AID, ECONOMIC FREEDOM, AND GROWTH

Foreign aid has often been intended by donors to entice recipient nations into policy and institutional reforms favorable to private sector economic development. In this study, we investigate the relationship between aid and changes to economic freedom in recipient nations over the 1990–2000 decade. The evidence is mixed. In general, we find that foreign aid has no significant effect on economic freedom overall. However, using a hedonic approach on the different categories of economic freedom, we find that aid has still managed to contribute toward a policy and institutional environment favorable to growth, as the different categories of economic freedom improved by aid more than offset those which are harmed by aid, in terms of their impact on growth . ( JEL 010, 019)     

Urban population in late medieval England: the evidence of the lay subsidies

Was there a growth in the proportion of the population living in England's towns in the later middle ages? Uncertainty about national population trends and about the taxation multipliers needed to arrive at population totals has made it difficult to answer this question. A direct comparison of the proportion of taxpayers that was urban in 1377 and 1524 suggests that the urban share of population was static or may even have declined in this period. However, such decline provides no simple index of urban prosperity or decay: a decline in urbanization could be the product of rural buoyancy rather than of urban recession.     

The Effect of Accountability and Time Budgets on Auditors' Testing Strategies*

This study investigates the joint effects of accountability and time budgets on auditors' testing strategies. The task studied, substantive analytical procedures, requires auditors to identify and test hypotheses when investigating the cause of unexpected fluctuations. Thus, auditors must determine the number of tests to conduct (i.e., extent), the number of potential hypotheses to directly test (i.e., breadth), the number of tests for each hypothesis (i.e., depth) and the number of potential error or non‐error hypotheses to test (i.e., focus). Testing strategies, which we define as choices made with respect to extent, focus, depth, and breadth of testing, have significant practical and theoretical implications. For example, reducing the breadth of testing may result in failure to test the correct hypothesis, potentially impairing audit effectiveness. In this study, auditors inherited five potential causes of an unexpected increase in the gross margin of a client. As in practice, their task was to conduct tests to investigate and identify the actual cause of the fluctuation. Auditors were randomly assigned to one of four conditions created by fully crossing accountability and time budgets. The results indicate that accountability leads to an increase in the extent and breadth of testing but does not affect the depth of testing. Further, accountability leads to an increase in the testing of errors but results in a decrease in the testing of non‐errors. The focus on breadth and error testing is consistent with the notion that accountability, to a superior with unspecified preferences, promotes more cautious behavior. The results also show that a time budget decreases the extent and depth of testing but does not affect the breadth of testing. There was no evidence that the two factors interactively affected testing strategies or performance. Finally, increased breadth of testing was the mechanism that led to better performance as measured by the identification of the actual cause of the unexpected fluctuation.     

General Tests of Latent Variable Models and Mean-Variance Spanning

The methods of Gibbons and Ferson (1985) are extended, relaxing the assumption that expected returns are linear functions of predetermined instruments. A model of conditional mean-variance spanning generalizes Huberman and Kandel (1987). The empirical results indicate that more than a single risk premium is needed to model expected stock and bond returns, but the number of common factors in the expected returns is small. However, when size-based common stock portfolios proxy for the risk factors, we reject the hypothesis that four of them describe the conditional expected returns of the other assets.     

FISCAL POLICY, ADJUSTMENT COSTS, AND ENDOGENOUS GROWTH

This paper develops a one-sector endogenous growth model inwhich investment incurs convex adjustment costs. Conditionsfor the existence of a balanced growth path are discussed. Fiscalissues are analyzed in a circumstance in which the governmentuses tax revenues to finance public expenditures that impacton both the productivity of the existing capital stock, andadjustments costs. The effect of these costs on the equilibriumgrowth rate and on the effectiveness of fiscal policy is discussed.Optimal fiscal policy is derived and the role of adjustmentcosts and congestion in determining the trade-off between differenttaxes is considered.     

PROFIT MAXIMIZATION: ECONOMICS' ZOMBIE CONCEPT

In the March 1969 issue of this journal Professor Rädel asked the question “Profit Maximization—Can It Be Justified?”¹ The professor would appear to answer his question in the affirmative although with some reservations. The statement “would appear” is necessary because Rädel's argument does not lead to any clear, unique, answer. Since the author believes that profit maximization cannot be justified a note on Rädel's article is in order. Not being able to provide an alternative theory the author will merely attempt to demonstrate that Rädel's arguments are not valid. This seems to be potentially fruitful as Rädel considers many of the more important justifications for profit maximization.