Longevity and Life‐cycle Savings*

We add health and longevity to a standard model of life‐cycle saving and show that, under plausible assumptions, increases in life expectancy lead to higher savings rates at every age, even when retirement is endogenous. In a stationary population these higher savings rates are offset by increased old age dependency, but during the disequilibrium phase, when longevity is rising, the effect on aggregate savings rates can be substantial. We find empirical support for this effect using a cross‐country panel of national savings rates.     

UNEMPLOYMENT INSURANCE AND EXPERIENCE RATING: INSURANCE VERSUS EFFICIENCY*

Unemployment insurance (UI) distorts firms' layoff decisions by reducing the cost of laying off workers. To dampen this increase, it has been suggested that UI should be financed with an experience‐rated tax. Despite the fact that increasing the level of experience rating can reduce unemployment, it can reduce the insurance coverage workers receive. With high experience rating, firms may reduce their severance payments by more than the UI benefit. We build a model where competitive firms offer contracts with severance payments to risk‐averse workers. Frictions in the labor market lead to incomplete insurance. This article shows that less than full‐experience rating enables the government to increase the insurance coverage workers receive. Welfare implications are also investigated.     

Non-Parametric Regression Models of Deviations from Othogonality in the Expectations Theory of the Term Structure

Regression tests of the expectations theory of the term structure typically reject the null hypothesis of orthogonality between implied forecast errors and the yield spreads. In the statistical literature on the term structure, these rejections are sometimes attributed to time-varying liquidity premia, and Engle et al . (1987) suggest that the ARCH-M model of time-variation in the liquidity premium may be sufficient to account for rejections of the expectations theory. We use non-parametric (kernel) regression to explore the regression test results on a number of data sets, and find some evidence of a persistent deviation from orthogonality for large absolute values of the spread. Incorporating ARCH-in-mean into models of the term premium indicates that this specification does explain significant time variation in liquidity premia, but the effect does not apepar to be sufficient to account for all of the deviations from orthogonality of forecast errors and spreads.     

Do Price Discreteness and Transactions Costs Affect Stock Returns? Comparing Ex‐Dividend Pricing before and after Decimalization

By the end of January 2001, all NYSE stocks had converted their price quotations from 1/8s and 1/16s to decimals. This study examines the effect of this change in price quotations on ex‐dividend day activity. We find that abnormal ex‐dividend day returns increase in the 1/16 and decimal pricing eras, relative to the 1/8 era, which is inconsistent with microstructure explanations of ex‐day price movements. We also find that abnormal returns increase in conjunction with a May 1997 reduction in the capital gains tax rate, as they should if relative taxation of dividends and capital gains affects ex‐day pricing.     

Book reviews

The Co-operation Phenomena: Prc)spects for Small Firms and the Small EconomiesDermont O'Doherty (Ed.)London, Irish Science and Technology Ajrency, Graham & Trotman, 1990, 270pp.

Flexible Manufacturing Technologies & International Competitiveness J. Tidd London, Pinter, 1991, ll3pp., £35.00.

Technology Strategy and the Firm: Management and Public Policy Mark Dodgson (Ed.)London, Longman, 1990, 252pp., £25.00 pb.

Computerization in Developing Countries: Model and Reality Per Lind London, Routledge, 1990, 175pp., £35.00 hb.

The Fifth Branch—Science Advisers as Policy Makers Sheila Jasonoff Cambridge, MA, Haroard University Press, 1990, 302pp., £22.50.