Predation and mergers: Is merger law counterproductive?

This paper extends the literature on predation and mergers to a multi-firm setting. Two new arguments why predation is rational when a merger is an alternative are provided. First, predation is less prone to the free-rider problem, since mergers concentrate the costs of eliminating a rival with one firm, whereas predation allows the costs to be spread out. Second, predation can be profitable since it limits the negative effects of the bidding competition for the prey. It is also shown that a restrictive merger policy might be counterproductive by “helping” predators avoid the disadvantageous bidding competition for the prey.     

Representative consumer's risk aversion and efficient risk-sharing rules

We study the representative consumer's risk attitude and efficient risk-sharing rules in a single-period, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual consumer's individual risk sharing rule and his absolute cautiousness, the first derivative of absolute risk-tolerance. Furthermore, we discuss some consequences of these results and refinements of these results for the class of HARA utility functions.     

Education, segregation and marital sorting: theory and an application to the UK

This paper presents a model of the intergenerational transmission of education and marital sorting. Parents matter both because of their household income and because their human capital determines the distribution of a child's disutility from making an effort to become skilled. We show that an increase in segregation has potentially ambiguous effects on the proportion of individuals that become skilled in the steady state, and hence on marital sorting, the personal and household income distribution, and welfare. We calibrate the steady state of our model to UK statistics. We find that an increase in the correlation of spouses in their years of education will bring about a small increase in the proportion of skilled individuals when the relative supply of skilled individuals is variable at the family level and a decrease when this supply is fixed. Ex-ante utility (of an unborn individual) increases in the first case and decreases in the second. The welfare effect of increased sorting is negative for unskilled individuals and positive for skilled individuals. Increased segregation always leads to an increase in welfare inequality between skilled and unskilled individuals.     

Quality-enhancing trade liberalization

This paper examines the effect of trade liberalization on the quality of industrial goods produced by a developing country. The intermediate goods used as inputs to industrial production are assumed to be non-traded and produced by firms with market power. It is shown here that for a certain range of human capital levels, exposure to free trade, instead of resulting in de-industrialization, can raise welfare through an improvement in the quality of domestically produced industrial goods.     

On the distributional effects of income in an aggregate consumption relation

Abstract .  In this paper we analyse the influence of characteristics of the income distribution in modelling aggregate consumption expenditure. We model the aggregate consumption relation of a heterogeneous population, using a statistical distributional approach of aggregation, and apply it to UK-Family Expenditure Survey data. A bootstrap test based on a non-parametric estimation methodology, which accounts for the presence of continuous and discrete variables, suggests that the mean and the dispersion of the income distribution significantly influence aggregate consumption expenditure. Also, the parameters of the aggregate relation are time varying. These findings have implications for constructing empirically sound models of aggregate consumption expenditure.     

Time variation in the cointegrating relationship between stock prices and economic activity

The present paper examines whether there exists a long‐run cointegrating relationship between a stock market index and output and interest rates. Moreover, estimation is conducted over the full sample and both a recursive and rolling sample to examine any time variation in the nature of the relationship. The results support evidence of a single cointegrating vector, where stock prices typically exhibit a positive relationship with industrial production and a negative relationship with interest rates. However, there is significant time variation and periods of time where contrary results are observed. As such any model of stock prices needs to account for such time variation     

Quality dualism

We suggest a theory of quality dualism, defined in terms of the gap between the highest quality good produced in the informal sector and the lowest quality produced in the formal sector. We develop a model of vertically differentiated products, in which firms producing in the formal and informal sectors face different factor prices, and have a relative advantage in the manufacture of different qualities. We then use the model to examine the cyclical behavior of the respective sizes of the two sectors. Finally, we point out that factor price changes, which reduce or increase the size of the informal sector, may have the same or opposite effect on the degree of dualism in the economy.     

Pricing to market behaviour in European car markets

This paper investigates PTM behaviour in European car markets for a period of great interest (1993-98), taking into account the role of invoicing currency. The results indicate that local currency price stability is a strong and pervasive phenomenon across products independently of the invoicing currency. The paper offers robustness checks, tests and arguments that justify the interpretation of this finding, at least in part, as evidence of PTM. It implies the existence of market segmentation and price discrimination, despite the completion of the single market programme on 1 January 1993.     

The valuation relevance of R&D expenditures: Time series evidence

The literature on the valuation relevance of R&D investments is based primarily on cross-sectional regressions or panel data regressions with time and firm (or industry) fixed effects such that the parameters relating R&D to market value are cross-sectionally constant. In an alternative approach, this paper investigates the value relevance of R&D investment using an earnings-based time series valuation model. Model parameters are estimated for each firm separately. In contradistinction to the results obtained from cross-sectional and fixed effects panel models, this study finds weak empirical support at best for the value relevance of R&D expenditures at the firm level.     

Reflections on the Efficient Market Hypothesis: 30 Years Later

In recent years financial economists have increasingly questioned the efficient market hypothesis. But surely if market prices were often irrational and if market returns were as predictable as some critics have claimed, then professionally managed investment funds should easily be able to outdistance a passive index fund. This paper shows that professional investment managers, both in The U.S. and abroad, do not outperform their index benchmarks and provides evidence that by and large market prices do seem to reflect all available information.