Austrian Economics and Public Choice

The Review of Austrian Economics -     

Stationary solution to the overlapping generations model of fiat money: Experimental evidence

Overlapping generations model of fiat money yields an infinity of competitive equilibrium solutions, only one of which is stationary. Economies reported in this paper involved a sequence of overlapping generations of three or four individuals; each individual lived for two periods. In their young age individuals were endowed with chips that could be traded for fiat money wish the individuals of the old generation. In their old age, individuals could exchange their units o flat money for the consumption good. Results of the experiments exhibit some support for the stationary solution. The results are robust to two designs of exchange institutions (double oral auctior and supply schedule auction) and to two different endogenous ways of converting money into chips at the end of the game (average price prevailing during the last period the game is actually played and the average price forecast made during the last period the game is actually played).A preliminary version of this paper was presented at the meeting of the Economic Science Association and at the Federal Reserve Bank of Minneapolis. The authors are grateful for comments received from various participants at both presentations. Financial support was provided by the McKnight Foundation, the Honeywell Foundation, National Science Foundation (SES 89-12552), and Richard. M. and Margaret Cyert Family Funds.     

Regional and State Variation in Homeownership Rates; or If California's Home Prices Were as Low as Pennsylvania's Would its Ownership Rate be as High?

There are significant disparities in homeownership rates across the regions and states of the United States. The causes of these disparities are determined within a standard probit model of the individual homeownership decision where the micro-level observations are aggregated to the regional level. Factors which play a significant role at the individual level are evaluated for their ability to explain regional differentiation. The relative price of owning and renting plays a major role as do other market level determinants. Individual demographic characteristics are not as important with the exception of those related to the immigration and citizenship status of the household head.     

Do share prices matter?

This paper examines whether the cross sectional variation in Australian share prices is partially explained by measures of firm size and ownership characteristics in a manner that is consistent with firms behaving in accordance with Merton's (1987) model of capital market equilibrium with incomplete information. Based on a sample of firms whose shares were traded on the ASX during 1995, we show that firms largely owned by less wealthy shareholders tend to have low stock prices, although this relation is not linear. In addition, larger, better–known, firms tend to have higher stock prices. These findings are consistent with prior evidence from US markets, and suggest the existence of a shareholder clientele effect in Australia that is related to the share price of the underlying firm.     

Measuring the economic benefit from R&D: results from the mass, length and flow programmes of the UK national measurement system

This study sought to measure the economic consequences of reduced expenditure on specific sections of the UK National Measurement System (NMS), part of the state-funded technological infrastructure. A method was developed which can be adapted to any publicly or privately financed R&D of which the benefits and cost-effectiveness are unclear or contested.
The recent interactions between the NMS and industry were investigated empirically. Five mechanisms were found to account for the majority of instances of successful value creation. Several case studies of each mechanism were collected, illustrating their existence beyond reasonable doubt.
Each of the cut projects would have been expected to have encouraged growth and profitability in identified sectors of the economy through one or more of these five mechanisms. The effects of the cuts were modelled over 30 years. Compared to the costs of the cut projects projected over the same period, the benefits to the economy were predicted to exceed the costs.     

Alternatives to blanket guarantees for containing a systemic crisis

This paper seeks to explain how policy actions undertaken at the outset of recent crises—particularly the issuance of extensive liquidity support and government guarantees—absorb off-budget fiscal resources and inappropriately constrain officials’ subsequent options for restructuring their country’s troubled financial and corporate sectors. Empirical evidence supports the commonsense view that the damage a crisis works on a country’s financial sector and on its real economy is lessened by taking market-mimicking actions that promptly estimate and allocate losses during the early stages of a crisis. The most important steps are to plan to call a timeout to separate hopelessly insolvent institutions from potentially viable ones and to provide haircuts, guarantees, and liquidity support in ways that protect taxpayers and avoid subsidizing insolvent institutions’ longshot gambles for resurrection.     

FDA Regulation of Product Risk and Its Impact Upon Young Biomedical Firms

Data gathered on 62 products from 26 biomedical firms founded in Massachusetts between 1968 and 1975 show a positive relationship between the level of technological sophistication of a firm's products and the risk associated with the use of those products. Oscar Hauptman and Edward Roberts report the results of their study of the impact of the U.S. Food and Drug Administration's approval process on these firms' resources and time. They found that young firms dealing with medical devices and pharmaceuticals were more sensitive to this regulatory process than those producing medical auxiliary products. Enactment of the 1976 FDA regulations amendment affecting medical devices apparently created a precarious environment for the marketing of new products. The amendment was found to have significant impact beyond its target product area, medical devices and supplies. It also challenged the management of firms producing drugs and Pharmaceuticals.