A list of articles published by members of the Dallas Fed Research staff.

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2001 Academic Publications

Restaurant Prices and the Mexican Peso
Southern Economic Journal, July 2001
Roberto Coronado and Thomas M. Fullerton, Jr.
Abstract: Of prime interest to border economies is exchange rate performance and currency valuation. Commonly used tools for this task include purchasing power parity (PPP) nominal benchmarks, and inflation-adjusted trade-weighted indices. The latter have the advantage of relying on commonly available international macroeconomic data but overlook microeconomic information that may offer additional insight to issues surrounding exchange rate policy debates. Other efforts have utilized small samples of international product price comparisons to shed light on currency valuation questions. This paper develops one such tool by repeated sampling of prices charged for identical menu items sold at restaurant franchises in El Paso, Texas, and Ciudad Juarez, Chihuahua. A battery of statistical tests indicate that the international currency value of the peso consistently differed from the exchange rate implied by the border region restaurant price ratios in 1997, 1998, and 1999.

The Rise of Goods-Market Competition and the Fall of Nominal Wage Contracting: Endogenous Wage Contracting in a Multisector Economy
Journal of Macroeconomics, Winter 2001
John V. Duca and David D. Van Hoose
Abstract: This paper shows how heterogeneity in wage setting and a link between nominal wage flexibility and goods-market competition arise in a multisector economy that is affected by aggregate and sector-specific shocks. Aggregate volatility increases the variance of real contract wages, whereas sectoral volatility increases the relative variance of real Walrasian wages. Given this trade-off, the prevalence of nominal wage contracting reflects both the relative volatility of aggregate versus sectoral disturbances and the overall degree of goods-market market competition. We find that these variables help explain the decline in unionization (a proxy for contracting) in the United States.

Free Markets on Film: Hollywood and Capitalism
Journal of Private Enterprise, Spring 2001
Robert Formaini

Don't Set Growth Limits for the New Economy
The Cato Journal, Fall 2001
Robert D. McTeer, Jr.

Reengineering Social Security in the New Economy
Cato Institute Social Security Paper No. 22, Jan. 2001
Thomas F. Seims
Abstract: The United States is currently undergoing profound social, demographic, and economic changes, shifting from an industrial base to a new information economy, at the same time that life expectancies are increasing and the baby-boom generation is nearing retirement. Given these changes, it is more important than ever to reengineer Social Security, adapting it to this new reality.

Specifically, the current pay-as-you-go (PAYGO) Social Security system is structurally flawed and produces a declining rate of return that is far lower than the return that workers could earn through investing their taxes in private capital markets. Indeed, young workers can expect future returns from Social Security of from only 0.58 percent (for high-wage earners) to 2.93 percent (for low-wage workers) even if the system somehow manages to pay all future benefits without an increase in taxes. The tax increases or benefit cuts necessary to keep the system solvent would reduce those rates of return still further. In contrast, workers who privately invested their payroll taxes could expect rates of return, and retirement benefits, between four and ten times greater.

If Social Security is to provide the same retirement security in the new economy as it did in the old, we must transform it from a PAYGO system, which essentially transfers wealth from one generation to another, to a system based on savings and investment in private capital markets. Given the dangers of allowing the government to control the investment of Social Security funds, the only viable alternative is to move to a system of individually owned, privately invested accounts.

The Capital Markets' Perspective on B2B E-Commerce Initiatives and Alliances
Journal of Financial Transformation
Thomas F. Siems and Andrew H. Chen
Abstract: In the business-to-business (B2B) sector, new electronic commerce (e-commerce) initiatives like Internet-enabled supply chains and electronic marketplaces (e-marketplaces) offer firms significantly lower procurement costs, increased operating efficiencies, and expanded market opportunities. Using an event-study methodology, we find that the capital markets respond favorably to firms announcing new B2B e-commerce initiatives and alliances. For B2B e-marketplaces, we find slightly higher, though statistically insignificant, average abnormal returns associated with vertical markets than with horizontal markets. When examining the data by the type of partner the e-commerce provider aligns with, we find that the capital markets reward firms the greatest when they form alliances with a competitor or a computer industry giant. The abnormal returns associated with these announcements are on average more than three times greater than returns from announcing a B2B e-commerce initiative alone or with Old Economy industry leaders.

On the Determinants of School District Efficiency: Competition and Monitoring
Journal of Urban Economics, May 2001
Lori L. Taylor, Shawna Grosskopf, Kathy J. Hayes and William L. Weber
Abstract: A number of researchers have asserted that inefficiency in the U.S. school system arises from a lack of incentives for public schools to behave efficiently. This paper uses a Shephard input distance function to model educational production, and a switching-regressions estimation to explore the relationship between school district efficiency and two existing incentive mechanisms-competition and voter monitoring. We find evidence that ease of monitoring enhances both technical and allocative efficiency of urban school districts, and that increased competition reduces allocative inefficiency in communities above a competitive threshold. We find no evidence that competition is related to technical inefficiency.

Optimal Categorical Transfer Payments: The Welfare Economics of Limited Lump-Sum Redistribution
Journal of Public Economic Theory, October 2001
Alan D.Viard
Abstract: Despite their importance in tax-transfer systems, categorical transfer payments, based on (nearly) exogenous characteristics such as disability or date of birth, have been deemphasized in optimal-tax analysis. I use the well-developed theory of first-best redistribution to clarify the welfare economics of categorical transfers, which are a form of limited lump-sum redistribution. The comparison to first-best redistribution explains how categorical transfers affect groups' labor supplies and utility levels, why the use of categorical transfers is inversely related to the planner's inequality aversion, and why their use reduces the optimal income tax rate.

Some Results on the Comparative Statics of Optimal Categorical Transfer Payments
Public Finance Review, March 2001
Alan D. Viard
Abstract: To alleviate equity-efficiency trade-offs, tax transfer systems pay categorical transfers to groups defined by characteristics correlated with earnings ability. The author examines the comparative statics of categorical transfer payments in a linear income tax model through analysis of first-order conditions and numerical calculations. The analysis sharpens previous results on the size of categorical transfers, the resulting reduction in the income tax rate, and the associated welfare gain. Notably, the author finds that categorical transfers should vary more across groups when earnings ability is more equal within each group, when labor supply is more elastic, and when less revenue is required for public goods.

Legal Fee Restrictions, Moral Hazard, and Attorney Rights
Journal of Law and Economics, Oct. 2001
Alan D. Viard and Rudy Santore
Abstract: When attorney effort is unobservable and certain other simplifying assumptions (such as risk neutrality) hold, it is efficient for an attorney to purchase the rights to a client's legal claim. However, the American Bar Association Model Rules of Professional Conduct prohibit this arrangement. We show that this ethical restriction, which is formally equivalent to requiring a minimum fixed fee of zero, can create economic rents for attorneys, even though they continue to compete along the contingent-fee dimension. The contingent fee is not bid down to the zero-profit level, because such a fee does not induce sufficient attorney effort. We thereby provide a political economy explanation for these restrictions.

Comment on Stabilization Policy and the Costs of Dollarization
Journal of Money, Credit, and Banking, May 2001
Carlos E. J. M. Zarazaga
Abstract: Comments on the article "Stabilization Policy and the Costs of Dollarization," by Stephanie Schmitt-Grohe and Martin Uribe, published in the May 2001 Part 2 edition of the Journal of Money, Credit and Banking. Welfare cost invariance property of the model used in the article; reasons for the large devaluation rate prescribed by the model used in the article.

“Evidencia Respecto de la Valoración del Peso Mexicano en la Región Fronteriza,"
Investigación Económica
Roberto Coronado and Thomas M. Fullerton, Jr.
Abstract: El desempeño del tipo de cambio y la valoración de la moneda son de interés primordial para las economías fronterizas. Las herramientas normalmente utilizadas para esta tarea incluyen las referencias nominales de la paridad del poder de compra y los índices de inflación ajustados por ponderaciones de comercio. Este último tiene la ventaja de contar con los datos macroeconómicos internacionales normalmente disponibles, pero omite otra información que puede ofrecer una visión adicional a los problemas circundantes de los debates de la política de tipo de cambio. Otros esfuerzos han utilizado muestras pequeñas de comparación internacional de los precios de los productos para remarcar las cuestiones sobre la valoración de la moneda. Este artículo desarrolla tal herramienta por medio de repetidas muestras de precios cobrados por artículos idénticos del menú vendidos en franquicias de restaurantes en El Paso, Texas y Ciudad Juárez, Chihuahua. Un conjunto de pruebas estadísticas indican que el peso ha sido consistentemente devaluado en 1997, 1998 y 1999.