Sam Peltzman

Prices Rise Faster than They Fall

Output prices tend to respond faster to input increases than to decreases. This tendency is found in more than two of every three markets examined. It is found as frequently in producer goods markets as in consumer goods markets. In both kinds of markets the asymmetric response to cost shocks is substantial and durable. On average, the immediate response to a positive cost shock is at least twice the response to a negative shock, and that difference is sustained for at least five to eight months. Unlike past studies, which documented similar asymmetries in selected markets (gasoline, agricultural products, etc.), this one uses large samples of diverse products: 77 consumer and 165 producer goods. Accordingly, the results suggest a gap in an essential part of economic theory. As a start on filling this gap, the study finds no asymmetry in the resonse of an individual decision maker (a supermarket chain) to its costs, but it finds above‐average asymmetry where a cost shock is filtered through a fragmented wholesale distribution system. It also finds a negative correlation between the degree of asymmetry and input price volatility and no correlation with proxies for inventory costs, asymmetric menu costs of price changes, and imperfect competition.

The Gains and Losses from Industrial Concentration

In essence, this paper will try to decompose the concentration-profits relationship into separate concentration-price arid concentration-cost relationships. By doing this, I hope to shed light on some of the allocative and distributive issues that, I suspect, give the subject its intrinsic interest, but which have not so far been confronted empirically: Does high concentration save or waste resources? Does it lead to higher prices? Who gains and loses from a social policy hostile to high concentration? Since the unique aspect of the paper is its focus on a concentration-cost relationship, most of the analytical effort is spent here. I review the theory underlying such a relationship, and develop and implement a model designed to estimate its importance. Subsequently, I try to estimate how much of the usual profit-concentration relationship is due to cost effects and how much to price effects. The main conclusion is that, while price effects are not absent, the cost effects so dominate them as to cast doubt on the efficacy of any general legal rule hostile to industrial concentration.

Voters as Fiscal Conservatives

Voters penalize federal and state spending growth. This is the central result of my analysis of voting behavior in Presidential, Senatorial, and gubernatorial elections from 1950–1988. The composition of federal spending growth seems irrelevant. The vote loss to the Presidents party from an extra dollar of defense or nondefense spending is the same. However, in gubernatorial elections, expansion of state welfare spending exacts a disproportionate political price. Deficit financing of federal or state spending does not appear to matter politically. I conclude by discussing the obvious question of why government budgets have grown in the face of this voter hostility.

The Economic Theory of Regulation after a Decade of Deregulation

WHAT HAS COME to be called the economic theory of regulation, or ET, began with an article by George Stigler in 1971.1 The most important element of this theory is its integration of the analysis of political behavior with the larger body of economic analysis. Politicians, like the rest of us, are presumed to be self-interested maximizers. This means that interest groups can influence the outcome of the regulatory process by providing financial or other support to politicians or regulators. Simultaneously with Stigler, Richard Posner provided an important critique, and several years later he gave the theory its grandiose name. The major theoretical development of the ET has been an article by Peltzman in 1976 and one by Gary Becker in 1983.2 By conventional measures the theory has been an academic success. In this paper I evaluate that success in light of the changes in regulatory institutions that have occurred since the ETs early development.

The Effect of Government Subsidies-in-Kind on Private Expenditures: The Case of Higher Education

The article points out that a subsidy-in-kind, such as below-cost education provided by state universities, replaces more private consumption of the subsidized good that an equivalent money subsidy, such as a scholarship. Indeed, a subsidy-in-kind may reduce total consumption. Empirical estimates in the article indicate that in higher education (a) about three-fourths of government expenditures substitute for private expenditures, (b) this fraction has exceeded one in a recent period, (c) a substantial part of this government-private substitution is due to the in-kind form of government subsidies, and (d) there is less government-private substitution in enrollment than expenditures.

The Growth of Government

BY conventional budget and gross national product (GNP) measures, governments role in the allocation of resources has increased considerably over the last century, and the growth shows no sign of abating. As a result, governments everywhere in the developed world have moved from a sometimes trivial to a now uniformly considerable role in shaping national expenditures. My task will be to try to explain this growth and size. To do so, I am going to equate governments role in economic life with the size of its budget. This is obviously wrong since many government activities (for example, statutes and administrative rules) redirect resources just as surely as taxation and spending, but the available data leave no other choice. My operating assumption has to be that large and growing budgets imply a large and growing substitution of collective for private decision in allocating resources. But the main intellectual problem I want to explore is the sources of this substitution generally. I first review the facts about the growth of government and some standard explanations. Since none of the explanations seems very satisfactory, I then present my own explanation, which focuses on the incentives to use a political mechanism to redistribute wealth. Finally, I confront my theory with some relevant data. The main result is counterintuitive: greater equality of private incomes increases the demand for political redistribution.

Capital Investment in Commercial Banking and Its Relationship to Portfolio Regulation

A bank is the prototypical financial institution; there are notable outward differences between the wealth invested by owners of financial institutions and that of other industries. The capital of a financial institution consists largely of financial assets and only to a small degree of the physical plant and equipment usually associated with capital in other industries. Moreover, these physical differences are associated with important functional differences. A financial institution, like any other firm, faces the problem of combining the inputs which it purchases to produce the outputs which it sells. In banking, the most important inputs are labor and deposits, and they produce liquidity services, brokerage services, accounting and information services, and the like. In this production process, bank capital has two roles: (1) It cooperates directly with the other inputs in the production of bank services, and (2) it is used to attract the deposit input by providing insurance to depositors against a decline in the value of a banks assets; the more capital a bank has, the more the value of its assets can fall before depositors incur losses. The difference between banking (and financial institutions in general) and most other industries is in the relative importance of these two roles. The equity capital of any firm serves, in part, to guarantee the value of the firms fixed obligations, but that function is usually subordinate to the provision of assets to the firm. However, in banking, equity capital (and equity is the form that almost all nondeposit ownership interest in bank assets has taken) typically accounts for only about a tenth of total bank resources, and most of the returns to equity capital derive from its insurance function. Bank owners invest capital primarily to attract deposits, which are then used to buy assets, and only secondarily to buy assets directly. Apart from these novel economic aspects, a study of investment in banking provides the opportunity to study the effects of government

The Control and Performance of State-Owned Enterprises

Society organizes economic activity in different forms chosen in response to varying transaction costs. If owners of enterprises could choose freely among organizational forms, we might expect that the forms observed in particular areas — say between partnership and corporation or small business and monolithic enterprise — were well chosen. Even if such choices were not made consciously, but any form could compete in any arena, forces of natural selection would push toward optimality.1

Political Economy of Public Education: Non-college-bound Students

My previous research showed that two important changes in the political environment of public schools--growing teacher unionization and a shift of funding responsibility to state governments--adversely affected the performance of college-bound students. Here I show similar impacts for public school students who do not go to college. These effects are found in analyses of 1971-91 changes in a school performance measure derived from individual scores on the Armed Forces Qualifying Test. Comparative analysis of performance trends in different areas of the same state suggests that the adverse performance effects of teacher unionization and spending centralization stem from their impact on state educational policy rather than on the direct operation of schools. These adverse effects are also found for students in the lower tail of achievement and for black students. They are not plausibly related to broader political and social changes.

The Political Economy of the Decline of American Public Education

THE state of American public education has become something of a national obsession. A mournful consensus seems to have formed around two conclusions: (1) American schools have performed poorly in comparison with schools in other countries, and (2) things have gotten worse over time. As my title indicates, this article is more motivated by recent changes in performance than by its average level. It is also motivated by a fact often neglected in discussions of school performance. The overwhelming majority of American elementary and secondary schools are political creatures. They are publicly owned, operated, directed, and funded. I want to see if the political character of the marketplace within which schools operate has something to do with the way they perform. For reasons elaborated subsequently, the data I analyze are incapable of providing a complete explanation of the decline of public school performance. So, even if this decline is entirely a political phenomenon, I could