The American Economist

Most of my work in economics involves constructing theoretical models. Over the years, I have developed some ways of doing this that may be worth describing to those who aspire to practice this art. In reality the process is much more haphazard than my description would suggest—the model of research that I describe is an idealization of reality, much like the economic models that I create. But there is probably enough connection with reality to make the description useful—which I hope is also true for my economic models.

The paper argues that there is a fundamental difference between the indeterminism of chaos theory and the indeterminism of quantum mechanics. The difference somewhat resembles Knight's distinction between risk and uncertainly. Theorists interested in going beyond equilibrium economics have failed to notice the difference. Therefore, they confuse between two kinds of economic change which involve indeterminism, viz., nonlinear dynamics and technological/institutional development. They also regard the evolutionary paradigm as an alternative of the equilibrium one—whereas each deals with a different phenomenon.

A well-known proposition found in numerous textbooks, as well as in marketing materials distributed by bond salesmen, asserts that a lower-yielding municipal bond can provide the same after-tax return as a higher-yielding corporate bond, ceteris paribus. A simple algebraic “equivalence relation” is sometimes adduced to illustrate what the before-tax yield on the corporate must be if its after-tax yield to the investor is to be equal to the yield on a municipal. A portfolio policy implication frequently suggested is that if the after-tax yield on the corporate is equal to the yield on the municipal, ceteris paribus, the “rational” investor should be indifferent to his allocation between the two.

This paper constructs a theory to demonstrate the dubious validity of that investment policy. The theory in this paper relies on the assumptions respecting the risk-aversive attitude of investors as well as the presence of risky taxable income statistically independent of the income from the bonds.

The main results of the analysis are expressed by two propositions that establish that the risk-averse investor will choose a specific allocation of his bond portfolio and will require a risk premium to induce him to hold municipals of the same risk as corporates.

When a student in introductory economics approaches us for study advice, what study methods should we recommend? Economists have been vocal about their belief that their discipline is more analytical and rigorous than other social sciences and, therefore, needs special study techniques for efficient learning. However, the literature on economic education is silent on what these techniques are. This paper attempts to fill the gap in the economic literature on discipline-specific learning techniques. We discuss, in the context of an illustrative lecture on price elasticity of demand, several study tips for efficient learning of economics. We believe these study techniques, though valuable for other disciplines, are uniquely suited for economics and would enhance the chances of students in introductory economics learning the subject well.

This paper examines the hypothesis of optimizing behavior of the U.S. consumers using quarterly and seasonally adjusted series on real consumer expenditures on eight commodity groups: clothing, durable goods, energy, food, housing, medical care, transportation, and others for the period of 1947:I through 1993:I. Following the Weak Axiom of Revealed Preference (WARP), a money-metric utility function is derived to calculate an efficiency index to determine the percentage difference between the observed cost of consumption and the optimum cost of consumption in each period of the sample. The empirical results provide evidence that the allocative efficiency in the U.S. has improved only slightly due to the wave of deregulations in the early 1980s. Our results are consistent with the predictions of the general theory of second best in showing that gains in the allocative efficiency may be minimal as long as many sectors of the economy remain partially or totally regulated.

This paper presents an empirical evaluation of Supplemental Instruction, a formal review/lab session program developed at the University of Missouri, designed to improve student learning in courses that have typically exhibited poor student performance. Using a two-equation model and student transcript data readily available to instructors and academic researchers, we evaluate the effectiveness of the program in economics principles. The analysis explicitly considers the confounding factor of self-selection in program participation. We find that ordinary least squares significantly underestimates the positive impact of Supplemental Instruction. The results suggest that formal programs designed to increase the intensity of instruction can have a demonstrable payoff in the form of increased student learning.

This paper uses cross-sectional data from the 1993 Major League Baseball season to derive the production function for the industry. Using that function, the hypothesis that employee productivity drops in response to the job security of a multi-year contract is test ed by comparing the marginal products of players in the year preceding and the year following the signing of a multi-year contract.

I find that the production function for Major League Baseball exhibits increasing returns to scale and, contrary to the popular belief of observers of the sport, hitting is more important to team success than pitching. I also find compelling, statistically significant evidence of worker disincentives associated with multi-year contracts.

This article empirically examines racial salary differences in the National Basketball Association from 1987 to 1993. The results of our analysis depict the NBA as a racially equal labor market which experienced tremendous growth over this period. In contrast to studies using mid-1980's data which estimated a white advantage between twelve and twenty-five percent, we find that no significant racial wage differential exists. The convergence of the salary differential between 1984 and 1993 can be fully explained by a narrowing in the relative prices paid for additional production and an increase in the relative production of black players. Furthermore, a regression capturing customer preferences yields the result that customers, who during the mid-1980's preferred white players, no longer differentiate between white and black players.