Showing papers in "Social Science Research Network in 1987"

Self-Selection and the Earnings of Immigrants

Abstract: This paper analyzes the way in which the earnings of the immigrant population may be expected to differ from the earnings of the native population because of the endogeneity of the migration decision. The conditions that determine the nature of the self -selection are derived and depend on economic and political characteristics of the sending and receiving countries. The empirical analysis shows that differences in the U.S. earnings of immigrants with the same measured skills, but from different home countries, are attributable to variations in conditions in the country of origin at the time of migration.

Financing Constraints and Corporate Investment

Abstract: Most empirical models of investment rely on the assumption that firms are able to respond to prices set in centralized securities markets (through the "cost of capital" or "q"). An alternative approach emphasizes the importance of cash flow as a determinant of investment spending, because of a "financing hierarchy," in which internal finance has important cost advantages over external finance. We build on recent research concerning imperfections in markets for equity and debt. This work suggests that some firms do not have sufficient access to external capital markets to enable them to respond to changes in the cost of capital, asset prices, or tax-based investment incentives. To the extent that firms are constrained in their ability to raise funds externally, investment spending may be sensitive to the availability of internal finance. That is, investment may display "excess sensitivity" to movements in cash flow. In this paper, we work within the q theory of investment, and examine the importance of a financing hierarchy created by capital-market imperfections. Using panel data on individual manufacturing firms, we compare the investment behavior of rapidly growing firms that exhaust all of their internal finance with that of mature firms paying dividends. We find that q values remain very high for significant periods of time for firms paying no dividends, relative to those for mature firms. We also find that investment is more sensitive to cash flow for the group of firms that our model implies is most likely to face external finance constraints. These results are consistent with the augmented model we propose, which takes into account different financing regimes for different groups of firms. Some extensions and implications for public policy are discussed at the end.

Equilibrium Political Budget Cycles

Abstract: Prior to elections, governments (at all levels) frequently undertake a consumption binge. Taxes are cut, transfers are raised, and government spending is distorted towards highly visible items. The "political business cycle" (better be thought of as "the political budget cycle") has been intensively examined, at least for the case of national elections. A number of proposals have been advanced for mitigating electoral cycles in fiscal policy. The present paper is the first effort to provide a fully-specified equilibrium framework for analyzing such proposals. A political budget cycle arises here via a multidimensional signaling process, in which incumbent leaders try to convince voters that they have recently been doing an excellent job in administering the government. Efforts to mitigate the cycle can easily prove counterproductive, either by impeding the transmission of information or by inducing politicians to select more costly ways of signaling. The model also indicates new directions for empirical research.

Stochastic Trends and Economic Fluctuations

Abstract: Are business cycles mainly the result of permanent shocks to productivity? This paper uses a long-run restriction implied by a large class of real-business-cycle models -identifying permanent productivity shocks as shocks to the common stochastic trend in output, consumption, and investment -to provide new evidence on this question. Econometric tests indicate that this common-stochastic-trend / cointegration implication is consistent with postwar U.S. data. However, in systems with nominal variables, the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business-cycle variability in output, consumption, and investment. (JEL E32, C32) A central, surprising, and controversial result of some current research on real business cycles is the claim that a common stochastic trend-the cumulative effect of permanent shocks to productivity-underlies the bulk of economic fluctuations. If confirmed, this finding would imply that many other forces have been relatively unimportant over historical business cycles, including the monetary and fiscal policy shocks stressed in traditional macroeconomic analysis. This paper shows that the hypothesis of a common stochastic productivity trend has a set of econometric implications that allows us to test for its presence, measure its importance, and extract estimates of its realized value. Applying these procedures to consumption, investment, and output for the postwar United States, we find results that both support and contradict this claim in the real-businesscycle literature. The U.S. data are consistent with the presence of a common

Mean Reversion in Stock Prices: Evidence and Implications

Abstract: This paper analyzes the statistical evidence bearing on whether transitory components account for a large fraction of the variance in common stock returns. The first part treats methodological issues involved in testing for transitory return components. It demonstrates that variance ratios are among the most powerful tests for detecting mean reversion in stock prices, but that they have little power against the principal interesting alternatives to the random walk hypothesis. The second part applies variance ratio tests to market returns for the United States over the 1871-1986 period and for seventeen other countries over the 1957-1985 period, as well as to returns on individual firms over the 1926- 1985 period. We find consistent evidence that stock returns are positively serially correlated over short horizons, and negatively autocorrelated over long horizons. The point estimates suggest that the transitory components in stock prices have a standard deviation of between 15 and 25 percent and account for more than half of the variance in monthly returns. The last part of the paper discusses two possible explanations for mean reversion: time varying required returns, and slowly-decaying "price fads" that cause stock prices to deviate from fundamental values for periods of several years. We conclude that explaining observed transitory components in stock prices on the basis of movements in required returns due to risk factors is likely to be difficult.

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.

Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test

Abstract: In this paper, we test the random walk hypothesis for weekly stock market returns by comparing variance estimators derived from data sampled at different frequencies. The random walk model is strongly rejected for the entire sample period (1962-1985) and for all sub-periods for a variety of aggregate returns indexes and size-sorted portfolios. Although the rejections are largely due to the behavior of small stocks, they cannot be ascribed to either the effects of infrequent trading or time-varying volatilities. Moreover, the rejection of the random walk cannot be interpreted as supporting a mean-reverting stationary model of asset prices, but is more consistent with a specific nonstationary alternative hypothesis.

The Choice of Organizational Form: The Case of Franchising

Abstract: Evaluates the agency problems associated with company owned versus franchised units in order to determine whether these agency considerations affect the own/franchise decision. Information on the ownership characteristics of franchise firms were gathered from 112 responses to queries sent to franchise companies listed in the 1982 Norback and Norback and the 1983 Siegel franchise directories. Monitoring problems and costs and franchising contract provisions are discussed. Results support the prediction that the owned units, which presumably entail more on-site monitoring, are located closer to central or regional headquarters than franchised units. In addition, the likelihood of franchising increases with higher monitoring costs, low initial investment costs per unit, and higher frequency of repeat customers. (SFL)

Permanent Income, Current Income, and Consumption

Abstract: This paper reexamines the consistency of the permanent income hypothesis with aggregate, post-war, United States data. The permanent income hypothesis is nested within a more general model in which a fraction of income accrues to individuals who consume their current income rather than their permanent income. This fraction is estimated to be 40 or 50 percent, indicating a substantial departure from the permanent income hypothesis. This finding is robust to various statistical problems that have plagued previous work, such as time aggregation, and cannot be easily explained by appealing to changes in the real interest rate or to non-separabilities in the utility function.

Prices of Single Family Homes Since 1970: New Indexes for Four Cities

Abstract: This paper uses data on nearly a million homes sold in four metropolitan areas -- Atlanta, Chicago, Dallas and San Francisco -- to construct quarterly indexes of existing home prices between 1970 and 1986. We propose and apply a new method of constructing such indexes which we call the weighted repeat sales method (WRS). We believe the results give an accurate picture of the actual rate of appreciation in home prices in the four cities. The paper explains the construction of the index, discusses the results and compares them with the National Association of Realtors data on the median price of existing single family homes for the period 1981 - 1986.

Industry Effects and Appropriability Measures in the Stock Markets Valuation of R&D and Patents

Abstract: This paper examines the stock market's valuation of a firm's innovative activity. We estimate the market's relative valuation of firms' tangible and intangible assets, focusing on knowledge capital in the form of accumulated "stocks" of R&D and patents. We tried to improve upon our estimates of the stock market's valuation of knowledge capital embodied in such "stocks" by bringing in measures of the appropriability environment facing a firm from the Yale Survey on Industrial Research and Development. The responses to Survey questions about the effectiveness of patents as a mechanism for protecting the returns from innovation turn out to be of some use: there is evidence of an interaction between industry level measures of the effectiveness of patents and the market's valuation of a firm's past R&D and patenting performance, as well as its current R&D moves. We find no evidence, however, that other appropriability mechanisms differ enough across industries to leave measurable traces in our data. The structure of the Yale Survey makes it possible to estimate the sampling error in the appropriability measures derived from it. This information was used by us in an errors-in-variables context, but with little success. In the absence of R&D variables, our estimates imply that a two standard deviation increase in our index of patent effectiveness would raise the value of a patent held by our average firm from $0.4 million to $1.0 million. When R&D variables are introduced into the equations, the patents variables become insignificant - R&D expenditures are a better measure of input to the innovative function of firms than patents are of its output - but we estimate that the same experiment would induce changes in q of between 10 and 27 percent for the average firm, approximately doubling the market's valuation of this kind of capital.

A Short Form Measure of User Information Satisfaction: A Psychometric Evaluation and Notes on Use

Abstract: This study examines the psychometric properties ofthe short form measure of user information satisfaction(UIS) proposed by Ives, Olson and Baroudi [1983]. Basedon extensive testing the questionnaire appears to be areasonably valid and reliable measure. A framework forhow this measure can be used to detect and diagnoseproblems with user satisfaction is presented, andillustrated via two case studies. Finally,recommendations and suggestions are made regarding thefuture use of this and other measures of user informationsatisfaction.

Risky Income, Life Cycle Consumption, and Precautionary Savings

Abstract: This paper argues that precautionary savings against uncertain income comprise a large fraction of aggregate savings. A closed-form approximation for life cycle consumption subject to uncertain interest rates and earnings is derived by taking a second-order Taylor-Series approximation of the Euler equations. Using empirical measures of income uncertainty, I find that precautionary savings comprises up to 56 percent of aggregate life cycle savings. The derived expression for n-period optimal consumption is easily implemented for econometric estimation, and accords well with the exact numerical solution. Empirical comparisons of savings patterns among occupational groups using the Consumer Expenditure Survey contradict the predictions of the life cycle model. Riskier occupations, such as the self-employed and salespersons, save less than other occupations, although this finding may in part reflect unobservable differences in risk aversion among occupations.

The Career Dynamics of Self-Employment

Abstract: Using retrospective career life-history data from West Germany, the process by which individuals move into and out of self-employment is studied by separately examining the rates of movement into self-employment and family employment. A general framework of how the self-employment process operates is established -- first, by recognizing that self-employment is episodic and second, by identifying the various ways by which one can become formally self-employed. This general framework is used to study the effects of three types of substantive variables thought to be important for understanding self-employment and entrepreneurship: religion, parental self-employment, and individual experience in self-employment. The rates of movement into self-employment-related first jobs, the rates of movement into self-employment at later stages in the career, and how self-employment affects later labor-market experiences are analyzed. For entry into self-employment as a first-job, only occupational education shows a statistically significant effect and this effect is negative -- those with higher levels of occupational education are less likely to become self-employed at labor-force entry. By contrast, initial movement into family employment is shown to be positively statistically significant and it improves considerably over a constant-rate model. It is also demonstrated that experience in self- and family-employment is one of the most stable positions in the labor force, despite high rates of business failure, because the self- and family employed have significantly lower rates of job change than the conventionally employed. (SFL)

Target Abnormal Returns Associated with Acquisition Announcements:Payment, Acquisition Form, and Managerial Resistance

Abstract: Abnormal returns earned by target firms at the time of initial acquisition announcements are related to form of payment, degree of resistance, and type of offer. Results indicate that interdependence among these characteristics is important. Previous research suggests that tender offer targets earn higher abnormal returns than merger targets. After controlling for payment method and degree of resistance, however, the difference in abnormal returns between tender offers and mergers is insignificant. Resisted offers are associated with insignificantly higher returns than unresisted offers. Abnormal returns associated with cash offers are significantly higher than those associated with stock offers.

Intergenerational Transfers and Savings

Abstract: In recent years the role of intergenerational transfers in the process of wealth accumulation has been the subject of substantial empirical and theoretical analysis. The key question stimulating this research is what is the main explanation for savings? Is it primarily accumulation for retirement as claimed by Albert Ando, Richard Brumberg, and Franco Modigliani in their celebrated Life Cycle Model of Savings? Is it primarily intentional accumulation for intergenerational transfers? Or is it primarily precautionary savings, much of which may be bequeathed because of imperfections in annuity markets? This paper examines a range of findings on the importance of intergenerational transfers. The strong conclusion that emerges from this evidence is that intergenerational transfers play a very important, if not a key, role in aggregate wealth accumulation. While intergenerational transfers figure very large in savings, the precise motivation for such transfers is unclear. Intergenerational altruism might appear the most likely candidate, but at least sane stylized facts, such as the equal allocation of bequests among children, are strongly at adds with the altruism model. Other explanations involving imperfect insurance arrangements or payments for child services do not appear capable of explaining the substantial amounts of transfers actually observed. Sorting cut the relative contributions of different models to intergenerational transfers and the precise role of intergenerational transfers in the process of wealth accumulation remains an intriguing and exciting enterprise.

How to Become a Dominant French Philosopher: The Case of Jacques Derrida

Abstract: How can an interpretive theory gain legitimacy in two cultural markets as different as France and the United States? This study examines the intellectual, cultural, institutional, and social conditions of legitimation of Jacques Derrida's work in the two countries and develops hypotheses about the process of legitimation of interpretive theories. The legitimation of Derrida's work resulted from a fit between it and highly structured cultural and institutional systems. In France, Derrida capitalized on the structure of the intellectual market by targeting his work to a large cultural public rather than to a shrinking group of academic philosophers. His work appealed to the intellectual public as a status symbol and as a novel and sophisticated way to deal with late 1960s politics. In the United States, Derrida and a group of prestigious literary critics reframed his theory and disseminated it in university departments of literature. His work was imported concurrently with the work of other French scholars with whom he shared a market. Derrida's support is more concentrated and stronger in one discipline than the support for other French intellectuals. In America, professional institutions and journals played a central role in the diffusion of his work, while cultural media were more central in France.

The Optimal Collection of Seigniorage: Theory and Evidence

Abstract: This paper presents and tests a positive theory of monetary and fiscal policy The government chooses the rates of taxation and inflation to minimize the present value of the social cost of raising revenue given exogenous expenditure and an intertemporal budget constraint The theory implies that nominal interest rates and inflation are random walks It also implies that nominal interest rates and inflation move together with tax rates United States data from 1952 to 1985 provide some support for the theory

Committees, hierarchies and polyarchies

Abstract: This paper examines optimal decision making under three different organizational forms: committees, hierarchies and polyarchies. Our focus is on the trade-off between errors of rejecting good projects versus errors of accepting bad projects, and on the trade-off between gains from more extensive evaluations of projects versus costs of evaluation. We characterize the optimal sizes of these organizations (as well as the optimal level of consensus in committees), and then analyze how these optima change under different organizational environments. We also analyze the influence of organizational environment on the relative performance of these alternative organizational forms.

Sticky Prices as Coordination Failure

Abstract: This paper shows that nominal price rigidity can arise from a failure to coordinate price changes. If a firm's desired price is increasing in others' prices, then the gains to the firm from adjusting its price after a nominal shock are greater if others adjust. This "strategic complementarity" in price adjustment can lead to multiple equilibria in the degree of nominal rigidity. Welfare may be much higher in the equilibria with less rigidity. In addition, with multiple equilibrium degrees of rigidity, the economy may have several short-run equilibria but a unique long-run equilibrium.

Implementing Packaged Software

Abstract: This paper presents a model of the implementationprocess for dedicated packages and describes a researchproject to test the model undertaken with the cooperation ofa major computer vendor. Data were collected from 78individuals in 18 firms using the package and from thepackage vendor. The results of the study offer some supportfor the model along with suggestions for packageimplementation for both the customer and package vendor.

The Marginals Never Vanished: Incumbency and Competition in Elections to the U.S. House OfRepresentatives, 1952-1982

Abstract: The average vote margin enjoyed by incumbent candidates for the U.S. House of Representatives increased sharply during the 1960s. Despite this, and contrary to assumptions common in the literature on recent congressional elections, electoral data show that House incumbents are no safer now than they were in the 1950s, the marginals, properly defined, have not vanished; the swing ratio has diminished little, if at all; and competition for House seats held by incumbents has not declined. Vote margins increased without adding to incumbent security, diminishing competition, or dampening swings because the heterogeneity of interelection vote swings increased at the same time.

One Share/One Vote and the Market for Corporate Control

Abstract: A corporation's securities provide the holder with particular claims on the firm's income stream and particular voting rights. These securities can be designed in various ways: one share of a particular class may have a claim to votes which is disproportionately larger or smaller than its claim to income. In this paper we analyze some of the forces which make it desirable to set up the corporation so that all securities have the same proportion of votes as their claim to income ("one share/one vote"). We show that security structure influences both the conditions under which a control change takes place and the terms on which it occurs. First, the allocation of voting rights to securities determines which securities a party must acquire in order to win control. Secondly, the assignment of income claims to the same securities determines the cost of acquiring these voting rights. We will show that it is in shareholders' interest to set the cost of acquiring control to be as large as possible, consistent with a control change occurring whenever this increases shareholder wealth. Under certain assumptions, one share/one vote best achieves this goal. We distinguish between two classes of benefits from control: private benefits and security benefits. The private benefits of control refer to benefits the current management or the acquirer obtain for themselves, but which the target security holders do not obtain. The security benefits refer to the total market value of the corporation's securities. The assignment of income claims to voting rights determines the extent 'to which an acquirer must face competition from parties who value the firm for its security benefits rather than its private benefits.

Effects of the Changing U.S. Age Distribution on Macroeconomic Equations

Abstract: The effects of the changing U.S. age distribution on various macroeconomic equations are examined in this paper. The equations include consumption, money demand, housing investment, and labor force participation equations. Seven age groups are analyzed: 16-19, 20-24, 25-29, 30-39, 40- 54, 55-64, and 65+. There seems to be enough variance in the age distribution data to allow reasonably precise estimates of the effects of a number of age categories on the macro variables. The results show that, other things being equal, age groups 30-39 and 40-54 consume less than average, invest less in housing than average, and demand more money than average. Age group 55-64 consumes more and demands more money. If these estimates are right, they imply, other things being equal, that consumption and housing investment will be negatively affected in the future as more and more baby boomers enter the 30-54 age group. The demand for money will be positively affected. If, as Easterlin argues, the average wage that an age group faces is negatively affected by the percent of the population in that group, then the labor force participation rate of a group should depend on the relative size of the group. If the substitution effect dominates, people in a large group should work less than average, and if the income effect dominates, they should work more than average. The results indicate that the substitution effect dominates for women 25-54 and that the income effect dominates for men 25-54.

The Equilibrium Approach to Exchange Rates

Abstract: Media reports on foreign exchange rates are filled with discussions of “overvalued” or “undervalued” currencies. Stories in the financial press about changes in exchange rates frequently state that they affect international competitiveness and employment.

Firm Size and R&D Intensity: a Re-Examination

Abstract: Using data from the Federal Trade Commission's Line of Business Program and survey measures of technological opportunity and appropriability conditions, this paper finds that overall firm size has a very small, statistically in- significant effect on business unit R & D intensity when either fixed industry effects or measured industry characteristics are taken into account. Business unit size has no effect on the R & D intensity of business units that perform R & D, but it affects the probability of conducting R & D. Business unit and firm size jointly explain less than one per cent of the variance in R & D intensity; industry effects explain nearly half the variance.

Inter-Industry Wage Differences and Theories of Wage Determination

Abstract: Numerous studies have shown large differences in wages for apparently similar workers across industries. These findings pose a challenge to standard model s of labor market behavior. A problem with past studies of industry wage differences is that they have failed to distinguish between union and nonunion workers. Many economists may expect union workers wages to be set in a noncompetitive fashion but would be surprised if nonunion wages were. We examine the differences in wages across industries for both union and nonunion workers. We find that even after controlling for a wide range of personal characteristics and geographic location large wage differences persist for both union and nonunion workers. Furthermore the premiums of union and nonunion workers are highly correlated. We review past studies which demonstrate that industry wage premiums are also highly correlated across countries and have been very similar over many decades. We present new evidence that the wages of different occupations are highly correlated across industries -- that is if any occupation in an industry is highly paid all occupations are. We also review the evidence which suggests that people who move from low to high paying industries receive a large fraction of the industry wage premium and that those who move from high to low paying industries lose the premium. Finally, we review the evidence on the correlates of industry wage differences. Quit rates, human capital variables, capital labor ratios and market power measures are all positively correlated with industry wage differences individually though the data are not adequate to determine their independent contributions in multiple regression. On the basis of all the evidence we conclude that standard labor market clearing models can not easily explain all the facts. Several alternative models are discussed including efficiency wage and collective action threat mode1 s. These are found to be more consistent with the facts though some troubling problems remain.

Why Does Money Affect Output? A Survey

Abstract: Why movements in nominal money appear to have strong and lasting effects on real activity is one of the most difficult questions in macroeconomics. The paper surveys the state of knowledge on the issue. with a focus on recent developments. The paper starts by reviewing the evolution of thought from Keynes' emphasis on wages to the "wage price mechanism" of the early 1970's. as well as the facts on the relation between money. prices and output. Prom this review. it concludes that the intellectual crisis of the 1970's came not from the inability of the prevailing theory to explain the facts -which it had mostly right-. but from the weakness of its theoretical foundations. The paper then examines the reconstruction effort. Two alternative strategies have been followed. The first has been to break with previous research and explore how far models based on perfect competition and imperfect information could go in explaining the effects of money on activity. This strategy has largely fizzled and its proponents moved away from the money-output issue. The second has been instead to explore whether the many insights of previous research could be made more rigorous and has focused on the potential role of imperfect competition in labor and goods markets ; substantial progress has been made. but no grand synthesis has emerged. nor is likely to in the foreseeable future.

Aging, Moving, and Housing Wealth

Abstract: We have described the relationship between family attributes and moving, and between moving and change in housing wealth. Moving is often associated with retirement and with precipitating shocks like the death of a spouse or by other changes in marital status. Median housing wealth increases as the elderly age. Even when the elderly move, housing equity is as likely to increase as to decrease. Thus, the typical mover is not liquidity constrained, although some are. High transaction cost associated with moving is apparently not the cause for the lack of the reduction in housing wealth as the elderly age. The absence of a well-developed market for reverse mortgages may be explained by a lack of demand for these financial instruments. The evidence suggests that the typical elderly family does not wish to reduce housing wealth to increase current consumption. For whatever reason, there is apparently a considerable attachment among homeowners to past housing.

Commitment and the Modern Union: Assessing the Link between Premarital Cohabitation and Subsequent Marital Stability

Abstract: In recent years, the incidence of premarital cohabitation has increased dramatically in many countries of Western Europe and in the United States. As cohabitation becomes a more common experience, it is increasingly important to understand the links between cohabitation and other steps in the process of family formation and dissolution. We focus on the relationship between pre- marital cohabitation and subsequent marital stability, and analyze data from the 1981 Women in Sweden survey using a hazards model approach. Our results indicate that women who premaritally cohabit have almost 80 percent higher marital dissolution rates than those who do not cohabit. Women who cohabit for over three years prior to marriage have over 50 percent higher dissolution rates than women who cohabit for shorter durations. Last, cohabitors and non-cohabitors whose marriages have remained intact for eight years appear to have identical dissolution rates after that time. In addition, we provide evidence that strongly suggests a weaker commitment, on the part of those who cohabit premaritally, to the institution of marriage.