Explaining Success: the Rule of Ten Percent and the Example of Market Share

This article has four aims. First, the author argues that, for good reasons, it has been impossible to find any single variable that accounts for more than 10% of the variation in business performance: he calls this the rule of 10%. Second he shows how a 10% effect can be presented graphically to seem much more significant. Third, given problems of measurement and definition, even the 10% which is explained may prove to be of limited value, which is illustrated with the well-established link between market share and return on investment. Fourth, even where variables can be identified and their contribution quantified, he questions the extent to which this can be done in a form useful to managers. The overall conclusion is that determinants of business success are so complex that managers should reject any "one big explanation" however convincing the presentation.     

THE MAGNITUDE OF PRICING ERRORS IN THE ARBITRAGE PRICING THEORY

In this paper the arbitrage pricing theory (APT) pricing errors for individual securities are estimated employing maximum likelihood factor analysis and Fama-MacBeth style aggregation. Results show that the pricing errors are large and statistically significant and that there is a high degree of variability in pricing errors across securities. This evidence contradicts the prevailing APT intuition that the pricing errors can be ignored as negligible. Pricing errors are also found to be related to residual variance and firm size.     

Agglomeration Effects and the Competition for Firms

A two-region economy consists of a given but different number of immobile workers in each region, and a given number of mobile firms. Firms create jobs where they locate, but there is frictional unemployment. Two sorts of agglomeration effects arise: those from economies of scale in matching, and those from production economies external to the firm. Regions may either be part of a unitary state in which case all regional policies are decided by the central government, or they may be part of a federal state in which case some policies are determined by the regional governments. We characterize the resource allocations in both a unitary and a federal state, and identify the set of instruments that are required to replicate the social optimum in each state.