The replacement problem

A prototypical vintage capital model of economic growth is developed, where the decision to replace old technologies with new ones is modeled explicitly. Technological change is investment specific. Depreciation in this environment is an economic, not a physical, concept. The vintage capital economy's balanced-growth paths and transitional dynamics are analyzed. The transitional dynamics are markedly different from the standard neoclassical growth model.     

Atheoretical macroeconometrics: A critique

The spurious nature of the restrictions used to identify many macroeconometric models has led some researchers to advocate a style of econometric inquiry that is less dependent on prior theoretical restrictions of the sort that were central to the approach of the Cowles Commission. This development, which we call atheoretical macroeconometrics, is summarized and evaluated in the current paper. It is contrasted with an updated version of the Cowles Commission approach. We conclude that while some of the exercises of atheoretical macroeconometrics are valid, those that have attracted the most attention and appear the most innovative-exogeneity testing, impulse response analysis and policy analysis using estimated vector autoregressions - are based on incorrect analysis.     

Strict Joint and Several Liability and Justice

The American tort system regularly conducts a sort of lottery in which plaintiffs try to name as many defendants in a tort action as they can in order to collect a large judgment from at least one of them. This procedure is encouraged under strict joint and several liability, which permits plaintiffs to recover greater damages from defendants – usually businesses – with less moral culpability for the tort than poorer defendants, who bear greater culpability. In a case involving the Disney Corporation and a negligent amusement park rider, for instance, Disney was forced to pay 86% of the court award to the plaintiff, even though the jury found the company to be only 1% liable for the injury. The legal principle of joint and several liability violates morality in several different ways. Even though the principle appears to be better in the short run for plaintiffs, I will show that it fails not only to satisfy utilitarianism, but compensatory justice as well. Hence, the legal principle of joint and several liability should be eliminated in favor of a better, fairer law, which I will briefly sketch at the end.     

Market performance of options on the Chicago board options exchange

Unproven assertions about potential option returns have accompanied increased interest in option trading since formation of the CBOE. This paper presents an analysis of return distributions from buying and selling CBOE options. Generally, buying options resulted in returns that were negative and lower than returns from buying the underlying stocks. Average returns from writing covered options exceeded returns from buying both options and stocks. Commissions and taxes shifted location of return distributions for all three investments, particularly reducing returns from buying options.     

False Friends

Due to the competitive nature of business as a whole, it is sometimes difficult to develop moral relationships with others. However, though friendships are possible in business, most relationships must be kept on the lower level of business acquaintanceship.     

A theory of optimal denominations for government liabilities

Summary The design and implementation of monetary arrangements has important implications for the welfare and determinacy properties of equilibria that arise under competitive monetary exchange. In this paper we consider one particular feature of a monetary arrangement. We ask whether a government should issue its liabilities so that they are imperfectly divisible and whether they should at the same time regulate private intermediation. We argue that the answer is affirmative. We then consider the optimal minimum denomination for government liabilities given that the social planner would like to implement a particular equilibrium. We show that generically the steady state equilibria supported by minimum denominations that result in Pareto optimal allocations are indeterminate. We then pose the question, what is the best (in a Pareto sense) stationary equilibrium that can be supported, subject to the constraint that the equilibrium display certain minimal determinacy properties? The existence of an optimum in this sense is established. Such equilibria are supported by having the government issue indivisible liabilities with appropriately chosen minimum denominations.Research supported in part by NSF Grant SES-8921346. We have benefitted from conversations with Stan Engerman, Rod Garratt, Glenn MacDonald, Anne Villamil, Neil Wallace and Warren Weber, and from the comments of seminar participants at Cornell and Rochester. We are especially grateful to Ed Prescott for his suggestions.