Showing papers in "The Bell Journal of Economics in 1977"
TL;DR: In this paper, the authors show that if managers possess inside information about the activities of firms, then the choice of a managerial incentive schedule and of a financial structure signals information to the market, and in competitive equilibrium the inferences drawn from the signals will be validated.
Abstract: The Modigliani-Miller theorem on the irrelevancy of financial structure implicitly assumes that the market possesses full information about the activities of firms. If managers possess inside information, however, then the choice of a managerial incentive schedule and of a financial structure signals information to the market, and in competitive equilibrium the inferences drawn from the signals will be validated. One empirical implication of this theory is that in a cross section, the values of firms will rise with leverage, since increasing leverage increases the market's perception of value.
3,759Â citations
TL;DR: In this paper, the authors argue that entry is deterred in an industry when existing firms have enough capacity to make a new entrant unprofitable, and that this capacity need not be fully utilized in the absence of entry.
Abstract: The paper argues that entry is deterred in an industry when existing firms have enough capacity to make a new entrant unprofitable. This capacity need not be fully utilized in the absence of entry. This can result in larger costs than are necessary, given output levels. It also results in higher prices and lower levels of output than those implied by various forms of the limit price model. Capacity and other forms of investment are effective entry deterring variables, partly because they are irreversible and represent preemptive commitments to the industry.
1,124Â citations
TL;DR: In this paper, the authors construct an equilibrium model of firms in which each firm locates in sequence with correct expectations of the way its decisions influence the decisions of firms yet to locate.
Abstract: Existing theory poorly describes the product diversity in a modern market economy largely because such theory is founded on an inadequate concept of equilibrium. Standard analysis regards decision makers as naive in their anticipations of the response of rivals to their decisions and neglects the substantial costs of relocating in the product characteristic space. In this paper, we construct an equilibrium model of firms in which each firm locates in sequence with correct expectations of the way its decisions influence the decisions of firms yet to locate. The nature of the equilibrium is explored in a series of familiar examples taken from the literature.
551Â citations
TL;DR: In this article, a firm is identified as having an internal labor market if the efficient mode of production requires that it employ heterogeneous worker types by offering a wage structure as a set of subsidizing contracts.
Abstract: The labor market is viewed as a market for labor contracts. A firm is identified as having an internal labor market if the efficient mode of production requires that it employ heterogeneous worker types by offering a wage structure as a set of subsidizing contracts. If the firm is free to offer its choice of wage structures, and if the Wilson notion of equilibrium is considered, then certain irreducible combinations of wage-job contracts will obtain. Depending upon the distribution of worker types, wages in these equilibrium wage structures may not correspond to the marginal productivities of individual workers, but the firm breaks even because the wages of high productivity types subsidize low productivity types within the firm. The theoretical framework of our model is based on recent contributions to the theory of self-selection screening.
425Â citations
TL;DR: A rational public policy toward hospitals requires a change in the internal organization of the hospital itself, which is actually two separate firms -- a medical staff and an administration.
Abstract: This paper investigates the economic implications of the hospital's internal organizations structure. It concludes: (1) The hospital is actually two separate firms -- a medical staff (or demand division) and an administration (or supply division). Each half of the organization has its own managers, objectives, pricing strategies and constraints. (2) Within this dual organization, the medical staff and administration have devised a complicated system of nonprice allocative rules. (3) This internal allocative scheme is subject to repeated breakdowns, especially when the medical staff's internal demands exceed the short-run capacity supplied by the administration. (4) Our current regulatory policy toward hospitals is almost exclusively directed at the supply side of the organization. Unless we revise our definition of "hospital" to include the doctor part of the firm, this policy is doomed to failure. (5) Ultimately, a rational public policy toward hospitals requires a change in the internal organization of the hospital itself.
332Â citations
TL;DR: In this article, the authors explore the implications of an alternative pricing philosophy where the common costs of runway construction are shared among the different aircraft types according to a club principle, and suggest new rules of thumb for allocating common costs based on the Shapley value and the nucleolus.
Abstract: Discussion of airport pricing policy has largely centered on the problem of congestion, but at most airports congestion is negligible. In the present paper we explore the implications of an alternative pricing philosophy where the common costs of runway construction are shared among the different aircraft types according to a club principle. Linear programming and game theory techniques are used to clarify the notions of optimal runway size and fair and efficient landing fees, and to suggest new rules of thumb for allocating common costs based on the Shapley value and the nucleolus. The model is applied to Birmingham Airport to assess investment and pricing policy in 1968-1969. To the authors' knowledge this paper is the first explicit application of the "club principle" and the largest numerical application of game theory to date.
242Â citations
TL;DR: In this article, the causes and consequences of such unsustainability are theoretically examined in an idealized regulatory environment, showing that strong demand substitution effects and product-specific scale economies work against sustainability, and no regulated market structure which provides the entire product set can be sustainable.
Abstract: Contrary to conventional wisdom, a regulated natural monopoly may be vulnerable to entry by uninnovative competitors even if it is producing and pricing efficiently and earning zero economic profits. The causes and consequences of this unsustainability are theoretically examined in an idealized regulatory environment. In particular, strong demand substitution effects and product-specific scale economies work against sustainability. If natural monopoly is unsustainable, no regulated market structure which provides the entire product set can be sustainable.
187Â citations
TL;DR: In this paper, a critique of two recent works on distribution costs: one on distribution returns to scale and one on comparative public/private efficiency is presented, and a new conceptualization of the factors influencing distribution costs is then presented and a reformulation of the returns-to-scale and comparative efficiency questions is suggested.
Abstract: Though municipal ownership of electric power distribution systems has been a growing public issue since the late 1960s, serious empirical econometric investigation of distribution has barely begun. The authors opens with a critique of two recent works on distribution costs: one on distribution returns to scale and one on comparative public/private efficiency. A new conceptualization of the factors influencing distribution costs is then presented and a reformulation of the returns to scale and comparative efficiency questions is suggested. Next, statistical analysis with some new models and a new data base is presented. The author concludes with some speculative explanations of his relative cost-efficiency findings and a discussion of policy implications.
186Â citations
TL;DR: In this paper, the authors analyzed under what conditions the price system or crude rationing is more effective in matching up the limited supply of a deficit commodity with those users who need it most.
Abstract: Using a simple formal model, the present paper analyzes under what conditions the price system or crude rationing is more effective in matching up the limited supply of a deficit commodity with those users who need it most. The answer depends in a well-defined way on the distribution of needs and income. Other things being equal, the price system has greater comparative effectiveness in sorting out the deficit commodity and in getting it to those who need it most when wants are more widely dispersed or when the society is relatively egalitarian in its income distribution. Conversely, rationing is more effective as needs for the deficit commodity are more uniform or as there is greater income inequality.
137Â citations
TL;DR: In this paper, a new approach for policy assessment, integrating process analysis and econometric models that have been used extensively in energy policy analysis and technology assessment, is presented, illustrated by an analysis of a national research, development, and demonstration plan for the United States.
Abstract: Models for energy policy assessment have been developed using both process analysis and econometrics. The process approach provides for the incorporation of information on future technological and structural changes based on detailed engineering studies. The econometric approach is well adapted to the description of aggregative consumer behavior and economic activity. This paper presents a new approach for policy assessment, integrating process analysis and econometric models that have been used extensively in energy policy analysis and technology assessment. The application of this approach is illustrated by an analysis of a national research, development, and demonstration plan for the United States. 30 references.
132Â citations
TL;DR: In this paper, the permissibility of four particular innovations in a cross section of jurisdictions in 1970 and the timing of these innovations are explained by attributes of local firms, labor unions, building officials, and housing demand, suggesting that the educational level of the chief building official, the extent of unionization, and the relative size of housebuilding firms in an area affect the diffusion of innovations in residential construction.
Abstract: Previous studies, including the reports of the Douglas and Kaiser Commission, have suggested that outmoded local regulation of residential construction has impeded technical progress in the industry. In this paper, we try to identify the determinants of differences across communities in these regulations. The permissibility of four particular innovations in a cross section of jurisdictions in 1970 and the timing of these innovations are explained by attributes of local firms, labor unions, building officials, and housing demand. Our results suggest that the educational level of the chief building official, the extent of unionization, and the relative size of housebuilding firms in an area affect the diffusion of innovations in residential construction.
TL;DR: In this paper, the effects of complexity on the pre-contract bidding process are discussed, and the implications of locating the liability for provision of precontract information on providers and on purchasers are considered.
Abstract: This note is concerned with the effects of contractual complexity on the precontract bidding process. Competitive bidding is seen to be a heterogeneous class of devices for transmitting information between organizations. Even for rather simple contracts (e.g., Demsetz' license plates contract), the purchaser is seldom interested solely in price -- he is interested in acquiring and providing information as well. For complex contracts, such as a fifteen-year cable television franchise, the information problems tend to dominate. The implications of locating the liability for provision of precontract information on providers and on purchasers are considered.
TL;DR: In this article, a two-period model was developed for the study of academic research employment, where information on prospective productivity is symmetrically available to both the firm and worker, and a contrasting asymmetrical information model was introduced to answer the general question when and how should a firm discharge employees of low productivity.
Abstract: Wage trends over the working career are explored in a two-period model assuming that workers have different intrinsic productivities which are manifested stochastically Firms compete for a limited number of risk averse employees The basic model, which was developed for the study of academic research employment, postulates that information on prospective productivity is symmetrically available to firm and worker The "observed" pattern of academic wages is found to emerge: young faculty is underpaid and the less well paid older faculty is overpaid The model is used to investigate early retirement plans intended to induce the latter group to retire It is found that such plans can only be economically advantageous if the prorated overhead costs of a faculty member exceed the value of his output The basic model is then reinterpreted to answer the general question: when and how should a firm discharge employees of low productivity? A contrasting asymmetrical information model is also introduced (employees have more information than employers) In the asymmetrical case, the composition of the labor force is endogenously determined by self-selection of prospective employees Firing of employees with poor track records can also occur
TL;DR: The extent of economies of traffic density in the rail freight industry is a matter of critical importance with respect to public investment in and the financial viability of the United States rail system.
Abstract: The extent of economies of traffic density in the rail freight industry is a matter of critical importance with respect to public investment in and the financial viability of the United States rail system Certain inadequacies of previous studies of rail costs are reviewed and methodological modifications proposed The results of an econometric analysis which incorporates these revisions are presented The evidence strongly supports the hypothesis that significant economies of density exist, and that many of the light-density lines which comprise 40 percent of the rail system should be eliminated
TL;DR: In this paper, the authors employ a multi-period framework and simple concepts of game theory to asses stockpiling strategies by the government of consuming nations and pricing strategies by a cartel, and examine outcomes when discount rates, time horizons, resource constraints, and storage and production costs vary; when consuming nations do not cooperate fully; and when a consuming nation or a cartel can issue threats and promises.
Abstract: Consuming nations can stockpile cartelized commodities to suppress prices in future periods. This analysis employs a multiperiod framework and simple concepts of game theory to asses stockpiling strategies by the government(s) of consuming nation(s) and pricing strategies by a cartel. Ultimate consumers are active, though nonstrategic, players in the game. The paper examines outcomes when discount rates, time horizons, resource constraints, and storage and production costs vary; when consuming nations do not cooperate fully; and when a consuming nation or a cartel can issue threats and promises. Both producers and consumers realize economic benefits from stockpiling in most of the cases that we investigate. Depletable resources are not considered except in an appendix. The net benefits of stockpiling constrained resources are problematical.
TL;DR: In this article, the authors argue that increases in wage levels due to entry regulation may be offset by employment stability guaranteed by this regulation and by increased reluctance of management to grant increases due to the type of profit regulation imposed.
Abstract: This paper investigates the contention that workers in regulated industries receive economic rents as a consequence of the regulation. We argue that increases in wage levels due to entry regulation may be offset by employment stability guaranteed by this regulation and by increased reluctance of management to grant increases due to the type of profit regulation imposed. An empirical analysis compares earnings in seven occupations in fourteen regulated industries with earnings in other manufacturing industries. Earnings in the electric utility industry are also analyzed. Both studies are supportive of our argument.
TL;DR: In this paper, the authors present a new approach to long-run production modeling which combines the simplicity of the statistical cost function with the technical detail of process analysis by using pseudo data generated by an electric power process model, which depict the cost-minimizing input configurations for alternative relative input prices.
Abstract: This paper presents a new approach to long-run production modeling which combines the simplicity of the statistical cost function with the technical detail of process analysis. Pseudo data, which are generated by an electric power process model, depict the cost-minimizing input configurations for alternative relative input prices. The pseudo data are then utilized to estimate a translog cost function, which provides price and substitution elasticities as well as a convenient form for micromodeling. Pseudo data offer numerous advantages compared to conventional time series particularly in that they avoid multicollinearity, a limited sample range, and inadequate technical and environmental detail.
TL;DR: In this article, the long-run cost curve for the Canadian life insurance industry is estimated with an output measure consisting of a weighted sum of activities, and it is shown that previous studies of returns to scale in life insurance used biased proxies for output which led to exaggerated estimates of the degree of return to scale.
Abstract: In this paper the long-run cost curve for the Canadian life insurance industry is estimated with an output measure consisting of a weighted sum of activities. It is shown that previous studies of returns to scale in life insurance used biased proxies for output which led to exaggerated estimates of the degree of returns to scale. Statistically significant (but not economically significant) returns to scale appear to exist in the Canadian industry, but the evidence is not conclusive.
TL;DR: In this paper, the effects of changes in cost and demand conditions, regulated fares, and number of carriers on rates of return, load factors, flight frequency, and excess profits are considered.
Abstract: Airline regulation is assumed to fix fares and the number of competitors. Noncooperative schedule determination in a single regulated market served by a small number of carriers is analyzed. Comparative static effects of changes in cost and demand conditions, regulated fares, and numbers of carriers on rates of return, load factors, flight frequency, and excess profits are considered. The signs of important effects are either definite or depend simply on one or two observable magnitudes. Interpretations of the results are presented, and some implications for regulatory policy and future research are discussed. /Author/
TL;DR: The authors analyzes risk sharing in defense contracting within an insurance framework with moral hazard present, and identifies the important exogenous characteristics of the firm that determine the equilibrium set of contract terms.
Abstract: This paper analyzes risk sharing in defense contracting within an insurance framework with moral hazard present. The positive model specifies conditions under which risk sharing between the firm and the government can be expected to occur, and identifies the important exogenous characteristics of the firm that determine the equilibrium set of contract terms. An important public policy implication is derived from a normative comparison between the simple incentive structure currently used in defense contracting and a modified contingent claims arrangement. The latter is shown to be superior in providing desirable risk sharing, while also maintaining appropriate marginal incentives for cost control. 1. Introduction * Contracting for national defense has accounted for over half of the total annual defense budget since the early 1960s. The goods supplied by private industry to satisfy the public demand for national defense are generally characterized by an advanced technology fraught with uncertainty, prone to rapid obsolescence, and having extremely large capital requirements. Furthermore, the demand for these goods fluctuates markedly, and is determined by a single buyer, the federal government. These characteristics tend to preclude the development of traditionally conceived markets, and have given rise to an alternative-the bilateral procurement contract. This contractual arrangement stipulates the terms of exchange between the government and a private firm, and also serves as a mechanism for risk sharing between the two parties. The procurement of major weapons systems and their component parts takes place almost exclusively through bilaterally negotiated contracts, rather than through a competitive bidding mechanism (which is generally used only for the procurement of ready-made items). Furthermore, the competition that does exist between firms vying for major defense contracts is principally along the lines of technical design, with true cost considerations playing a relatively minor role in contract awards. The lack of significant price competition creates a strong potential for monopoly profits to be earned in
TL;DR: In this article, the authors used time series regression models to identify changes in seat prices which are unrelated to changes in stock prices or share trading volume and found that the most important regulatory change occurred in March, 1934, when the Securities and Exchange Act was first considered by Congress; both New York and American Stock Exchange seat prices fell unexpectedly by about 50 percent in one month.
Abstract: This paper tests the hypothesis that members of national securities exchanges have received net benefits from the regulatory activities of the Securities and Exchange Commission. The prices of stock exchange seats are analyzed in time periods of major changes in the regulation of the securities industry during the 1926-1972 period. Time series regression models are used to identify changes in seat prices which are unrelated to changes in stock prices or share trading volume. Empirical analysis of the unexpected changes in seat prices indicates that the most important regulatory change occurred in March, 1934, when the Securities and Exchange Act was first considered by Congress; both New York and American Stock Exchange seat prices fell unexpectedly by about 50 percent in one month. There is no evidence that this capital loss was ever recouped after March, 1934. There is also evidence that recent changes in the fixed commission rate structure of the brokerage industry have had a negative impact on seat prices. Thus, there is evidence which contradicts the hypothesis that securities brokers have benefited by capturing control of the regulators of the securities industry.
TL;DR: In this paper, the authors estimate the long-run marginal cost of producing a depletable resource and illuminate several important policy issues dealing with the development of coal resources, which is the essence of depletion is the movement from cheaper to more costly deposits.
Abstract: This paper has a two-fold purpose. The wider and more abstract purpose is estimating the long-run marginal cost of producing a depletable resource. The second purpose is the illumination of several important policy issues dealing with the development of coal resources. The essence of depletion is the movement from cheaper to more costly deposits. Econometric models estimated from past observations on prices and outputs cannot capture this movement, since the past reflects only the more favorable deposits.
TL;DR: In this paper, a generalization of both the theory of the labor-managed firm and that of the managerial firm by allowing all members of the firm to participate in decisionmaking and sharing of profits is presented.
Abstract: This paper attempts a generalization of both the theory of the labor-managed firm and that of the managerial firm by allowing all members of the firm to participate in decisionmaking and sharing of profits. We demonstrate that under rather plausible assumptions, and independently of the objective function of the firm, some profit sharing and participation in decisionmaking are required for Pareto efficiency. The allocation relations for factors of production that obtain under different decision-making structures are shown to be substantially different from each other and also different from what pure profit maximizing would indicate.
TL;DR: In this article, the Ford Foundation World Commodities Conference, Airlie, Virginia, March 18, 1977 under National Science Foundation Grant # GSF SIA75-00739
Abstract: Prepared for the Ford Foundation World Commodities Conference, Airlie, Virginia, March 18, 1977 under National Science Foundation Grant # GSF SIA75-00739
TL;DR: In this article, the authors examined the impact of line-of-business reporting on the financial community in general and on the securities markets in particular, using the capital asset pricing model.
Abstract: This paper examines the impact of line of business reporting, first required by the Securities and Exchange Commission in 1971, on the financial community in general and on the securities markets in particular. The capital asset pricing model is used to assess the effect of this disclosure requirement on the securities markets. Although the conclusions of this study are intended to evaluate required line of business reporting, the study also serves as a focal point to examine the important problem concerning the usefulness of the rapid increase in required disclosure by government regulatory agencies.
TL;DR: In this article, a two-period analysis of the dynamic interaction between the planners and the firm in terms of the former's adjustment of future tentative targets according to past performance and the latter's reaction to this process is presented.
Abstract: This paper develops further the analysis begun by Weitzman and others of the new Soviet incentive system. Elaborating on the single-period model, it investigates the firm's reaction to uncertainty in the case of risk aversion, generalizes the treatment of the expenditure of effort, and introduces the possibility of multiple objectives. Turning to a two-period analysis, it begins the difficult study of the dynamic interaction between the planners and the firm in terms of the former's adjustment of future tentative targets according to past performance and the latter's reaction to this process.
TL;DR: In this article, an empirical study of 48 electric utilities in 1970 suggests that undercapitalization may be present and that regulators set price below that which unregulated firms would set given their chosen capital stock.
Abstract: This model of an electric utility views the regulator as setting price with the firm choosing ex ante capital and labor inputs and responding to ex post demand with its fuel input and the services of the ex ante inputs. If the firm anticipates that its choice of capital stock will influence the price set by the regulator, inefficient production many result. An empirical study of 48 electric utilities in 1970 suggests that undercapitalization may be present and that regulators set price below that which unregulated firms would set given their chosen capital stock.
TL;DR: In this paper, it is shown that depending upon the design criterion employed in planning for the capacity expansion of the power system, off-peak marginal cost prices should also be imputed with some marginal capacity costs.
Abstract: In contrast to traditional methods which impose capacity costs on peak customers only, it is shown that, depending upon the design criterion employed in planning for the capacity expansion of the power system, off-peak marginal cost prices should also be imputed with some marginal capacity costs. Taking the loss of load probability (LOLP) design criterion as an example, we establish this conclusion formally, and suggest an algorithm to apportion accurately marginal capacity costs to various periods. The algorithm is then extended for power systems planned to meet a given loss of energy probability (LEOP) design target. Provisions to incorporate random deviations of customer's demand and maintenance requirements in the calculation process are also suggested.
TL;DR: In this paper, the authors compared homogeneous and hybrid price and quantity controls of a cartel seeking to maximize cumulative profits within an uncertain economic environment, and the primary determinant of the superior control was shown to be the relative influence each choice has on the variation in total output.
Abstract: Homogeneous and hybrid price and quantity controls of a cartel seeking to maximize cumulative profits are compared within an uncertain economic environment. The primary determinant of the superior control is shown to be the relative influence each choice has on the variation in total output. A member firm's size, relative to the total output, and the correlation of its output with the outputs of the other firms are therefore crucial in predicting whether the firm should optimally face a price or a quantity. Extensions of the analysis to pollution control, agricultural supports, and planned economies are also outlined.
TL;DR: In this article, the authors extend the Baumol-Oates result and show that a fee (subsidy) which achieves a given level of an undepletable externality (pure public good), does so at a minimum cost to society.
Abstract: This paper extends the Baumol-Oates result which proves that a fee (subsidy) which achieves a given level of an undepletable externality (pure public good), does so at a minimum cost to society. The extension proves that such a fee (subsidy) is also a quasi-optimal Pareto solution for a competitive economy. Any estimate of the initial fee (subsidy) should be evaluated through a benefit-cost approach rather than through the minimum cost approach which requires the assumption of fixed inputs. In addition, it is shown that no knowledge of the marginal utilities of the externalities (public good) to consumers is necessary to evaluate the quasi-(Pareto) optimal solution.