The role of economies of scale in justifying free trade: the Canada-USA Free Trade Agreement and Europe 1992 compared

In what way will the benefits of free trade emerge? This analysis looks at the role of economies of scale in justifying free trade. It takes the 1989 Canada-USA Free Trade Agreement and the European 1992 programmes as two recent examples of analyses in which economy of scale arguments were central to the economic evaluation of welfare gains. The official assessments of both policy moves are scrutinized and compared. It is suggested that the advantages of economies of scale are exaggerated in each account. The policy implications of the critique are drawn out for the case of both internal and external economies of scale. The argument is that a move away from traditional mass production process technologies and business strategies is underway, which requires a radically different approach to trade and scale issues.     

SEASONED EQUITY OFFERINGS FOR NEW INVESTMENT AND THE INFORMATION CONTENT OF INSIDER TRADES

Significant negative valuation effects are widely acknowledged for firms announcing seasoned equity offerings. This result is consistent with theoretical models linking new equity issues to increased adverse-selection costs, lower management ownership in the firm, misuse of free cash flow, or expectations for earnings declines. Also increasingly evident, insiders trade around corporate announcements. We test the hypothesis that insider trading and announcements of new equity issues serve as joint signals in the market's evaluation of prospective capital investment projects. Our findings are consistent with the hypothesis that insider trading is related to market reaction to announcements of new equity issues.     

Do Wages Rise or Fall Following Merger?*

This paper provides a systematic empirical analysis of the effects of merger and acquisition activity on profitability and firm‐level employee remuneration in the UK, using a specially constructed database for the period 1979–91. It finds that both profitability and wages rise following acquisition, and firms that merge within the same industry division experience larger increases in profitability and pay their workers higher wages than those engaged in unrelated acquisitions; i.e. in part, the result of an increase in the efficiency with which labour is used following related acquisition.     

Do oil tariffs lower wages?

An oil tariff has potential to alter the pattern of production and income distribution across productive factors. This paper use a general equilibrium model of production and trade with inputs of capital, labor, and international energy to examine the effects of an oil tariff. Under a range of conditions, higher energy prices created by oil tariffs would lower the ratio of wages to capital rents, and production of labor intensive goods would fall. This paper concentrates on the potential of oil tariffs to alter patterns of production and income distribution.