Price-Cap Regulation and Inefficiency in Relative Pricing

The allocative efficiency properties of three price-cap schemes are compared. The scheme that uses lagged quantities in the price index and has a fixed cap works well when the firm is myopic but generates inefficient relative prices otherwise. With myopia prices are efficient and welfare is higher than with equal pricing, but the gain to the firm comes at the expense of lower consumer surplus. When the firm is not myopic pricing can be so inefficient that steady-state welfare is below the no-regulation level.     

Hitting the Jackpot or Hitting the Skids: Entertainment, Poverty, and the Demand for State Lotteries

A bstract .   State-sponsored lotteries are a lucrative source of revenue. Despite their low payout rates, lotteries are extremely popular, particularly among low-income citizens. State officials laud the benefits of lottery proceeds and promote the fun and excitement of participation. This entertainment value is one explanation for lottery demand by the poor: individuals with lower incomes substitute lottery play for other entertainment. Alternatively, low-income consumers may view lotteries as a convenient and otherwise rare opportunity for radically improving their standard of living. Bad times may cause desperation, and the desperate may turn to lotteries in an effort to escape hardship. This study tests these competing explanations. We examine lottery sales data from 39 states over 10 years and find a strong and positive relationship between sales and poverty rates. In contrast, we find no relationship between movie ticket sales, another inexpensive form of entertainment, and poverty rates.     

STICKY WAGE, EFFICIENCY WAGE AND KEYNESIAN UNEMPLOYMENT

Abstract.  This paper provides a model of involuntary unemployment by combining the insights of the sticky wage theory and the efficiency wage theory. It implies that employed workers tend to supply more effort in response to economic downturns. Thus, a negative shock to an economy has intriguing impacts on the unemployment. The model also shows that a negative demand shock may have a relatively small effect on output since changes in work effort serve to partially mitigate the effects of the shock. Moreover, it yields some implications that complement the existing 'work sharing' literature.     

The effect of a magazine’s free digital content on its print circulation: Cannibalization or complementarity?

We examine how offering digital content affects demand for print magazines. Using a searchable website archive, we measure the digital content offered by a sample of US consumer magazines from 1996 to 2001. We find strong evidence that digital content cannibalizes print sales. On average, a magazine’s print circulation declines about 3–4% when it offers a website. However, the effect varies with the type of digital content offered. Offering digital access to the entire contents of the current print magazine reduces print sales by about 9%. We find no evidence that digital content complements print magazines. These results are robust to including controls for unobserved magazine, category, and time effects, as well as controls for the impact of contemporaneous price changes and other factors.     

Ideology, markets and money

Contemporary economic theory is considered in terms of the science/ideologydistinction. Marx's critique of Hegel is then used to derivea demarcation criterion that sharply separates scientific knowledgefrom ideology. This critique interprets Hegelian methodologyas fundamentally ideological because it understands realityin terms of abstract thought and then hypostatises that thoughtas reality. This process is more generally treated in termsof Marx's theory of value and money, in which money really doesdo what Hegelian logic purports to do. The consequences of consideringMarxian theory in this way provide some purchase on the logicand limitations of contemporary economic theory.     

THE DETERMINANTS OF THE INTER-INDUSTRY PATTERN OF DIVERSIFICATION BY U.K. MANUFACTURING ENTERPRISES*

Evidence of the diversity of output of larger U.K. manufacturing enterprises’in 1958, 1963 and 1968 is provided in the Reports on the Census of Production. The Censuses show that between 1958 and 1968 diversification was a significant and general trend in manufacturing industries and an important element in the growth of firms during the period. Moreover diversification seems to be part of a longer term trend in U.K. industry and part of the typical development pattern of the large firm. A theory of the firm's diversification decision is proposed and from this theory predictions are made of the structural features both of a firm's primary industry and of outside industries which are likely to encourage diversification from the one industry to the other. The power of the model in explaining the pattern of diversification between SIC manufacturing orders in the period 1963–68 is weak, due in part to the wide variety of factors influencing diversification and to the aggregated form of the data. Nevertheless, the results show the importance of research and development effort in encouraging diversification and the stimulus to diversification given by profitability and risk in firms’primary industries and high rates of output growth in outside industries. While the findings offer no clear conclusions regarding the impact of diversification upon economic performance, the results are consistent with the propositions that (i) diversification encourages technical progress in industry and (ii) diversification increases the efficiency with which resources are allocated between industries.     

Finance, Politics, and the Accounting for Stock Options

The politics of option accounting crosses party lines, reflecting both the interests of the affected constituencies and the desire for power over standard setting. House Bill HR-3574, which mandates an assumption of zero stock price volatility, runs counter to the recently passed Financial Accounting Standards Board (FASB) rule requiring fair-value expensing of stock options. For any option issued at or out of the money, where strike prices are normally set, expense recognition is zero under this bill's mandated assumption.
Besides excessive use of stock options, the lack of a "final peace" in the option accounting war appears to have encouraged another questionable corporate practice. This article examines a sample of "six-and-one restructurings," exchanges of options in which expensing of re-priced (deep out-of-the-money) options can be avoided if employees wait at least six months and one day before receiving new options. The authors found that market-adjusted stock prices tend to decrease during the six-month period before the strike price is reset. This result provides one more reason why companies should be required to use fair-value option pricing models to expense options.     

Bank Risk, Capitalization, and Operating Efficiency

A simultaneous equation framework is used to test hypotheses about the interrelationships among bank interest rate and credit risk-taking, capitalization, and operating efficiency. A positive effect of inefficiency on risk-taking was found and supports the moral hazard hypothesis that poor performers are more vulnerable to risk-taking than high performance banking organizations. A positive effect of inefficiency on the level of capital is attributable to regulatory pressure on underperforming institutions. At the same time, firms with more capital are found to operate more efficiently than less well-capitalized banking organizations. A U-shaped relationship is detected between inefficiency and loan growth, indicating that operating efficiency improves at a decreasing rate as loan growth rate increases. This supports the hypothesis that entrenched managers who pursue a growth objective to enhance their own wealth tend to operate inefficiently.