A discrete characterization of Slutsky symmetry

Summary A smooth demand function is generated by utility maximization if and only if its Slutsky matrix is symmetric and negative semidefinite. Slutsky symmetry is equivalent to absence of smooth revealed preference cycles, cf. Hurwicz and Richter (Econometrica 1979). To observe such a cycle would require a continuum of data. We characterize Slutsky symmetry by means of discrete antisymmetric revealed preference cycles consisting of either three or four observations.The first author's research was supported in part by NSF grant DMS-9401355, and the second author's by the Deutsche Forschungsgemeinschaft, SFB 303, and by a SUNY Faculty Research award.     

Ethical reflection and service internships

To achieve the goals of ethics education, students must have oportunities to develop both moral capacities (imagination, responsibility, and perseverance) and intellectual capacities (critical thinking). This article contends that service-based learning represents an important opportunity for integrative ethics education. It describes a program of leadership internships at North Central College in Naperville, Illinois, in which faculty members conduct a for-credit reflection seminar with students involved in service internships. The seminar is based upon student-written cases about ethical issues they face in their work settings.David C. Smith is Executive Vice President of the Council for Ethics in Economics, an association of leaders in busienss and the professions dedicated to strengthening the ethical fabric of business and economic life. Prior to joining the Council in August, 1994, he was Director of the campus-wide Leadership, Ethics, and Values Program at North Central College in Naperville, Illinois.     

Roads, Land Use, and Deforestation: A Spatial Model Applied to Belize

Rural roads promote economic development, but they also facilitatedeforestation. To explore this tradeoff, this article developsa spatially explicit model of land use and estimates probabilitiesof alternative land uses as a function of land characteristicsand distance to market using a multinomial logit specificationof this model. Controls are incorporated for the endogeneityof road placement. The model is applied to data for southern Belize, an area experiencingrapid expansion of both subsistence and commercial agriculture,using geographic information system (GIS) techniques to selectsample points at 1-kilometer intervals. Market access, landquality, and tenure status affect the probability of agriculturalland use synergistically, having differential effects on thelikelihood of commercial versus semisubsistence farming. Theresults suggest that road building in areas with agriculturallypoor soils and low population densities may be a "lose-lose"proposition, causing habitat fragmentation and providing loweconomic returns.     

Formal and Informal Regulation of Industrial Pollution: Comparative Evidence from Indonesia and the United States

Economic theory and recent empirical work suggest that whenformal regulation of pollution is absent or less than 100 percenteffective, affected communities are often able to negotiateabatement from plants in their vicinity through "informal regulation."Using a model of equilibrium pollution, this article confirmsthe existence of significant informal regulation for unregulatedpollutants in both Indonesia and the United States as well asfor regulated pollutants in the United States. Combining plant-leveldata with community data in both countries, regressions revealthat even after controlling for traditional economic variablessuch as output levels and input prices as well as for plantcharacteristics such as industrial sector and age, the per capitaincome of affected communities significantly affects pollutionintensities. Higher-income communities win significantly loweremissions in both countries and for both unregulated and regulatedpollutants in the United States, presumably because income affectsboth preferences for environmental quality and the ability tobring pressure on polluting factories.     

The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function

This paper examines the efficiency and price effects of mergers by applying a frontier profit function to data on bank megamergers. We find that merged banks experience a statistically significant 16 percentage point average increase in profit efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on profits from merger-related changes in prices were found to be very small.     

Public utility valuation and risk under incentive regulation

The objective of providing inducements for public utilities to seek to improve the efficiency of their operations has been a longstanding regulatory concern. Among the evolving strategies for furthering that objective is a shift toward what has come to be referred to as incentive regulation. We examine here how this departure from past regulatory practice will affect the market value and market risk of the utility firm, and the specific manner in which an incentive mechanism can be implemented in order to achieve a desired valuation outcome. A particular focus is the establishment of boundaries on allowed rates of return under incentive regulation which are consistent with that desired outcome. The likely impact on utility ratepayers is considered.     

Selected Economic Analysis at the Antitrust Division: The Year in Review

Of the many activitiesof the Antitrust Division of theU.S. Department of Justice, we havesummarized some that raise interestingeconomic issues. We describe recentimprovements in the methodology to beused in ``coordinated effects' analysisof mergers. We also discuss four casesbrought by the DOJ that raise issues ofmarket definition, the influence ofcommon partial ownership of competitors,and the effects of fringe suppliers inconstraining collusion by large firms.     

Controlling for the Impact of Variable Liquidity in Commercial Real Estate Price Indices

Liquidity in private asset markets is notoriously variable over time. Therefore, indices of changes in market value that are based on asset transaction prices will systematically reflect intertemporal differences in the ease of selling a property. We define and develop a concept of "constant-liquidity value" in the context of a model that is characterized by pro-cyclical volume of trading. We then present an econometric model that allows for estimation of both a standard transaction-based price index and a constant-liquidity index. Our application to the NCREIF database reveals that, in the case of institutional commercial real estate investment, constant-liquidity values tend to lead transaction-based and appraisal-based indices in time, and also to display greater volatility and cycle amplitude. The differences can be significant for strategic investment policy viewed from a mean-variance portfolio optimization perspective.