# Review of Economic Studies

Published by Oxford University Press (OUP)

Online ISSN: 1467-937X

Print ISSN: 0034-6527

Published by Oxford University Press (OUP)

Online ISSN: 1467-937X

Print ISSN: 0034-6527

Publications

An optimal policy is derived for a sequential family size decision making problem. It is shown that households will follow
a stopping rule, replacing dead children until an optimal number of living children is reached. The behavioural equation derived
from the optimal policy is then used to explain retrospective household data collected in Bangladesh in 1977–1978. This data
provides some support for the underlying hypothesis.

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In this paper, we decompose city size wage premia into various components. We base these decompositions on an estimated on-the-job
search model that incorporates latent ability, search frictions, firm-worker match quality, human capital accumulation, and
endogenous migration between large, medium, and small cities. Counterfactual simulations of the model indicate that variation
in returns to experience and differences in wage intercepts across location type are the most important mechanisms contributing
to observed city size wage premia. Variation in returns to experience is more important for generating wage premia between
large and small locations, while differences in wage intercepts are more important for generating wage premia between medium
and small locations. Sorting on unobserved ability within education group and differences in labour market search frictions
and distributions of firm-worker match quality contribute little to observed city size wage premia. These conclusions hold
for separate samples of high school and college graduates.

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This paper is an econometric examination of female fertility and labour-supply decisions. Based upon utility-maximizing choice,
fertility and labour-supply demand functions are specified and estimated jointly with a wage-accumulation equation. A main
contribution of the paper is the demonstration of a maximum-likelihood estimation method which avoids the main selectivity-bias
problems in this area.

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The economic welfare of a community is affected by policies that determine both the rate of capital accumulation and the rate of growth of population. The optimum size of population at any point is time will depend on the size of the existing capital stock and the optimum rate of savings will depend on the existing number of people. Consequently, in this sense, a population policy cannot be developed without a concurrent savings policy. The criterion of optimality that will be used is the ma ximization of the total discounted welfare of all generations from now to infinity. The problem will be to select that rate of savings and that size of population at every moment which will achieve this maximum welfare if, in fact, a maximum exists. An inquiry is made into the existence of an optimum policy under various circumstances. An attempt is made to evaluate the consequences of various ethical beliefs.

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A mathematical model is established whereby optimal accumulation paths of population and the economy can be figured when the basic feature of population dynamics, age dependence, is taken into account. This model series links 2 previously separate disciplines and literatures - i.e., formal policy dealing with the dynamics of age and time. An integral-equation control theory is utilized. Recognition of age structure in analyzing fertility trends is important at both macro- and microeconomic levels. The present model was constructed by embedding an age-disaggregated population in a simple economic growth model where the fertility level and rate of savings can both be influenced by government policy. Such policy should balance the lifetime value of births and capital against the social costs necessary to create them. One the problem has been defined and a dynamic theory developed, optimum static theories can be establihsed where the variables are held constant over time.

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How can we know in advance whether simplifying assumptions about beliefs will make a difference in the conclusions of game-theoretic models? We define critical types to be types whose rationalizable correspondence is sensitive to assumptions about arbitrarily high-order beliefs. We show that a type is critical if and only if it exhibits common belief in some non-trivial event. We use this characterization to show that all types in commonly used type spaces are critical. On the other hand, we show that regular types (types that are not critical) are generic, although perhaps inconvenient to use in applications. Copyright 2011, Oxford University Press.

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The abstract for this document is available on CSA Illumina.To view the Abstract, click the Abstract button above the document title.

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Estimated U.S. M1 demand functions appear unstable, regularly “breaking down,” over 1960–1988 (e.g. missing money, great velocity
decline, M1-explosion). We propose a money demand function whose arguments include inflation, real income, long-term bond
yield and risk, T-bill interest rates, and learning curve weighted yields on newly introduced instruments in M1 and non-transactions
M2. The model is estimated in dynamic error-correction form; it is constant and, with an equation standard error of 0–4%,
variance-dominates most previous models. Estimating alternative specifications explains earlier “breakdowns,” showing the
model's distinctive features to be important in accounting for the data.

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This paper addresses two questions: What accounts for the gender gap in labour-market outcomes? What are the driving forces
behind the changes in the gender labour-market outcomes over the period 1968–1997? It formulates a dynamic general equilibrium
model of labour supply, occupational sorting, and human-capital accumulation in which gender discrimination and an earnings
gap arise endogenously. It uses this model to quantify the driving forces behind the decline in the gender earnings gap and
the increase in female labour-force participation, the proportion of women working in professional occupations, and hours
worked. It finds that labour-market experience is the most important factor explaining the gender earnings gap. In addition,
statistical discrimination accounts for a large fraction of the observed gender earnings gap and its decline. It also finds
that a large increase in aggregate productivity in professional occupations plays a major role in the increase in female labour-force
participation, number of hours worked, and the proportion of females working in professional occupations. Although of less
importance, demographic changes account for a substantial part of the increase in female labour-force participation and hours
worked, whereas home production technology shocks do not.

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This paper addresses two questions: What accounts for the gender gap in labour-market outcomes? What are the driving forces behind the changes in the gender labour-market outcomes over the period 1968-1997? It formulates a dynamic general equilibrium model of labour supply, occupational sorting, and human-capital accumulation in which gender discrimination and an earnings gap arise endogenously. It uses this model to quantify the driving forces behind the decline in the gender earnings gap and the increase in female labour-force participation, the proportion of women working in professional occupations, and hours worked. It finds that labour-market experience is the most important factor explaining the gender earnings gap. In addition, statistical discrimination accounts for a large fraction of the observed gender earnings gap and its decline. It also finds that a large increase in aggregate productivity in professional occupations plays a major role in the increase in female labour-force participation, number of hours worked, and the proportion of females working in professional occupations. Although of less importance, demographic changes account for a substantial part of the increase in female labour-force participation and hours worked, whereas home production technology shocks do not.

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“Monte Carlo experimentation in econometrics helps ‘solve’ deterministic problems by simulating stochastic analogues in which
the analytical unknowns are reformulated as parameters to be estimated.” (Hendry (1980)) With that in mind, Monte Carlo studies
may be divided operationally into three phases: design, simulation, and post-simulation analysis. This paper provides a guide
to the last of those three, post-simulation analysis, given the design and simulation of a Monte Carlo study, and uses Pesaran's (1974) study of statistics for testing non-nested hypotheses
to illustrate the techniques described. A statistic is derived for testing for significant deviations between the asymptotic
and (observed) finite sample properties. Further, that statistic provides the basis for analysing discrepancies between the
finite sample and asymptotic properties using response surfaces. The results for Pesaran's study indicate the value of asymptotic
theory in interpreting finite sample properties and certain limitations for doing so. Finally, a method is proposed for adjusting
the finite sample sizes of different test statistics so that comparisons of their power may be made. Extensions to other finite
sample properties are indicated.

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The internal market in Europe will greatly increase the international mobility of resources. How will this affect fiscal policy
in different countries? We consider taxation of capital in a two-country model, where a democratically-chosen government in
each country chooses tax policy. Higher capital mobility changes the politico-economic equilibrium in two ways. On the one
hand, it leads to more tax competition between the countries: this “economic effect” tends to lower tax rates in both countries.
On the other hand, it alters voters' preferences and makes them elect a different government: this “political effect” offsets
the increased tax competition, although not completely.

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This paper considers the role of foreign investors in developed country equity markets. It presents a quantitative model of
trading that is built around two new assumptions about investor sophistication: (i) both the foreign and domestic populations contain investors with superior information sets; and (ii) these knowledgeable investors have access to both public equity markets and private investment opportunities. The model
delivers a unified explanation for three stylized facts about U.S. investors' international equity trades: (i) trading by U.S. investors occurs in waves of simultaneous buying and selling; (ii) U.S. investors build and unwind foreign equity positions gradually; and (iii) U.S. investors increase their market share in a country when stock prices there have recently been rising. The results suggest
that heterogeneity within the foreign investor population is much more important than heterogeneity of investors across countries.

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The influential Krugman-Flood-Garber (KFG) model of balance of payment crises assumes that a fixed exchange rate is abandoned
if and only if international reserves reach a critical threshold value. From a positive standpoint, the KFG rule is at odds
with many episodes in which the central bank has plenty of international reserves at the time of abandonment. We study the
optimal exit policy and show that from a normative standpoint, the KFG rule is generally suboptimal. We consider a model in
which the fixed exchange rate regime has become unsustainable due to an unexpected increase in government spending. We show
that when there are no exit costs, it is optimal to abandon immediately. When there are exit costs, the optimal abandonment
time is a decreasing function of the size of the fiscal shock. For large fiscal shocks, immediate abandonment is optimal.
Our model is consistent with evidence suggesting that many countries exit fixed exchange rate regimes with still plenty of
international reserves in the central bank's vault.

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We consider a class of models that generalizes the popular Mixed Proportional Hazard (MPH) model for duration data: the Generalized
Accelerated Failure-Time (GAFT) model. We show that the GAFT model is non-parametrically identified (up to a normalization).
We then reconsider the non-parametric identification of the MPH model. We show that the class of MPH models is not closed
under normalization. This implies that a finite mean of the mixing distribution is a necessary condition for (non-parametric)
identification of the MPH model. It is impossible to test this hypothesis without imposing arbitrary restrictions on the base-line
hazard and/or the regression function.

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This paper is concerned with the design of non-cooperative game forms for economic decision problems. A decision problem is
presented which admits non-dictatorial game forms with the following properties:
Nash equilibria exist and all Nash equilibrium outcomes are Pareto optimal; or
dominant strategies exist and all dominant strategy equilibria are Pareto optimal;
but not both. This is, any (non-dictatorial) game form whose Nash equilibria are well behaved does not have dominant strategies,
and any game form with well behaved dominant strategy equilibria must have at least one non-optimal non-dominant strategy
Nash equilibrium.

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This paper examines the effects of terms-of-trade changes on the external adjustment of a small open economy where each consumer
has a life-cycle saving function. The supply side of the economy is given by the standard two-sector model with two primary
factors: labour and capital. It is shown that, when both commodities are produced, a terms-of-trade deterioration leads to
a current account deficit (surplus) if the export (import) sector is more labour intensive.

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Recent work on macroeconomics of price increases of intermediate imports while theoretically rigorous and elegant, is still
unable to explain the stylized facts. This paper attempts to remedy the shortcomings of earlier papers by using a two-period
model to properly analyse investment and savings behaviour and hence the current account. The model also incorporates disequilibrium
in first-period labour and goods markets to compare the response of countries in different disequilibrium regimes to shocks
in intermediate input prices.

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The paper uses a simple multitask career concern model in order to analyse the incentives of government agencies' officials.
Incentives are impaired by the agency pursuing multiple missions. A lack of focus is even more problematic in the case of
fuzzy missions, that is when outsiders are uncertain about the exact nature of the missions actually pursued by the agency.
Consequently agencies pursuing multiple missions receive less autonomy.
The paper further shows that professionalization creates a sense of mission for the agency, and that the specialization of
officials raises their incentives. Last, the paper compares its predictions with the stylized facts on Government bureaucracies.

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A risk neutral principal wishes to exact a payment from a risk neutral agent whose wealth he does not know, but may verify
through a costly auditing procedure. We characterize efficient schemes for the principal when he is allowed to choose schedules
for preaudit and postaudit payments and audit probabilities, subject to the constraint that only monetary incentives can be
used and that the principal may never make a net payment to the agent. The main results are that efficient schemes involve
preaudit payments which are increasing in the agent's wealth, audit probabilities are decreasing in the agent's wealth and
also satisfy certain constraints as equalities. In general, such schemes involve stochastic auditing and rebates after an
audit.

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This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008

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An econometric methodology is proposed for reconciling inaccurate measures of latent data which are subject to accounting
constraints. The method deals with the case in which the measurement errors are serially correlated, generalizing previous
contributions. A class of efficient estimators are derived for the latent data. Consistent estimators for the weight matrices
applied to the observed information based on a linear regression procedure are obtained together with confidence interval
estimators for these weight matrices. Approximate confidence intervals are suggested for the latent data themselves together
with specification tests for the assumptions underlying the procedure. An application of the proposed method is made to U.K.
Gross Domestic Product in constant prices for 1958Q1–1989Q4.

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This paper measures the role of quality-adjusted years of schooling in accounting for cross-country output per worker differences.
While data on years of schooling are readily available, data on education quality are not. I use the returns to schooling
of foreign-educated immigrants in the U.S. to measure the education quality of their birth country. Immigrants from developed
countries earn higher returns than do immigrants from developing countries. I show how to incorporate this measure of education
quality into an otherwise standard development accounting exercise. The main result is that cross-country differences in education
quality are roughly as important as cross-country differences in years of schooling in accounting for output per worker differences,
raising the total contribution of education from 10% to 20% of output per worker differences.

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The conventional approach to social programme evaluation focuses on estimating mean impacts of programmes. Yet many interesting
questions regarding the political economy of programmes, the distribution of programme benefits and the option values conferred
on programme participants require knowledge of the distribution of impacts, or features of it. This paper presents evidence
that heterogeneity in response to programmes is empirically important and that classical probability inequalities are not
very informative in producing estimates or bounds on the distribution of programme impacts. We explore two methods for supplementing
the information in these inequalities based on assumptions about participant decision-making processes and about the strength
in dependence between outcomes in the participation and non-participation states. Dependence is produced as a consequence
of rational choice by participants. We test for stochastic rationality among programme participants and present and implement
methods for estimating the option values of social programmes.

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accumulation of capital in an earlier paper, and the adjustment is found nearly to double the importance of technical progress as a source of growth.3 The present paper studies the interaction of productivity change and intermediate input.4 The expansion in the production of intermediate goods occurring because of increased factor efficiency makes it important to distinguish between productivity change originating in a sector and the impact of productivity change on the sector. Productivity change in the first sense refers to the shift in the sectoral technology and is measured by the conventional productivity residual. Productivity change in the second sense measures the equilibrium response to the shifting sectoral technologies, and includes (a) the induced reallocation of factor input between sectors, and (b) the induced expansion in intermediate input, which serves to magnify the effect of technical change. In assessing the importance of productivity change as a source of growth, it is the second sense which is relevant, since it is the impact of productivity change which affects the evolution of the sector, and not the change in factor efficiency occurring within that sector. The distinction between the two aspects of productivity change is analogous to the distinction between nominal and effective tax incidence. An ad-valorem excise tax imposed at a given statutory rate may be regarded as shifting the commodity supply curve upward; the distributional impact of the tax depends on the equilibrium adjustment to this shift. The well-known Harberger (1962) model of tax incidence was, in fact, specifically intended to take these adjustments into account. In an essentially parallel vein, this paper develops the distinction between nominal and effective rates of technical change from the point of view of productivity analysis. Effective rates of productivity change are defined in this paper using the reduced form of an N-sector growth model, where the rate of change of total factor supply, and the rate of change of technological efficiency are assumed to be given exogenously. The growth rates of the endogenous variables-prices and quantities-are expressed as linear combinations 511

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The paper analyzes the effect of tax-deferred individual retirement accounts (IRAs) in the United States on net individual
saving. The results are based on a model of constrained optimization with the limit on tax-deferred saving the principle constraint.
The estimates suggest that contributions to IRAs represent substantial net saving increases. Were the IRA limit to be increased,
only about 10 to 20% of resulting increase in IRA contributions would be taken from other savings. About 50% would come from
reduced consumption and about 35% from reduced taxes.

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When does an individual's expected wealth accumulation profile increase as earnings risk increases? This paper answers this
question for multi-period models where earnings shocks are independent over time. Sufficient conditions are stated in terms
of properties of a decision rule for savings and, alternatively, in terms of properties of preferences.

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This paper presents a dynamic, choice-theoretic general equilibrium model of capital accumulation in an open economy. Equilibria
with and without capital mobility are described and compared. It is shown that neither is necessarily Pareto optimal and that
an equilibrium with free trade in capital does not Pareto-dominate an equilibrium with autarky. The effects of restricting
capital flows by taxing foreign investment earnings are discussed. It is seen that there will be no agreement within a country
as to what constitutes an optimal tax.

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This paper develops a growth theory that captures the replacement of physical capital accumulation by human capital accumulation
as a prime engine of growth along the process of development. It argues that the positive impact of inequality on the growth
process was reversed in this process. In early stages of the Industrial Revolution, when physical capital accumulation was
the prime source of growth, inequality stimulated development by channelling resources towards individuals with a higher propensity
to save. As human capital emerged as a growth engine, equality alleviated adverse effects of credit constraints on human capital
accumulation, stimulating the growth process.

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The effect of government policies on the level of investment and inflation has become a major concern of policy-makers in a number of industrial countries. Proposals to raise the level of business investment have included overall tax cuts, tax incentives to spur investment and a reduction in the level of government spending. This paper presents a theoretical apparatus to explore the relationships between fiscal policy, government debt, inflation and capital accumulation. It develops a one-sector growth model embodying a stochastic production function and government fiscal policy. Atomistic agents in the economy choose consumption levels and allocate their wealth between risky capital and risky government debt to maximize expected discounted utility over an infinite horizon. Fiscal policy, by affecting asset yields, affects the composition of portfolios, the price of government bonds and the accumulation of capital. The model is used to answer three general questions: (1) Does the level of government expenditure affect the rate of capital accumulation and inflation in steady state? (2) Does the mode of government finance, when the choice is between an income tax and deficit finance, affect these magnitudes? (3) What is the effect of uncertainty in the productivity of capital on growth? The analysis relates to several areas of literature: (1) the analysis of the relationship between capital accumulation and debt, (2) the theory of the demand for government debt, (3) considerations of the effect of income taxation on risk bearing, and (4) the analysis of capital accumulation under uncertainty. 1. The effects on output and the capital stock of the government's expenditure decision and its decision to finance its expenditure by taxation or debt issue are explored in two major bodies of economic theory. The literature on the "burden of the debt" as developed by Modigliani (1961), Diamond (1965), and Phelps and Shell (1969), for example, implies that policies which increase the value of outstanding government debt will tend to lower the level of the capital stock by displacing capital with public debt in private wealth. The theory of money and growth as represented by Tobin (1965) and Sidrauski (1967b) also implies that government debt displaces capital, but specifically recognizes the role of capital gains on government debt.

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Hartwick’s rule of investigating resource rents in an economy with producible capital and exhaustible resources becomes, in a general model of heterogeneous stocks, a rule whereby the total value of net investment (resource depletion counting negative) is equal to zero. It is shown that holding the discounted present value of net investment constant is necessary and sufficient for a competitive path to give constant utility. Conditions for the general rule to give a maximin path are also discussed.

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Since the actual solution to intertemporal rational expectations models is usually not known, it is useful to have criteria
for judging the accuracy of a given numerical solution. In this paper we propose a test for accuracy that is easy to implement
and can be applied to a wide class of models without knowledge of the exact solution. We discuss the power of the test by
simulating several models with the linear-quadratic approximation and with the method of parameterized expectations. We conclude
that the test is powerful.

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In this paper, I provide a theoretical explanation for the gender differences in education and on the labour market that are
observed empirically in most OECD (Organisation for Economic Cooperation and Development) countries, including the US Within
a cheap talk model of grading, I show that biased grading in schools results in (1) boys outperforming girls in maths and
sciences, (2) boys having more top and more bottom achievers in maths and sciences than girls, (3) girls outperforming boys
in reading literacy, (4) female graduates enrolling in university studies more often than male graduates, (5) the predominance
of female students in arts and humanities at the university, (6) the predominance of male students in maths and sciences at
the university and (7) the gender wage gap on the labour market for the highly educated.

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