acquisitions and investment we derive a simple theoretical framework in which acquisitions are treated as an alternative way of obtaining capital goods our framework predicts that both investment and acquisitions are positively related to a firm s shadow value of capital we transform our theoretical specification into an econometric model which we then estimate using a long panel data set spanning 503 us firms over 15 consecutive years our results indicate that an increase in the shadow value of capital has approximately the same proportionate effect on the level of acquisitions as it does on investment this result proves to be robust to a variety of alternative specifications recent years have witnessed a dramatic increase in the number of corporate takeovers this tide of activity raises a number of questions about the causes and consequences of acquisitions what effects do takeovers have on research and development spending do takeovers reduce employment how important are tax considerations in motivating acquisitions do management objectives and or the availability of free cash flow play a role in acquisitions although these questions have been addressed in previous research no specific optimizing model has been put forward to explain the fundamental nature of the acquisition decision in this paper we propose such a model when a firm makes an acquisition it obtains assets in this way acquisitions and investment are similar activities which one might expect to be guided at least to a substantial extent by similar economic principles in this paper we specify and estimate a simple model that explicitly links a firm s acquisition activities to its investment choices the only unusual feature of this model is that these goods can be either purchased directly investment or obtained by taking over another firm acquisitions our model is based on the firm s intertemporal optimization problem under what are with this one exception standard assumptions our specification yields a pair of equations in which a firm s choices regarding acquisitions and investment are jointly determined and are influenced by the shadow value of capital as in many models of investment we assume that firms face convex costs of adjusting their capital stocks consequently the shadow value of capital may exceed its replacement cost firms for which the shadow value of capital is high relative to its purchase price will have an incentive to make relatively large capital purchases in relation to their existing capital stock under standard assumptions the shadow value of capital is reflected in the firm s stock market

stacking up the ladder a panel data analysis of tanzanian household energy choices energy use statistics in tanzania reflect the country s low level of industrialization and development in 2016 only 16 9 of rural and 65 3 of urban inhabitants in mainland tanzania were connected to some form of electricity we use a nationally representative three wave panel dataset 2008 2013 to contribute to the literature on household energy use decisions in tanzania in the context of the stacking and energy ladder hypotheses we firstly adopt a panel multinomial logit approach to model the determinants of household cooking and lighting fuel choices secondly we focus explicitly on energy stacking behaviour proposing various ways of measuring what is inferred when stacking behaviour is thought of in the context of the energy transition and presenting household level correlates of energy stacking behaviour thirdly since fuel uses have gender differentiated impacts we investigate women s bargaining power in the decision making process of household fuel choices we find that whilst higher household incomes are strongly associated with a transition towards the adoption of more modern fuels especially lighting fuels this transition takes place in a context of significant fuel stacking in tanzania government policy has been aimed mostly at connecting households to the electric grid however the public health environmental and social benefits of access to modern energy sources are likely to be diminished in a context of significant fuel stacking lastly we present evidence that the educational attainment of women in the household is an important aspect of household fuel choices

the effects of uncertainty on investment and the expected long run capital stock abstract this paper examines the effects of output price uncertainty on the optimal investment behavior of a risk neutral competitive firm with a constant returns to scale production function in the presence of convex costs of adjustment investment is an increasing function of q the shadow price of capital given the current price of output we find that increased uncertainty will raise the current rate of investment increased uncertainty will also increase the expected long run capital stock if the price of output is serially uncorrelated however if the price of output is serially correlated then the direction of the effect of increased uncertainty on the expected long run capital stock depends on the curvature of the marginal adjustment cost function in this case we obtain results which are directly opposite of the results in the literature and we locate the flaw in the existing analysis

dividend taxes corporate investment and q abstract taxes on corporate distributions have traditionally been regarded as a double tax on corporate income this view implies that while the total effective tax rate on corporate source income affects real economic decisions the distribution of this tax burden between the shareholders and the corporation is irrelevant recent research has suggested an alternative to this traditional view one explanation of why firms in the united states pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions this capitalization leaves investors indifferent at the margin between a corporation s decision to pay out dividends or to retain earnings this alternative view holds that while changes in the dividend tax rate will affect shareholder wealth they will have no impact on corporate investment decisions this paper develops econometric tests which distinguish between these two views of dividend taxation by extending tobin s q theory of investment to incorporate taxes at both the corporate and personal levels the implications of each view for corporate investment decisions can be derived the competing views may be tested by comparing the performance of investment equations estimated under each theory s predictions british time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions the econometric results suggest that dividend taxes have important effects on investment decisions

stock market volatility and investment do only fundamentals matter the empirical evidence in the volatility literature suggests that movements in stock prices cannot be satisfactorily explained purely in terms of changes in fundamentals this paper shows how to obtain proxies for the fundamental and fad components of changes in stock prices and asks the question do only fundamentals matter for investment decisions we find that changes in investment are significantly associated with movements in both components of stock prices the point estimates suggest that changes in fundamentals have a greater effect than changes in non fundamentals the statistical significance of the difference between their coefficients depends upon the financing regime these conclusions are shown to be robust to modifications and extensions of the model

retail bank deposits as quasi fixed factors of production neoclassical models of the banking firm for example michael klein 1971 treat all deposit liabilities as fully variable factors of production banks then maximize profits minimize liability costs by equating the marginal costs of all liability types during each period the empirical relevance of these models is difficult to establish because binding deposit rate ceilings regulation q force bank competition for many retail deposits into implicit interest channels that are not readily measured it is therefore noteworthy that during two recent periods when deposit rate ceilings were not binding banks paid retail deposit rates considerably in excess of the rate at which they could borrow via large unregulated certificates of deposit such behavior seems inconsistent with the cost minimization prescribed by neoclassical bank models however if retail deposit accounts are interpreted as quasi fixed gary becker 1962 walter oi 1962 donald parsons 1972 sherwin rosen 1968 inputs to the banking firm these important historical observations can be reconciled with bank profit maximization this paper first describes two historical episodes during which the bank retail deposit rate exceeded the negotiable certificate of deposit rate for substantial periods of time while no profit maximizing cost minimizing bank would pay such a rate differential if retail deposit quantities are costlessly variable interpreting retail deposit accounts as quasi fixed inputs to the bank explains the peculiar rate structures a simple two period model of bank liability selection formalizes the analysis i two puzzling historical episodes

accounting rates of return many economic studies provide empirical evidence regarding cross sectional differences in firm profitability in most of these studies firm profitability is measured by an accounting rate of return net income dividend by the book value of assets hereafter arr rather than an economic rate of profit franklin fisher and john mcgowan define the firm s economic rate of profit irr as that interest rate which equates the present value of its net revenue stream to its initial outlay 1983 p 82 fisher and mcgowan examine the analytic relation between a firm s arr and its irr in a series of examples and conclude that the arr is such a bad surrogate for the irr that the results of arr based empirical studies are likely to be totally misleading p 91 william long and david ravenscraft 1984 have criticized the theoretical work of fisher and mcgowan because the nature of the analytic relationship between the arr and the irr in the context of highly simplified hypothetical examples may not be indicative of the nature of the relationship in empirical settings their criticism adopts the utilitarian view that the arr has to be treated as a suitable surrogate for the irr as long as no preferable alternative measure of profitability is available for empirical work this view has merit as long as the measurement error which is contained in the arr is random rather than systematic unfortunately the nature and extent of the measurement error which is contained in the arr in a particular empirical setting can only be determined unequivocally if the irr is unequivocally known in such a case of course there would be no need to rely on the arr at all due to this unhappy circle empirical research on firm profitability has continued to rely on the arr despite the fact that many persons reasonably believe that the results of such research may be totally misleading fisher and mcgowan g c harcourt 1965 while others reasonably believe that the results are reliable enough to form a basis for policy decisions long and ravenscraft recent work by y ijiri 1978 1979 1980 and by myself 1982 has shown that conditional irr estimates can be obtained from data in firms financial statements while these irr estimates are conditional they do abstract from certain extraneous factors that influence arrs and that differ across firms consequently the conditional irr estimates are free from some of the sources of measurement error which are known to contaminate the arr thus the conditional irr estimates can be used to provide evidence on whether these sources of measurement error have or have not affected the outcome of prior studies in which profitability was measured by the arr such evidence can help to objectively resolve the conflict between the opposing views on the reliability of arr based profitability research this paper uses conditional irr estimates to examine the properties of the measurement error in the arr in a study of the relationship between firm profitability and firm size the remainder of the paper is organized as follows in section i the theoretical work of fisher and mcgowan is used professor of accounting university of iowa iowa city ia 52242 i gratefully acknowledge the comments of william albrecht dan dhaliwal gary fethke franklin fisher scott linn william r kinney jr and the participants of a workshop at the university of florida on earlier versions of this paper 1 some authors for example william long and david ravenscraft 1984 have used the sales margin ratio earnings sales as a measure of profitability however if one views profitability as return per unit of sacrifice the sales margin ratio is not a profitability measure since it ignores the sacrifice or investment required to generate a dollar of sales consequently this paper does not attempt to shed any insight into prior studies that have relied on the sales margin ratio as a measure of profitability

interconnectedness in the cds market concentrated risks in the market for credit default swaps cdss are widely considered to have contributed significantly to the 2007 08 financial crisis we examine the structure of the cds market using a network based approach that allows us to capture the interconnectedness between dealers and nondealers of cds contracts we find a high degree of interconnectivity among major market participants our work helps assess the stability of the cds market and the potential contagion among market participants our findings are of practical importance because even after central clearing becomes mandatory counterparty risk will remain a relevant systemic consideration owing to the long term nature of cds contracts

energy demand substitution from biomass to imported kerosene evidence from tanzania abstract we analyze domestic household energy demand and use patterns in tanzania using a detailed household survey of purchase transactions a multivariate probit model and the quaids modeling framework the main fuel sources that we study are kerosene charcoal and firewood these three accounted for 96 5 of spending on energy by households charcoal and firewood are used for cooking while kerosene is used for lighting and cooking kerosene is almost exclusively imported while charcoal and firewood are produced domestically these fuel sources are important given the impacts of wood harvesting on the environment and kerosene imports on public finances we find a statistically significant response in kerosene demand to charcoal prices suggesting a pattern of substitution but no strong substitution relationships between other fuel pairs these results which we use in a simulation of tariff change imply that policies centered on price changes may not be effective in changing consumer behavior unless alternative sources of energy are readily accessible

the analytical derivation and empirical test of a tax adjusted fundamental value model in implementing the theory of current valuation for fixed assets accountants encounter a range of difficult estimation problems many of these problems arise because fixed assets yield their productive potential over many accounting periods theoreticians regulators users and preparers have sought to overcome difficulties in estimating values for owned used assets by estimating the historical cost or the current cost of a new asset and applying a depreciation factor that adjusts for diminished productive capacity the resulting depreciated cost estimate then serves as a proxy for the economic value of the owned used asset previous research has demonstrated that this depreciated cost estimate of economic value is sensitive to both the valuation model and the assumed depreciation schedule see for example greenball 1969 beaver and dukes 1973 beaver and landsman 1983 mohr and dilley 1984 swenson 1987 and kim and moore 1988 the purpose of our study is to extend prior research by examining the interactive

investment cash flow sensitivities credit rationing and financing constraints in small and medium sized firms the controversy on whether investment cash flow sensitivity is a good indicator of financing constraints is still unsolved we apply a comprehensive approach by cross validating our analysis with both balance sheet and qualitative data on self declared credit rationing and financing constraints on a sample of mainly small and medium sized firms our qualitative information shows that self declared credit rationing is weakly related to both traditional a priori factors such as firm size age and location and lenders rational decisions taken on the basis of their credit risk models we use the qualitative information on firms which were denied additional credit to provide evidence relevant to the investment cash flow sensitivity debate the evidence shows that self declared credit rationing significantly discriminates between firms which possess or not such sensitivity while a priori criteria do not the same result does not apply when we consider the wider group of financially constrained firms which do not seem to have a higher investment cash flow sensitivity supporting the more recent empirical evidence in this direction

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

capacity investment and market power in the economic value of energy firms regulation of energy firms faces the complex problem of balancing private earning a fair rate of return on investment and public assure safe and reliable supply of energy at the lowest possible costs goals tobin s q is a forward looking indicator on investment opportunities and on market power of firms that energy regulators can use for more effective regulation this paper presents the empirical evidence on the determinants of differences in observed values of tobin s q for a sample of large listed energy firms from 10 different countries in the period 2000 2006 we find that adjustment costs represent around sixty percent of the difference between economic and book value of the assets for the representative firm while rents from market power represent the other forty percent therefore across countries there is room for regulatory actions aiming at reducing energy prices but less than what may be inferred from the observed average q values

conjectural variation elasticities and concentration abstract this paper shows that measures of seller concentration can be interpreted as weighted averages of conjectural variation elasticities this interpretation allows an assessment of the appropriateness of a wide variety of concentration measures for price cost margin studies

deadweight loss in oligopoly a new approach ever since harberger s 18 pioneering article researchers have attempted to estimate the welfare loss resulting from the exercise of market power despite nearly four decades of work in this area however surprisingly few researchers disagree with harberger s finding that deadweight loss is quite small while many dispute his claim that deadweight loss in manufacturing amounts to only about 0 1 of gnp few estimates exceed more than 1 3 of the value of output some of the higher estimates moreover include losses of a broader nature than the purely allocative losses on which harberger focuses in this paper i use a generalization of a recent model of oligopoly to estimate the magnitude of deadweight loss in the u s manufacturing sector while the exact magnitude of the losses depends on several parameters the estimates indicate that deadweight loss may be considerably higher than earlier work suggests ranging from roughly 6 10 of the value of shipments if demand is inelastic to over 20 if demand is elastic

tax adjusted q model with intangible assets theory and evidence from temporary investment tax incentives we propose a tax adjusted q model with physical and intangible assets and estimate the effect of bonus depreciation in the united states in the early 2000s we find that investment responds moderately to tax incentives but allowing for heterogeneity reveals that intangible intensive firms respond more than physical intensive firms and that this difference is accentuated among large firms accounting for intangible assets increases the estimated total investment response from 3 7 to 14 3 of aggregate investment in 2000 among the largest 500 firms our results suggest that understanding the behavior of large and intangible intensive firms matters for investment policy

welfare losses in canadian manufacturing under alternative oligopoly regimes abstract welfare losses are computed for 167 canadian industries using simulations of a general oligopoly model the computations cover a wide range of oligopoly behavior and reveal the implications of different demand marginal cost and conjectural variation elasticities for the case of horizontal cost losses are a maximum of 0 51 percent of gnp under cournot equilibrium and 6 35 percent under a collusion equilibrium in general losses increase as the absolute value of the price elasticity of demand declines and as marginal cost and conjectural variation elasticities increase

another look at the linear q model an empirical analysis of aggregate business capital spending with maintenance expenditures the paper revisits the empirical investment literature which has established that aggregate business fixed investment is not found to be related linearly to marginal or average tobin s q the theoretical background is extended here by developing a supply side model where the depreciation rate of private capital is determined endogenously the firm can either invest in new capital which adds directly to the existing capital stock at the presence of convex adjustment costs or extend the durability of installed capital through maintenance expenditure which affects its depreciation rate the model shows that tobin s q is then a positively related sufficient statistic for both components of aggregate capital expenditures this central implication is tested empirically using aggregate time series survey data from canada on new investment and maintenance expenditures covering the period 1956 93 the estimated relationships produce significant and plausible parameter estimates for the structural parameters of the q model le texte examine la litterature empirique sur l investissement qui a etabli que le niveau d investissement agrege des entreprises en capital fixe n est pas relie de facon lineaire au coefficient moyen ou marginal q de tobin on enrichit l arriere plan theorique en developpant un modele d offre dans lequel le taux de depreciation du capital prive est determine de facon endogene l entreprise peut soit investir dans du capital nouveau ce qui ajoute directement au stock de capital existant soit allonger la vie du capital en place par des depenses de maintenance qui modifient le taux de depreciation le modele montre que le coefficient q de tobin est alors positivement relie aux deux composantes des depenses agregees en capital cette implication importante est mise au test empiriquement en utilisant les series chronologiques en provenance des enquetes de statistiques canada sur les nouveaux investissements et les depenses de maintenance pour la periode 1956 93 les relations estimees produisent des parametres plausibles et significatifs pour les parametres structurels du modele q

working class power capitalist class interests and class compromise this article proposes a general theoretical framework for understanding the concept of class compromise in terms of a reverse j model of the relationship between the associational power of workers and the interests of capitalists increases in working class power adversely affect capitalist class interests until such power crosses some intermediate threshold beyond which further increases in working class power are potentially beneficial to capitalists interests this article argues that the reverse j curve is itself the result of two distinct kinds of effects of workers power on capitalists interests one a negative effect in which workers power undermines the capacity of capitalists to unilaterally make various kinds of decisions and the second a positive effect in which workers power helps capitalists solve the various kinds of collective action problems they face

corporate finance side of the q theory of investment abstract this paper presents a model of a firm under uncertainty in which the financial and investment decisions are simultaneously determined if profits are small relative to investment the firm finances a constant fraction of incremental investment by debt and the rest by retentions if profits are large relative to investment a constant fraction of marginal finance comes from debt and the rest from new shares in these two financing regimes a one to one relationship between optimal investment and q can be derived no such relation exists in the third and intermediate regime in which incremental investment is entirely debt financed

on dfis liability management beyond reference rate setting strategies derived in a capm framework the paper addresses two related questions i limited deposit accommodation under capital regulation and ii characterization of rate differentials in correlated uncorrelated multideposit markets under certain circumstances an optimal rate capacity choice policy will imply deposit capacity is not fully utilized all the time since capacity is not costless excess liability capacity may be an optimal financial decision when the intermediary must meet adequacy test assorted with financial penalties or with enforceable limitations on its balance sheet growth in the other case the intermediary is likely to introduce risky rate differentials to the extent risk is actually reduced enough to increase its market valuation for correlated multideposit markets this obtains whenever pairs of supplies are sufficiently negative to make their weighted covariance sum larger than the segment own variance alternatively for uncorrelated segments higher rates will be offered to steady depositors whose standard deviation of class supply contributes little to total risk

a bottleneck capital model of development abstract a simple augmentation of the ramsey cass koopmans growth model allows it to match observed transitions by initially poor economies a high convexity installation cost directly dampens investment demand for a first capital input the resulting scarcity acts as a bottleneck strongly dampening demand for investment in a complementary capital input as well the match to observed transitions holds both for narrow and broad interpretations of capital in either case the bottleneck capital s share of factor income need not be large

investment and time to plan and build a comparison of structures vs equipment in a panel of italian firms time to build models of investment expenditures play an important role in many traditional and modern theories of the business cycle especially for explaining the dynamic propagation of shocks we estimate the structural parameters of a time to build model using annual firm level investment data on equipment and structures for expenditures on equipment we find no evidence of time to build effects beyond one year for expenditures on structures by contrast there is clear evidence of such effects in the range of two to three years the contrast between equipment and structures is intuitively reasonable and consistent with previous results the estimates for structures also indicate that initial period expenditures are low and increase as projects near completion these results provide empirical support for including time to plan effects for investment in structures more generally these results suggest a potential source of specification error for q models of investment and production based asset pricing models that ignore the time required to plan build and install new capital jel d24 g31 c33 c34

climate change adaptation a study of fuel choice and consumption in the us energy sector abstract using cross sectional data this paper estimates a national energy model of fuel choice by both households and firms consumers in warmer locations rely relatively more heavily on electricity rather than natural gas oil and other fuels they also use more energy climate change will likely increase electricity consumption on cooling but reduce the use of other fuels for heating on net american energy expenditures will likely increase resulting in welfare damages that increase as temperatures rise for example if the us warms by 5 c by 2100 we predict annual welfare losses of 57 billion

did railroad deregulation lead to monopoly pricing an application of q this paper asks whether given that railroads now have almost total freedom to set their rates competition is sufficie nt to keep railroads from making supracompetitive profits previous a ttempts to measure railroads profits rely on accounting measures of the rate of return but recent work raises serious doubts about the a ccuracy of these measures therefore this paper uses tobin s q the r atio of a firm s market value to the replacement cost of its assets the values of q show that railroads are not making supracompetitive p rofits thus there is no justification for increased regulation of ra ilroad rates copyright 1987 by the university of chicago

energy consumption practices of rural households in north china basic characteristics and potential for low carbon development reducing the climate impact of rural household energy consumption in china is complicated since it is bound up with deeply routinized daily practices and dependent from existing infrastructural systems of energy supply to assess the potential for low carbon development we first estimate the overall co2 emissions of rural households followed by a more in depth description and characterization of the different energy use practices within the households space heating turns out to be the largest emission source among domestic energy practices in north china we present lifestyle and context related factors that help to explain existing differences in domestic energy use practices of households the potential for low carbon development is discussed both at the demand side and the supply side at the demand side the use of more efficient technologies and cleaner energy sources for space heating seems to be a high potential measure for achieving low carbon households at the supply side the reduction of rural domestic co2 emissions could be effectively supported by making available to householders renewable and cleaner energy sources and technologies in order to be effective such low carbon energy options should take into account the income characteristics and lifestyles of rural householders

internal net worth and the investment process an application to u s agriculture recent models of firm investment decisions stressing informational imperfections in capital markets provide a foundation for interpreting evidence that movements in internal finance can predict investment spending even after one controls for measures of firms investment opportunities while such evidence is suggestive it is often open to other interpretations we examine these models using data on equipment investment in the u s agricultural sector this sector is particularly interesting because it has experienced large fluctuations in net worth and the profitability of investment and reasonable measures of net worth can be constructed our findings provide support for a class of internal funds models of investment under asymmetric information

multiple capital inputs q and investment spending despite their explicit treatment of dynamics and solid theoretical basis investment models based on the brainard tobin q have recorded a generally disappointing empirical performance when the q model is expanded to recognize the possibility that the value of the firm depends on two or more capital inputs with differing adjustment cost technologies the econometric equation following from optimizing behavior includes q as well as a set of additional explanatory variables the importance of these omitted variables is assessed and the capital homogeneity assumption for equipment and structures implicit in conventional q models is rejected the multi capital q model is then extended in two ways i adding inventory research and development and labor as quasi fixed factors and ii exploring the sensitivity of the instrumental variables estimates to normalization we conclude that the multi capital q model is a useful extension that overcomes an important omitted variables problem in the conventional q framework

determinants of households space heating type a discrete choice analysis for german households abstract considering the increasing attention on efficient use of energy it becomes vitally important to understand the energy related behavior of households this article presents empirical evidence on the determinants of the space heating technology applied by a household three sets of variables are examined as potential influences building socio economic and regional characteristics to highlight both the differences and similarities the results are obtained from a sample of house owners and from a sample including all households the influence of socio economic factors is similar across these groups income is found to exert only a minor impact on the system choice dwelling features are significant in determining the heating type particularly in the sample including all households regional effects are important clear differences prevail between east and west germany

adjustment costs uncertainty and the behavior of the firm this paper examines the effects of demand and cost uncertainty on a firm s investment output and pricing decisions but unlike most earlier studies in which demand and cost are simply not known at the time an output or pricing decision is made here i consider uncertainties over future demand and costs it will be seen that the effects of such uncertainties depend critically on the characteristics of the firm s adjustment costs i treat demand uncertainty in a dynamic context by letting the market demand function shift randomly but continuously through time according to a stochastic process this means that today s demand is known exactly but future demand may be larger or smaller and has a variance that increases with the time horizon likewise uncertainty over factor costs is characterized by treating those variables as stochastic processes i combine this characterization of uncertainty with a dynamic model of the firm in which some factor inputs can be adjusted freely in response to stochastic demand changes but other factors are quasi fixed in that adjustment costs are incurred when they are changed in this model the firm s price and output are random processes but we can examine the firm s behavior in expected value terms of interest is whether the presence of uncertainty should cause competitive or monopolistic firms to invest and produce more or less than they would otherwise how the effects of uncertainty are influenced by the presence of risk aversion and how the use of inventories can alter the impact of uncertainty on capacity and sales of course these questions have been addressed by others in the past among the earliest studies of demand uncertainty are those of edwin mills 1959 1962 and samuel karlin and charles carr 1962 mills examined a single period monopolistic firm that sets both output and price and showed that additive demand uncertainty i e the demand function is of the form q q p u where u is a random variable leads to a lower price if marginal cost is constant so that the firm reduces the expected loss from discarding unsold production karlin and carr confirmed for both the static case and the multiperiod case with inventory carryover that additive uncertainty tends to reduce the price and increase the output of a risk neutral firm while multiplicative uncertainty does the opposite other papers have been concerned with the way in which the error term enters the demand function additively multiplicatively or nonlinearly the implications of choosing price ex ante instead of output the implications of risk aversion and the use of inventories for example agnar sandmo 1971 and david baron 1970 showed that a risk averse competitive firm will produce less when the price is a random variable or subject to an additive error term but a riskneutral firm will not alter its production hayne leland 1972 extended these results to a monopolistic firm whose demand can depend in a general way on a random error term for example q q p u and showed that uncertainty reduces the production of a

tobin s q and the importance of focus in firm performance using tobin s q as a measure of performance we seek to estimate the relative importance of industry focus and share effects in determining firm performance our methods are analogous to those of richard schmalensee and like him we find that industry effects account for the majority of the explained variance however we also find that firm effects exist in the form of focus effects that is narrowly diversified firms do better than widely diversified firms we interpret this finding as consistent with profit maximization by firms with different factor endowments

financial frictions investment and tobin s q we develop a model of investment with financial constraints and use it to investigate the relation between investment and tobin s a firm is financed partly by insiders who control its assets and partly by outside investors when their wealth is scarce insiders earn a rate of return higher than the market rate of return i e they receive a quasi rent on invested capital this rent is priced into the value of the firm so tobin s is driven by two forces changes in the value of invested capital and changes in the value of the insiders future rents per unit of capital this weakens the correlation between and investment relative to the frictionless benchmark we present a calibrated version of the model which due to this effect generates realistic correlations between investment a nd cashflow

socio economic determinants of charcoal expenditures in tanzania evidence from panel data abstract compared to firewood charcoal is a relatively clean and convenient fuel nevertheless the mass production of charcoal can contribute substantially to deforestation rendering it imperative to regulate charcoal use this article uses nationally representative panel data on tanzania conducted in 2008 and 2010 to examine how charcoal expenditures change over time within any given household the focus of the analysis will be on identifying certain socio economic factors that affect charcoal use at the household level the framing of the analysis on variation in time within each household addresses the omitted variable bias that often undermines inference from comparisons across different households we find that while charcoal expenditures increase with household income the rise in charcoal use with income is relatively gradual household size is unrelated to charcoal expenditures but urban rural differences in fuel choice are large even though we include household fixed effects in all specifications in this regard policymakers and urban planners need to pay particular attention to the role of urbanization in predicting trends in charcoal expenditures in developing countries like tanzania

investment and market power abstract this paper argues that the degree of market power within an industry is an important determinant of interindustry differences in investment behavior a neoclassical investment model is analyzed to show that market power is positively associated with capital stock flexibility the intuition for the result is that firms adjust their stocks and investment plans quickly in response to new conditions so as to capture the rents asssociated with their market power

dynamic effects of permanent and temporary tax policies in a q model of investment abstract this paper incorporates the tax policy analysis of hall and jorgenson into a dynamic optimizing model with adjustment costs to develop a q model of investment this framework is particularly useful for analyzing the dynamic effects on investment of permanent and temporary changes in tax policy it is shown that contrary to the conventional intertemporal substitution argument a temporary investment tax credit need not be nore expansionary than a permanent investment tax credit the role of depreciation allowances in determining the dynamic response of investment to temporary changes in the tax rate is also investigated

taxes investment and q this paper attempts to provide a unified analysis of the effects of taxation on the equilibrium value of marginal q under alternative financial policies it is shown that the q approach does not avoid all the specification problems associated with analyses based on the cost of capital the theoretically and empirically crucial relationship between average and marginal q is also examined and it is shown that under uk and us tax rules the possibility of winding up precludes persistent undervaluation in equilibrium there have now been a considerable number of empirical studies of investment behaviour based on some variant of tobin s q defined as the ratio of the firm s market value to the value of its capital stock see for instance jenkinson 1981 oulton 1981 poterba and summers 1981 summers 1981 and von furstenberg 1977 the q approach is seen as having the empirical advantage compared in particular with the more traditional approach based on the cost of capital of allowing expectations to be brought directly into the study of investment behaviour by relying on asset prices to digest all relevant expectations and reflect them in observable data an immediate difficulty however is that whilst the incentive to invest is related to the effect on shareholder wealth at the margin and hence to marginal q only the value of average q is directly observable the consequent difficulty of implementation is not however considered here see bailey and scarth 1980 and hayashi 1982 for discussion of conditions under which marginal q can be inferred from average q rather this paper is concerned with the prior question of how personal and corporate taxation affects the equilibrium value of marginal q for there has as yet been no systematic analysis of the effects of taxation on the equilibrium value of marginal q comparable with the analysis of the relationship between taxation and the cost of capital in king 1974 thus auerbach 1979a b bradford 1981 and edwards and keen 1984 have all considered how taxes affect q when the marginal source of funds is either retained profit or the sale of new equity and the distinction between these two cases has also been recognized in the empirical work of poterba and summers 1983 but the important case in which debt is the marginal source has been ignored the effects on marginal q of the constraints that typically need to be imposed in modelling financial policy have also been neglected this paper attempts to fill these gaps in the literature by providing a general analysis of the relationships between taxation financial policy investment and q the paper also examines the implications of the special tax provisions that may apply in the event in the firm s ceasing operations winding up this bears upon one of the unresolved issues associated with the new view of equity finance auerbach 1983 namely the suggestion that if dividends are taxed more heavily than capital gains

the electricity consumption and gdp nexus for the fiji islands fiji is a small open island economy dependent on energy for its growth and development hence the relationship between energy consumption and economic growth is crucial for fiji s development in this paper we investigate the nexus between electricity consumption and economic growth for fiji within a multivariate framework through including the labour force variable we use the bounds testing approach to cointegration and find that electricity consumption gdp and labour force are only cointegrated when gdp is the endogenous variable we use the granger causality f test and find that in the long run causality runs from electricity consumption and labour force to gdp implying that fiji is an energy dependent country and thus energy conservation policies will have an adverse effect on fiji s economic growth

q and the tax bias theory abstract a growing body of literature analyzes the variation in q the ratio of financial market value to asset current replacement cost and makes inferences about attributes such as monopoly power profitability managerial performance etc these studies ignore potential biases embedded in q that result from non neutral tax policies this study examines the association between q and tax biases and establishes that differences in accumulated depreciation tax shields explain significant variation in q the implication that q should be adjusted for tax biases before use in empirical research is examined further adjusting q for tax biases at least with the factors herein leads only to minor changes in econometric analyses

economic vs accounting depreciation abstract in this paper we present and estimate a model of economic depreciation consistent with producer s optimization the estimated economic depreciation which is a function of the rate of utilization and level of maintenance is about half of that used according to tax accounting depreciation the difference between the economic and tax rates of depreciation results in a subsidy and earlier capital replacement the implicit maximum net tax subsidy expressed as a proportion of the acquisition price of the asset is 13 3 for a sample of canadian trucking firms

interest rate uncertainty and the financial intermediary s choice of exposure the financial intermediary s choice of operating as a broker with minimal risk exposure or as an asset transformer with interest rate risk is modeled as a funds inventory decision made prior to the resolution of uncertainty regarding the borrowing or lending interest rates it is shown that an increase in the interest rate uncertainty leads the intermediary to reduce its exposure thereby offering decreased asset transformation and more brokerage services however a stochastic increase in the interest rates leads to greater asset transformation and less brokerage services the high and volatile nominal interest rates associated with contemporary inflation have prompted a pronounced change in commercial bank balance sheets low cost deposits have been replaced by alternative funding vehicles bearing high and increasingly variable interest rates see budzeika 3 4 kane 9 and silber 13 in an apparent adaptive response to the loss of deposits banks have eschewed fixed rate loans in favor of variable rate lending thereby more closely matching the durations of their assets and liabilities see flannery 6 and boltz and campbell 2 this change in bank lending practices has been popularly interpreted as an effort to immunize cash flows in the face of increased interest rate uncertainty see haley 8 and wojnilower 15 however apart from niehans and hewson 11 the adaptive recomposition of bank balance sheets has not been formally addressed in this paper we provide a model of balance sheet duration mismatching and then show that an increase in interest rate volatility is likely to lead an intermediary to choose a balance sheet that is more closely matched 1 balance sheet mismatching can be understood in terms of the two basic functions of financial intermediaries as explained by niehans 10 brokerage and asset transformation if a financial intermediary precisely matches the properties of its assets and liabilities and thereby maintains a perfectly hedged position it functions exclusively as a broker joining borrowers and lenders without assuming any risk the broker s function is then simply to reduce the search costs associated with joining complementary transactors the brokerage function is deshmukh is professor of managerial economics and decision sciences greenbaum is harold l stuart professor of banking and finance and kanatas is assistant professor of finance all at northwestern university s j l kellogg graduate school of management we gratefully acknowledge the helpful suggestions of michael brennan and an anonymous referee this project was supported by the banking research center and the kellogg center for advanced study in managerial economics and decision sciences

investment in greek manufacturing under irreversibility and uncertainty the message in used capital expenditures this article contributes to the existing literature by showing that uncertainty produces a nonuniform impact to the extent that different types of capital goods exhibit heterogeneous irreversibility which we define as asset specific irreversibility hence asset specific irreversibility is responsible for asymmetries in responses across types of capital goods to uncertainty we also show that for a given type of capital good uncertainty produces a variety of responses across sectors which we define sector specific irreversibility in other words sectoral differences in terms of the ability to substitute a given type of capital with labour introduce a second order effect of uncertainty on investment

tobin s q and financial policy abstract recent research in macroeconomics has emphasized the importance of linking the financial and real sectors and working with optimizing models tobin s q model of investment would appear to provide a framework satisfying these two criteria in contrast to the original presentation of the q model the formal development has not recognized that the firm actively participates in a number of financial markets in this broader context q may be an uninformative and possibly misleading signal for investment expenditures we then endeavor to turn this negative theoretical result to positive advantage in resolving a number of empirical problems with q models

rural household energy consumption the effects of access to electricity evidence from south africa this paper examines household energy consumption patterns in rural areas in the light of energy transition theories in particular the study aims to identify the effects of access to electricity on fuel choice the analysis uses data from an extensive household survey conducted in south africa and examines the prevalence of different fuels energy expenditure the end uses of fuels and multiple fuel use patterns it is concluded that evidence exists for the presence of an energy transition in rural households largely driven by income access to electricity affects the nature of this transition and there is weak evidence to suggest that it accelerates the process

tobin s q investment and the endogenous adjustment of financial structure abstract should q theory be modified to take account of financial structure this paper analyzes a general equilibrium q model where financial structure affects firm value agency costs and taxes combine to yield an interior solution for the endogenous debt equity ratio although q is still a sufficient statistic for investment the endogenous adjustment of financial structure alters the relation between the interest rate and investment in this model an increase in the corporate tax rate could either raise or lower the steady state capital stock furthermore both q and investment could jump in opposite directions to that of their steady state values

dynamic factor demands under imperfect competition the greek manufucturing industry 1958 1981 the intertemporal maximization problem of the firm under adjustment costs for its factors of production and imperfect competition in the output market is considered the first order conditions with respect to capital and labour the production function and the demand equation have been jointly estimated using greek manufacturing data and values for the structural parameters have been obtained the estimates are plausible and most of them significant tests of the overidentifying restirctions are unable to reject the overall specification of the model at conventional levels of significance

identifying a permanent markup shock and its implications for macroeconomic dynamics abstract a permanent price markup shock is justified using an industry based model in which an increase in market concentration raises the desired markup moreover evidence in favor of the non stationarity of the markup is presented which in turn implies that per capita hours are also non stationary structural vector autoregressions are then constructed that can identify shocks to the markup technology and the federal funds rate the results show that 1 inflation responds immediately to shocks to the markup and technology whereas it displays a hump shaped response to a monetary policy shock and that 2 per capita hours decline in response to positive shocks to the markup and technology these empirical findings have important implications for macroeconomic dynamics including the issues on inflation inertia and the technology hours debate the paper also points out that the dynamics of the economy cannot be correctly explained without consideration of the permanent markup shock finally the approach in this paper suggests several ways to identify a wage markup shock using structural vector autoregressions

dynamic factor demands and the effects of energy price shocks a dynamic model is used to understand how sharp changes in energy prices affect investment behavior employment and energy use the authors discuss the theory behind their model selection model specifications estimation methods and data list parameter estimates and elasticities for the selected model and describe the simulations they conclude that 1 the data strongly reject the hypothesis of constant returns to scale within their specification of aggregate production 2 the data indicate adjustment costs on labor are small and 3 their results help reconcile some of the conflicting estimates of energy demand elasticities appearing in recent literature 23 references 3 figures 3 tables

household energy preferences for cooking in urban ouagadougou burkina faso abstract an extensive survey on household expenditures in ouagadougou the capital of burkina faso was used to analyze the factors determining urban household energy choices using a multinomial logit model wood energy remains the preferred fuel of most urban households in the country though rational the choice is not sustainable as it portends a threat to the savanna woodlands and the economy many important policies have been adopted by public authorities to minimize household wood energy consumption and to substitute it by alternative fuel despite the magnitude of all these policies the depletion rate of the forest resource is increasing a kind of inertia is thus observed for household preferences for cooking fuel this model analyzes the sociological and economic variables of household energy preferences for cooking in ouagadougou the analyses show that the inertia of household cooking energy preferences are due to poverty factors such as low income poor household access to electricity for primary and secondary energy low house standard household size high frequency of cooking certain meals using woodfuel as cooking energy the descriptive analyses show that the domestic demand for wood energy is strongly related to household income the firewood utilization rate decreases with increasing household income in other words this fuel appears as a transition good for these households which aim for other sources of energy for cooking that are more adapted for urban consumption this implies that a price subsidy policy for liquid petroleum gas lpg and its cook stoves could significantly decrease the utilization rate of wood energy

on the nature and significance of collusive price leadership abstract with the help of a simple analytical model we are able to analyze and to further clarify the conditions for collusive price leadership as they were originally devised by jesse markham within the confines of this model we show how collusion increases price cost margins but at the same time decreases concentration in the industry

application of an almost ideal demand system aids to ethiopian rural residential energy use panel data evidence abstract it is well known that poor rural households in low income economies are reliant on traditional fuels to meet basic domestic energy needs but little is known about the specific underlying socio economic drivers of residential fuel choices in ethiopia i used the linear approximation almost ideal demand system laaids with normalized prices to compute expenditure elasticity and a multinomial logit model mlm to examine household fuel use the laaids model result showed that expenditure was elastic for modern fuels but inelastic for traditional fuels regression results from the mlm indicated that fuel choice behaviour of rural households could be more accurately described as fuel stacking behaviour as opposed to the energy ladder hypothesis in rural areas household fuel choice may be constrained by limited access to commercial fuels and efficient cook stoves supply dependency and affordability consumer preferences and a web of other intricate factors rural households had less incentive for fuel switching due to underlying factors and the availability of fuel wood without direct financial cost with continued deforestation and receding forests households are expected to develop inter fuel substitution and switching behaviour conditional on access to modern energy technologies

corporation tax finance and the cost of capital this paper examines the influence of corporate tax exhaustion on the firm s financial and investment decisions a dynamic programming model is used to establish effective marginal tax rates in the presence of a tax system that permits the carry forward of losses to future periods the paper demonstrates that internal optimal financial structures may result which do not require the imposition of external constraints the cost of capital is highly sensitive to the current taxable earnings of the firm and the implications of this for such tax transfer activities as leasing are discussed

the q theory of investment with many capital goods the q theory of investment which relates investment to the ratio of market to replacement value of capital has attracted considerable attention in a recent series of papers for instance a q variable has been used as an independent variable in empirical investment equations estimated by george von furstenberg 1977 von furstenberg et al 1980 burton malkiel et al 1979 and others these papers however leave somewhat unclear the theoretical rationale for using q as an investment determinant this has motivated work by hiroshi yoshikawa 1980 lawrence summers 1981 michael salinger and summers 1981 and fumio hayashi 1982 who show that under certain conditions the rate of investment of a sharevalue maximizing firm is indeed a function of q this is an important result because it shows that investment equations with q an independent variable are not ad hoc constructions rather they are grounded in a theory of the firm with an appealing behavioral hypothesis viz value maximization an important assumption underlying this research is that capital can be treated as a homogeneous good of course this is an extremely common assumption in the analysis of investment and is not particularly more bothersome in the q theory context than elsewhere nonetheless there are certain situations where it may be desirable or even essential to be able to study investment disaggregated by type of capital good thus the purpose of this paper is to examine whether and how the q theory can be extended to this more general case 1 intuitively one would expect some difficulty with the q theory in the many capitalgood context as already noted by james tobin and william brainard 1977 p 243 and by salinger and summers p 12 one way to see why is to recall the tobin brainard distinction between marginal and average q as hayashi writes

market structure and market value while the use of market models to determine the sources of economic profits is quite new at least two empirical studies considering the market structure and market value relation have appeared to date interestingly they conflict thomadakis 1977 found a close positive relation between the four firm concentration ratio and relative excess valuation measured as the difference between the market value of the firm and the book value of tangible assets all normalized by sales as a result thomadakis argued that industry concentration plays a role in the determination of excess profits from currently held assets and those expected from the firm s investment options p 185 in contrast lindenberg and ross 1981 reported no significant relation between concentration and tobin s q ratio measured as the ratio of the market value of the firm to the replacement cost of tangible assets this result disputes thomadakis s findings and a purely structuralist interpretation of economic profits according to lindenberg and ross market power may or may not be evident in highly concentrated markets since high q s can occur in concentrated or unconcentrated markets and conversely low q s indicating no significant market power can occur in markets that have high degrees of concentration p 28

sources of change in the demand for energy by indonesian households 1980 2002 abstract this paper describes the energy transition in indonesia and examines the determinants of energy demand by fuel the key innovation of this paper is the documentation of how these relationships have evolved over time we present a new method to combine econometric analysis and index decomposition analysis to examine household energy transition this approach also allows us to consider a broad range of demographic and structural factors while providing a clear and concise representation of our findings we find that the composite indices mask important underlying patterns in particular our results indicate that energy transition in indonesia cannot be confidently attributed to any one index rather it has been driven predominantly by the triple interaction of demographics income growth and change in demand supply parameters our findings point to the importance of utilizing time series data in studying both the characteristics and determinants of energy transition in developing countries

the relation between firm growth and q with multiple capital goods theory and evidence from panel data on japanese firms we derive from a model of investment with multiple capital goods a one to one relation between the growth rate of the capital aggregate and the stock market based q we estimate the growth q relation using a panel of japanese manufacturing firms taking into account the endogeneity of q identification is achieved by combining the theoretical structure of the q model and an assumed serial correlation structure of the technology shock which is the error term in the growth q equation for early years of our sample cash flow has significant explanatory power over and above q the significance of cash flow disappears for more recent years for the heavy industry when japanese capital markets was liberalized the estimated q coefficient implies that the adjustment cost is less than a half of gross profits net of the adjustment cost

non structural measures of competition toward a synthesis of alternatives abstract procedures for detecting or measuring market power have been suggested in recent years by iwata rosse and panzar and bresnahan this paper integrates elements from all three approaches to provide a single more unified alternative to the structure conduct performance paradigm

liability management of financial intermediaries in a dynamic and uncertain perspective this paper examines the effect of rate uncertainty first for the loan rate alone next for both asset and liability rates on the liability funding decisions of a risk neutral intermediary in this model a la pindyck rates evolve according to stochastic processes convex adjustment costs arise from the dichotomy of existing core deposits and new savings balances and the intermediary s cash flow is embedded into capital market theory then we show that the stationary equilibrium obtains at the intersection of the locus of no change in deposit holdings with the isocline of zero change in savings balances loan rate uncertainty alone shifts the savings isocline outward when marginal adjustment costs are rising at an increasing rate but when asset and liability rates are uncertain their impact on the mean intermediation spread core deposit holdings and adjustment costs depends on whether they are correlated or not

lending policies of financial intermediaries facing credit and funding risk this paper compares the optimal lending decisions of financial intermediaries that differ in their risk exposure all intermediaries are assumed to face a loan demand described by a random applicant arrival process with each applicant offering a unique risk adjusted rate of return loan demand is therefore uncertain in both quantity and quality the intermediaries differ in terms of their risk exposure because of disparate funding practices intermediaries functioning as brokers minimize their exposure by borrowing funds only as demand is realized whereas those behaving as asset transformers borrow in advance of realizing loan demand thereby maintaining a loanable funds inventory and sustaining the related exposure the optimal sequential lending policy is shown to involve setting a credit standard that becomes stricter with the length of the intermediary s planning horizon and the volume of loans outstanding most importantly it is shown that brokers adopt stricter credit standards than asset transformers and therby reduce their volume of lending

diversification ricardian rents and tobin s q according to prevailing theory firms diversify in response to excess capacity of factors that are subject to market failure by probing into the heterogeneity of these factors we develop the corollary that firms that elect to diversify most widely should expect the lowest average rents an empirical test with tobin s q as the measure of rents is consistent with this theory

the efficient estimation of econometric models with rational expectations the efficient estimation of econometric models with rational expectations by the substitution method usually entails the use of a non linear simultaneous equations estimator and hence is not very attractive computationally it is shown that for a wide class of problems efficient estimates can also be obtained with standard estimation methods if instead an errors in variables approach is used for many other problems although not providing fully efficient estimates because rationality is not imposed the errors in variables method will still have a strong appeal because otherwise it uses all of the structural information in the model unlike the substitution method when an incomplete information set is used it guarantees consistent estimates and it is easy to compute

the determinants of merger waves an international perspective article i nfo one of the most conspicuous features of mergers is that they come in waves that are correlated with increases in share prices and price earnings ratios we use a natural way to discriminate between pure stock market influences on firm decisions and other influences by examining merger patterns for both listed and unlisted firms if real changes in the economy drive merger waves as some neoclassical theories of mergers predict both listed and unlisted firms should experience waves we find significant differences between listed and unlisted firms as predicted by behavioral theories of merger waves

stock market and investment the signaling role of the market the author examines the role of the stock market as a signal to managers in undertaking capital expenditures he concludes that while both managerial and market perceptions are integral managerial perception is of greater importance the evidence suggeststhat as a statistic the q ratio is not sufficient to explain firms capital expenditure decisions thus the standard q model of investment should be modified to provide a more meaningful description of a firm s capital spending decisions overall the results suggest that stock market activity has only limited implications for the economy s resource allocation process evidence for the q theory of investment confirms previous findings in the literature that the model s poor empirical perfomance was partly the result of using aggregate data for the whole economy also since market perception plays only a limited role in determining capital expenditures shareholder myopia is unlikely to result in managerial myopia the implications for developing countries are while the stock market may not be central to a firm s capital spending decisions it is not a sideshow either the market plays an important signaling role for managers this is a powerful rationale for financial reform and capital development in developing countries the results also suggest that complaints that stock market activity leads to misallocation of resources may be exaggerated

monopolistic competition and the q theory of investment abstract in this paper we analyse the implications for q models of investment of replacing the assumption of perfect competition in the output market with the assumption of monopolistic competition the structural investment equation that can be derived in this case has a richer dynamic structure than the conventional one and it contains in addition to present and future q output as an explanatory variable in the applied section we discuss the extent to which monopolistic competition helps in providing a remedy for the empirical weaknesses of q models the estimates are obtained using aggregate data for u k industrial and commercial companies for the period 1951 1979

quadratic engel curves and consumer demand this paper presents a model of consumer demand that is consistent with the observed expenditure patterns of individual consumers in a long time series of expenditure surveys and is also able to provide a detailed welfare analysis of shifts in relative prices a nonparametric analysis of consumer expenditure patterns suggests that engel curves require quadratic terms in the logarithm of expenditure while popular models of demand such as the translog or the almost ideal demand systems do allow flexible price responses within a theoretically coherent structure they have expenditure share engel curves that are linear in the logarithm of total expenditure we derive the complete class of integrable quadratic logarithmic expenditure share systems a specification from this class is estimated on a large pooled data set of u k households models that fail to account for engel curvature are found ro generate important distortions in the patterns of welfare losses associated with a tax increase

consistent conjectures in a value maximizing duopoly recent literature on consistent conjectures has established that under a variety of conditions only competitive behavior is rational rationality or consistency is defined in this literature as the condition that the slope of a firm s profit maximizing reaction function must equal the conjecture made about the firm s reactions by its rivals this concept of consistency is due to bresnahan 5 who uses it to select among the many possible conjectural equilibria in duopoly as defined by bowley 3 perry 24 extends the duopoly analysis to the case of an arbitrary fixed number of identical firms as well as to the case of free entry and exit both papers show that only the bertrand conjecture in which firms accommodate rivals output changes by making equal and opposite changes is consistent when marginal costs are constant in addition perry shows that this result also holds when entry and exit are free the bertrand conjecture is identified with competitive behavior since it implies price taking and marginal cost pricing the equivalence that both papers establish between consistent conjecture equilibrium cce and competitive equilibrium under constant marginal cost may have important practical implications johnston summarizes his thorough survey of cost functions with the comment two major impressions however stand out clearly the first is that the various short run studies more often than not indicate constant marginal cost and declining average cost as the pattern that best seems to describe the data that have been analyzed 15 168 therefore the results of bresnahan and perry would seem to apply to a wide range of observed behavior making a strong theoretical case that much economic activity is truly competitive regardless of the number of firms 2 even when marginal costs are not constant and the number of firms is fixed the implication of the consistent conjectures hypothesis for profit maximizing firms is that behavior is more competitive than coumot this result in itself is important since recent work has indicated that cournot equilibrium approaches the competitive limit in the case of large economies see for