There is an active discussion in the literature on whether the standard search and matching model (Mortensen and Pissarides (1994), Pissarides (1985, 2000)) is consistent with U.S. business cycle facts. The issue that received the most attention is whether the model can generate the volatility of labor market variables (e.g., vacancies, unemployment) that is quantitatively consistent with the data. Shimer (2005) proposed a calibration of the model that implied that the model generates only a small volatility in the variables of interest. Hagedorn and Manovskii (2006), on the other hand, propose a different calibration strategy, and find that the model does generate a volatile labor market.
A number of economists have recently advocated a policy of linking pension benefits (or contributions) to individuals’ fertility choices. The reason for this is that, with a pay-as-you-go social security system, the higher the number of children, the higher will be the available tax revenues (levied on the children when they grow up) to finance the pensions of the retired population. With all parents sharing the benefits associated with their own and every other parents’ having more children (the extra tax revenues their action generates), there is a positive externality in the system. This externality, if not corrected, implies that the equilibrium number of children in a decentralized system would be suboptimal.
A second and related issue concerns the “quality” of children and their human capital accumulation through educational decisions of the parents. The externality here arises because the rate of return of a pay-as-you-go (PAYG) system depends not just on the fertility rate, but also on productivity growth. The more productive the children, the higher will be their ability to produce and to pay taxes. This reinforces the public good nature of a family’s child rearing activities.
Numerous empirical studies find that liquidity matters for asset returns. On the theoretical side, there is however little agreement on what aspects of liquidity can generate large cross-sectional effects in asset returns. A number of theoretical models use the concept of expected holding period to link liquidity to asset prices. So far, it has been hard to investigate these theories empirically. While some attempts have been made, they all suffer from lack of data on actual holding periods.
Instead they rely on proxies of investor holding periods constructed from data on turnover. Even though a high-turnover stock necessarily have many of the stock’s investors buying and selling the stock, it is by no means certain that all owners of the stock have short holding periods. The core of this problem is that turnover is a characteristic of a stock, while holding period is a decision made by individual investors.
