FACTOR SUBSTITUTION, RATIONAL EXPECTATIONS, AND THE EFFECTS OF COMMODITY PRICE SHOCKS ON EMPLOYMENT AND INVESTMENT

Within an aggregate model with three inputs to production, the paper studies the effects of an increase in the price of one of the inputs, called commodities. No restrictions are placed on the production possibility constraint, and expectations are assumed to be formed rationally. After considering the effects on the demand for the two remaining inputs, labor and capital, the paper analyzes the effects on employment under a wage rigidity constraint. A dynamic formulation is used to analyze the effects on investment, which are found to depend weakly and sometimes perversely on partial substitution parameters.     

Delivered Pricing and Merger with Demand Constraints

The consequences of a demand constraint (low willingness to pay) are examined in a model of merger by spatial price discriminators. The imposition of a demand constraint reduces the extent of inefficiency associated with merger and also eliminates the resolution of the merger paradox obtained in the earlier, unconstrained case. Moreover, with the introduction of a demand constraint, a tax on transport cost can actually improve efficiency, which is never the case in the absence of the demand constraint. Indeed, the optimal tax often eliminates all spatial price competition by creating local monopolies.     

AGGREGATE EFFECTIVE DEMAND AND SUPPLY CURVES

This paper provides a systematic and precise microeconomic basis for aggregate effective demand and supply curves. A shadow price framework permits an orderly treatment of effective demand and supply. The shadow price is the monetary amount which one would pay for the right to buy or sell one extra unit of the good at the market price. The analysis supports Keynes's approach to interest rate and investment demand theory.     

SOLVENCY REGULATION AND THE PROPERTY-LIABILITY "INSURANCE CYCLE"

Fluctuations in the supply of property-liability insurance may be exacerbated by regulation. To limit insolvencies, regulators constrain insurers against writing an excessive quantity of insurance relative to net worth. Revenue is used as a measure of aggregate quantity. In a competitive market with inelastic demand, a constraint on the ratio of revenue to net worth yields a catastrophe process for price dynamics. Indirect evidence supports the argument that the current form of solvency regulation is destabilizing.     

MANAGERS' COMPENSATION AND MISREPORTING: A COSTLY STATE VERIFICATION APPROACH

We look for the optimal shareholder-manager contract leading to high effort and truthful revelation of firm performance. This twofold incentive compatibility constraint calls for a convex compensation scheme (a fixed wage plus a stock option) coupled with a state contingent audit. In order to reduce expected verification costs, an optimal stock option plan assigns the manager a large number of options with high strike price. It is suggested that focusing the audit activity (and supervision) on the exercise of stock option packages is a better solution to the problem of misreporting than giving up stock options as a compensation tool. ( JEL D82, G30, M40, M52)     

DEMAND INDUCEMENT AND THE PHYSICIAN/PATIENT RELATIONSHIP

The physician/patient relationship is a paradigm for any expert/client relationship. The physician both diagnoses the patient's illness and recommends a treatment. This dual role gives the physician incentive to recommend treatments whose costs outweigh their medical benefits. These socially inefficient treatments correspond to the notion of "physician-induced demand." The level of inducement chosen by the physician is shown to depend on the price and potential medical benefits of treatment and the relative diagnostic skills of physician and patient. This model offers several testable hypotheses, some of which are confirmed by related studies.     

ISLANDS, INDEXATION AND MONETARY POLICY

This paper develops a synthesized macroeconomic model that incorporates the local-global informational asymmetries of an "islands" economy into a setting characterized by endogenous wage indexation. In such an economy, agents are unable both to filter out the separate influences of demand and supply shocks on observed output prices and to distinguish between the separate price effects of local and aggregate disturbances, so that optimal wage indexation depends upon both the variances of supply and demand disturbances and the information-conditioned forecasts of agents. As a result, optimal monetary policy generally depends upon the variances of local and aggregate supply and demand.     

FAMILY BEQUESTS AND THE DERIVED DEMAND FOR HEALTH INPUTS

A family investment model whereby parents allocate resources among their own consumption, health investments and financial bequests to children is specified and used to develop hypotheses which are tested on cross section data. As predicted by the model, the demand for physician visits for young children is found to 1) depend on family income only up to some level ($10,000 in 1969 $ in this case), 2) increase with maternal education, and 3) vary with price measures and family size, There is also evidence that greater health investments in young children pay off in fewer severe illnesses in young adulthood.     

ON THE INFREQUENT ADJUSTMENT OF PRICE BY FIRMS

Many firms change price no more than twice a year. This phenomenon is readily explained by very small price adjustment costs, and the fact that the firm's rate of profit is often insensitive to deviations in the interval between price changes from its optimal level. As a result, firms which change price only once or twice a year may earn almost as much profit as firms that adjust price optimally. This refutes the standard objection that price adjustment costs are too small to matter. The argument does not require extreme assumptions about the flatness of the firm's profit function.     

DURABILITY, MAINTENANCE AND THE PRICE OF USED ASSETS

This paper considers assets whose service flow decays at a rate determined by built-in durability and the level of maintenance. A cost minimization model determines optimal durability and maintenance and shows how these variables respond to changes in interest rates, the price of maintenance, and the cost of new assets. The price of old assets adjusts so that the cost of services from both old and new assets is the same. The model provides a framework for analyzing data on automobile scrapping rates and repair expenditures. Data for postwar United States show that scrapping rates are sensitive to the price of repairs relative to the price of new cars. The amount of repairs per car also responds to the relative repair price .     

HEALTH CARE, INSURANCE, AND THE CONTRACT CHOICE EFFECT

This article explores the interdependence between the individual consumer's demand for medical care and choice of health insurance coverage, with emphasis on its implications for demand behavior and empirical analysis. We show that an increase in the price of medical care has two effects on demand, the usual response of reduced quantity demanded and a health insurance contract choice effect resulting from the consumer's incentive to change insurance plan. The contract choice effect, widely neglected in studies of medical care demand, alters both the quantitative and qualitative predictive properties of the consumer's demand for medical services. (JEL D11, D81, I11 )     

THE U.S. LABOR INCOME SHARE AND AUTOMATION SHOCKS

The causes and consequences of the 1964–2016 swings in the U.S. labor income share/labor share (LS) are parsed through the lens of a structural model estimated on aggregate and LS series jointly. Where conventional models fall short, the present model yields a counter-cyclical LS unconditionally and in response to demand and monetary policy shocks, as well as a small wage pro-cyclicality, via moderate wage indexation. Shifts in automation, workers' market power, investment efficiency, and the relative price of investment account for 54%, 24%, 6%, and 4% of LS fluctuations, respectively. Automation shocks explain the lion's share of the post-2007 cyclical LS tumble and 11% of output cycles, and generate a distinctive counter-cyclical labor response. (JEL E32, E25, E52)     

SPATIAL COMPETITION AND THE PRICE OF COLLEGE

This article provides the first evidence that universities compete directly on price, and that the market for students depends on the proximity of competitors. Exploiting detailed data from private U.S. universities, price competition is tested by introducing geographic proximity into a spatial-autoregressive tuition model. Standard spatial models show that list and net tuition are inversely related to distance between institutions, consistent with price competition in higher education. An extension to the spatial-econometrics literature relaxes a constraint that estimated spatial relationships are common across all observations, implying that spatial effects differ across qualitative classes of institutions . ( JEL C21, I2, L11)     

MENTAL ILLNESS AND THE DEMAND FOR ALCOHOL, COCAINE, AND CIGARETTES

This article estimates the effect of mental illness on demand for addictive substances, allowing for structural endogeneity and simultaneity between mental illness and addictive consumption. Results show that individuals with a history of mental illness are 26% more likely to consume alcohol, 66% more likely to consume cocaine, and 89% more likely to consume cigarettes. This high-participation group is also price-responsive, although their price elasticities differ somewhat from those without mental illness. The results provide added justification for higher taxes and supply reduction activities. Furthermore, subsidizing the treatment of mental illness can reduce addictive consumption.(JEL I1 )     

STRATEGIC INFORMATION DISCLOSURE: THE CASE OF MULTIATTRIBUTE PRODUCTS WITH HETEROGENEOUS CONSUMERS

We examine the incentives for firms to voluntarily disclose otherwise private information about the quality attributes of their products. In particular, we focus on the case of differentiated products with multiple attributes and heterogeneous consumers. We show that there exist certain configurations of consumers' multidimensional preferences under which a firm, no matter whether producing a high‐ or low‐quality product, may choose not to reveal the quality even with zero disclosure costs. The failure of information unraveling arises when providing consumers with more information results in more elastic demand, which triggers more intensive price competition and leads to lower prices and profits for competing firms. As a result, the equilibrium in which disclosure is voluntary may diverge from that in which disclosure is mandatory. (JEL L15, L5)     

PRODUCT DIVERSITY,DEMAND STRUCTURES,AND OPTIMAL TAXATION

This article studies optimal taxation in a general equilibrium macroeconomic model with endogenous entry. We compare the constant elasticity of substitution (CES) model to three alternative demand structures: oligopolistic competition in prices, oligopolistic competition in quantities, and translog preferences. Our economy is characterized by two distortions: a labor distortion due to the misalignment of markups on goods and leisure, and an entry distortion due to the misalignment of the consumer surplus effect and the profit destruction effect of entry. The two distortions interact in determining the wedge between the market‐driven and optimal level of product diversity. We show how optimal labor and entry taxes depend on the prevailing demand structure, the nature and size of entry costs, and the degree of substitutability between goods. (JEL E22, E61, E62)     

STOCHASTIC INFLATION AND THE OPTIMAL POLICY OF PRICE ADJUSTMENT

This paper analyzes the optimal policy of price adjustment for a monopolistic firm in the presence of stochastic inflation. It shows that an increase in the expected rate of inflation or in the cost of price adjustment leads to an increase in the initial real price and a decrease in the terminal real price in each period with a fixed nominal price. It also shows that the effects of increased riskiness of inflation are ambiguous.     

NOMINAL COSTS AND THE DEMAND FOR REAL TRANSACTIONS BALANCES

The standard specification of constant real transactions costs assumes that over the sample period transactions costs move in lock-step with the GNP deflator; our model assumes that transactions costs move negligibly compared to the GNP deflator. That is, nominal transactions costs are assumed constant here rather than real transactions costs as in other estimates of money demand. We find with this nominal-transactions-cost specification that the real money demand function is more stable in terms of the stability of the coefficients and the accuracy of out of sample predictions than indicated by earlier studies.     

THE NEAR OPTIMALITY OF MARK-UP PRICING

Mark-up pricing policies result in a loss of profits compared to marginal pricing behavior. These losses, however, are often very small, even for large changes in the money supply. But by adopting a simple pricing rule the firm does not have to forecast the future, and avoids the informational and computational costs required to determine the profit maximizing price each period. Thus, even if these costs are small, mark-up pricing policies may be optimal, or approximately so, at least for some firms. In a macro model this is likely to imply large monetary non-neutralities.     

A MODEL OF OPTIMAL PLANT SIZE WITH AN APPLICATION TO THE DEMAND FOR COGNITIVE ACHIEVEMENT AND FOR SCHOOL SIZE

A model of optimal plant size is developed which predicts that 1) plants experience increasing returns to in-plants inputs, 2) the relative price of plant output is greater in rural areas than in urban areas, and 3) plants are larger in urban areas than in rural areas. The model's predictions appear to be consistent with behavior in a number of consumer services (e. g., grocery, movie, and library services). These predictions are more rigorously tested and are strongly supported when demand functions for cognitive achievement and for school size are estimated. These regressions also lend support to the quality-quantity model of fertility.