Automatic adjustment clauses and allocative efficiency in public utilities

This paper presents a formal analysis of the efficiency effects of automatic adjustment clauses (AACs) is regulated industries. Using a two-input model of ex ante/ex post input choice and a general putty-clay technology, we analyze the relative extent of allocative distortions due to each of three alternative regulatory policies—periodic rate review with and without an AAC, and an AAC without any rate review—for the case of a regulated firm that chooses an ex post technology to maximize the present value of future profits.Our results indicate that the economic rationale for using AACs in industries already subject to intermittent rate review is not unambiguous, even in the face of severe cost inflation, and is particularly sensitive to the magnitude of the price elasticity of demand for output and the rate and direction of input price changes. We are forced to conclude that the use of AACs in regulated industries such as electric power, while originally justified on the basis of financial viability, may well carry significant economic costs in the form of allocative inefficiency that may outweigh the benefits.     

The error learning hypothesis: The evidence reexamined

This paper reexamines the error learning hypothesis, taking explicit account of both the measurement error in forward rates and the nonstationary of liquidity premiums. The evidence is consistent with the model, but with lower explanatory power than the previous results of Meiselman (1962) and Van Horne (1965).     

Long-run implications of industrial bond ratings as risk surrogates

The financial quality of industrial bonds is observed at two different times (1968 and 1976). Discriminant models, using pertinent financial ratios as input variables, are able to replicate approximately 70 percent of Moody's ratings for both years, thus indicating that ratings remain appropriate risk proxies for long periods, However, average levels of key ratios changed. Ratios measuring leverage, coverage, and profitability deterioriated over time, indicating increased absolute risk. But, since these deterioriations were fairly uniform across groups, there appears to be little change in the relative degree of riskiness across rating groups.     

Polymorphism in competitive strategies: Trading stamps

This paper uses the example of trading stamps to examine a model of competitive nonprice marketing strategies. A concept borrowed from ethology, polymorphic equilibrium, is developed and used to explain salient features of trading stamp use by retail firms. The results contribute to an understanding of why virtually identical firms may optimally choose quite different competitive strategies. The paper also demonstrates the possibility of cyclical movements in the proportion of firms that adopt nonprice strategies such as the use of trading stamps.     

Return and price volatility of bonds with different credit risk

This article analyzes the relative price and monthly holding period return volatility of bonds with differing credit risk. The research proceeds by decomposing the causes of price volatility into that due to duration and yield volatility. Lower duration, due to higher coupon rate, and relatively stable yields, due to the behavior of credit risk and risk aversion over the business cycle, may well make lower quality issues such as A and Baa industrials exhibit less volatility than high-quality issues such as Aaa industrials and United States Treasury issues.     

Concept testing

This paper is a review of concept testing based on the published literature and a series of personal interviews with leading practitioners. While there is considerable agreement on the usefulness of concept testing, practitioners disagree on the best way to perform them. In addition to highlighting these disagreements, the paper covers general suggestions for improving concept testing.     

Price elasticity and bid-ask price spreads in the treasury bond market

Typical analyses of transactions costs in the bond markets explain these costs in terms of yield, term to maturity, coupons, and issue size. However, these analyses do not recognize the price elasticity of bonds to interest rate movements, which provides better measures of market risk and bid-ask price spreads. Elasticity or duration and issue size together display stronger associations with bid-ask price spreads than do the traditional variables. The association is also less subject to multicollinearity of the independent variables. Finally, stepwise regressions show that coupon and yield data add no information about bid-ask price spreads not already impounded in the duration statistic. This casts doubt on the nonduration arguments often used to support these variables as separately meaningful in transactions cost analyses.     

Exponents of multiattribute models

The effect of different exponents on the predictive ability of multiattribute models is examined. Survey data on 1202 individuals concerning their preferences for television shows is analyzed. The results indicate that the optimal power is not 1, and that consequently it may be somewhat more advantageous to improve on an already strong attribute than on relatively weak ones.     

Bank structure and mortgage rates: Implications for interstate banking

Competition in financial markets has been the subject of many studies in the area of market structure and performance. This paper analyzes the differences in mortgage rates between unit banking and branch banking states to consider the likely outcome of interstate banking on competition. A model of interest rate determination is developed which suggests that, at least in the mortgage market, interstate banking will, ceteris paribus, decrease competition if it lowers the number of competing firms and increases deposit concentration levels. Support is provided for the argument that only those states under statewide branching laws may receive more competitive environments from the spread of interstate banking.     

Regularity and diversity in firm size distributions in U.S. industries

The size distribution of firms in manufacturing industries has long been a matter of interest in industrial organization. Distribution in different industries show considerable regularity that static economic theory fails to explain. Stochastic growth models appear to provide some insights, but empirical tests of the log-normal or Pareto distributions have been inconclusive. This paper draws on market share data for over three hundred U.S. manufacturing industries and analyses the distribution of largest firm sizes. A statistical test of the Pareto hypothesis, rather different from previous tests in the literature, decisively rejects that hypothesis as a general explanation for the upper tail of the distribution. Instead, great diversity among distributions is found, and the regularities that do emerge imply a greater clustering of large firms than predicted by theory.     

Entry inclinations under uncertainty

This paper considers the market entry decision of a potential entrant that behaves as if it knew the future market demand and its own cost schedules, and formulates a set of probability judgements as to the unknown output rates that its future rivals will maintain. The special case where entry is free and each in-market seller, as well as the potential entrant, assumes that the others will not alter their production provokes the classic Cournot-Stackelberg situation. Although one might suspect that uncertainty would tend to inhibit entry as compared with an equivalent, in the expected-value sense, certainty situation, this is not at all the case. The suspucion is not necessarily true even when management is risk averse.