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Concerns about income inequality emphasize the importance of accurate income measures. Estimates of top income shares based only on individual tax returns are biased by tax-base changes, social changes, and missing income sources. This paper addresses these shortcomings and presents new estimates of the distribution of national income since 1960. Our analysis of pretax income shows that top income shares are lower and have increased less since 1980 than other studies using tax data. In addition, increasing government transfers and tax progressivity have resulted in rising real incomes for all income groups and little change in aftertax top income shares. [ABSTRACT FROM AUTHOR]

This paper studies the optimal determination of deposit insurance when bank runs are possible. We show that the welfare impact of changes in the level of deposit insurance coverage can be generally expressed in terms of a small number of sufficient statistics, which include the level of losses in specific scenarios and the probability of bank failure. We characterize the wedges that determine the optimal ex ante regulation, which map to asset- and liability-side regulation. We demonstrate how to employ our framework in an application to the most recent change in coverage in the United States, which took place in 2008. [ABSTRACT FROM AUTHOR]

This paper extends a canonical model of intergenerational human capital investment to a geographic context to study the role of migration in influencing income mobility in the United States. The main result is that migration is considerably influential in shaping the high rates of economic mobility observed among children from low-wage areas, with human capital investment behavioral responses being important to consider. Equalizing school quality across locations does more to reduce interstate inequality in income mobility than equalizing skill prices, and policies that attempt to decrease human capital flight from low-wage areas via cash transfers are unlikely to be cost-effective. [ABSTRACT FROM AUTHOR]

This paper introduces a new approach to the empirical testing of the Lucas-Sargent-Wallace (LSW) "policy ineffectiveness proposition," which compares the LSW hypothesis with an alternative that states that prices respond fully in the long run, but only gradually in the short run, to nominal aggregate demand disturbances. The empirical equations, estimated for a new set of quarterly data extending back to 1890, exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal GNP. The paper compares and tests three alternative methods of introducing "persistence effects" into the LSW framework. This paper presents new empirical test of the LSW policy ineffectiveness proposition that introduce three major improvements on previous studies. First and most important, unlike earlier papers that tested the LSW proposition in isolation from any plausible alternative, this paper explicitly compares the LSW characterization of price and output behavior with the major competing hypothesis underlying conventional analyses of monetary policy, that prices adjust gradually to nominal demand changes whether anticipated or not. A single reduced-form equation for the inflation rate is developed in which the LSW and gradual-price-adjustment hypotheses appear as special cases, which allows coefficient estimates to distinguish the two. The second innovation here is a much expanded set of U.S. quarterly time-series data extending over the entire period between 1890 and 1980. Unlike previous studies that have been limited to 30 years of postwar quarterly data, the sample space here is extended to 90 years. The characterization of price and output behavior in more than 200 new quarterly data observations is of independent interest outside of the context of the LSW debate. [ABSTRACT FROM AUTHOR]

This paper provides new evidence that Medicaid’s introduction reduced infant and child mortality in the 1960s and 1970s. Mandated coverage of all cash welfare recipients induced substantial cross-state variation in the share of children immediately eligible for the program. Before Medicaid, higher- and lower-eligibility states had similar infant and child mortality trends. After Medicaid, public insurance utilization increased and mortality fell more rapidly among children and infants in high-Medicaid-eligibility states. Mortality among nonwhite children on Medicaid fell by 20 percent, leading to a reduction in aggregate nonwhite child mortality rates of 11 percent. [ABSTRACT FROM AUTHOR]

This paper investigates the effect of early twentieth-century state maximum-hours laws on the employment of women in manufacturing. Maximum-hours laws are found to have reduced not only women's hours of work in 1920 but their employment as well. Further, the effect was not uniform by race and nativity: While the employment of foreign-born women was significantly reduced--by as much as 30 percent in the most restrictive states--the employment of native white women was largely unaffected. This and other evidence adduced in the paper suggest that early support for maximum-hours legislation for women, especially by the emerging American labor movement, may have been motivated in part by the well-documented hostility to immigration during this period. [ABSTRACT FROM AUTHOR]

In this paper the issues raised in the turn-of-the-century American debate over the quantity theory of money are examined. J. Laurence Laughlin of Chicago, the leading antiquantity theorist, provoked the controversy with theoretical and empirical criticisms of the quantity theory, while Irving Fisher emerged as the chief defender of the monetary orthodoxy. Laughlin argued that issues of convertible paper money would not raise prices or the money supply but would instead lead to losses of monetary gold. His position was regarded as incompatible with the classical neutrality-of-money theorem. To identify the fundamental sources of disagreement between Laughlin and the quantity theorists, the neutrality-of-money proposition is decomposed into two components: the neutrality proposition per se and the assumed causal role of money. [ABSTRACT FROM AUTHOR]

Many studies have documented large and persistent productivity differences across producers, even within narrowly defined industries. This paper both extends and departs from the past literature, which focused on technological explanations for these differences, by proposing that demand-side features also play a role in creating the observed productivity variation. The specific mechanism investigated here is the effect of spatial substitutability in the product market. When producers are densely clustered in a market, it is easier for consumers to switch between suppliers (making the market in a certain sense more competitive). Relatively inefficient producers find it more difficult to operate profitably as a result. Increases in substitutability truncate the productivity distribution from below, resulting in higher minimum and average productivity levels as well as less productivity dispersion. The paper presents a model that makes this process explicit and empirically tests it using data from U.S. ready-mixed concrete plants, taking advantage of geographic variation in substitutability created by the industry's high transport costs. The results support the model's predictions and appear robust. Markets with high demand density for ready-mixed concrete--and thus high concrete plant den-. [ABSTRACT FROM AUTHOR]

A central statement of the theory of natural trading partners is that preferential trading with regional trading partners is less likely to be trade diverting and therefore geographically proximate partners are to be considered “natural” partners for preferential arrangements. This paper examines this question empirically. The analytical framework involves a general equilibrium model of preferential trade and an econometric model with tight links to this theory. This framework is used to implement tests of the natural trading partners hypothesis using U.S. trade data for the years 1964–95: Welfare changes that would result from preferential tariff reductions by the United States against various trading partners are first estimated, and correlations with bilateral “distance” measures (with and without controls for income levels) are then examined. Since the argument for “natural” trading partners is based on the greater likelihood of geographically proximate countries to be more significant trading partners, correlations between the welfare change estimates and bilateral trade volume are examined as well. Both geographic proximity and trade volume are found to have no effect. Thus this paper is unable to find any support for the natural trading partners theory in U.S. data. [ABSTRACT FROM AUTHOR]

This paper is a statistical analysis of the manner in which the Federal Reserve determines the level of the federal funds rate target, one of the most publicized and anticipated economic indicators in the financial world. The paper introduces new statistical tools for forecasting a discrete-valued time series such as the target and suggests that these methods, in conjunction with a focus on the institutional details of how the target is determined, can significantly improve on standard vector autoregression forecasts of the effective federal funds rate. We further show that the news that the Fed has changed the target has statistical content substantially different from the news that the Fed failed to make an anticipated target change, causing us to challenge some of the conclusions drawn from standard linear VAR impulse-response functions. [ABSTRACT FROM AUTHOR]

Data for the United States and countries in western Europe indicate a negative correlation between the dependency ratio and labor tax rates and the generosity of social transfers, after other factors that influence the size of the welfare state are controlled for. This occurs despite the increased political clout of the dependent population implied by the aging of the population. This paper develops an overlapping generations model of intra- and intergenerational transfers (including old-age social security) and human capital formation that addresses this seeming puzzle. We show that with democratic voting, an increase in the dependency ratio can lead to lower taxes or less generous social transfers. [ABSTRACT FROM AUTHOR]

This paper models the fertility decision of individuals who differ in their wage rate and their intensity of preferences for rearing children, and whose utility of having a child out of wedlock depends on the level of "social approval" associated with doing so. This social approval in turn is a function of the fraction of individuals in previous generations that chose to have children out of wedlock. The model is a straightforward extension of the typical rational choice model that motivates much of the empirical literature—a literature that has cast doubt on a strong link between AFDC and illegitimacy. However, the model introduces elements from epidemic models that many have in mind when arguing for such a link. As a result, the predictions of this extended model are consistent with empirical findings while at the same time linking the rise in illegitimacy solely to government welfare programs. Specifically, a program similar to AFDC is introduced into an economy with low illegitimacy rates, and a transition path to a new steady state is calculated. Along the transition path, observed cases of illegitimacy are rising among both the poor and nonpoor despite the fact that AFDC payments are held constant or even falling. The simultaneous trends of declining real welfare benefits and rising illegitimacy over the past two and a half decades are therefore not inconsistent with the view that illegitimacy might be caused primarily by government welfare policies. Although this paper certainly does not claim to prove such a link, it does suggest that current empirical approaches have been focused too much on an artificially narrow model and have thus given rise to results that can be differently interpreted in the context of a more natural model. At the same time, the model also suggests that welfare reform aimed at reducing the incentives for poor women to have out-of-wedlock births may not be as effective as policy makers who believe in a causal link between AFDC and illegitimacy might suspect. [ABSTRACT FROM AUTHOR]

The article comments on economist Alan Freiden's paper related to the marriage market in the U.S. Freiden has been reasonably faithful to economist Gary Stanley Becker's marriage model in his attempt to estimate the reduced-form equation explaining variation in the proportion of females married. His observational units are regional subaggregates in cross-section data. Thus, the Freiden paper represents a commendable attempt to evaluate the usefulness of the model. The major problem arising in going to the data is in translating and measuring full income. Full income is a precise concept in the theory but is made up of two main components, one of which is ambiguous in its effect upon marriage. The existence of marriage predates progressive income tax and joint returns. Nevertheless, levels of marriage incidence in modern society should depend on tax structure. Divorce costs probably vary directly with the number of immature children, thus, the index used by Freiden is not so appropriate for his higher-age groups. The notion that the "likelihood" of marriage increases the greater the difference in joint and individual household production is appealing but somewhat lacking in rigor.

This paper reconsiders Cochrane's evidence on the relative stability of long-term growth. It estimates variance ratios for nine OECD countries for the period 1871-1985. For the United States, Cochrane found that long-run or low-frequency components of growth are stable relative to year-to-year changes in output. The results of this paper indicate that the relative stability of long-run growth is unique to the U.S. data. For countries other than the United States, the point estimates for the variance ratio are all considerably larger than Cochrane's estimate of one-third. In fact, almost all the lower probability bounds are larger than one-third. This evidence indicates considerably less tendency for long-run stability than found by Cochrane. Two factors account for the cross-country differences in the variance ratios. For some countries, low-frequency components of growth are considerably more variable than those for the United States. In others, high- to medium-frequency components are considerably smoother. The contribution of each factor varies across countries. The United States seems to be the only country that combines smooth dynamics at low frequencies and variable dynamics at high to medium frequencies. Finally, the paper examines the covariation among long growth cycles. Long cycles are more highly correlated across countries than year-to-year changes in output. In fact, levels of per capita output appear to be cointegrated, which implies that there are bounds on the degree to which output levels can diverge in the long run. Overall, these measures suggest that output fluctuations in the various countries are not all alike. For most countries, the evidence tends to support the view that a large fraction of the economy's year-to-year movements leave long-term marks. It tends to contradict the view that long-run growth is stable relative to year-to-year changes in output. [ABSTRACT FROM AUTHOR]

Almost all recent research on macroeconomic fluctuations has worked with seasonally adjusted or annual data. This paper takes a different approach by treating seasonal fluctuations as worthy of study in their own right. Our results show that seasonal fluctuations are an important source of variation in all macroeconomic quantity variables but are small or entirely absent in both real and nominal price variables. The timing of the seasonal fluctuations consists of increases in the second and fourth quarters, a large decrease in the first quarter, and a mild decrease in the third quarter. The paper demonstrates that, with respect to each of several major stylized facts about business cycles, the seasonal cycle displays the same characteristics as the business cycle, in some cases even more dramatically than the business cycle. That is, we find that at seasonal frequencies as well as at business cycle frequencies, output movements across broadly defined sectors move together, the timing of production and the timing of sales coincide closely, labor productivity is procyclical, nominal money and real output are highly correlated, and prices vary less than quantities. There is a "seasonal business cycle" in the U.S. economy, and its characteristics closely mirror those of the conventional business cycle. [ABSTRACT FROM AUTHOR]

A long tradition in the development literature has been to associate the aggregate savings rate with the dependency ratio, the ratio of dependent children to adults. In this paper I formalize the relationship by developing a life-cycle model in which offspring are assets from the viewpoint of their parents. The model is used to help explain the increase in nineteenth-century U.S. savings rates. I find that between 1830 and 1900 about one-quarter of the 6-percentage-point rise in the savings rate can be attributed to a decline in the dependency rate. In this paper I examine the hypothesis that a falling dependency rate accounts for part of the rise in nineteenth-century savings rates. The view that the savings rate is negatively related to the dependency ratio, the ratio of dependent children to adults, has long been popular in the development literature as an explanation of low savings rates in developing countries, but only Kelley (1972) and David (1977) have applied it to the United States.[3] From 1830 to 1900 the ratio of children aged 14 and under to adults aged 20 and over fell from 1.0 to 0.6 (U.S. Bureau of the Census 1975, pp. 16-17) largely because of declines in age-specific fertility rates. [ABSTRACT FROM AUTHOR]

Markets for many products are dominated by a small group of states or countries with a natural advantage in the marketplace because of some initial endowment of resources, favorable climate, or location. The purpose of this paper is to explore how such markets involving a few political jurisdictions interact noncooperatively. We examine how such a market might be structured and operate and the extent of monopoly rent that can be extracted in the absence of collusion. We answer these questions for an empirically estimated model of western U.S. coal in which two states (Montana and Wyoming) dominate production. We demonstrate that in this market the amount of rent that can be extracted is greatly reduced through competition (relative to a cartel). Nevertheless, even with two producing states competing against each other, significant rents can be captured-significant enough to refute the contention that little rent can accrue without a cartel. The purpose of this paper is to explore such markets involving a few noncooperative political jurisdictions. Two questions in particular are investigated. One is how such a market might be structured and operate. To this end, we propose tax-reaction-function Nash equilibria rather than the more conventional quantity-based Cournot and von Stackelberg equilibria. This approach is consistent with the use of severance taxes or export tariffs to exercise market power. The second question we investigate concerns the extent of monopoly rent that can be extracted in the absence of collusion. Where on the continuum between perfect competition and the perfect cartel do such noncooperative equilibria lie? [ABSTRACT FROM AUTHOR]

This paper reevaluates the concept of unemployment in the context of differing labor market and nonmarket opportunities for men and women, discussing common fallacies in female to male unemployment rate comparisons and their use as an indicator of labor market equality. Suggestive empirical evidence is presented for an alternative unemployment rate concept for women, for interpreting the procyclical variation in female to male unemployment rate differentials, and for decomposing unemployment differences into differences in labor market characteristics and in behavioral coefficients for the two sexes. The paper concludes that a large part of the observed unemployment rate differential may be attributed to the definition and methodology used in deriving unemployment statistics rather than to discrimination in productive opportunities. While this paper did not advocate a change in labor force definitions, it has investigated the consequences of recognizing home production as employment. An alternative unemployment rate for women was defined and was found to lie below the actual unemployment rate for men. A look at the unemployment rate differential between males and females over time revealed procyclical variation-not the expected result if the unemployment of women is predominated by employer discrimination. Finally, estimated unemployment equations indicated that a female is less likely to experience unemployment than a male with identical characteristics and, if unemployed, would experience fewer weeks of unemployment per year. [ABSTRACT FROM AUTHOR]

It has often been argued that prices are sticky in the United States. However, the empirical papers that have claimed to support this view have not reflected any formal behavioral theory. This paper presents a theory that justifies price stickiness, namely, that firms, fearing to upset their customers, attribute a cost to price changes. The rational expectations equilibrium of an economy with many such firms is presented, estimated with postwar U.S. data, and tested against alternative hypotheses. The results largely support the model. Furthermore, the hypothesis that prices are not sticky is rejected by U.S. data. It is often argued that prices are sticky in the United States. In particular, various empirical papers have claimed to provide evidence that supports this view. However, these empirical papers have suffered from one major common flaw. None of them estimated equations that represented a formal theory. Therefore their results are very hard to interpret.[1] In general these studies have assumed that prices adjust at a constant rate to their desired value. This paper presents evidence related to a specific model of sticky prices. In this model, prices are sticky because firms face a subjective cost to changing their prices. They are sticky in the sense that they are closer to those prices which prevailed the period before than they would be if no agent's decisions at t depended on prices at t - 1. The model incorporates a number of specific assumptions about the functional forms of the demand functions, production functions, etc. It therefore significantly reduces the set of outcomes that do not contradict it. [ABSTRACT FROM AUTHOR]

A substantial fraction of cyclical unemployment is better characterized as fluctuations of the "frictional" or "natural" rate than as deviations from some relatively stable natural rate. Shifts of employment demand between sectors of the economy necessitate continuous labor reallocation. Since it takes time for workers to find new jobs, some unemployment is unavoidable. This paper presents evidence that most of the unemployment fluctuations of the seventies (unlike those in the sixties) were induced by unusual structural shifts within the U.S. economy. Simple time-series models of layoffs and unemployment are constructed that include a measure of structural shifts within the labor market. These models are estimated and a derived natural rate series is constructed. Since the widespread acceptance of the natural rate hypothesis, economists have come to view cyclical unemployment as deviations from some relatively stable natural rate. In this paper, it will be argued that, given a definition of the natural rate based on microeconomic foundations, much of cyclical unemployment is better described as fluctuations of the natural rate itself. As much as half of the variance of unemployment over the postwar period can be attributed to fluctuations of the natural rate brought about by the slow adjustment of labor to shifts of employment demand between sectors of the economy. [ABSTRACT FROM AUTHOR]

In this paper we construct and empirically test a theory of the agricultural firm which explains the long-term growth in farm size in the United States. Typically the U.S. farm unit is a family enterprise. Consequently the ratio of the opportunity cost of farm labor to the price of machinery services determines the size of the farm operation by influencing the machine-labor ratio. Applying the model to U.S. data, we explain virtually all of the growth in the machine-labor ratio and in farm size over the 1930-70 period by changes in relative factor prices without reference to "technological change" or "economies of scale." In this paper we construct and empirically test an equilibrium theory of the size of the family farm in which three factors play the leading roles: input prices, nonfarm income, and technology. We concentrate on the first two since their introduction constitutes the major innovation of the paper. The analysis is in the nature of comparative statics, and dynamic adjustments are mentioned only in passing. Rent and land values are considered, but capital gains stemming from the recent inflationary experiences are disregarded. [ABSTRACT FROM AUTHOR]

This article uses a radically different methodology to address the question of the impacts of minimum wage laws on employment and earnings. This methodology uses the adult wage structure which exists prior to a change in the federal minimum wage to identify the members of the subminimum wage population. This allows the parameterization of the disemployment effects of the minimum wage amendment on the subminimum population and the spillover employment effects on the above-minimum population. The members of the subminimum population are found to experience considerably reduced employment probabilities and annual hours worked (conditional on employment). Some evidence of above-minimum spillover effects is also found. The paper evaluates the impact of the minimum on the earnings distribution and concludes that the burden of the minimum wage falls most severely on females. This effect on adult females is surprisingly neutral with respect to race. The greatest beneficiaries of the minimum among the adult population are union members. Once again, this effect is relatively neutral with respect to race. This paper has developed a radically different methodology for evaluating the economic impacts of minimum wage laws. It employed micro-observations to identify the wage structure which would have prevailed in the absence of a minimum wage and compared the wage predicted by this structure with the legally established minimum wage to identify the members of the subminimum population. It was found that the subminimum population is disproportionately composed of blacks, females, restricted individuals, residents of small cities, those with low education, the old, and non-union members. After the members of the subminimum population were identified, the probability of a person belonging to this population was parameterized as a probit function. The disemployment effects on the subminimum population were then identified at both the extensive margin (the probability of wor... [ABSTRACT FROM AUTHOR]

A version of the overlapping-generations model suggests that an increase in the rate of innovation alters capital formation in favor of schooling and other human capital at the expense of physical capital, and tends to reduce total savings, defined as human investments plus financial savings. The theoretical explanation suggests that relative capital formation in human beings, but not necessarily absolute capital formation, is positively associated with the degree of innovation. Analysis of U.S. time-series data supports the hypotheses advanced in the paper. [ABSTRACT FROM AUTHOR]

This paper tests the fundamental implication of classical stochastic macroeconomic models la Sargent-Lucas, namely, that conditional means of real variables are invariant with respect to monetary and fiscal policy. Using a multiple-equations technique to examine U.S. data from 1952:II to 1972:III, the classical hypothesis (which includes the natural-rate hypothesis) is rejected. While such evidence does not completely rule out the possibility of classical behavior by the economy, it provides some reassurance for those predisposed toward policy activism. [ABSTRACT FROM AUTHOR]

This paper examines the apparent contradiction of diminishing returns to labor due to procyclical real wages and labor productivity. The paper shows how this problem arises using Cobb-Douglas production function estimates for the private business sector in the United States during the period 1948-73. The difficulty with this evidence is that it ignores the cyclical pattern of factor employment. When this pattern is taken into account, the resulting estimates indicate diminishing returns to labor. More important, the results show that procyclical real wage and productivity are consistent with the theory when the cyclical behavior of factor employment is taken into account. [ABSTRACT FROM AUTHOR]

The paper shows theoretically that U.S. tax laws are designed to induce equalization of private rates of return from investment in the United States and abroad but that, unless the marginal government expenditures on investment equal tax payments by the investment, there is a difference between private and social rates of return to U.S. foreign investment. Calculations covering the period 1960-69 for developed countries and U.S. holdings of bonds, equities, and direct investment in manufacturing showed that private rates of return generally were positive but that social rates of return from investing abroad rather than domestically were strongly negative, assuming zero marginal government expenditures and disregarding all externalities. The present paper has been stimulated by this controversy over the merits of international investment in general and the effects of taxation in particular. It attempts to shed light on the issues by presenting some estimates of the after-tax rates of return yielded by some forms of U.S. asset holdings abroad during the period I960-69. In a rational decision about future U.S. policies, presumably such a rate of return should carry important weight. This paper represents a pioneering effort, and its primary aim is to sort out some theoretical issues and provide a rough first estimate. No other studies of this sort seem to exist for the United States, though the broader issues of the efficiency aspects of international taxation agreements have been studied theoretically (Kindleberger 1968; Musgrave 1969) and estimates of the subsidies as dollar flows have been prepared (Musgrave 1972). The overall welfare effects of foreign investment have received a great deal of attention, and a ready set of references to these can be found in Reddaway (1968) and Dunning (1970). Jenkins (1972, chap. 4) estimates Canada's taxation gains from foreign-owned capital in Canada. [ABSTRACT FROM AUTHOR]

This paper explores racial differences in police use of force. On nonlethal uses of force, blacks and Hispanics are more than 50 percent more likely to experience some form of force in interactions with police. Adding controls that account for important context and civilian behavior reduces, but cannot fully explain, these disparities. On the most extreme use of force—officer-involved shootings—we find no racial differences either in the raw data or when contextual factors are taken into account. We argue that the patterns in the data are consistent with a model in which police officers are utility maximizers, a fraction of whom have a preference for discrimination, who incur relatively high expected costs of officer-involved shootings. [ABSTRACT FROM AUTHOR]

This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER's TAXSIM. Variation in the income distribution across US states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects. I find that the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and that the effect of tax cuts for the top 10 percent on employment growth is small. [ABSTRACT FROM AUTHOR]

This paper asks whether pay disclosure in the public sector changes wage setting at the top of the distribution. I examine a 2010 California mandate that required municipal salaries to be posted online. Among top managers, disclosure led to approximately 7 percent average compensation declines, and a 75 percent increase in their quit rate, relative to managers in cities that had already disclosed salaries. The wage cuts were largely nominal. Wage cuts were larger in cities with higher initial compensation, but not in cities where compensation was initially out of line with (measured) fundamentals. The response is more consistent with public aversion to high compensation than the effects of increased accountability. [ABSTRACT FROM AUTHOR]

This paper documents the gender gap in performance among highskilled professionals in the United States. On the basis of widely used performance measures in law firms, we find that male lawyers bill 10 percent more hours and bring in more than twice as much new client revenue as female lawyers. The differential impact across genders in the presence of young children and differences in aspirations to become a law firm partner account for a large share of the difference in performance. We show that accounting for performance has important consequences for gender gaps in lawyers' earnings and subsequent promotion. [ABSTRACT FROM AUTHOR]

Investors value the liquidity and safety of US Treasuries. We document this by showing that changes in Treasury supply have large effects on a variety of yield spreads. As a result, Treasury yields are reduced by 73 basis points, on average, from 1926 to 2008. Both the liquidity and safety attributes of Treasuries are driving this phenomenon. We document this by analyzing the spread between assets with different liquidity (but similar safety) and those with different safety (but similar liquidity). The low yield on Treasuries due to their extreme safety and liquidity suggests that Treasuries in important respects are similar to money. [ABSTRACT FROM AUTHOR]

This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanships as a source of exogenous variation in state-level federal expenditures. We show that fiscal spending shocks appear to significantly dampen corporate investment activity. This retrenchment occurs within large and small states and is most pronounced among geographically concentrated firms. The effects are economically meaningful, and the mechanism--entirely distinct from interest rate and tax channels--suggests new considerations in assessing the impact of government spending on private-sector economic activity. [ABSTRACT FROM AUTHOR]

The paper develops a model of directed search on the job in which transitions of workers between unemployment and employment and across employers are driven by heterogeneity in the quality of firm-worker matches. The equilibrium is such that the agents' value and policy functions are independent of the endogenous distribution of workers across employment states. Hence, the model can be solved outside of the steady state and used to measure the effect of cyclical productivity shocks on the labor market. Productivity shocks are found to generate large fluctuations in workers' transitions, unemployment, and vacancies when matches are experience goods, but not when matches are inspection goods. [ABSTRACT FROM AUTHOR]

This paper constructs a model of saving for retired single people that includes heterogeneity in medical expenses and life expectancies, and bequest motives. We estimate the model using Assets and Health Dynamics of the Oldest Old data and the method of simulated moments. Out-of-pocket medical expenses rise quickly with age and permanent income. The risk of living long and requiring expensive medical care is a key driver of saving for many higher-income elderly. Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest but also benefit the rich by insuring them against high medical expenses at the ends of their lives. [ABSTRACT FROM AUTHOR]

This paper examines hours worked in continental Europe and the United States from 1956 to 2003. The empirical work establishes two results. First, hours worked in Europe decline by almost 45 percent compared to the United States over this period. Second, this decline is almost entirely accounted for by the fact that Europe develops a much smaller market service sector than the United States. A simple model of time allocation is used to understand these patterns. I find that relative increases in taxes and technological catch-up can account for most of the differences between the European and American time allocations over this period. [ABSTRACT FROM AUTHOR]

Household investment leads nonresidential business fixed investment over the U.S. business cycle. Because real business cycle theory has not been able to account for this observation, it represents a potent challenge to the view that transitory productivity disturbances are the main source of aggregate fluctuations. This paper reconciles RBC theory with the investment dynamics by extending the traditional home production model to make household capital complementary to business capital and labor in market production. Empirical evidence suggesting that household capital is a complementary input in market production is also presented. [ABSTRACT FROM AUTHOR]

This paper proposes and estimates a static transferable utility model of the marriage market. The model generates a nonparametric marriage matching function with spillover effects. It rationalizes the standard interpretation of marriage rate regressions and points out its limitations. The model was used to estimate U.S. marital behavior in 1971/72 and 1981/82. The marriage matching function estimates show that the gains to marriage for young adults fell substantially over the decade. Unlike contradictory marriage rate regression results, the marriage matching function estimates showed that the legalization of abortion had a significant quantitative impact on the fall in the gains to marriage for young men and women. [ABSTRACT FROM AUTHOR]

Theories of government spending driven by a common-pool problem in the fiscal revenues pool predict that greater districting of a political jurisdiction raises the scale of government. This paper presents evidence on this and related predictions from a cross section of city governments in the United States. The main finding is that, when other plausible determinants of government spending are controlled for, greater districting leads to a considerably greater scale of government activity. The results also show that at-large electoral systems do not, and forms of government that concentrate powers in the office of the executive do, break this relationship. [ABSTRACT FROM AUTHOR]

The paper presents empirical evidence based on the U.S. Consumer Expenditure Survey that accounting for limited asset market participation is important for estimating the elasticity of intertemporal substitution. Differences in estimates of the EIS between asset holders and non-asset holders are large and statistically significant. This is the case whether estimating the EIS on the basis of the Euler equation for stock index returns or the Euler equation for Treasury bills, in each case distinguishing between asset holders and non-asset holders as best as possible. Estimates of the EIS are around 0.3–0.4 for stockholders and around 0.8–1 for bondholders and are larger for households with larger asset holdings within these two groups. [ABSTRACT FROM AUTHOR]

This paper estimates a dynamic model of schooling attainment to investigate the sources of racial and ethnic disparity in college attendance. Parental income in the child's adolescent years is a strong predictor of this disparity. This is widely interpreted to mean that credit constraints facing families during the college-going years are important. Using NLSY data, we find that it is the long-run factors associated with parental background and family environment, and not credit constraints facing prospective students in the college-going years, that account for most of the racial-ethnic college-going differential. Policies aimed at improving these long-term family and environmental factors are more likely to be successful in eliminating college attendance differentials than short-term tuition reduction and family income supplement policies aimed at families with college age children. [ABSTRACT FROM AUTHOR]

Police checking for illegal drugs are much more likely to search the vehicles of African-American motorists than those of white motorists. This paper develops a model of police and motorist behavior that suggests an empirical test for distinguishing whether this disparity is due to racial prejudice or to the police's objective to maximize arrests. When applied to vehicle search data from Maryland, our test results are consistent with the hypothesis of no racial prejudice against African-American motorists. However, if police have utility only for searches yielding large drug finds, then our analysis would suggest bias against white drivers. The model's prediction regarding nonrace characteristics is also largely supported by the data. [ABSTRACT FROM AUTHOR]

To offer a possible interpretation for recent empirical findings on earnings growth, this paper constructs a simple model with endogenous human capital investment, a distribution of natural abilities, and unbiased technological progress. The model predicts that in the long run, average earnings within any education group will grow more slowly than average wages overall. It also predicts that average earnings in high-education groups ultimately will rise relative to average earnings in low-education groups. In the model, these processes do not imply secular increases in the degree of inequality in the overall cross-sectional distribution of earnings. [ABSTRACT FROM AUTHOR]

This paper estimates the impact of globalization on markups, and the effect of changing markups on US welfare, in a monopolistic competition model. We work with symmetric translog preferences, which allow for endogenous markups and firm entry and exit, thereby changing product variety. We find that between 1992 and 2005, US import shares rose and US firms exited, leading to an implied fall in markups, while variety went up because of imports. US welfare rose by early 1 percent as a result of these changes, with product variety contributing one-half of that total and declining markups the other half. [ABSTRACT FROM AUTHOR]

This paper analyzes the application of liability to large-scale, long-term hazards. The key features distinguishing such hazards are the long temporal separation between exposure to a hazard and disease and the large damages when injuries finally emerge. The large scale of damages creates a strong incentive to avoid liability payments, and the long temporal separation creates numerous avenues through which parties can avoid paying possible damage awards. The analysis focuses on the incentive to avoid paying damages by vertically divesting production tasks associated with serious occupational risks. Such divestiture can lower liability costs if the small firm operating the risky stage goes out of business before latent injuries emerge or has insufficient assets to pay damages and declares bankruptcy when suits are filed. The paper then presents an empirical regression analysis of small-firm entry into the U.S. economy between 1967 and 1980, the period in which liability laws were changing. The point estimate is that, ceteris paribus, liability changes appear to have led to a large increase in small corporations in hazardous sectors. Hence the empirical analysis shows widespread attempts to avoid liability by shielding assets through divestiture. [ABSTRACT FROM AUTHOR]

Many have argued that if labor income is difference stationary, the permanent income hypothesis predicts that consumption should be relatively volatile. In U.S. aggregate data, labor income is well characterized as having a unit root; however, consumption turns out to be relatively smooth. This anomaly is known as Deaton's paradox. I resolve Deaton's paradox by providing decompositions of labor income into permanent and transitory components. These preserve the univariate dynamic properties of labor income. However, when agents distinguish permanent and transitory movements in their labor income--as the rational expectations hypothesis asserts they should--the permanent income hypothesis correctly predicts the observed smoothness in consumption. [ABSTRACT FROM AUTHOR]

This paper analyzes theoretically and empirically the role and significance of occupational mobility in the labor market focusing on individuals' careers. It provides additional dimensions to the analysis of investment in human capital, wage differences across individuals, and the relationships among promotions, quits, and interfirm occupational mobility. It is shown that part of the returns to education is in the form of higher probabilities of occupational upgrading, within or across firms. Given an origin occupation, schooling increases the likelihood of occupational upgrading. Furthermore, workers who are not promoted despite a high probability of promotion are more likely to quit. [ABSTRACT FROM AUTHOR]

This paper extends Stigler and Pehzman's approach to regulation by incorporating a legislature. The model yields comparative statics results and hence testable implications. The paper then tests between two opposing approaches about regulatory agency behavior. The first assumes agencies operate independently of the legislature and hence exercise discretion; the second assumes that Congress controls agency decisions. The recent behavior of the Federal Trade Commission provides the empirical setting. Substantial evidence is found for the specific predictions of the model, including the hypothesis of systematic congressional influence over FTC decisions. In this paper, we develop a model of agency decision making based on the premise that agencies are controlled by the legislature. We argue, therefore, that to understand the genesis of agencies, as well as the stability and change in agency policy, we must understand the underlying legislative politics. With this in mind, we develop a model of legislative choice. The model characterizes the nature of policy equilibrium and, perhaps more important, it yields comparative statics results that lead to predictions about policy change. Following the theoretical development of the model, we turn to an empirical application that tests the specific assertions of our model as well as the hypothesis of legislative control. The recent changes occurring at the FTC and the relation of these changes to Congress provide the setting for our tests. We find substantial evidence for both the hypothesis of legislative control and the predictions of our specific model of Congress. [ABSTRACT FROM AUTHOR]

Noting that a suggested measure of natural resource scarcity, resource rent, is unobservable, we show that rent is linked to (observable) marginal exploration cost. A two-period model of extraction and exploration reveals that rent is equal to this cost when discovery is certain. Under risky exploration, cost data can be used to bound rent. The model also indicates how exploration uncertainty affects the competitive firm's extraction and exploration decisions. Finally, the behavior of U.S. oil and gas exploration costs suggests that these costs were rising in the postwar era, which has different implications for scarcity than indicated by other measures of scarcity. In Section II of this paper we develop a model of exploration and extraction that suggests a close link between rent and the (observable) cost of finding an additional unit of the resource. Under certain circumstances the two measures can in tact be shown to coincide. More generally, in the uncertain environment of resource exploration, cost can be used only to bound an estimate of rent. After working through these arguments we present, in Section III, some findings concerning the behavior of exploration costs for our most important extractive resources, oil and gas. It turns out that these costs have been rising (in real terms), which has rather different implications for scarcity than some earlier findings of steady or declining extraction costs and prices, and rising reserves. Although we agree with the criticisms that have been made of the measure of scarcity used in The Limits to Growth (and indeed with other criticisms of that work), our model and related casual observation do suggest that a concern for increasing scarcity may not be misplaced. [ABSTRACT FROM AUTHOR]

This paper estimates a general equilibrium model of suppressed inflation using quarterly U.S. data for the sample period 1942:IV-48:II. It finds that the price level was reduced by at least 30.4 percent and that this suppression of inflation reduced employment by at least 11.7 percent and output by at least 7.1 percent. It also finds that monetary policy could have been equally successful in combating inflation but would not have had the side effect of reducing employment and output. In this paper, I look at the effects of price controls during World War II. I find that general price controls worked in the sense that the price level and the inflation rate were substantially lower than they would have been in the absence of price controls. General price controls, however, failed to work in the sense of maintaining a high level of employment and output. I find that a tight monetary policy could have been equally successful in preventing inflation and that such a monetary policy would have resulted in at least 11.7 percent more employment and 7.1 percent more output.[1] Therefore, even if one could solve all the problems of administering general price controls, they would be no bargain. [ABSTRACT FROM AUTHOR]

In this paper I examine the ability of the monocentric models to predict the mean length of commute in urban areas. I compare actual mean commute with that which is predicted by monocentric models and find that actual commuting distance is about eight times greater than that predicted by the model. Next I calculate the volume of commuting which would result if people chose their houses and jobs at random, making no effort to economize on commuting. This overpredicts actual commuting by about 25 percent. In Section I of the paper, I establish briefly the commuting rules consumers would follow if they behaved according to the optimization strategy of the standard monocentric models. Next I show that, both under complete centralization of employment and under dispersed employment, obedience of this optimization rule will result in assignment of households to houses and jobs in such a way that aggregate commuting for the urban area is minimized, given the locations of houses and jobs. (Home and job locations are taken as given throughout the work, and I do not explore determinants of density gradients.) In Section II, I estimate the mean length of commute implied by this optimization behavior for a sample of 14 cities in 1972. I also report Annual Housing Survey (U.S. Department of Commerce, Bureau of the Census 1979, 1980) estimates of actual mean length of commute for these cities (for 1975, 1976, or 1977, depending on the city). [ABSTRACT FROM AUTHOR]