durable goods theory for real world markets the early 1970s witnessed three major advances in durable goods theory swan 1970 1971 and sieper and swan 1973 on optimal durability coase 1972 on time inconsistency and akerlof 1970 on adverse selection this paper surveys durable goods theory starting with these three contributions where much of the focus is on recent literature and on models that explain real world phenomena in addition to the ideas found in the contributions of swan coase and akerlof topics covered include why producers sometimes practice planned obsolescence the role of adverse selection in new car leasing and reasons for aftermarket monopolization

advertising learning and consumer choice in experience good markets an empirical examination this article empirically analyzes different effects of advertising in a nondurable experience good market a dynamic learning model of consumer behavior is presented in which i allow both informative effects of advertising and prestige or image effects of advertising this learning model is estimated using consumer level panel data tracking grocery purchases and advertising exposures over time empirical results suggest that in this market advertising s primary effect was that of informing consumers the estimates are used to quantify the value of this information to consumers and evaluate the welfare implications of an alternative advertising regulatory regime

the timing and magnitude of retail store markdowns evidence from weekends and holidays we examine daily prices of eight goods at seventeen retail stores collected in ann arbor michigan over a four month period from november 1 to february 28 we focus on weekly and seasonal price patterns and on the frequency of price markdowns or sales there were frequent markdowns in the intensive shopping period prior to christmas and a tendency for such sales to occur on weekends we interpret these findings as evidence that a significant number of markdowns are timed to occur when shopping intensity is exogenously high we complement the imperfect information based motives for sales in the literature by contributing an additional element based on the role of bulk shopping and increasing returns in the shopping technology

does the form of compensation matter abstract the role of fee contracts in the agency relation between investment bankers and client firms in tender offers is investigated using a sample of offers between 1978 and 1986 different fees have different payoff functions which can be used by firms to create incentives and by bankers to signal differences in abilities the effectiveness of fee contracts in resolving agency problems in tested with mixed results the evidence suggests that fee contracts are used as a tool by both firms and bankers and that contracts influence tender offer outcomes but that contracting is only a partial solution to the agency problem

analyzing the effects of insuring health risks on the trade off between short run insurance benefits vs long run incentive costs this paper constructs a dynamic model of health insurance to evaluate the short and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia our study is motivated by recent us legislation that has tightened regulations on wage discrimination against workers with poorer health status americans with disability act of 2009 ada and ada amendments act of 2008 adaaa and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 patient protection and affordable care act ppaca in the model a trade off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life using household panel data from the psid we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no wage discrimination and no prior conditions laws for the evolution of the cross sectional health and consumption distribution of a cohort of households as well as ex ante lifetime utility of a typical member of this cohort in our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time this is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives the resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies relative to only implementing wage nondiscrimination legislation

is the glass steagall act justified a study of the u s experience with universal banking before the glass steagall act of 1933 removed commercial banks from the securities underwriting business we evaluate the argument for the separation of commercial and investment banking that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality a comparison of the performance of securities underwritten by commercial and investment banks prior to the act shows no evidence of this instead the public appears to have rationally accounted for the possibility of conflicts of interest and this appears to have constrained the banks to underwrite high quality securities jel g21 g24 n22

unions and hospitals some unresolved issues abstract this article investigates the impact of unions on the wages of hospital workers our ols findings agree with previous ols studies unions increase registered nurses rns wages by five percent and by about eight to ten percent for other hospital workers by contrast we find after correcting for selectivity bias in hospital unionization status a direct union effect of about twenty percent on rn wages and in excess of thirty percent on wages of other hospital workers while the results based on selectivity bias adjustments make us uneasy we do not reject them out of hand we also find indirect union effects up to five percent by other unionized occupations within a hospital and up to ten percent by other unionized hospitals in the local labor market prospective reimbursement programs have a negative impact on the wages of hospital workers but are only significant for non unionized occupations our three empirical tests of monopsony all reject the view that monopsony is a factor in hospital wage setting even considering the large union effects based on selectivity bias adjustment we conclude that unions have been a minor contributor to hospital cost inflation

corporate control and the choice of investment financing the case of corporate acquisitions we test the proposition that corporate control considerations motivate the means of investment financing cash and debt or stock corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock which dilutes their holdings and increases the risk of losing control our empirical results support this hypothesis in corporate acquisitions the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing also the previously observed negative bidders abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership do firms have systematic preferences for the means of financing investments in modigliani and miller s 1958 m m s perfect market no tax world the means by which investments are financed are irrelevant for the total value of the firm miller 1977 extended this irrelevance proposition to a case where taxes exist however casual observation suggests that firms are not indifferent to the means of financing for example many firms prefer to finance investments from internal sources or by debt rather than by issuing new equity an explanation for such systematic financing preferences and the consequent capital structure of firms is therefore called for indeed a number of such explanations have been advanced for example deangelo and masulis 1980 showed that in miller s 1977 framework the means of financing is not irrelevant if firms have different expected marginal effective tax rates due to differences in fixed charges it has also been argued that financing preferences may result from agency costs associated with debt e g barnea haugen and senbet 1981 or from asymmetry of information between managers and outside investors myers and majluf 1984 recently harris and raviv 1988 and stulz 1988 advanced a new argument for the existence of financing preferences that centers around managers incentive to maintain control over the corporation specifically by increasing debt and using the proceeds to retire equity held by the public owners managers increase the probability of maintaining control and reaping the benefits associated with it since the substitution of debt for outsiders equity decreases the fraction of

what difference does dynamics make the case of digital cameras abstract when the well known blp model is applied to products with rapid technological changes and declining prices it tends to yield implausible results a sequence of increasingly sophisticated dynamic demand models most recently gowrisankaran and rysman 2009 hereafter gr have been developed to overcome these problems we apply both models to new data on the us digital camera market in addition we demonstrate that the gr model can be specified as a blp model plus an additional set of terms this suggests that a dynamic model can be estimated as a blp model plus a non parametric function which is less computationally demanding as a first step to implementing this semi parametric approach we estimate a blp model augmented with age as a proxy for the non parametric component we find that demand for digital cameras is more elastic when demand dynamics is accounted for in both the dynamic model and the blp model with the age proxy this suggests that the market is more competitive though the results are consistent with firms engaging in intertemporal price discrimination merger simulations predict the lowest price and quantity changes using the gr model

managerialism ownerism and risk abstract this paper proposes that managers having the value of their human capital dependent on the performance of the firm they manage and being unable to diversify away this risk are expected to attempt to reduce their employment risk internally by project selection or by income smoothing intended to stabilize the firm s income stream an empirical investigation shows that manager controlled firms exercise income smoothing to a greater extent than owner controlled firms have relatively lower unsystematic risk and perhaps lower systematic risk

bank underwriting of debt securities modern evidence this article examines debt securities underwritten by section 20 subsidiaries of bank holding companies relative to those underwritten by investment houses consistent with a net certification effects for banks bank underwriting of lower credit rated firms to whom the bank lends results in relatively higher prices lower yields we find no evidence of conflicts of interest even when an issue is used to repay bank debt further banks bring a relatively larger proportion of small issues to the market contrary to the contention that universal banking stunts availability of finance to small firms bank underwritings appear to benefit small firms article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the effect of drinking and smoking on the labour market outcomes of low income young adults among adults the causal drinking bonus and smoking penalty have been estimated to be as large as 12 and 24 respectively the magnitudes of these effects compare in size with many active labour market programs targeted at low income young adults this article extends the literature by examining these relationships in such a group somewhat surprisingly the data indicate that just as in the greater population young drinkers have more favourable labour market outcomes than nondrinkers however when a fixed effects approach is used to identify causal impacts there is no evidence that drinking has a positive impact on labour market outcomes and some evidence for negative returns to drinking the smoking penalty is estimated to be much smaller among this group and not statistically significant finally estimates suggest that the observed correlations between consumption and labour market outcomes are biased by unobserved characteristics of the individual as well as unobservables that change over time t

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

loan underpricing and the provision of merger advisory services abstract this paper investigates the primary and secondary syndicated bank loan market to analyze the effect on pricing when the financial institution commingles syndicated lending with merger advisory services in particular we investigate the connection between the acquirer s choice of financial advisor in a merger and future financing commitments we find evidence of underpricing of syndicated bank loans in both the primary and secondary market in the primary market we show that non acquisition loans granted by merger advisors to acquiring firms after the merger announcement date are charged a lower all in spread relative to acquisition loans if there has been a prior lending relationship consistent with this finding we find that syndicated bank loans for non acquisition purposes arranged by the acquirer s advisor after the merger announcement date trade in the secondary market at a significant discount since the terms on these non acquisition loans are not set upon merger announcement they are most subject to risk shifting and underpricing agency problems these findings offer evidence consistent with the existence of loss leader and potentially conflicted loans priced at below market terms that are offered by the acquirer s relationship bank advisor in order to win merger advisory business

mergers with differentiated products the case of the ready to eat cereal industry traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products i discuss an alternative which consists of demand estimation and the use of a model of postmerger conduct to simulate the competitive effects of a merger i estimate a brand level demand system for ready to eat cereal using supermarket scanner data and use the estimates to 1 recover marginal costs 2 simulate postmerger price equilibria and 3 compute welfare effects under a variety of assumptions the methodology is applied to five mergers two of which occurred and for which i compare predicted to actual outcomes

characteristics of demand for pharmaceutical products an examination of four cephalosporins we model demand for four cephalosporins and compute own and cross price elasticities between branded and generic versions of the four drugs we model demand as a multistage budgeting problem and we argue that such a model is appropriate to the multistage nature of the purchase of pharmaceutical products in particular the prescribing and dispensing stages we find quite high elasticities between generic substitutes and also significant elasticities between some therapeutic substitutes

wage and labor supply effects of illness in cote d ivoire and ghana instrumental variable estimates for days disabled abstract sickness should make individuals less productive but there are problems in measuring this effect first how is adult morbidity measured in a household survey second how is the impact or morbidity on productivity inferred if earning is partly used to improve health self reported functional activity limitation due to illness is considered an indicator of morbidity for wage earners and self employed people to deal with both the measurement and joint determination problems an instrumental variable estimation approach is used where local food prices and health services instrument for disability days that reduce wages by at least 10 and hours by 3 or more

the role of bank advisors in mergers and acquisitions this paper looks at the role of commercial banks and investment banks as financial advisors in their role as lenders and advisors banks can be viewed as serving a certification function however banks acting as both lenders and advisors face a potential conflict of interest that may mitigate or offset any certification effect overall we find evidence of a net certification effect for target firms but conflicts of interest for acquirers in particular target firms earn higher abnormal returns when the target s own bank is hired as merger advisor consistent with the bank s role as certifier of the more informationally opaque target s value to the acquirer in contrast we find no net certification role for acquirers there are at least two possible reasons for this first certification of value may be less important for acquirers because it is the target firm that must be priced in a merger second acquirers may utilize commercial bank advisors in order to obtain access to bank loans to finance activities in the postmerger period thus an acquirer may choose its own bank with whom it has had a prior lending relationship as an advisor in a merger however this choice weakens the certification effect and creates a potential conflict of interest because the advisor s merger advice may be distorted by considerations related to the bank s past and future lending activity

demand for differentiated durable products the case of the u s computer printer market i introduction this paper aims to provide a theoretical and empirical description of consumer behavior in a dynamic market for differentiated durable goods the computer hardware industry serves as an example of the type of market we consider markets for computer systems and components as well as for many other high technology products exhibit some striking similarities that are of particular concern for an empirical economist as follows products are differentiated in multiple dimensions in addition to price products are durable yielding consumption services over multiple periods product quality rapidly improves over time empirical work on estimating differentiated product demand systems has been dominated by static discrete choice models with random utility see berry levinsohn and pakes 1995 goldberg 1995 and nevo 2001 among others however markets for durable goods exhibit several features at odds with their assumption of myopic consumer behavior first traditional static discrete choice models implicitly assume that consumers participate in the market every period choosing one of the available products or an outside option thus the fraction of consumers who do not buy any product in a given period could only be explained by the high value they assign to the outside alternative for durable goods however purchases are made infrequently and result in a consumer s exiting the market for a significant period of time hence the model needs to account for consumers outflow from the market arising from their purchase decisions second a static framework may give a misleading picture of the aggregate sales time pattern in a dynamic industry in many markets for durable products it is not uncommon to see rapidly improving product quality and falling prices given any reasonable set of consumer preferences over the product characteristics space static discrete choice models for such an industry will tend to predict an upward trend in aggregate sales this fails to account for a variety of patterns commonly seen in the data third the evolution of product quality leads to the possibility of intertemporal demand substitution by forgoing a current purchase the consumer retains the option to buy a potentially better product in the future hence the decision of when to buy may be just as important for consumers as the decision of what to buy this trade off cannot be accounted for in the static framework the purpose of this paper is to remedy these shortcomings of static discrete choice models in durable goods markets with particular attention paid to technological change and the dynamics of new products adoption the paper presents a dynamic model of consumer demand for differentiated durable products that explicitly accounts for consumers expectations of future product quality and consumers outflow from the market that arises endogenously from their purchase decisions in this model the consumer faces a sequence of static discrete choice problems over a non stationary choice set we show that for a subclass of random utility models which include the multinomial logit and the mcfadden 1978 generalized extreme value gev model there exists a scalar valued sufficient statistic that determines the value of the option to postpone the purchase this allows us to model industry evolution over a vastly reduced state space and to formalize the consumer s decision of when to buy as an optimal stopping problem a solution to that problem defines the hazard rate of product adoptions while the nested discrete choice model determines the alternative specific purchase probabilities integrating individual decisions over the population distribution generates rich dynamics of aggregate and product level sales the paper proceeds to present monte carlo evidence that ignoring the time dimension of consumer choice will induce a downward bias in the estimates of consumer preferences over quality sometimes reversing the sign of the coefficients

estimation of a model of entry in the airline industry this paper considers the effect of an airline s scale of operation at an airport on the profitability of routes flown out of that airport the empirical methodology uses the entry decisions of airlines as indicators of underlying profitability the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city pair profitability these estimates imply that city pair profits increase in airport presence and decrease rapidly in the number of entering firms the literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms

the effect of alcohol use on wages 1988 the effect of alcohol use on wages applied economics vol 20 no 10 pp 1343 1351

corporate takeover bids methods of payment and bidding firms stock returns this study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids the results reveal significant differences in the abnormal returns between common stock exchanges and cash offers the results are independent of the type of takeover bid i e merger or tender offer and of bid outcomes these findings supported by analysis of nonconvertible bonds are attributed mainly to signalling effects and imply that the inconclusive evidence of earlier studies on takeovers may be due to their failure to control for the method of payment recent studies on corporate takeovers provide inconclusive results on the valuation effects of acquisitions on the common stock of bidding firms 1 substantial differences are reported between the studies that analyze acquisitions initiated as tender offers and those that confine their samples to merger proposals the existence of mixed empirical findings for the bidding firms makes it difficult to interpret existing evidence and to draw conclusions about the managers acquisition motivations nevertheless the reason for the substantial difference between empirical findings on mergers and tender offers still remains an unresolved issue it is observed however that mergers are usually common stock exchange offers whereas tender offers are usually cash offers given that different methods of financing a project have different signalling implications myers and majluf 39 the differential stock returns of bidders in mergers and tender offers may be due to the method of acquisition financing

disentangling the effect of arthritis on earnings a simultaneous estimate of wage rates and hours worked poor health affects both wage rates and hours of work here we develop a procedure for examining the separate impact of a specific chronic disease arthritis on wages and hours worked and then translate these results into earnings our methodology provides a consistent approach for measuring how a specific chronic disease affects total earnings as well as its component parts we find that arthritis affects wage rates and hours worked differently and the pattern of these effects differs considerably between men and women

investment banking contracts in tender offers abstract empirical analysis reveals that investment banker advisory fees in tender offers average 1 29 of the value of a completed transaction far below the levels often alluded to in the business press most fees are contingent on offer outcome with target firm fees typically contingent on transaction value and bidding firm fees on the number of shares purchased although these contingent contracts motivate investment bankers to satisfy some client objectives many also create conflicts of interest between banker and firm these incentive problems are apparent in offer evaluation in hostile offers and in the price paid by bidding firms

the long term default performance of bank underwritten security issues abstract the glass steagall act of 1933 barred commercial banks and their affiliates from underwriting and dealing in securities activities amidst concerns that banks abused the trust of their depositors and clientele by systematically underwriting poor quality security issues this paper examines if these concerns were justified by studying the long term default performance of bank underwritten issues as compared to non bank underwritten issues the evidence shows that contrary to conventional wisdom bank underwritten issues defaulted less than non bank underwritten issues over a seven year period from the issue date and had a significantly lower mortality rate

one is almost enough for monopoly it has been argued that two factors product durability and potential entry may force a monopolist to price at marginal cost this article shows that when these two forces coexist the tendency toward competition may be negated first we prove that durable goods oligopolists without commitment powers may attain joint profits arbitrarily close to those of a monopolist with perfect commitment power second we demonstrate that the presence of a potential entrant may enable a durable goods monopolist to act as if he had commitment power thus potential as well as actual entry may restore monopoly power

work and the accommodation of chronic illness a re examination of the health labour supply relationship this study uses a data set of over 14000 households from the state of new jersey in the usa to estimate the impact of specific chronic health conditions on the probability of employment and finds wide variation of employment impacts across chronic conditions additionally the elasticity of the employment response is generally greater for women and lower skilled workers most notable is the role of comorbidity individuals with multiple conditions have markedly lower probability of employment and chronic illness explains virtually all of the large gap in employment probability for those who have multiple conditions this is shown using a summary index of disease status that correlates closely with employment rates across age groups in the aggregate chronic disease striking in adulthood explains about 10 of the total non employment in the new jersey among those aged 35 74 finally cross sectional evidence gives little support for health as a primary determinant of the aggregate age employment profile

information reusability competition and bank asset quality this paper explains the recent decline in bank asset quality using the notion of information reusability banks are viewed as information processors they exist because of their advantage in extracting the surplus associated with the reusability of borrower specific information it is shown that a bank s incentive to screen loan applicants and hence maintain the quality of its assets depends on the surplus this screening can produce which in turn depends on information reusability two recent changes in banks operating environment are increased competitition and greater temporal volatility in borrower credit risks the former has directly reduced banks informational surplus while the latter has impaired information reusability hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets it is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality

arthritis and the earnings of men an analysis incorporating selection bias abstract arthritis is a chronic and crippling disease which affects the work effort and earnings of more than 14 million working age victims this paper examines the effects of arthritis on the earnings of men aged 18 to 64 arthritis has large and significant effects on earnings most models incorporating selection bias have examined groups with lower labor force participation rates than prime age males but significant selection bias is found here when selection bias is considered the estimated absolute effects of arthritis are increased and the percentage of the gap between arthritic and non arthritic males explained by arthritis as opposed to other factors increases this study is unusual in identifying the effects of a single disease on earnings

alcoholism work and income this article reports on an empirical analysis of the relationships between alcoholism and income and working we show that the relationships between alcoholism and labor market success have important age or life cycle dimensions we present evidence that alcoholism may affect income more by restricting labor market participation than by affecting the wages of workers finally we demonstrate that the effects of alcoholism on earnings depend on the extent to which one controls for other covariates associated with alcoholism as such we suggest that there may be important indirect as well as direct effects of alcoholism on labor market success

conflict of interest and the credibility of underwriter analyst recommendations brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public we show that stocks that underwriter analysts recommend perform more poorly than buy recommendations by unaffiliated brokers prior to at the time of and subsequent to the recommendation date we conclude that the recommendations by underwriter analysts show significant evidence of bias we show also that the market does not recognize the full extent of this bias the results suggest a potential conflict of interest inherent in the different functions that investment bankers perform

the mode of acquisition in takeovers taxes and asymmetric information we develop a model in which the mode of acquisition conveys information concerning the value of the bidder the model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the u s tax code we demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers the model yields a number of unique predictions about the construction of acquisition offers we present evidence consistent with the model when one firm acquires another it can pay for the acquisition with cash stock or a combination of the two recent studies find that announcement returns to bidding firms who make cash offers are higher than when stock offers are made models consistent with this evidence note that as in myers and majluf 1984 a bidder with private information about the value of its assets only offers stock when its shares are overvalued by target shareholders recognizing this adverse selection target shareholders reduce their estimate of the bidder s value thus without some benefit in stock over cash as a means of payment a lemons problem arises for stock offers and bidders only choose cash offers our paper advances the use of stock in an offer through its tax advantages in the united states to realize the benefits available in nontaxable offers an offer must contain at least fifty percent stock thus when the bidder has private information about the value of its assets stock off6rs can still occur because of their tax advantage the intuition is as follows target holders can postpone the realization of capital gains when they receive stock in a takeover so other things equal they demand higher prices in cash takeovers while the offer of stock may have tax advantages the shares swapped are valued by the target as if they were offered by the average bidder making a stock offer thus a pool of higher private valuation bidder types choose cash offers in spite of the tax consequences a pool of lower private valuation types

the underwriting experience of commercial bank affiliates prior to the glass steagall act a reexamination of evidence for passage of the act abstract we examine a major rationale for the passage of the glass steagall act separating commercial and investment banking activities in the u s that these banks abused their superior knowledge by misrepresenting the quality of inferior security issues or passing off bad commercial loans through publicly offered security issues this issue is of current interest even in today s more relaxed environment in the u s and in the universal banking system in europe since there are still lingering doubts that such abuses will not recur in a systematic study of the performance of bond issues underwritten by different classes of underwriters prior to the passage of the glass steagall act we find bank affiliate issue default rates were lower ex ante yields were lower ex post prices were higher and the relative ability of ex ante yields to predict ex post performance no different than investment bank issues the results hold for all categories of bond issues domestic corporate foreign corporate and foreign governments we have also isolated the performance of the bonds underwrit national city company and chase securities corporation which were targets of the pecora hearing these two bank affiliates were found to issue bonds of lesser quality than the other bank affiliates but no worse than those of the investment banks

a reexamination of the conglomerate merger wave in the 1960s an internal capital markets view one possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less developed capital markets examining 392 bidder firms during the 1960s we find the highest bidder returns when financially unconstrained buyers acquire constrained targets this result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing we also find that bidders generally retain target management suggesting that management may have provided companyspecific operational information while the bidder provided capital budgeting expertise