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1998

Economics Working Papers, 1998

98-01 REECE, WILLIAM S. and RUSSELL S. SOBEL.

"Price Discrimination under Capacity Constraints."

Abstract: This paper examines the firm's profit maximizing price discrimination problem in the face of capacity constraints. The addition of a capacity constraint significantly complicates the price discrimination model. Airlines, hotels, and universities are examples of firms that practice price discrimination. In each of these cases, the firm's short-run problem is not a decision about production levels but is one of allocating a fixed number of seats, rooms, or other output units among customers. We show that the conditions for short-run profit maximization are very different under these circumstances than in the standard model in which the firm is not constrained by short-run capacity.

98-02 SOBEL, RUSSELL S. and GARY A. WAGNER .

"On the Determinants of Congressional Bill Sponsorship and Voting Behavior."

Abstract: This paper analyzes two new data sets that measure the total amount of spending reflected in each legislator's aggregate voting record and his or her bill sponsorship activities. We contrast the results from these new measures of aggregate legislative behavior with identical models for legislators' votes on specific bills. We also provide the first exploration of differences in the determinants of the bill sponsorship and voting behavior of legislators. Tests are performed to see whether significant differences exist between Republicans and Democrats. Finally, the bill sponsorship data provide a unique opportunity to explore the presence of vote trading in Congress.

98-03 GARRETT, THOMAS A.

"The Impact of Video Lottery on Parimutuel Racing Revenues."

Abstract: Parimutuel racetracks across the country have experienced significant declines in revenues over the past several decades. Several racetracks have implemented video lottery gambling in an attempt to slow or reverse this decline in racing revenues. This paper examines the impact of video lottery on parimutuel dog racing revenues at two racetracks in West Virginia. Using time series techniques, the results suggest that while video lottery has improved parimutuel racing in the short run, the downward trend of racing revenue continues. This continued decrease in racing revenues has important tax and revenue implications for both track owners and the state.

98-04 GARRETT, THOMAS A.

"Determinants of State Lottery Adoption."

Abstract: This paper examines the effects constituency characteristics and legislative behavior have on the probability of state lottery adoption. Because legislators and their constituents rarely vote on the same issue, the case of state lottery adoption allows a direct examination into legislative behavior since both the voter and the legislator voted on the issue of lottery adoption. New evidence is provided on the significant characteristics considered by legislators and voters when voting on lottery adoption. In addition, the methodology not only permits a direct test for several theories of legislative behavior, the results also support the hypothesis of legislative shirking.

98-05 GARRETT, THOMAS A.

"The Impact of Video Lottery on Parimutuel Racing Revenues."

Abstract: Parimutuel racetracks across the country have experienced significant declines in revenues over the past several decades. Several racetracks have implemented video lottery gambling in an attempt to slow or reverse this decline in racing revenues. This paper examines the impact of video lottery on parimutuel dog racing revenues at two racetracks in West Virginia. Using time series techniques, the results suggest that while video lottery has improved parimutuel racing in the short run, the downward trend of racing revenue continues. This continued decrease in racing revenues has important tax and revenue implications for both track owners and the state.

98-06 CUSHING, BRIAN.

"The Influence of Race Relations on Destination Choices of Black-American Migrants during the Civil Rights Era."

Abstract: The migration of African-Americans out of the South between 1940 and 1970 was one of the most remarkable migration flows in U.S. history. Much of the nonstatistical literature has concluded that economic factors were the dominant determinants of this "Great Migration," but some have suggested that the effect of economic factors may be overstated and that noneconomic factors, such as race relations, played an important role. Empirical studies regarding migration of blacks 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. This literature virtually ignored nontraditional factors, such as race relations, in explaining these differences, despite the regional institutional differences regarding race relations. Since the 1960s, many of the institutions affecting race relations have changed in the United States. This was followed closely by a change in patterns of black migration, including modest net inmigration to the South. This paper abstracts from the decision to outmigrate, focusing on the extent to which race relations distorted destination choices of black migrants. The research provides evidence that regional differences in race relations are crucial for explaining the differences in migration patterns of blacks and whites during the 1950s and 1960s. Distortion of black migration patterns during the 1950s and 1960s could be an important factor contributing to the current socioeconomic crisis in northern urban ghettoes.

98-07 CUSHING, BRIAN.

"Will Interstate Differences in Restrictions on Receipt of Public Assistance Affect Migration of the Poor? Some Evidence from the Past."

Abstract: Under the more decentralized welfare system, states will now have greater responsibility for decisions regarding eligibility, benefit levels, and program rules. This has renewed interest in how interarea differences in welfare programs influence migration of the poor. While scholars and policy-makers have studied the relationship between welfare benefit differentials and migration extensively, they have not considered how interarea variations in eligibility criteria and other program rules might affect migration of the poor. This research uses a sample of large metropolitan areas to study the effect of eligibility criteria on migration of the poor.

98-08 CUSHING, BRIAN.

"Migration and Persistent Poverty in Rural America: A Case Study from Central Appalachia."

Abstract: In 1964, the President's Appalachian Regional Commission (PARC) concluded that "'real' Appalachian standards of living are below national norms. Three decades later, Central Appalachia, particularly its nonmetropolitan portion, continues to be severely impoverished and still stands as "a region apart." This study focuses on a six-county isolated, rural area that is a classic example of long-term economic distress in Central Appalachia. It analyzes the patterns of in- and outmigration for the area during the 1980s, along with the resulting demographic changes between 1980 and 1990. It then looks at the characteristics of the region's poor population. The paper finishes by discussing how migration and demographic characteristics likely influenced economic prospects in the region during the 1990s and the implications of this for the success of recent welfare reform initiatives, which assume that in the absence of the welfare system crutch, individuals will either find employment locally or relocate to areas where employment opportunities are available.

98-09 ZHENG, BUHONG and BRIAN CUSHING.

"Distribution-Free Statistical Inferences for Testing Marginal Changes in Inequality Indices."

Abstract: Marginal change in income inequality refers to the change in inequality of the same income distribution due to an exogenous shock such as new government income policies or an endogenous change such as wives' participation in the labor force. In this paper we show that the estimates of marginal changes in inequality for the Gini and generalized entropy indices are asymptotically normally distributed, and the standard errors can be consistently estimated without any prior knowledge of the underlying distribution. Using the 1990 U.S. Census PUMS data, we apply the inference procedures to test marginal changes in U.S. married family income inequality due to the participation of wives in the labor force. We confirm the inequality-reducing finding of previous empirical studies. Wives' participation in the labor force, however, has differential impacts upon family income inequality within different population subgroups classified by husbands' earnings.

98-10 MITCHELL, DOUGLAS W.

"AN ANALYTIC RICCATI SOLUTION FOR TWO-TARGET DISCRETE-TIME CONTROL."

Abstract: This paper analytically solves the Riccati equation of discrete optimal control with two targets and one tool. This is accomplished by reducing the problem to a nonlinear univariate dynamic equation; this can be solved by a suitable transformation of variable. When the original system is non-controllable but possibly stabilizable, the scalar dynamics degenerate to a linear equation without transformation. One case of the latter can be generalized to arbitrary numbers of tools and targets. Beyond its direct application to two-target economic problems, the present approach may provide insight toward the eventual solution of the general Riccati equation.

98-11 DODSON III, MARVIN E.

"The Optimum Demand for Immigrants A Leviathan Approach."

Abstract: Maximization of fiscal return or budgetary surplus is the underlying assumption of the Leviathan model of government behavior (Brennan and Buchanan, 1977, 1978, 1980). Leviathan is a public choice theory that describes and attempts to predict government action. According to the Leviathan model, the policy maker or bureaucrat ignores any social welfare and strives to maximize the budgetary surplus, thereby improving his own situation. The theoretical model proposed here uses the Leviathan approach to explain immigration policy in the United States. In addition, this approach provides a framework for describing the optimum number of immigrants to admit in each period given the Leviathan motive. This model is not proposed as a superior approach to immigration policy, only another alternative. Shea and Woodfield (1997) employ the benevolent-dictator approach to immigration policy. Therefore, any inconsistencies between their results and these may provide interesting implications that follow directly from the assumptions about how government behaves. This approach and the resulting model of immigration policy provide several contributions to the existing theoretical literature on immigrant demand. First, I introduce the reality of subsidies in the host country. The fact that subsidies and unemployment exist in the host country, makes their inclusion in any policy analysis necessary. Second, I treat immigrants as an investment, where expected returns and up front training costs exist. This displays more clearly the principle that immigrants can be beneficial to the host country. Third, the addition of flexibility in this model is important to the ongoing public debate concerning immigration policy. Fourth, I examine the demand for unskilled immigrants directly, an approach so far untouched in the literature. Fifth, I add to the literature that compares the resulting skill distribution of immigrants when a total limit exists on immigration with the scenario where no such limit exists. Sixth, the possibility of nonpecuniary benefits with regard to immigration are considered. The results of the model imply that the optimum demand for both categories is greater than zero, when certain conditions are met. Contrary to Shea and Woodfield, under these conditions the demand for unskilled immigrants does not depend upon their bundling with skilled immigrants. In fact, demand for unskilled immigrants depends upon the probability of employment in the unskilled labor market, the magnitude of subsidies and the amount of spending necessary in training. The model also produces a rule for policy with regard to subsidies that meets the conditions for positive unskilled immigrant demand.

98-12 DODSON III, MARVIN E.

"Does the Federal Minimum Wage Produce Large Employment Effects in Low Wage Areas? Evidence from West Virginia."

Abstract: Most minimum wage literature focuses on teenage employment because they are generally paid at the minimum wage level or nearer to this target than the majority of adults. Instead of a demographic group, the low wage area theory of the minimum wage states that a geographical group or area that receives wages at or close to the minimum wage should also display evident negative employment affects. Additionally, any individual industry within a low wage area that pays a large portion of its employees nearer to the minimum wage should also display these negative affects. West Virginia qualifies as a low wage area compared to the nation. Further, several industries within the state display large wage gaps relative to the respective national average. In this study the following three hypotheses are tested. First, that total employment in West Virginia will display significant reductions due to the minimum wage. Second, these negative impacts will also vary across sub-regions within the state according to the wage gap between the region and the U.S. average. Third, these negative employment affects will be more pronounced in industries where the average industry wage is lower relative to the average industry wage for the United States. Using data on West Virginia counties and pooling across six years, employment elasticities are estimated from a conditional factor demand equation. Both total and SIC (2 digit) county employment are analyzed. In addition labor force participation is considered. Several specifications of the factor demand function are tested in an attempt to control for factors other than the wage and output level and isolate the elasticity with respect to the minimum wage. This study indicates that total employment in West Virginia counties is impacted by the minimum wage within the range of accepted estimates for teen employment. Further, if this impact is evident for total employment in West Virginia the impact on teenage employment may be more pronounced than the national estimates for that age group. These findings provide support for the low wage area theory of minimum wage affects.

98-13 DODSON III, MARVIN E.

"Welfare or Similarly Born Immigrants? Further Evidence on the Determinants of Location Choices of NewUnited States Immigrants."

Abstract: The locational incentive of welfare payments with regard to new United States immigrants is the focus of this study. There have been two recent studies that investigate the same incentive, but they have resulted in opposing findings. Buckley finds that AFDC payments are a positive and significant factor in an immigrant's locational decisions. On the other hand, Zavodny finds that the presence of immigrants with similar nativity is the deciding factor. Buckley examines immigrants according to their admission category and state of intended residence, implying that there are differences across these admission categories. Unfortunately, Buckley's investigation lacks an important finding found in Zavodny's study. According to Zavodny, an immigrant's locational choice is determined mainly by the presence of immigrants with the same country of birth in a particular state, not the total number of immigrants as examined by Buckley. However, she does not investigate differences across admission categories. The logical next step is to examine the varying classes of immigrants using the procedure established by Zavodny. These findings may provide more insight into the argument made by Buckley. Specifically, the United States may be encouraging the immigration of less skilled, more publicly supported immigrants under the current legislation. If this is the case, legislation that encourages skilled and marketable immigrants to apply may be needed for the United States to be a viable competitor in the market for immigrants. This study reexamines the question of locational choice, using elements from both of the above investigations. Using unpublished cross tabulated INS data, the number of immigrants admitted under different classifications, from a specific country into each state is regressed on state macroeconomic factors, state welfare generosity, and the number of foreign born persons from the same country of birth in each state. This process is completed for immigrants admitted under three different categories; family sponsored, direct relative, and employment based. The fifteen source countries that make up the bulk of immigration in 1991 and the 48 continental states are the observational units. This provides a total sample of 720 observations for each admission class. In addition, the previous literature is extended by examining the difference in expected income between each source country and the intended state of residence. The bulk of the demographic / mobility literature addresses the difference between the expected income in the source country or area and the new location as the prime motivation for immigration. This difference may pick up some of the economic "pushes" associated with immigration. This extension of the literature is accomplished by replacing the state income variable with the expected difference in income associated with each state.

98-14 MITCHELL, DOUGLAS A.

"An Analytic Riccati Solution For Two-Target. Discrete-Time Control."

Abstract: This paper analytically solves the Riccati equation of discrete optimal control with two targets and one tool. This is accomplished by reducing the problem to a nonlinear univariate dynamic equation; this can be solved by a suitable transformation of variable. When the original system is non-controllable but possibly stabilizable, the scalar dynamics degenerate to a linear equation without transformation. One case of the latter can be generalized to arbitrary numbers of tools and targets. Beyond its direct application to two-target economic problems, the present approach may provide insight toward the eventual solution of the general Riccati equation.

98-15 DAVIES, ANTHONY and KAJAL LAHIRI.

"Reexamining the Rational Expectations Hypothesis Using Panel Data on Multi-Dimensional Forecasts."

Abstract: In this article, we develop a general econometric framework for analyzing the ASA-NBER expectations surveys of professional forecasters. The framework allows for a complex correlation among forecast errors made by different individuals, for different targ

98-16 DAVIES, ANTHONY, RAJDEEP GREWAL and THOMAS CLINE .

"A General Framework for Modeling the Consumer Choice Process and Explaining Context Effects."

Abstract: In this article, we develop a general framework for analyzing the consumer choice process. The framework models the consumer choice process as a function of six fundamental principles of consumer behavior. We show that these six principles jointly explain

98-17 BALVERS, RONALD, YANGRU WU and ERIK GILLILAND

"Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies."

Abstract: For U.S. stock prices, evidence of mean reversion over long horizons is mixed, possibly due to the lack of a reliable long time series. Using additional cross-sectional power gained from national stock-index data of eighteen countries during the 1969-1996 period, we find strong evidence of mean reversion in relative stock-index prices. Results for US$ stock-index prices with reinvested dividends suggest that the speed of reversion is well approximated as constant across countries, and imply a half life of 3 to 3½ years. Parametric contrarian investment strategies that exploit mean reversion across national stock indices outperform the buy-and-hold and standard contrarian strategies.

98-18 WAGNER, GARY and TOD S. PORTER.

"Assessing the Location Effects of School Districts in the Determination of Beginning Teacher Salaries: Evidence from Ohio."

Abstract: This paper provides a new treatment of the role of district location in models of the determination of teacher salaries by incorporating the methodology of spatial econometrics. Through the use of a location variable we examine how average beginning teacher salaries in sixty-one school districts in the Cleveland region are influenced by other districts? salaries in the region. Depending on the specification of the location variable, we find that a $1 increase in average beginning teacher salaries from the districts with whom a district interacts generates an own-salary increase in average teacher salaries ranging from $0.53 to $1.08. We find that the correct specification of the location variable incorporates both the size and distance of neighboring districts.

98-19 BANDYOPADHYAY, SUBHAYU, and SUDESHNA C. BANDYOPADHYAY.

"Illegal immigration and capital mobility: Enforcement, income distribution and welfare."

Abstract: We analyze the effects of capital mobility on: (1). the efficient policy mix (of internal and border enforcement) and the effectiveness of enforcement in achieving a target illegal immigration level; (2). national income maximizing enforcement policy in the presence of an income distribution target. Under capital mobility enforcement is more effective in achieving a desired level of illegal immigration because the legal wage in the host nation is fixed by the international price of capital. A rise in enforcement simply reduces the expected illegal wage and the incentive to migrate. In contrast, under capital immobility, enforcement raises the host country legal wage. This factor increases the incentive to migrate and thus greater enforcement is necessary to achieve a target immigration level. Under capital mobility, income distribution can be unbundled from the immigration control objective. A subsidy to capital locating within domestic borders achieves a desired legal wage. However, the capital market is distorted by lowering the domestic return on capital below the international rate. This justifies a more restrictive enforcement policy which leads to capital outflows that reduce the capital market distortion. Although only internal enforcement can be optimal (national income maximizing) without the subsidy, both border and internal enforcement may be justified in its presence.

98-20 RHINE, RUSSELL.

"Economies of Scale and Optimal Capital In Nuclear and Fossil-Fuel Electricity Production."

Abstract: This essay tests for economies of scale in the electric utility industry using a five year panel data set that includes both fossil fuel and nuclear fuel electricity generation. In addition, a variable cost function is used as opposed to a total cost function because the assumption of cost minimizing production inputs is not met. That is, electric utilities are overcapitalized. Therefore, the optimal capital stock is estimated, which is significantly less than the actual capital stock, and an estimate of economies of scale is generated. Evidence suggests that firms are operating on the negatively sloped portion of the long-run average cost curve near the trough. This indicates either slight economies of scale or no economies of scale. The results also shows that over the sample period the industry is moving away from a downward sloping long-run cost curve toward a flat cost curve.