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Economics Working Papers, 1991

91-01 See Revised Version: Working Paper 92-15.

Abstract: This paper examines the effects of specific and as-valorem tariffs on the sales of each heterogeneous quality level in a perfectly competitive industry. The predictions of the analysis differ significantly from those derived for the homogenous good case. In particular, we find that the post-tariff sales for an entire industry are decreased by a tariff only when the lowest quality is imported. Also, as-valorem tariffs may actually increase the sales of some imported qualities. The welfare effects of tariffs are shown to depend on whether a country specializes in the low or high end of the quality spectrum.


"Strategic Export Policy for a Duopoly with Endogenous Quality."

Abstract: This paper develops a model of a duopoly with endogenous quality and considers the effects of specific taxes on the initial equilibrium. It is shown that a specific tax on a high quality variety increases the quality of both high and low quality varieties. However, a tax on the low quality variety increases its quality but may result in a downgrading of its high quality competitor. Optimal export policy is how to differ between countries depending on the relative quality of the countries' exports.


"Output Price Indexes for the U.S. Life Insurance Industry," published in the Journal of Risk and Insurance.

Abstract: This article derives a nonparametric index number of output prices for the life insurance industry based on the modern theory of index numbers and the economics theory of the financial firm. The method is illustrated by calculating an output price index for the U.S. life insurance industry for 1976 though 1989. The price index is then used to deflate nominal output to get an index of real output.


"The Mean-Variance CAPM without Elliptical Symmetry of Returns."

Abstract: The literature has identified only one set of conditions under which decreasingly absolute risk averse agents' n-asset portfolio behavior can be described with mean- variance analysis consistent with expected utility analysis: namely (assuming there is a risk-free asset), if the vector of risky asset returns is distributed with elliptical symmetry. This paper provides an alternate set of conditions: cubic utility (with appropriate parameter restrictions), and a distribution of returns with all returns having zero-valued third moments and third comoments. This distributional assumption is substantially less restrictive than elliptical symmetry. The implication for the mean- variance CAPM is discussed.


"Comparative Behavior of `More Risk Averse' Agents with Two Risky Assets," published in Quarterly Review of Economics and Finance.

Abstract: Hadar and Seo (1990) pointed out that Ross's (1981) definition of a "riskier" asset is unreasonable. The following theorem is proven here: With elliptically symmetric returns and two risky assets, a diversifier who is more risk averse in the Arrow-Pratt or Ross sense will hold more of the second-order stochastically dominated asset. Thus it is impossible to successfully extend Ross's analysis of utility function conditions for one agent to be " more risk averse", in a sense consistent with holding more of the riskier asset, to the case where "riskier" is defined in the conventional sense of SSD.

91-06 Georgellis, John B. and HOWARD J. WALL.

"The Fertility Effect of Dependent Tax Exemptions: Estimates for the United States," published in Applied Economics.

91-07 Cornwell, Christopher and WILLIAM N. TRUMBULL.

"Estimating the Economic Model of Crime wit Panel Data," published in Review of Economics and Statistics.

Abstract: We use panel data methods to estimate the deterrent effects of criminal justice variables such as probability and severity of punishment. Panel data allow us to control for jurisdiction specific effects which cannot be observed. We find that previous studies have overestimated the size of the deterrent effects because of their failure to control for unobserved variables. One unobserved effect is the rate that crimes are recorded. Unobserved variations in the recording rate can bias upward estimates of deterrent effects. Our method allows us to estimate deterrent effects with official data, generally the only kind of data available.


"An Evaluation of the United Nations' Human Development Index," published in Journal of Economic and Social Measurement.

Abstract: The United Nations Development Programme devised an index of human development for 130 countries by combining literacy and life expectancy information with income data. The purpose of the index is to provide a measurement of development which does not rely solely on economic indicators. The present paper improves on this notion and provides two alternative indices of human development and their corresponding development ranking. We improve on the work of the UNDP by avoiding several methodological inconsistencies of the UNDP index. Also, comparative evaluations of the three rankings are provided.


"On Protection and the Product Line," published in International Economic Review as "Protection and the Product Line: A Comment."

Abstract: This comment reconciles conflicting hypotheses about the effect of ad-valorem tariffs on the average quality of imports. Contrary to Krishna (1990), it is shown that the effect is independent of market structure. It is shown that the effect depends instead on whether or not consumers are restricted to purchasing only one variety.


"An Empirical Investigation of Outcome Reversals in n-Winner Elections," published in Public Choice.

Abstract: This paper uses thermometer ratings of public figures by a sample of voters to investigate the empirical incidences of outcomes reversals in a common n-winner voting system, in which voters must vote for n candidates and the top n vote-getters win. An outcome reversal occurs if an increases in the number of vacancies causes a winning candidate to become a loser, or if a Condorcet candidate is not among the top n vote- getters. Using these real-world rank orderings by voters, we find that these reversals occur with surprisingly high frequency.

91-11 BALVERS, RONALD J. and Jeffrey H. Bergstrand.

"The Distribution of World Wealth and Equilibrium Exchange Rates."

Abstract: Extending the closed-economy equilibrium literature, cf. Lucas (1987), this paper generates closed-form theoretical solutions for the real exchange rate, relative (per capita) consumption and relative wealth from a stochastic, dynamic, general equilibrium model of two countries' representative consumers, in the notable absence of perfect pooling. In contrast with Stockman (1980),Lucas (1982) and others, the two consumers differ fundamentally in terms of preferences, initial endowments, and consumption opportunities. The solutions offer insight into the robust cross-sectional relationship between relative per capita GDPs and relative national price levels established in Kravis and Lipsey (1983, 1987, 1988) in a manner consistent with equilibrium exchange rate theories and the productivity-differentials model of Balassa (1964). Applications of panel data from Summers and Heston (1988) to the model's reduced-form and structural equations yields economically-plausible estimates of taste parameters and suggests that the United States has had a lower rate of time preference of average that ten other OECD countries.

91-12 BALVERS, RONALD J. and Thomas Cosimano.

"Periodic Learning about Hidden State Variables," published in Journal of Economic Dynamics and Control.

Abstract: In active learning models the value function is necessarily convex in the priors. Hence, in combination with a concave objective, the decision problem in each period need not become concave so that nonconvexity problems are inherent. This paper considers and objective that unambiguously implies a quasi convex decision problem and highlights the effect of nonconvexity, on active learning. In such an environment a trigger policy for learning is optimal: When the dynamic marginal cost of uncertainty is less that the dynamic average cost the minimum amount of learning is optimal. As a result, uncertainty builds until the inequality is reversed. At that trigger point the maximum amount of learning is chosen for one period, uncertainty falls and the cycle then repeats itself.


"A Keynesian General Equilibrium Model with Competitive Firms and Rational Expectations," published in Zeitschrift für Nationalökonomie.

Abstract: A keynesian general equilibrium model is developed from Neoclassical principles. The model is based on competitive firm behavior, and optimizing agents that form expectations rationally. Firms determine their product price to maximize expected profits. Non- neutrality results follow from micro foundations that view firms as committing to a price and output level before actual demand is observed. It follows that optimal output levels are in part determined by demand conditions. In the general equilibrium framework, increases in government spending lead to welfare-improving increases in aggregate output.

91-14 BALVERS, RONALD J. and Norman C. Miller.

"Factor Demand under Conditions of Product Demand and Supply Uncertainty," published in Economic Inquiry.

Abstract: The paper develops a theory of factor demand that is implicit in the literature on the theory of the firm under uncertainty, and that encompasses the traditional neo-classical factor demand and Keynesian effective factor demand. The model allows factor demand and output to move positively with product demand, even with a constant product price. This, in turn, permits real wages to move procyclically in response to product demand shocks. In addition the model provides a new perspective on the "adding-up" problem (which posits that total factor payments exceed output if increasing returns to scale exist) and generates positive profits that are similar in spirit to those of Frank Knight.

91-15 ACHARYA, ARNAB and Michael Spagat.

"Individual Savings with Random Pricing, Rationing, Queuing, Taxation, and a Second Economy."

Abstract: We develop a model of consumption and savings in an infinite horizon economy with random quantity and queue rationing of good on a 1st economy, goods freely available at higher prices on a 2nd economy, random prices and taxation. We prove that the wealth distribution will converge to a unique invariant distribution. We study in detail a linear example.


"The Effect of Race Relations on the Migration of Blacks in the U.S."

Abstract: Empirical studies regarding migration of black persons in the United States during the 1950s and 1960s concluded that the patterns and determinants of migration for blacks were significantly different from those of whites. Surprisingly, this literature virtually ignored race relations as an important factor in explaining these differences, despite the very obvious regional institutional differences regarding race relations. Since the mid-1960s, many if the institutions affecting race relations have changed in the United States. Concurrently, patterns of migration for blacks have undergone a dramatic change. This paper taps numerous data sources in an attempt to model race relations, particularly institutionalized forms of discrimination, in a model of interstate migration. The research provides strong evidence that regional differences in race relations were a major factor in explaining the differences in migration patterns of blacks and whites during the 1960s. It also indicates that changes in race relations since the 1960s help to explain the shift of black migration patterns during the 1970s.


"The Effects of Race, Income, and the Social Welfare System on U.S. Metropolitan Mobility." combined with 91-20 and published in Urban Studies as "The Effect on the Welfare System on Metropolitan Migration in the U.S., by Income Group, Gender, and Family Structure."

Abstract: It is unclear that low-income households use mobility as effectively as do the nonpoor. To the extent that this is true, poverty and dependence on the income maintenance system are unnecessarily increased; economic growth and society's welfare are decreased. This research paper addresses some important issues regarding mobility out of metropolitan areas in the United States. The primary focus is on migration by income group, with a secondary focus on migration by racial group. Some conclusions reached in much of the previous literature on migration by race and income group are not supported by this study.

91-18 See Revised Version: Working Paper 92-03.


"Labor Supply with a Randomly Varying Wage."

Abstract: This paper considers theoretically the labor supply decision when the wage per unit of labor is independently and identically distributed across units of labor. This situation is exemplified by a salesperson on commission or a professional athlete with performance- based pay. It is more complicated than Block and Heineke's (1973) situation in which all units of labor receive the same random wage. Here the presence of uncertainty alters the income and substitution effects of the mean wage, and the degree of uncertainty itself has an ambiguous effect on labor supply.


"The Effects of Race, Income, Gender, and the Social Welfare System on Destination Choices of Migrants," combined with 91-17 and published in Urban Studies as "The Effect of the Welfare System on Metropolitan Migration in the U.S., by Income Group, Gender, and Family Structure."

Abstract: This research paper addresses some important issues regarding migration into metropolitan areas in the United States, particularly the effect of the social welfare system on migration decisions. The primary focus is on migration by income group, with a secondary focus on how race, gender, and family status relate to migration. Unlike most previous literature, the results provide only weak support for the hypothesis that social welfare benefits influence migration decisions of either poor or nonpoor households.


"Computationally Convenient Optimal Intertemporal Portfolios under Linear Constraints," published in Journal of Economics and Business.

Abstract: This paper considers the normative question of how to obtain computationally convenient optimal intertemporal portfolios under assumption which are as realistic as possible. In each period expected utility of final-period wealth is maximized, possibly subject to linear inequality constraints. Random net portfolio additions are permitted. Return distributions can evolve deterministically. Under certain assumptions the portfolio problem is shown to be computationally straight forward. Intertemporal properties of the portfolio sequence, including the time path of the risky share, are discussed.


"Consistent Conjectures and `Voluntary' Export Restraints."

Abstract: This paper considers the conditions under which a voluntary export restraint, or VER, is voluntary on the part of the foreign firm. We examine a duopoly in which conjectural variations are "consistent." In this way, conjectural variations are made endogenous and are consistent with maximizing behavior. Also, it is the structure of cost and demand, instead of exogenously determined conjectures, that determine whether or not a VER is voluntary. Our results indicate that under constant marginal costs a VER is always voluntary. Under increasing marginal costs a VER is voluntary as long as demand is not "too convex."