Empirical Patterns of Firm Growth and R&D Investment: a Quality Ladder Model Interpretation

We present a partial equilibrium model of endogenous firm growth with R&D investment and stochastic innovation as the engines of growth, drawing on the quality ladder models in the macro growth literature, and the literature on patent races and the discrete choice models of product differentiation. The model fits a number of empirical patterns well, including: (i) a skewed size distribution of firms with persistent differences in firm sizes, (ii) firm growth independent of firm size, as stated in the so-called Gibrat's law, and (iii) R&D investment proportional to sales.     

What the Pension Benefit Guaranty Corporation can learn from the Federal Savings and Loan Insurance Corporation

This article attempts to draw attention to some important lessons that the Pension Benefit Guaranty Corporation (PBGC) can learn from the experience of the Federal Savings and Loan Insurance Corporation (FSLIC). FSLIC was the government agency that insured deposits at savings and loan associations until it was replaced in 1989, leaving a massive deficit to be financed by taxpayers. Like FSLIC, the PBGC is a government agency that guarantees a form of private corporate debt. As guarantor of the pension benefits promised by private plan sponsors, the PBGC bears the risk of a shortfall between the value of insured benefits and the assets securing those benefits. There has been a significant change in the attitude and behavior of senior public officials and legislators as a result of the S&L debacle. Directors of the PBGC and the Secretaries of Labor to whom they report have pointed out the weaknesses of some of the pension funds that the PBGC insures and have pursued an active legislative agenda designed to reduce the PBGC's vulnerability to those weaknesses. Those efforts have resulted in a series of laws and amendments to laws that have significantly improved the U.S. pension guarantee system. But the magnitude of the PBGC's exposure to shortfall risk depends on three factors: (1) the financial strength of plan sponsors, (2) the degree of underfunding of insured benefits, and (3) the mismatch between the market-risk exposure of insured benefits (a form of long-term corporate debt) and the market-risk exposure of the assets securing that debt. Only the first two of these have been addressed by past legislative reforms. The third factor appears not to be well understood. It is apparently a widespread belief among policymakers that a well-diversified pension portfolio of equity securities provides an effective long-run hedge against liabilities of defined-benefit pension plans, so that there is no mismatch problem. This belief is mistaken. Equities are not a hedge against fixed-income liabilities even in the long run. Thus, even if the PBGC achieves the goal of full funding at one point in time, the mismatch between the market-risk exposure of the pension benefits that it insures and the pension assets backing them creates the potential for large shortfall losses in the future as the economy and capital market rates change in unpredictable ways. Therein lies an uncomfortable parallel with the S&L debacle.     

Money stock revisions and unanticipated money growth

An important ‘empirical regularity’ is the strong positive effect of money shocks on output and employment. One strand of business cycle theory relates this finding to temporary confusions between absolute and relative price changes. These models predict positive output effects of unperceived monetary movements, but the quantitative importance of unperceived shifts in nominal aggregates is subject to question. Another strand of theory, based on long-term nominal contracts and analogous price-setting institutions, generates output effects from unanticipated, but not necessarily contemporaneously unperceived, money shocks. However, the real effects of unpredicted, but contemporaneously understood, monetary changes are not obviously consistent with efficient institutional arrangements. The present paper provides some empirical evidence on the two types of theories by analyzing the output effects associated with revisions in the money stock data, where the revisions are interpreted as components of unperceived monetary movements. The revisions turn out to have no significant explanatory power for output. Previous findings that innovations from an estimated money growth equation have a significant output effect remain intact when the revisions are included as separate explanatory variables. Overall, the study provides a small amount of evidence against the special role of unperceived, as opposed to unanticipated, money movements as a determinant of business fluctuations.     

Empirical labor search: A survey

This paper surveys the existing empirical research that uses search theory to empirically analyze labor supply questions in a structural framework, using data on individual labor market transitions and durations, wages, and individual characteristics. The starting points of the literature are the Mincerian earnings function, Heckman's classic selection model, and dynamic optimization theory. We develop a general framework for the labor market where the search for a job involves dynamic decision making under uncertainty. It can be specialized to be in agreement with most published research using labor search models. We discuss estimation, policy evaluation with the estimated model, equilibrium model versions, and the decomposition of wage variation into factors due to heterogeneity of various model determinants as well as search frictions themselves. We summarize the main empirical conclusions.     

Decentralized allocation of resources among many producers

We reconsider the question of allocating resources in large teams using decentralized procedures. Our assumption on the distribution of procedures is that it approximates a given undelying distribution in producers space; thus we relax prior approaches which utilize replicas or iid samplings. We examine when solving the allocation problem for the underlying distribution yields an appropriate solution to the specific sample. We then show how market- like mechanisms may be used to get a decentralized decision process which is asymptotically optimal.