Showing papers in "Research Papers in Economics in 1988"

Government spending in a simple model of endogenous growth

Abstract: One strand of endogenous-growth models assumes constant returns to a broad concept of capital. I extend these models to include tax- financed government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures but subsequently decline. With an income tax, the decentralized choices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth.

Agency Costs, Net Worth, And Business Fluctuations

Abstract: This paper constructs a simple neoclassical model of intrinsic business cycle dynamics in which borrowers' balance sheet positions play an important role. The critical insight is that the agency costs of undertaking physical investments are inversely related to the entrepreneur's/borrower's net worth. As a result, accelerator effects on investment emerge: Strengthened borrower balance sheets resulting from good times expand investment demand, which in turn tends to amplify the upturn; weakened balance sheets in bad times do just the opposite. Further, redistributions or other shocks that affect borrowers' balance sheets (as in a debt-deflation} may have aggregate real effects.

The Social Life of Things

Abstract: The meaning that people attribute to things necessarily derives from human transactions and motivations, particularly from how those things are used and circulated. The contributors to this volume examine how things are sold and traded in a variety of social and cultural settings, both present and past. Focusing on culturally defined aspects of exchange and socially regulated processes of circulation, the essays illuminate the ways in which people find value in things and things give value to social relations. By looking at things as if they lead social lives, the authors provide a new way to understand how value is externalized and sought after. They discuss a wide range of goods - from oriental carpets to human relics - to reveal both that the underlying logic of everyday economic life is not so far removed from that which explains the circulation of exotica, and that the distinction between contemporary economics and simpler, more distant ones is less obvious than has been thought. As the editor argues in his introduction, beneath the seeming infinitude of human wants, and the apparent multiplicity of material forms, there in fact lie complex, but specific, social and political mechanisms that regulate taste, trade, and desire. Containing contributions from American and British social anthropologists and historians, the volume bridges the disciplines of social history, cultural anthropology, and economics, and marks a major step in our understanding of the cultural basis of economic life and the sociology of culture. It will appeal to anthropologists, social historians, economists, archaeologists, and historians of art.

The Theory of Environmental Policy

Abstract: In this book, Professors Baumol and Oates provide a rigorous and comprehensive analysis of the economic theory of environmental policy. They present a formal, theoretical treatment of those factors influencing the quality of life. By covering both the theory of externalities and its application to environmental policy, the authors have retained the basic structure and organization of the first edition, which has become a standard reference in the field. In this edition, however, they have updated their analysis to incorporate recent research in environmental economics.

Deposit insurance, risk, and market power in banking

Abstract: A fixed-rate deposit insurance system provides a moral hazard for excessive risk taking and is not viable absent regulation. Although the deposit insurance system appears to have worked remarkably well over most of its 50-year history, major problems began to appear in the early 1980s. This paper addresses the puzzle of why major problems began to arise in the early 1980s and not sooner. ; The hypothesis is that increases in competition caused bank charter values to decline, which, in turn, caused banks to- increase default risk through increases. in asset risk and reductions in capital. This hypothesis is tested using pooled cross section time-series data for the 1970-1986 period for a sample of 85 large bank holding companies.

Stock Prices, Earnings, and Expected Dividends

Abstract: This paper presents estimates indicating that, for aggregate U.S. stock market data 1871-1986, a long historical average of real earnings is a good predictor of the present value of future real dividends. This is true even when the information contained in stock prices is taken into account. We estimate that for each year the optimal forecast of the present value of future real dividends is roughly a weighted average of moving average earnings and current real price, with between 2/3 and 3/4 of the weight on the earnings measure. This means that simple present value models of stock market prices can be strongly rejected. We use a vector autoregressive approach which enables us to compute the implications of this for the behavior of stock prices and returns. We estimate that log dividend-price ratios are more variable than, and virtually uncorrelated with, their theoretical counterparts given the present value models. Annual returns on stocks are quite highly correlated with their theoretical counterparts, but are two to four times as variable. Our approach also reveals the connection between recent papers showing forecastability of long-horizon returns on corporate stocks, and earlier literature claiming that stock prices are too volatile to be accounted for in terms of simple present value models. We show that excess volatility directly implies the forecastability of long-horizon returns.

Unemployment Insurance And Unemployment Spells

Abstract: This paper tests the effects of the level and length of unemployment insurance (UI) benefits on unemployment durations. The paper particularly studies individual behavior during the weeks just prior to when benefits lapse. Higher UI benefits are found to have a strong negative effect on the probability of leaving unemployment. However, the probability of leaving unemployment rises dramatically just prior to when benefits lapse. When the length of benefits is extended, the probability of a spell ending is also very high in the week benefits were previously expected to lapse. Individual data are used with accurate information on spell durations, and the level and length of benefits. Semiparametric estimation techniques are used and compared to alternative approaches. The semiparametric approach yields more plausible estimates and provides useful diagnostics.

Horizontal Mergers: An Equilibrium Analysis

Abstract: The authors analyze horizontal mergers in Cournot oligopoly. They find general conditions under which such mergers raise price, and show that any merger not creating synergies raises price. The authors develop a procedure for analyzing the effect of a merger on rivals and consumers and, thus, provide sufficient conditions for profitable mergers to raise welfare. They show that traditional merger analysis can be misleading in its use of the Herfindahl Index. Their analysis stresses the output responses of large firms not participating in the merger. Copyright 1990 by American Economic Association.(This abstract was borrowed from another version of this item.)

Do Taxes Affect Corporate Financing Decisions

Abstract: A new empirical method and data set are used to study the effects of tax policy on corporate financing choices Clear evidence emerges that non-debt tax shields "crowd out" interest deductibility, thus decreasing the desirability of debt issues at the margin Previous studies which failed to find tax effects examined debt-equity ratios rather than individual, well-specified financing choices This paper also demonstrates the importance of controlling for confounding effects which other papers ignored Results on other (asymmetric information) effects on financing decisions are also presented

What Moves Stock Prices

Abstract: This paper estimates the fraction of the variance in aggregate stock returns that can be attributed to various kinds of news First, we consider macroeconomic news and show that it is difficult to explain more than one third of the return variance from this source Second, to explore the possibility that the stock market responds to information that is omitted from our specifications, we also examine market moves coincident with major political and world events The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases, casts doubt on the view that stock price movements are fully explicable by news about future cash flows and discount rates(This abstract was borrowed from another version of this item)

Collateral, loan quality, and bank risk

Abstract: Most commercial loans are made on a secured basis, yet little is known about the relationship between collateral and credit risk. Several theoretical studies find that when borrowers have private information about risk, the lowest-risk borrowers tend to pledge collateral. In contrast, conventional wisdom holds that when risk is observable, the highest-risk borrowers tend to pledge collateral. An additional issue is whether secured loans (as opposed to secured borrowers) tend to be safer or riskier than unsecured loans. Empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers, riskier loans and riskier banks.

Does public capital crowd out private capital

Abstract: The central focus of this paper is on the question: does higher public capital accumulation ‘crowd out’ private investment? Higher public capital accumulation raises the national investment rate above the level chosen by rational agents and induces an ex ante crowding out of private investment. However, an increase in the public capital stock also raises the return to private capital, which crowds in private capital accumulation. Empirical evidence on the net effect of these opposing forces is presented.

The dynamic effects of aggregate demand and supply disturbance

Abstract: We interpret fluctuations in GNP and unemployment as due to two types of disturbances: disturbances that have a permanent effect on output and disturbances that do not. We interpret the first as supply disturbances, the second as demand disturbances. We find that demand disturbances have a hump shaped effect on both output and unemployment; the effect peaks after a year and vanishes after two to five years. Up to a scale factor, the dynamic effect on unemployment of demand disturbances is a mirror image of that on output. The effect of supply disturbances on output increases steadily over time, to reach a peak after two years and a plateau after five years. 'Favorab1e supply disturbances may initially increase unemployment. This is followed by a decline in unemployment, with a slow return over time to its original value. While this dynamic characterization is fairly sharp, the data are not as specific as to the relative contributions of demand and supply disturbances to output fluctuations. We find that the time series of demand-determined output fluctuations has peaks and troughs which coincide with most of the NBER troughs and peaks. But variance decompositions of output at various horizons giving the respective contributions of supply and demand disturbances are not precisely estimated. For instance, at a forecast horizon of four quarters, we find that, under alternative assumptions, the contribution of demand disturbances ranges from 40 to over 95 per cent.(This abstract was borrowed from another version of this item.)

Meteor Showers Or Heat Wages? Heteroskedastic Intra-Daily Volatility In A The Foreign Exchange Market

Abstract: This paper defines and tests a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information. Examining the behavior of the yen/dollar exchange rate while each of the major markets are open it is possible to test for informational effects from one market to the next. Assuming that news has only country specific autocorrelation such as a heat wave. any intra-daily volatility spillovers (meteor showers) become evidence against market dexterity. ARCII models are employed to model heteroskedasticity across intra-daily market segments. Statistical tests lead to the rejection of the heat wave and therefore the market dexterity hypothesis. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of volatility in other markets.

Privatization: An Economic Analysis

Abstract: The process of selling assests and enterprises to the private sector raises questions about natural monopolies, the efficiency and equity of state-owned versus privately owned enterprises, and industrial policy. This comprehensive analysis of the British privatization program explores these questions both theoretically and empirically.

Financial Market Imperfections and Business Cycles

Abstract: This paper develops a simple model of macroeconomic behavior which incorporates the impact of financial market "imperfections," such as those generated by asymmetric information in financial markets. These information asymmetries may lead to breakdowns in markets, like that for equity, in which risks arm shared. In particular, we analyze firm behavior in the presence of equity rationing and imperfect futures markets, in which there are lags in production. Aft a consequence, firms act in a risk-averse manner. We trace out the macroeconomic consequences, and show that they are able to account for many of the widely observed aspects of actual business cycles.

The Inflation Tax in a Real Business Cycle Model

Abstract: Money is incorporated into a real business cycle model using a cash-in-advance constraint The model is used to analyze whether the business cycle is different in high-inflation and low-inflation economies and to analyze the impact of variability in the growth rate of money The welfare cost of the inflation tax is measured and the steady-state properties of high and low inflation economies are compared The welfare cost of a sustained (10 percent) inflation is estimated to be between 011 percent and 04 percent of GNP The features of the business cycle are the same in high and low inflation economies, but the steady-state paths may be quite different Copyright 1989 by American Economic Association (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another version of this item) (This abstract was borrowed from another versio (This abstract was borrowed from another version of this item)

Appropriating the Returns from Industrial R&D

Abstract: In this paper, we describe the results of an inquiry into the nature of appropriability conditions in over one hundred manufacturing industries, and we discuss how this information has been and might be used to cast light on important issues in the economics of innovation and public policy. Our data, derived from a survey of high-level R&D executives, are informed opinions about the nature of an industry's technological and economic environment rather than quantitative measures of inputs and outputs.

Breach of Trust in Hostile Takeovers

Abstract: The paper questions the common view that share price increases of firms involved in hostile takeovers measure efficiency gains from acquisitions. Even if such gains exist, most of the increase in the combined value of the target and the acquirer is likely to come from stakeholder wealth losses, such as declines in value of subcontractors' firm-specific capital or employees' human capital. The use of event studies to gauge wealth creation in takeovers is unjustified. The paper also suggests a theory of managerial behavior, in which hiring and entrenching trustworthy managers enables shareholders to commit to upholding implicit contracts with stakeholders. Hostile takeovers are an innovation allowing shareholders to renege on such contracts ex post, against managers' will. On this view, shareholder gains are redistributions from stakeholders, and can in the long run result in deterioration of trust necessary for the functioning of the corporation.

Income Distribution, Market Size, and Industrialization

Abstract: When world trade is not free and costless, a less developed country can profitably industrialize only if its domestic markets are large enough. In such a country, for increasing returns technologies to break even, sales must be high enough to cover the set-up costs, This paper studies some determinants of the size of the domestic market, and focuses on two conditions conducive to industrialization. First, agriculture or exports must provide the source of autonomous demand for manufactures. Such expansion of autonomous demand usually results from increases in farm productivity or from opening of new export markets. Second, income generated in agriculture or exports must be broadly enough distributed that it materializes as demand for mass-produced domestic goods, and not just for luxuries. We resort to these two determinants of the size of domestic markets to interpret several historical development episodes.

The role of services in production and international trade: a theoretical framework

Abstract: The following sections are included:IntroductionServices in the Process of Expansion and FragmentationInternational Markets and the Production ProcessPrice Changes and the Role of Services in TradeComparisons with Existing ModelsConcluding RemarksReferences

The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment

Abstract: This paper uses two data sets to examine the impact of the potential duration of unemployment insurance (UI) benefits on the duration of unemployment and the time pattern of the escape rate from unemployment in the United States. The first part of the empirical work uses a large sample of household heads to examine differences in the unemployment spell distributions of UI recipients and nonrecipients. Sharp increases in the rate of escape from unemployment both through recalls and new job acceptances are apparent for UI recipients around the time when benefits are likely to lapse. The absence of such spikes in the escape rate from unemployment for nonrecipients strongly suggests that the potential duration of UI benefits affects firm recall policies and workers' willingness to start new jobs. The second part of our empirical work uses accurate administrative data to examine the effects of the level and length of UI benefits on the escape rate from unemployment of UI recipients. The results indicate that a one week increase in potential benefit duration increases the average duration of the unemployment spells of UI recipients by 0.16 to 0.20 weeks. The estimates also imply that policies that extend the potential duration of benefits increase the mean duration of unemployment by substantially more than policies with the same predicted impact on the total U1 budget that raise the level of benefits while holding potential duration constant.

Heteroskedasticity In Stock Returns

Abstract: We use predictions of aggregate stock return variances from daily data to estimate time varying monthly variances for size-ranked portfolios. We propose and estimate a single factor model of heteroskedasticity for portfolio returns. This model implies time-varying betas. Implications of heteroskedasticity and time-varying betas for tests of the capital asset pricing model (CAPM) are then documented. Accounting for heteroskedasticity increases the evidence that risk-adjusted returns are related to firm size. We also estimate a constant correlation model. Portfolio volatilities predicted by this model are similar to those predicted by more complex multivariate generalized-autoregressive- conditional- heteroskedasticity (GARCH) procedures.

Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence

Abstract: Recent research based on variance ratios and multiperiod-return autocorrelations concludes that the stock market exhibits mean reversion in the sense that a return in excess of the average tends to be followed by partially offsetting returns in the opposite direction Dividing history into pre-1926, 1926-46, and post-1946 subperiods, we find that the mean-reversion phenomenon is a feature of the 1926-46 period, but not of the post-1946 period which instead exhibits persistence of returns Evidence for pre-1926 data is mixed The statistical significance of test statistics is assessed by estimating their distribution using stratified randomization Autocorrelations of multiperiod returns imply a forecast of future returns, which is presented for post-war three-year returns using 1926-46, full sample, and sequentially updated coefficient estimates The correlation between actual and forecasted returns is negative in each case We conclude that evidence of mean reversion in US stock returns is substantially weaker than reported in the recent literature If mean-reversion continues to be a feature of the stock market, then the experience of the past forty years has been an aberration

Applied Production Analysis

Abstract: This book contains a modern treatment of production economics from a dual perspective, with special emphasis on recent developments. Results that were scattered throughout professional journals and monographs are now gathered into an integrated approach using a common notation. The book prepares the reader to apply the tools of the dual approach to real world problems and data sets. Particular care has been devoted to choosing topics for discussion that achieve this goal. Throughout the book there are worked examples and exercises, which are geared toward developing the reader's facility in using modern developments in production economics. Separate chapters are devoted to production, cost, and profit functions. Other topics include flexible functional forms, aggregation across inputs and outputs using the theory of separable structures, aggregation over economic optimizing firms, the representation of multioutput technologies, and the analysis and measurement of technical change from both a primal and a dual perspective.