may in fact be signaling on the part of communities. These results also indicate that community bids reveal information, and restrictions on this bidding may do more harm than good.

We propose a model in which an unanticipated reduction in the money supply leads to a contemporaneous increase in inventories followed by periods with lower output. This persistent real effect does not require price-rigidity or real shocks and confusion. It is obtained in a model in which markets are cleared and agents are price-takers.

Results in Lucas (1987) suggest that if public policy can affect the growth rate of the economy, the welfare implications of alternative policies will be large. In this paper, a stochastic, dynamic general equilibrium model with endogenous growth and money is examined. In this setting, inflation lowers growth through its effect on the return to work. However, the welfare costs of higher inflation are extremely modest.

The process by which per capita income in the South converged to northern levels is intimately related to the structural transformation of the U.S. economy. We find that empirically most of the southern gains are attributable to the nation-wide convergence of agricultural wages to non-agricultural wages, and the faster rate of transition of the Southern labor force from agricultural to non-agricultural jobs. Similar results describe the Mid-West's catch up to the North-East (but not the relative experience of the West). To explain these observations, we construct a model in which the South (Mid-West) has a comparative advantage in producing unskilled-labor intensive agricultural goods. Thus, it starts with a disproportionate share of the unskilled labor force and lower per capita incomes. Over time, declining education/training costs induce an increasing proportion of the labor force to move out of the (unskilled) agricultural sector and into the (skilled) non-agricultural sector. The decline in the agricultural labor force leads to an increase in relative agricultural wages. Both effects benefit the South (Mid-West) disproportionately since it has more agricultural workers. The model successfully matches the quantitative features of the U.S. structural transformation and regional convergence, as well as several other stylized facts on U.S. economic growth in the last century. The model does not rely on frictions on factor mobility, since in our empirical work we find this channel to be less important than the compositional effects the model emphasizes.

We study the asset pricing implications of a multi-agent endowment economy where agents can default on debt. We build on the environment studied by Kocherlakota (1995) and Kehoe and Levine (1993). We present an equilibrium concept for an economy with complete markets and with endogenous solvency constraints. These solvency constraints prevent default, but at the cost of reduced risk sharing. We show that versions of the classical welfare theorems hold for this equilibrium definition. We characterize the pricing kernel, and compare it to the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks.

This paper studies efficient insurance arrangements in village economies when there is complete information but limited commitment. Commitment is limited because only limited penalties can be imposed on households which renege on their promises. Any efficient insurance arrangement must therefore take into account the fact that households will renege if the benefits from doing so outweigh the costs. We study a general model which admits aggregate and idiosyncratic risk as well as serial correlation of incomes. It is shown that in the case of two households and no storage the efficient insurance arrangement is characterized by a simple updating rule. An example illustrates the similarity of the efficient arrangement to a simple debt contract with occasional debt forgiveness. The model is then extended to multiple households and a simple storage technology. We use data from the ICRISAT survey of three villages in southern India to test the theory against three alternative models: autarky, full insurance, and a static model of limited commitment due to Coate and Ravallion (1993). Overall, the model we develop does a significantly better job of explaining the data than does any of these alternatives.

A cash-in-advance model with sequential markets is constructed, where unanticipated monetary injections are nonneutral and can potentially produce large liquidity effects. However, if the monetary authority adheres to an optimal money rule, money should not respond to unanticipated shocks, so that a Friedman rule is suboptimal and the monetary authority does not exploit the liquidity effect. Quantitatively, the model can generate variability in money and nominal interest rates close to what is observed, and can produce data with no obvious evidence of the existence of liquidity effects.

This paper presents a model in which a country's average propensity to save tends to rise endogenously over time. The paper uses a two-sector neoclassical framework to model the transition from agriculture to manufacturing which typically accompanies economic development. Key assumptions are that only the agricultural sector uses land and a simple version of Engel's law. When a country's income per capita is low, agricultural consumption is important; consequently, land is valuable and capital gains on it may account for most wealth accumulation, making the NIPA APS appear low. If exogenous technological progress raises incomes over time, Engel's law shifts demand to manufactured goods. Then land's importance in portfolios relative to reproducible capital diminishes and the measured average propensity to save can rise.

This paper examines the effect of different education financing systems on the level and distribution of resources devoted to public education. We focus on California, which in the 1970's was transformed from a system of mixed local and state financing to one of effectively pure state finance and subsequently saw its funding of public education fall between ten and fifteen percent relative to the rest of the US. We show that a simple political economy model of public finance can account for the bulk of this drop. We find that while the distribution of spending became more equal, this was mainly at the cost of a large reduction in spending in the wealthier communities with little increase for the poorer districts. Our model implies that there is no simple trade-off between equity and resources; we show that if California had moved to the opposite extreme and abolished state aid altogether, funding for public education would also have dropped by almost ten percent.

A pairwise random meeting model with money is used to study the nominal yield on pure-discount, default-free securities that are issued by the government. There is one steady state with matured securities at par and, for some parameters, another with them at a discount. In the former, exogenous rejection of unmatured securities by the government is necessary and sufficient for such a steady state to display a positive nominal yield on unmatured securities. In the latter, the post-maturity discount on securities induces a deeper pre-maturity discount even if there is no exogenous rejection of unmatured securities.

This paper analyzes how political stability depends on economic factors. Fluctuations in groups' economic capacities and in their abilities to engage in rent-seeking or predatory behavior create periodic incentives for those groups to renege on their social obligations. A constitution remains in force so long as no party wishes to defect to the noncooperative situation, and it is reinstituted as soon as each party finds it to its advantage to revert to cooperation. Partnerships of equals are easier to sustain than are arrangements in which one party is more powerful in some economic or noneconomic trait. In this sense, inequality is bad for social welfare. Surprisingly, perhaps, it is the rich, and not the poor segments of society who in our model pose the greater threat to the stability of the social order. Using cross-country data, we test and confirm the prediction that most constitutional disruptions should be accompanied by increases in income inequality.

This paper is interested in the small sample properties of the indirect inference procedure which has been previously studied only from an asymptotic point of view. First, we highlight the fact that the Andrews (1993) median-bias correction procedure for the autoregressive parameter of an AR(1) process is closely related to indirect inference; we prove that the counterpart of the median-bias correction for indirect inference estimator is an exact bias correction in the sense of a generalized mean. Next, assuming that the auxiliary estimator admits an Edgeworth expansion, we prove that indirect inference operates automatically a second order bias correction. The latter is a well known property of the Bootstrap estimator; we therefore provide a precise comparison between these two simulation based estimators.

I show that a simple sticky price model based on Rotemberg (1982) is consistent with a variety of facts concerning the correlation of prices, hours and output. In particular, I show that it is consistent with a negative correlation between the detrended levels of output and prices when the Beveridge-Nelson method is used to detrend both the price and output data. Such a correlation, i.e.,a negative correlation between the predictable movements in output and the predictable movements in prices is present (and very strong) in U.S. data. Consistent with the model, this correlation is stronger than correlations between prices and hours of work. I also study the size of the predictable price movements that are associated with predictable output movements as well as the degree to which there are predictable movements in monetary aggregates associated with predictable movements in output. These facts are used to shed light on the degree to which the Federal Reserve has pursued a policy designed to stabilize expected inflation.

We explain how a long period of slow pre-industrial development triggers an Industrial Revolution that leads to modern balanced growth. Development in the preindustrial period is driven by increasing returns to specialization made possible by a growing population. Increasing access to specialized intermediate goods eventually makes fundamental technological innovation possible. Innovation initiates the Industrial Revolution, after which productivity grows endogenously regardless of population growth. Industrialization reconciles the crucial role of population early on with its weak relation to per capita product in developed economies. Faster population growth speeds early development, though if it results from a highly productive primitive technology, the consequences for development are ambiguous.

Handout for "Policy Concerning Water Markets": Using Water Better: A Market-Based Approach to California's Water Crisis, by Ronald H. Schmidt and Frederick Cannon. Published 1991 by Bay Area Economic Forum (Calif.), Association of Bay Area Governments, Bay Area Council (Calif.). Handout for "Environmental Issues and Ag Lending": Land Values and Environmental Regulation by Michael D. Boehlge, Philip M. Raup and Kent D. Olson. University of Minnesota Department of Agricutural and Applied Economics Staff Paper P91-3, January 1991.

A number of theoretical models of technology adoption have been proposed that emphasize technological switching, loss of expertise and subsequent technology-specific learning. These models imply that measured productivity may initially fall and then later rise after the adoption of a new technology. This paper investigates whether or not this implication is a feature of plant-level data from the Colombian manufacturing sector. We regress measures of productivity growth at the plant level on a plant-specific measure of technology adoption and its lagged values. We find that...

We examine price formation in a simple static model with asymmetric information, a countable number of risk neutral traders and without noise traders. Prices can exhibit excess volatility (the variance of prices exceeds the variance of dividends), even in such a simple model. More generally, we show that for an open set of parameter values no equilibrium has prices which turn out to equal the value of dividends state by state, while for another open set of parameter values there exist equilibria such that equilibrium prices equal the value of dividends state by state. When information collection is endogenous and costly, expected prices exhibit a "V-shape" as a function of the cost of information: They are maximized when information is either costless so that everyone acquires it, or else is so costly that no one chooses to acquire it. Prices are depressed if information is cheap enough so that some agents become informed, while others do not. If the model is altered so that information is useful in making productive decisions, then the V-shape is altered, reducing the attractiveness of prohibitively high costs.