Showing papers on "Physical capital published in 1987"

A Simple Model of Capital Market Equilibrium with Incomplete Information

Abstract: THE SPHERE of model financial economics encompasses finance, micro investment theory and much of the economics of uncertainty. As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both permeable and flexible. The complex interactions of time and uncertainty guarantee intellectual challenge and intrinsic excitement to the study of financial economics. Indeed, the mathematics of the subject contain some of the most interesting applications of probability and optimization theory. But for all its mathematical refinement, the research has nevertheless had a direct and significant influence on practice. ’ It was not always thus. Thirty years ago, finance theory was little more than a collection of anecdotes, rules of thumb, and manipulations of accounting data with an almost exclusive focus on corporate financial management. There is no need in this meeting of the guild to recount the subsequent evolution from this conceptual potpourri to a rigorous economic theory subjected to systematic empirical examination? Nor is there a need on this occasion to document the wide-ranging impact of the research on finance practice.2 I simply note that the conjoining of intrinsic intellectual interest with extrinsic application is a prevailing theme of research in financial economics. The later stages of this successful evolution have however been marked by a substantial accumulation of empirical anomalies; discoveries of theoretical inconsistencies; and a well-founded concern about the statistical power of many of the test methodologies.3 Finance thus finds itself today in the seemingly-paradoxical position of having more questions and empirical puzzles than at the start of its

International Capital Mobility: What Do Saving-Investment Correlations Tell Us?

Abstract: The finding that countries' investment rates are highly correlated with their national saving rates has been confirmed by many studies. Our interpretation of the saving-investment evidence is that the hypothesis of a high degree of substitutability for claims on physical capital located in different countries is not supported by the data. High international substitutability for bonds would imply the same for physical capital if capital were perfectly substitutable for bonds within each country, but there is no more reason for this assumption to hold than for the assumption that all goods are perfect substitutes.

Asset Pricing and Dual Listing on Foreign Capital Markets: A Note

Abstract: INTERNATIONAL CAPITAL FLOWS CAN be hampered by a variety of barriers such as transaction costs, information costs, and legal restrictions. These barriers can be severe enough to produce segmentation of capital markets along national borders, thereby producing incentives for firms to adopt financial policies that can effectively reduce the associated negative effects. According to Stapleton and Subrahmanyam [6, p. 313], dual listing of the firm's securities on foreign capital markets is one such policy.1 However, adoption of this policy will bring forth asset-pricing adjustments. The purpose of this note is to provide and analyze a closed-form solution to the equilibrium asset-pricing problem that arises in this situation.2 Once the solution is obtained, comparative statics are provided.3 The model presented assumes that one of the domestic securities is dually listed on a foreign capital market, while none of the foreign securities is dually listed on the domestic capital market. This scenario often characterizes the initial stages of capital market integration, in which a country with relatively scarce capital or a relatively underdeveloped capital market allows a small number of domestic securities (or a fund of domestic securities) to be listed on a foreign capital market while simultaneously forbidding its citizens to invest in foreign securities. This point can be illustrated by the emergence of a variety of "country" funds in the U.S. capital market, such as the Japan Fund in the 1960's, the

Asymmetric Information, Financing Constraints, and Investment

Abstract: The results of a number of theoretical papers lead to the hypothesis that financial variables affect capital sp ending because of asymmetric information in capital markets. The auth ors review the relevant theory and test this hypothesis with a large sample of firm data. The results show that financial variables such a s cash flow and interest expense add significant explanatory power to investment equations based on Dale Jorgenson's neoclassical model, w ith a CAPM specification for the firm's cost of capital, and a sales- accelerator model. The analysis, therefore, links recent theoretical work on capital markets to long-standing empirical debates in the inv estment literature. Copyright 1987 by MIT Press.

Human Capital Concepts

Abstract: Publisher Summary The concept of human capital refers to the fact that human beings invest in themselves, by the means of education, training, or other activities, which raises their future income by increasing their lifetime earnings. The term investment refers to expenditure on assets that will produce income in the future and contrast investment expenditure with consumption, which produces immediate satisfaction or benefits but does not create future income. It is possible to measure the profitability of investment in human capital using the same techniques of cost benefit analysis and investment appraisal that have been traditionally applied to physical capital. The profitability, or rate of return on investment, is a measure of the expected yield of the investment, in terms of the future benefits or income stream generated by the capital compared with the cost of acquiring the capital asset. Explanations of the concept of human capital suggest that education or training raised the productivity of workers. Migration, as well as health care, can all increase earning capacity, and can therefore be regarded as investment in human capital.

Economics of Education: A Review

Abstract: Publisher Summary This chapter discusses the economics of education. Contribution of education to economic growth, the profitability of investment in education, the role of educated manpower in economic development , the costs of education, the finance of education, and more recently studies of the effects of education on the distribution of income and wealth are the factors considered when economics of education is done. Economic theories of capital and investment tend to concentrate on investment in physical capital, such as buildings, factories, and machines that generate income in the form of production of goods and services. The costs of education are measured in terms of the total resources devoted to education, which economists call the opportunity cost. Cost-effectiveness analysis is used to compare the efficiency of alternative ways of achieving the same objective. Educated manpower is one of the most crucial inputs in the economy of any country. Students receive financial aid in the form of scholarships, bursaries, grants, or subsidized loans, which help to reduce the financial burden of fees or of the students' living expenses. There is a fixed and stable relationship between the level of educational qualifications of workers and the level of output of an industry or sector of the economy.

On the misuse of the profits-sales ratio to infer monopoly power

Abstract: The common use of the profits-sales ratio as a measure of the Lerner index of monopoly power is flawed, even with the assumption of constant returns, because of problems connected with the valuation of capital. The size of the error is related to the cost of capital, the growth rate of the firm, the depreciation method used, and, most important, the shape of the stream of benefits resulting from an investment. Examples show that the error can be quite large; further, the error is likely to be systematically related to the variables used in regression studies.

On the Definition and Magnitude of Recent Capital Flight

Abstract: This paper presents a survey of alternative definitions of capital flight and empirical estimates of capital flight utilizing a common database. At the conceptual level, we argue that the definition of capital flight requires a somewhat arbitrary distinction between normal capital flows and those representing capital flight. At the empirical level, our results illustrate the range of estimates of capital flight that are possible and how alternative definitions or databases contribute to the dispersion of estimates. Our results show that for some countries, differences in definitions or databases may have substantial effects, causing some estimates of capital flight to be positive and others negative. We argue that an appropriate definition of capital flight is one that is consistent with the kinds of economic questions under consideration. In theory, capital flight should be viewed within the context of a general equilibrium model. When this is done, capital flight will appear to be a symptom of underlying economic forces rather than a cause of national welfare losses.

Import Competition and the Stock Market Return to Capital

Abstract: We measure the responsiveness of returns to capital invested in six U.S. industries to shocks to the prices of competing import goods. Recognizing that most capital services are not traded on spot rental markets, we treat the intersectoral mobility of capital as the outgrowth of investment behavior. Then the return to capital is realized as an asset return to equity holders. . We model expected returns by CAPM, and relate "excess" returns in a period to unanticipated shocks to the variables that affect current and future profits. We find that positive shocks to import prices cause higher than normal stock market returns in all six industries. The magnitudes of the responses are consistent with the hypothesis that capital is highly sector specific in five of these industries.

Effects of Capital Gains Taxation on Life‐Cycle Investment and Portfolio Management

Abstract: We examine the impact of capital income taxation, both accrual forms of taxation and taxation of realized capital gains, on total savings and the demand for corporate financial instruments. We find that investors may hold both debt and equity in the face of effective collection of capital gains taxation even in a flat tax system. We also find that the two taxes will have substantially different effects on saving and consumption behavior, making it unlikely that the tax structure can be summarized by any single equivalent accrual tax rate. THIS PAPER EXAMINES THE impact of income taxation on the demand for various corporate financial instruments, focusing on unique features due to taxation of realized capital gains. We take a life-cycle view of investment behavior and examine how accrual and realization taxation jointly affect an individual's allocation of intertemporal resources. We shall consider the impact on his demand for debt and equity, showing that taxation of realized capital gains generates an intrapersonal tax clientele effect: at any one point of time, an individual will strictly prefer either to buy debt or equity, but that choice may be different at different ages. Therefore, many individuals will simultaneously hold both debt and equity. We also find that any attempt to measure the "effective" capital gains tax rate will be difficult and that existing approaches appear flawed since they do not correspond to the pattern of distortions which we find in this explicit model of asset demand and saving. This analysis deviates from earlier work on capital gains taxation in several substantial dimensions. Whereas much of the capital gains taxation literature focuses on how capital gains tax regulations generate arbitrage opportunities in perfect capital markets, the analysis used below essentially assumes effective enforcement of the intent of capital gains taxation. This is desirable since, contrary to the perfect capital market implication, capital gains tax revenues are nontrivial. Therefore, in examining the nature of asset demand and choice, it is reasonable to assume somewhat effective collection of the capital gains tax liabilities. Our analysis will assume completely effective enforcement to highlight the impact of capital gains taxation; it will be clear that several types of leakages will not substantially alter the qualitative conclusions.

Country Risk and the Organization of International Capital Transfer

Abstract: Foreign portfolio investment is threatened by the risk of default and repudiation, while direct foreign investment is threatened by the risk of expropriation. These two contractual forms of investment can differ substantially in: (1) the amount of capital they can transfer from abroad to capital-importing countries; (2) the shadow cost of capital and (3) their implications for the tax policy of the host. The interaction of public borrowing from abroad with investments abroad by private citizens of the borrowing country can imply multiple equilibria with very different welfare consequences. One equilibrium involves private inflows and repayment of public debt. Another is characterized by capital flight and default.

Energy, Obsolescence, and the Productivity Slowdown

Abstract: The growth rate of output per worker in the U.S. declined sharply during the 1970's. A leading explanation of this phenomenon holds that the dramatic rise in energy prices during the 1970's caused a significant portion of the U.S. capital stock to become obsolete. This led to a decline in effective capital input which, in turn, caused a reduction in the reduction in the growth rate of output per worker. This paper examines a key prediction of this hypothesis. If there is a significant link between energy and capital obsolescence, it should be revealed in the market price of used capital: if rising energy costs did in fact render older, energy-inefficient capital obsolete, prospective buyers should have reduced the price that they were willing to pay for that capital. An examination of the market for used capital before and after the energy price shocks should thus reveal the presence and magnitude of the obsolescence effect. We have carried out this examination for four types of used machine tools and five types of construction equipment. We did not find a general reduction in the price of used equipment after the energy price shocks. Indeed, the price of used construction equipment - the more energy intensive of our two types of capital - tended to increase after 1973. We thus conclude that our data do not support the obsolescence explanation of the productivity of slowdown.

The e Role of Farm Size and Resource Constraints in the Choice between Risky Technologies

Abstract: This paper investigates the relationship between farm size and technology adoption by applying a model recently developed by Just and Zilberman to the choices of a sample of southeastern soybean farmers. The adoption of double cropping soybeans with wheat is evaluated with an expanded model which includes availability of specialized equipment and human capital. It is found that the empirical farm size-technology adoption relationship is consistent with risk aversion and a high covariance of returns between the old and new technologies. Accounting for human and physical capital differences across farms improves the power of the hypothesis tests.

Capital market theory and the pricing of financial securities

Abstract: Publisher Summary The core of financial economic theory is the study of individual behavior of households in the intertemporal allocation of their resources in an environment of uncertainty and of the role of economic organizations in facilitating these allocations. The intersection between this specialized branch of microeconomics and macroeconomic monetary theory is most apparent in the theory of capital markets. The complexity of the interaction of time and uncertainty provides intrinsic excitement to study the subject. The mathematics of capital market theory contains some of the most interesting applications of probability and optimization theory. This chapter discusses necessary conditions for static financial equilibrium that are used to determine restrictions on equilibrium security prices. The combined consumption–portfolio selection problem is formulated in a more realistic and more complex dynamic setting. The chapter examines intertemporal equilibrium pricing of securities and discusses the conditions under which allocations in the continuous trading model are Pareto efficient.

The Effectiveness of Capital Controls and Their Implications for Monetary Autonomy in the Presence of Incomplete Market Separation

Abstract: This paper demonstrates the long-run ineffectiveness of quantitative capital controls using a model in which economic agents can evade controls by incurring costs at the time that capital is transferred. Differentials between domestic and off-shore interest rates, together with expectations about future yield differentials, provide incentives for capital flows, which in turn feed back to eliminate the differentials in the long run. Consequently, under fixed exchange rates, the proportion of a change in domestic credit that is "offset" by capital flows is a function of time; quantitative capital controls can provide only some temporary autonomy for national monetary policy.

Money capital in the theory of the firm : a preliminary analysis

Abstract: Preface Part I. Theoretical Issues and Analytic Motivation: 1. The firm in a monetary economy 2. Assets, capital, and capitalization 3. The concept and relevance of economic value Part II. The Neoclassical Tradition: 4. Production, pricing, investment, and financing interdependence in the firm 5. Probability, risk, and economic decisions 6. Utility, uncertainty, and the theory of choice 7. Financial asset markets and the cost of money capital 8. The cost of money capital: further analysis and controversy 9. The investment expenditure project Part III. Postclassical Perspectives: 10. Neoclassicism and an alternative perspective 11. Production and the place of money capital 12. Uncertainty and decisions in the firm References Index.

Educational policy and labour productivity: an output accounting exercise*

Abstract: What is the contribution of education to output, productivity or their growth? Economists have tried to answer this question using output accounting or growth accounting - by the decomposing of output or its growth into the contributions of various factors, including education. The approach in this paper is output accounting, of which Krueger (I968) provides an early example. Using crude aggregate census data on some 20- mostly developing - countries, Krueger posed the question: how much do differences in educational endowments lead to differences in per capita income? She estimated the effect on per capita income in the United States of assuming not the U.S. educational distribution but the distribution in each other country. The size of this effect xw}as then related to the differences in per capita income. Krueger explained more than half the difference in per capita income by differences in human capital, and so concluded that human capital (defined more broadly than educational attainment) contributed more than all other factors combined. Another version of the same exercise, but using a three-factor production function, was conducted by Fallon and Layard (I 9 75), with similar data sources but for a different set of countries. They found the contribution of their index of human capital to be lower than Krueger's estimate and generally lower than that of physical capital. Output and growth accounting both suffer from well-known drawbacks (see, for instance, Bowman, I980 and Nelson, I98I). First, failing to take account of the other determinants of income can bias estimates of the difference in income and productivity attributable to education. Secondly, in simply assuming that the (standardised) earnings difference between the educated

The Age of Capital, the Age of Utilized Capital Tests of the Embodiment Hypothesis Revisited

Abstract: Early tests of the embodiment hypothesis, which suggests that new capital is more productive than old, may have been biased due to the incorrect use of age, rather than utilized age of capital. This study, which attempts to correct for the potential mismeasurement bias by using the utilized age of capital in the analysis, finds evidence that the embodiment hypothesis is valid.

International Capital Flows and Domestic Economic Policies

Abstract: This paper, written for the NBER Conference on the Changing Role of the United States in the World Economy, covers the capital account in the U.S. balance of payments. It first traces the history from 1946 to 1980, a period throughout which Americans were steadily building up a positive net foreign investment position. It subsequently describes the historic swing of the capital account in the 1980s toward massive borrowing from abroad. There are various factors, in addition to expected rates of return, that encourage or discourage international capital flows: transactions costs, government controls, taxes, default and other political risk and exchange risk. But the paper argues that the increase in real interest rates and other expected rates of return in the United States, relative to other countries, in the early 1980s was the major factor that began to attract large net capital inflows. It concludes that a large increase in the U.S. federal budget deficit, which was not offset by increased private saving, was the major factor behind the increase in real interest rates, and therefore behind the switch to borrowing from abroad.

Rates of Profit and Interregional Flows of Capital

Abstract: This paper investigates the flows of capital in a model of an economy that has two regions. Technology is fixed and independent of scale. Investment is controlled partly by individual firms and partly by central financial institutions. In both cases, investment is divided between regions in a ratio that depends on the rate of profit earned in them. The system has a unique equilibrium growth path. The central conclusion of the model is that even if capital does tend to flow from less to more profitable regions, that flow does not in itself guarantee that profit rates tend to equalize. Therefore net capital flows do not point to higher profit regions, and high relative productivity is not necessarily correlated with high relative growth rates.

Risk and Capital Accumulation in a Small Open Economy

Abstract: This paper examines the dynamics of capital accumulation in a small open economy where home capital is risky and consumers are risk-averse. It is assumed that the economy participates in perfect international bond markets but that risky home capital is held by domestic residents only. Under these assumptions the rate of investment is no longer independent of the saving rate, and they are positively related. As a result, a rise in savings does not increase foreign investment by the same amount but by less, and in some situations the quantity of foreign assets may even decrease.

The Competitive Market Assumption and Capital Budgeting Criteria

Abstract: n It has been frequently observed that estimated benefits from capital projects tend to be optimistic and that the net present values of completed projects are often below those originally estimated. Statman and Tyebjee [9, p28] present evidence "that people who evaluate forecasts consider the forecasts to be optimistically biased." Bierman [1, pp. 64-65] presents a series of quotes showing that overly optimistic forecasts are regarded as a serious problem by financial officers of Fortune 500 corporations. Over 80% of the respondents to a survey [6, p47] of financial officers of Fortune 500 companies felt that revenue forecasts are typically overestimated. It is important to understand how these biases come to be, and how decisions can be made in an environment where the basic estimates are

Labor Supply Decisions, Human Capital Attributes, and Inequality in the Size Distribution of Earnings in the U.S., 1952-81

Abstract: This paper analyzes the impact of human capital and labor force variables and macroeconomic growth measures on inequality in the size distribution of earnings for the United States. Our technique utilizes a beta distribution of the second kind to approximate the distribution of earnings. We derive a measure of inequality that depends solely on the parameters of the beta distribution and that links human capital, labor force, and macroeconomic variables to changes in the parameters of the beta distribution. We then relate the changing parameters of the beta distribution to changes in the degree of inequality in the marginal distribution of earnings.