Showing papers on "Physical capital published in 1983"

Risk, inflation, and the stock market

Abstract: Most explanations for the decline in share values over the past two decades have focused on the concurrent increase in inflation.This paper considers an alternative explanation: a substantial increase in the riskiness of capital investments. We show that the variance of firms' real gross marginal return on capital has increased significantly, increasing the relative riskiness of investors' returns on equity, and that this can explain a large part of the market decline. We also assess the effects of increase in the mean and variance of the inflation rate, and a decline in firms' expected return on capital.

Productivity and R&D at the Firm Level in French Manufacturing

Abstract: In a companion study to that of Griliches and Mairesse for the United States, we have investigated the relationship between output, labor, and physical and RD it is less so in the time dimension. However, the within-firm estimates are still significant and of a likely order of magnitude.In this respect, they are more satisfactory than the U.S. ones. We show that this is largely due to a better measurement of the variables: (1) the fact that we can use a value-added measure of output instead of sales (or equivalently that we include materials among the factors of the production function); (2) the fact that we can correct the measures of labor, physical capital and output for the double counting or expensing out of the labor, capital and materials components of R&D expenditures.

International Trade and Human Capital: A Simple General Equilibrium Model

Abstract: The paper incorporates the formation of human capital into the two-factor, two-good model of international trade. Workers can choose between being unskilled and earning the corresponding wage or obtaining an education that enables them to earn a higher wage. The wages of skilled and unskilled labor and the direct and indirect costs of education are all determined endogenously, along with the terms of trade and the pattern of comparative advantage. The implications of the model are consistent with the extensive empirical research on the role of human capital in explaining patterns of comparative advantage.

Some Aspects of the Taxation of Capital Gains

Abstract: The analysis of the effects ofcapital gains taxation requires a careful modelling both of the details of the tax code and the imperfections in the capital market. Under the standard assumptions concerning perfect capital marketsand under the standard idealizations of the tax code, there are several strategies by which rational investors can avoid not only all taxes on their capital income;these strategies leave individuals consumption and bequests in each state of nature and at each date unchanged from what they would have been in the absence of taxes.Although certain detailed provisions of the tax code may limit the extent to which rational investors can avail themselves of these tax avoidance activities, there are ways, in a perfect capital market, by which the effects of these restrictions can be ameliorated. Accordingly,any analysis of the effects of capital taxation must focus on imperfect capital market.If individuals face limitations on the amounts which they can borrow and/or if there are limitations on short sales, then under some circumstances there is a locked - in effect (individuals do not sell securities which they would have sold inthe absence of taxation); but under other circumstances individuals are induced to sell securities that they otherwise would have held, in order to takea dvantage of the a symmetric treatment of short term losses and long term gains. A policy of realizing gains as soon as they become eligible for long term treatment dominates the policy of postponing the realization of capital gains,provided the gains are not too large.A simple general equilibrium model is constructed within which it is shown that the taxation of capital gains may increase the volatility of asset prices,and lead individuals not to trade when they otherwise would.While the analysis casts doubt on the significance of the welfare losses resulting from these exchange inefficiencies,there are circumstances in which the tax leads to production inefficiencies, e.g. terminating projects at other than the socially optimal date.Finally, we argue that the focus of some recent policy debates on the short run revenue impact of a decrease in the tax rate on capital gains is misplaced: even when the short run revenue impact is positive, consumption may increase (thus exacerbating inflationary pressures) and private savings may decrease (thus leading to a lower level of investment in the private sector). Moreover, there issome presumption that the long run revenue impact is negative.Our analysis has some important implications for empirical research.In particular, it suggests that the impact of the tax is not adequately summarized by a single number, such as the "effective tax rate" representing the average ratio of tax payments to capital gains. Moreover, the impact of the tax cannot be assessed by looking only at reported capital gains and losses.

Principles of Financial Management

Abstract: An Overview of Financial Management: Introduction to Financial Management The Dynamic Environment The Operating Environment The Financial System and Corporate Securities Markets VALUATION AND THE COST OF CAPITAL: The Time Value of Money Valuation and Rates of Return Cost of Capital CAPITAL INVESTMENT DECISION Capital Budgeting Techniques Capital Budgeting Under Uncertainty CAPITAL STRUCTURE: Financial Leverage and Growth Dividend Policy TOOLS FOR FINANCIAL ANALYSIS AND PLANNING: Break Even Analysis Analysis of Financial Statements Financial Forecasting and Planning WORKING CAPITAL MANAGEMENT: Working Capital Policy Cash and Short-term Securities Accounts Receivable Inventories SOURCES OF FUNDS: Short Term and Intermediate Term Sources of Funds Leasing Bonds Stocks Convertibles, Warrants and Rights EXPANDING THE FIRMS OPERATIONS: External Growth and Contraction International Business Finance Glossary.

Changes in the International Distribution of Resources and Their Impact on U.S. Comparative Advantage

Abstract: T HE Heckscher-Ohlin (H-O) theory suggests international trade is determined by relative resource supplies among countries. Prior empirical research, such as work on the determinants of U.S. comparative advantage in a single year, has concentrated on the static predictions of H-O theory. However, H-O theory also suggests changes over time in resource supplies will alter trade structure. The present paper investigates this aspect of H-O theory. Particular emphasis is given to the role of world resource changes as an explanation of changes in U.S. trade and of the increased international competition in manufactured goods faced by the United States. Some recent studies have examined the relationship between changes in resource endowments and trade. Heller (1976) examined changes in the factor content of Japan's trade between 1958 and 1968 and found the observed patterns-consistent with changes in Japan's physical and human capital endowments. Stern and Maskus (1981) investigated changing factor input determinants of U.S. trade by estimating annual cross-section regressions over 1958-77. They suggested U.S. net exports made less direct use of unskilled labor over time. Further, analysis of the factor content of U.S. trade suggested increased U.S. abundance in physical capital relative to human capital between 1958 and 1971. Balassa (1979), using a 1970 crosssection of countries, concluded that physical and human capital accumulation largely explained changing patterns of comparative advantage in manufactures. Although these studies made important contributions, a number of issues remain concerning the relationship between resources and trade. Stern and Maskus, in listing directions for further research, cite first an examination of "How and why endowments of physical capital, human capital and labor have changed within the U.S. and our major trading partners." This paper reports a substantial data effort which addresses this topic. Another important consideration is that the direct effect of resource endowment variation on trade has yet to be determined. Previously, inferences about the effect of resource endowments on trade have been based primarily on results from industry cross-section regressions. Authors of such work indirectly infer the effect of resource variation on trade by assuming the coefficients from such regressions reflect resource abundance. However, Leamer and Bowen (1981) recently demonstrated that signs of coefficients from such regressions need not reflect a country's true resource abundance. Thus, the usual negative coefficient for the capital-labor ratio in an analysis of U.S. trade cannot be used to infer the scarcity of capital and thus cannot be used to infer the effect of an increase in capital endowment on U.S. trade. Similarly, Balassa's procedure of first regressing, for each of a sample of countries, industry trade on input intensity and then using the estimated coefficients as the dependent variable in a cross-country regression on resources is an inappropriate method for inferring the effect of resources on trade. This paper advances consideration of these issues by investigating aspects of the relationship between resources and trade. Section II examines changing patterns of resource supply among thirty-four countries over 1963-75. Section III investigates whether these resource changes are associated with altered comparative advantage in manufactured goods. Section IV uses cross-country regressions to estimate the resource endowment, as opposed to factor input, determinants of U.S. manufacturing trade and thereby the direct effect of resource variation on U.S. trade. The Received for publication April 23, 1981. Revision accepted for publication November 30, 1982. * New York University. This paper is an outgrowth of research in Bowen (1980a) and of further work conducted at UCLA under a Ford Foundation grant directed by Edward E. Leamer. An earlier version was presented at the 1980 Southern Economic Association meetings in Washington, D.C. Comments by C. Michael Aho, Robert Baldwin, Edward Leamer, Joseph Pelzman, Leo Sveikauskas and an anonymous referee are gratefully acknowledged. The author remains responsible for errors.

The Allocation of Capital Between Residential and Nonresidential Uses: Taxes, Inflation and Capital Market Constraints

Abstract: We have constructed a simple two-sector model of the demand for housing and corporate capital. Economic growth and an increase in the inflation rate were then simulated with a number of model variants. The model and simulation experiments illustrate both the tax bias in favor of housing and the manner in which the increase in inflation between 1965 and 1978 magnified it. The existence of capital-market constraints offsets the bias against corporate capital, but it introduces a sharp, inefficient reallocation of housing from less wealthy, constrained households to wealthy households who do not have gains on mortgages and are not financially constrained.

Transition Losses of Partially Mobile Industry-Specific Capital

Abstract: In estimating the economic effects of public policy, comparative static models typically assume homogenous factors that are either mobile or immobile. For changes designed to improve factor allocations, the former assumption would overstate welfare gains, while the latter would understate them. The model in this paper restricts each industry's capital reduction to its rate of depreciation. The stock of depreciated capital represents an industry-specific type of capital that may earn a lower equilibrium return. This model suggests that previous estimates of efficiency gains from integration of U. S. personal and corporate income taxes are overstated by $5 billion.

Investment Versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts

Abstract: In closed economies, saving and investment represent, respectively, the supply of and demand for new domestic capital. Saving incentives shift the supply curve for new domestic capital, while investment incentives shift the demand curve. The basic public finance equivalence theorem—the real effects of a tax (subsidy) are independent of who nominally pays the tax (receives the subsidy)—applies equally well to the market for new capital. Hence, in closed economies, saving and investment incentives do not represent conceptually distinct policies, and the real effects of taxes or subsidies applied to the supply of new capital, saving, can be replicated by taxes or subsidies applied to the demand for new capital, investment.

International Capital Movements Under Uncertainty

Abstract: In this paper, we analyze the determinants of international movements of physical capital in a model with uncertainty and international trade in goods and securities.In our model, the world allocation of capital is governed, to some extent, by the asset preferences of risk averse consumer-investors. In a one-good variant in the spirit of the MacDougall model, we find that relative factor abundance, relative labor force size and relative production riskiness have separate but interrelated influences on the direction of equilibrium capital movements.These same factors remain important in a two-good version with Heckscher-Ohlin production structure. In this case, the direction of physical capital flow is determinate (unlike in a world of certaint and may hinge on the identity of the factor which is used intensively in the industry with random technology.

The capital budgeting behaviour and corporate characteristics of capital‐constrained firms

Abstract: This paper addresses (1) the nature and pervasiveness of organisational constraints, frnancial and otherwise, on investment, and (2) the corporate characteristics and capital budgeting behaviour of capital-constrained firms for a sample of 126 UK companies. The results indicate that corporate size, risk and profitability are important corporate characteristics in this regard, and that financially-constrained firms tend to adopt naive capital budgeting methods in resolving the capital rationing problem.

Capital Accumulation and Foreign Investment Taxation

Abstract: This paper presents a dynamic, choice-theoretic general equilibrium model of capital accumulation in an open economy. Equilibria with and without capital mobility are described and compared. It is shown that neither is necessarily Pareto optimal and that an equilibrium with free trade in capital does not Pareto-dominate an equilibrium with autarky. The effects of restricting capital flows by taxing foreign investment eamings are discussed. It is seen that there will be no agreement within a country as to what constitutes an optimal tax. of restricting capital mobility by foreign investment taxation is discussed. The model employed is a two-country, overlapping-generations model (OLG) with production. It is an international version of Diamond's (1965) closed economy model, which combines a one-sector Solow growth model with Samuelson's OLG model. Each period a given number of agents are born. The agents live two periods and then die. In their first period of life agents born in period t may trade only with agents born in t - 1 or t. In their second period of life they may trade only with agents born in t + 1 or t. The model begins at period one. At this time the young of generation one and the old of generation zero are alive. It will be seen that in the first period of life agents save, and in the second period of life agents consume the return on their savings. Thus, the abstraction of a two-period life captures the essential feature of a life-cycle model: the agents begin life by saving, but at some point start to dissave. The major results are that if two countries differ only in initial capital abundance, then in autarky the initially more capital-abundant country will always be more capital abundant and will always have higher wages and lower interest rates than the initially less capital-abundant country. However, the steady state is identical in each country, with or without trade. Neither an autarky nor a laissez-faire equilibrium is necessarily Pareto optimal. Autarky and laissez faire are shown to be Pareto non-comparable. In the relatively capital-abundant country, laissez faire is preferred by generation zero and autarky is preferred by later generations. The reverse is true in the relatively labour- abundant country. There will be no unanimity as to the optimal level of foreign investment taxation in either country. Generation zero in the relatively capital- (labour-) abundant country will prefer a smaller (larger) tax than that which would maximize current national

The taxation of capital income

Abstract: * Preface * Introduction I. Optimal Capital Taxation and Investment Incentives * he Optimal Taxation of Heterogeneous Capital * Tax Neutrality and the Social Discount Rate * Efficient Design of Investment Incentives II. Taxation and Corporate Finance * Share Valuation and Corporate Equity Policy * Wealth Maximization and the Cost of Capital II. Inflation and the Firm * Inflation and the Tax Treatment of Firm Behavior * Inflation and the Choice of Asset Life * Index

Capital aggregation in the presence of obsolescence‐inducing technical change

Abstract: The major question addressed is the treatment of capital embodied technical progress. Should Obsolescence be deducted to calculate a net stock, or should quality adjustments be made in each vintage of new capital, or both, or neither? In order to estimate the contribution of new investment to growth it is necessary to use a capital stock where different vintages are weighted in proportion to their marginal products. The commonly used gross capital measures do not do this, because they do not allow for the higher marginal product of more modern capital. Such an allowance for capital embodied technical progress can be made either by quality adjusting new capital or by incorporating obsolescence into the valuation of the old capital (but not both). However, even if new capital incorporates an allowance for improved quality, it will still be necessary to revalue the old capital. Frequently, a reasonable approximation to the net capital stock results from a linear decline in quasi-rents and can be approximated by published estimates of the stock of capital net of straight line depreciation. Steady technical progress will not lead to the commonly used exponential service decline functions. To avoid overestimating the return to investment when technology changes it will be necessary to use information on capital embodied technical change to revalue old capital, rather than to change the price indices for new capital.

Correcting input-output coefficients for capital depreciation

Abstract: Energy intensities represent energy required, directly and indirectly to produce goods and services. Indirect energy sources include energy embodied in current account inputs as well as capital depreciated during the production process. Approximately 20 percent of all energy used in production processes is consumed in the production of capital goods. Ignoring the flow of energy embodied in capital inputs thus results in significant underestimates of energy intensities. This report presents a procedure for correcting the current account flow data of the Bureau of Economic Analysis (BEA) Input-Output Tables for capital depreciation. The theoretical reasons for correction are presented, and techniques used in previous studies are discussed. Sources of capital stock data and capital stock lifetimes are provided. Also included is a methodology for forming a price index for capital services for Input-Output industries. Finally, capital-corrected energy intensities are presented for 1972 and compared with noncapital-corrected energy intensities. 11 references, 1 figure, 3 tables.

On the simultaneous existence of full and partial capital aggregates

Abstract: Earlier work on aggregate production functions with capital-embodied technology showed that, when firms employ more than one capital type, conditions for partial capital ("equipment") aggregation and for total capital aggregation differ. This paper studies simultaneously existing partial and total aggregates. Existence of a total and one partial aggregate implies existence of the complementary partial aggregate. However, simultaneous existence requires each firm's production function to be strongly separable in its capital subaggregates. The use of subaggregates like "equipment" and "plant" together with an aggregate "capital" thus implies that "plant" and "equipment" are perfect substitutes and is highly questionable.

Capital Market Equilibrium with Divergent Investment Horizon Length Assumptions

Abstract: The Sharpe-Lintner Capital Asset Pricing Model (CAPM) has always contained an implicit question: what if all investors are single-period wealth maximizers but the length of the single period varies across investors? Gressis, Philappatos, and Hayya (GPH) [7] have pointed out that as the assumption of investment horizon length is changed, the Capital Market Line (CML) intersects the Efficient Frontier (EF) at different points causing different investors to hold different efficient portfolios. GPH assert that these different portfolio holdings will result in an inefficient market portfolio—and dire consequences for the capital market model.

Determinants of the Structure of Swedish Foreign Trade in Manufactures, 1968-1979

Abstract: Swedish net exports of manufactured goods are analyzed empirically for the years 1968, 1970, 1977 and 1979 in a neo-Heckscher-Ohlin framework where technological effects are taken into account. The analysis is repeated for bilateral exchange with other industrial countries, lessdeveloped countries and socialist countries. There is some evidence that Swedish net exports of manufactures to a growing extent embody direct services of human capital, especially vis-Avis the LDCs and socialist countries. A positive relationship between direct inputs of physical capital and net trade, such as was found for 1957, is no longer evident. I. Introduction The direct factor content of Swedish foreign trade in manufactures is analyzed in this paper, using a modified neo-Heckscher-Ohlin model in combination with some technological factors assumed to influence the structure of foreign trade. The presumption that human capital is an important determinant of Sweden's comparative advantage is confronted with data. Previous results, dating back to 1957, concerning the role of physical capital are also followed up. During the last decade, the change in the driving forces of international trade, as evidenced by restructuring problems in many industrialized countries (Sweden is no exception), has attracted a great deal of attention. At the same time, a number of studies have appeared in which the export performance of notably the U.S. and West Germany has been analyzed