price dumping in intermediate good markets abstract we analyze price dumping and anti dumping duties in the context of a model with a vertical industry structure dumping in the intermediate good market arises from differences in country specific final good production costs the price differential or dumping margin is shown to increase as the productivity difference increases an anti dumping duty designed to reduce the equilibrium price differential has two effects on welfare a welfare loss from reduced final good production and a contrasting gain achieved by producing the lower output level more efficiently

inflation and relative price variability in the euro area evidence from a panel threshold model the impact of inflation on relative price variability rpv generates an important channel for real effects of inflation this article provides first evidence on the empirical relation between inflation and rpv in the euro area stirred by the widespread use of inflation caps or target bands in monetary policy practice we are particularly interested in threshold effects of inflation in line with the predictions of monetary search models our results indicate that expected inflation significantly increases rpv only if inflation is either very low below 0 95 per annum p a or very high above 4 96 p a

a model of trade credit in a capital constrained distribution channel abstract in a product market with uncertain demand we examine a distribution channel consisting of one manufacturer and one capital constrained retailer the retailer may fund its business by borrowing credit either from a competitive bank market or from the manufacturer provided it is also to the latter s benefit to extend trade credit under bank credit financing we show that the channel behaves as if the retailer is not constrained by capital in a wholesale price contract we find that trade credit makes both channel members better off and is the unique financing equilibrium trade credit better integrates the channel than bank credit by centralizing the financing of distribution at the manufacturer we further compare bank versus trade credit under a classical channel contract revenue sharing contract in addition we present a set of numerical experiments to show how product cost internal capital and demand variability impact on the market equilibrium under both bank and trade credits

tax adjusted discount rates this paper develops models for discount rates that are adjusted for the interest tax shields of an infra marginal firm in a general tax equilibrium where there is cross sectional variation in corporate tax rates under the assumption that the firm optimally maintains a predetermined debt ratio a tax adjusted riskless discount rate model is given for valuing certainty equivalents and a tax and risk adjusted discount rate model is given for valuing expected cash flows for the latter case the asset equity debt and tax shield betas are derived and a weighted average cost of capital interpretation is given the tax adjusted capm apt security market lines for expected returns in stock and bond markets both have the same slope but different intercepts a formula is also provided for the present value of the interest tax shield when the firm optimally maintains a predetermined debt level the analysis here also differs from the existing literature in the following respects it allows for cross sectional variation in corporate tax rates and personal tax rates it shows that the market values of risky and riskless interest tax shields differ only to the extent that tax laws provide for nonlinear taxation of gains and losses it also shows that interest tax shields should be discounted at a tax adjusted discount rate that reflects the fact that they accrue to equity investors rather than debt investors continuous time simplifications of the formulas in this paper and the previous literature are also given

the optimum quantity of money theory and evidence in this paper we propose a simple and general model for computing the ramsey optimal inflation tax which includes several models from the previous literature as special cases we show that it cannot be claimed that the friedman rule is always optimal or always non optimal on theoretical grounds the friedman rule is optimal or not depending on conditions related to the shape of various relevant functions one contribution of this paper is to relate these conditions to measurable variables such as the interest rate or the consumption elasticity of money demand we find that it tends to be optimal to tax money when there are economies of scale in the demand for money the scale elasticity is smaller than one and or when money is required for the payment of consumption or wage taxes we find that it tends to be optimal to tax money more heavily when the interest elasticity of money demand is small we present empirical evidence on the parameters that determine the optimal inflation tax calibrating the model to a variety of empirical studies yields an optimal nominal interest rate of less than 1 per year although that finding is sensitive to the calibration

the behavior of prices and inflation an empirical analysis of disaggregat price data this paper analyzes the effects of inflation on the dispersion of prices as well as other aspects of price behavior using disaggregated data on prices of foodstuffs in israel during 1978 84 we find that the effect of expected inflation on intramarket price variability is stronger than the effect of unexpected inflation we show that even in times of high inflation price quotations are not trivially short and price changes are not synchronized across firms these facts taken together confirm that there is some staggering in the setting of prices we find that the distribution of real prices is far from being uniform as many menu cost based models assume or conclude in fact as inflation increases to very high levels this distribution is not even symmetric when the annual inflation rate reaches 130 percent there are equal chances of finding real prices above or below the market average but upward deviations in the real price are further away from zero than downward ones furthermore as the annu

inflation and relative price variability parks study reexamined the authors show that richard w parks 1978 widely cited evidence on the correlation between the rate of inflation and the variability of relative prices in the united states during 1948 75 depends on one observation 1974 when the sample period is extended through 1989 the correlation depends on the observations for 1974 and 1980 since both are years of large oil price shocks the authors make the case that causation is likely to run from these shocks to relative price variability and inflation with accommodating monetary policy playing a role copyright 1993 by ohio state university press

multimarket competition theory and evidence the multimarket perspective identifies potential entrants as existing firms in related markets the paper uses this new framework to analyze entry strategies and entry deterrence successful entry permitting and entry deterring strategies require understanding of the feedbacks from the entry market to the home market and vice versa the multimarket perspective integrates literature on industrial organization and strategic management

bankruptcy risk and optimal capital structure this study finds shortcomings in empirical tests of the capital structure irrelevance hypothesis the alternative hypothesis is that firms choose value maximizing mixes of debt and equity on account of bankruptcy costs and the tax deductibility of interest payments based upon the cross sectional implications of the tax shelter bankruptcy cost hypothesis an alternative test of the irrelevance hypothesis is performed the test examines the relationship between failure rates and leverage ratios for 36 lines of business the results are inconsistent with the irrelevance hypothesis in their landmark paper modigliani and miller 26 demonstrate that under certain assumptions the market value of a firm is independent of its capital structure these assumptions include the absence of taxes transactions costs and bankruptcy costs recently miller 24 has argued that the introduction of corporate and personal taxes does not alter the capital structure irrelevance result in the absence of bankruptcy costs 1 the inclusion of bankruptcy costs generally considered in conjunction with the tax deductibility of interest payments has led others to conclude that capital structure will affect the value of the firm 2 in this case value maximizing firms may choose optimal capital structures consisting of both debt and equity there have been numerous attempts to discriminate empirically between the miller irrelevance mi hypothesis and the tax shelter bankruptcy cost ts bc hypothesis several are discussed in section i of this paper there it is argued that studies attempting to measure directly the effect of changes in capital structure on firm values are subject to serious complications and are unable to discriminate between the mi and ts bc hypotheses other studies focus on cross sectional implications of the mi and ts bc hypotheses the cross sectional tests are based on the assertion that bankruptcy costs may tend to induce firms with greater business risk to include less debt in their capital structures whereas the mi hypothesis does not predict such a relationship unfortunately the existence of positive bankruptcy costs is not sufficient to ensure that the ts bc hypothesis will predict the inverse relation

evidence on the functional relationship between relative price variability and inflation with implications for monetary policy this paper considers the functional relationship between relative price variability rpv and inflation using quarterly personal consumer expenditure data in the us over 1967q1 2003q1 deriving some implications for monetary policy non parametric regression techniques are used to explore the shape of the rpv function and this shape is related to the theory outlined by rotemberg 1982 1983 the empirical rpv function yields a plausible optimal value of inflation in the region of five percentage points which is consistent with this theory and lies within the range of values cited by recent evaluations of sand and grease effects

inflation inflation uncertainty and relative price dispersion evidence from bivariate garch m models abstract one potential real effect of inflation is its influence on the dispersion of relative prices in the economy menu cost models generally imply that higher trend inflation will increase price dispersion in contrast signal extraction models predict that increased inflation uncertainty will raise relative price dispersion existing empirical studies do not distinguish between these separate hypotheses we constuct a bivariate garch m model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion

stochastic capacity investment and flexible vs dedicated technology choice in imperfect capital markets this paper analyzes the impact of endogenous credit terms under capital market imperfections in a capacity investment setting we model a monopolist firm that decides on its technology choice flexible versus dedicated and capacity level under demand uncertainty differing from the majority of the stochastic capacity investment literature we assume that the firm is budget constrained and can relax its budget constraint by borrowing from a creditor the creditor offers technology specific loan contracts to the firm after which the firm makes its technology choice and subsequent decisions capital market imperfections impose financing frictions on the firm our analysis contributes to the capacity investment literature by extending the theory of stochastic capacity investment and flexible versus dedicated technology choice to understand the impact of capital market imperfections and by analyzing the impact of demand uncertainty variability and correlation on the operational decisions and the performance of the firm under different capital market conditions we demonstrate that the endogenous nature of credit terms in imperfect capital markets may modify or reverse conclusions concerning capacity investment and technology choice obtained under the perfect market assumption and we explain why the theory developed in this paper suggests some rules of thumb for the strategic management of the capacity and technology choice in imperfect capital markets this paper was accepted by john birge focused issue editor

inflation and the distribution of price changes this paper reconsiders the empirical evidence connecting inflation to its higher order moments in particular we examine the statistical properties of the observed positive correlation between the sample mean and the sample cross sectional skewness of price changes this correlation has attracted substantial attention over the years and has recently been the focal point of a debate among macroeconomists we show that the sample mean skewness correlation suffers from a small sample bias that accounts for the entirety of the observed correlation in other words we establish that one of the stylized facts in the literature on aggregate price behavior need not be a fact at all

money and the dispersion of relative prices a price dispersion equation is tested with data from the german hyperinflation the equation is derived from a version of lucas s and barro s partial information localized market models in this extension different excess demand elasticities across commodities imply a testable dispersion equation in which the explanatory variable is the magnitude of the unperceived money growth in order to test this hypothesis a price dispersion series is constructed and a measure of the unperceived part of money growth is estimated the model receives support from the empirical analysis although it is evident that unincluded variables have important effects on price dispersion

estimating product market competition methodology and application abstract in oligopolies firms behave strategically and commit to actions that elicit favorable responses from rivals firm actions consequently are a function of the nature of these strategic interactions in this paper we develop a methodology for the empirical estimation of strategic interactions in product markets we then apply our measure of strategic interactions to ceo compensation we use quarterly data on profits and sales from compustat to estimate the slope of firm s reaction function when the slope is negative and marginal profits decrease with an increase in the rival s actions the firm is classified as a strategic substitute when the slope is positive and marginal profits increase with an increase in the rival s actions the firm is classified as a strategic complement as predicted by theory we find significant evidence that strategic substitutes decrease the pay for performance incentives of their ceos on the other hand strategic complements significantly increase ceo pay for performance incentives the empirical measure developed can be used to test a wide variety of strategic models

the relationship between relative prices and the general price level it is very nearly a truismi amaong neoclassical economists that the public is wont to confuse changes in the general price level with relative price changes correspondingl y one might speak of the independence between the two as one of the central postulates of the neoclassical tradition william stanley jevons was aml ong the first to identify this basic dichotomin economic life as well as to attempt to explain the ordinary citizen s seenming incapacity to understand it

the structure and incentive effects of corporate tax liabilities this paper describes situations in which tax liabilities assume the form of a negative position in a call option this structure motivates an examination of the investment decisions of taxed corporations in the presence of risk it is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger these effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders and under alternative assumptions about the tax code and about the timing of investment and financing decisions this paper makes an observation regarding the functional form assumed by the tax liabilities of corporations with potentially redundant deductions and evaluates its consequences for investment incentives interest and other deductions against taxable income can be taken for the most part only to the extent of that income in a single period model this gives the net tax liability a familiar structure it can be viewed as a call option where the exercise price on the call is the allowable deductions the tax paying entity holds a positive position in the assets which generate the taxable income and a negative position in a call option on those assets the analogy between options and the structure of tax liabilities calls attention to some interesting incentive effects concerning risk using their model of option valuation black and scholes 5 showed that the value of an option is increasing in the variance of the asset it is written on other authors have generalized this result and studied its implications for corporate financing see jagannathan 16 jensen and meckling 17 and green 15 the importance of the risk attributes of the underlying asset in option valuation suggests that taxation may have important incentive consequences for investment decisions involving risk it has been recognized in the public economics literature for some time that asymmetries in the tax schedule can affect risk taking behavior early papers by mossin 20 and stiglitz 25 studied individual portfolio decisions over a riskless and a risky asset our analysis differs from these in a number of respects the most important of these is our use of market valuation rather than expected utility in the decision maker s objective function this is surely a more appropri

safety first bankruptcy and the pricing and investment decisions of the firm the paper analyzes the impact of imposing a constraint on the probability of bankruptcy for the pricing and investment choices of firms two models are presented in which a firm faces stochastic demand in one costs are known with certainty and in the other costs of production are probabilistic in both cases the constraint induces a reduction in optimal price if demand is elastic for less elastic demand price increases may be indicated with constant costs the constraint lowers optimal investment the results are applicable to the analysis of rating agencies behavior or to the design of bond covenants especially for public utilities

trade costs and multimarket collusion contrary to conventional wisdom this article argues that trade liberalization may facilitate collusion and reduce welfare with the help of a duopoly model in which firms interact repeatedly in multiple markets we first show that if trade costs i e tariffs transport costs and discount factors are not too high efficient cartel agreements necessitate the cross hauling of goods as that entails lower deviation incentives in this setting we then demonstrate that reciprocal trade liberalization always raises total output when trade costs are within a range whose lower bound exceeds a threshold level but may reduce total output and thus be pro collusive when trade costs are below that threshold level

on the interaction of real and financial decisions of the firm under uncertainty this study analyzes the interaction between the optimal level of investment and debt financing for this purpose a model is structured in which a firm facing an uncertain price has to decide on its optimal level of investment and debt the amount of investment sets a limit on output whose optimal level is determined after price is realized the debt involved is risky there exists a possibility of bankruptcy the analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage we also demonstrate that as the tax rate increases optimal capacity decreases and optimal leverage increases an analysis of the impact of changes in the expected price shows that under some conditions an increase in expected price would lead to an increase in optimal investment firm size and a decrease in optimal debt

multi market collusion with territorial allocation abstract we develop a supergame model of collusion between price setting oligopolists located in different markets separated by trade costs the firms produce a homogeneous good and sustain collusion based on territorial allocation of markets we first show in a much more general framework than some earlier literature that a reduction in trade costs can paradoxically increase the sustainability of collusion then we prove a new paradox in which the scope for collusion may be enhanced by an increase in the number of firms the paper thus highlights several hitherto unknown theoretical implications of collusion under price competition

inflation and relative price variability new evidence for the united states this article provides new evidence on the empirical relationship between inflation and relative prices in the united states in line with the predictions of recent monetary search models we find that the impact of expected inflation on relative price variability rpv has disappeared during the recent period when inflation expectations have been stabilized on a low level endogenous break point tests are applied to identify the timing and to confirm the significance of the changing role of inflation for rpv the empirical findings are robust with respect to different price indices disaggregation levels and measurement concepts

how big is the debt overhang problem abstract i re examine the debt overhang problem where the flexible investment level rather than the irreversible decision whether or not to operate is used to measure the underinvestment caused by debt financing i measure a large overhang cost with long term debt or short term debt as is standard underinvestment with long term debt is more severe when investment opportunities are poor and is mitigated as opportunities improve in contrast underinvestment with short term debt remains significant even when investment opportunities are good firms lever up as opportunities improve to take advantage of tax shields so that equity claimants still face the incentive to underinvest

price dispersion and inflation evidence from israel the paper considers the question whether observed price differentials reflect perceived differences in quality service agreements or location or whether information imperfections can explain this phenomenon it sets out theoretical arguments linking inflation to reductions in the information stock held by agents and thus to greater price dispersion the hypothesis is tested using monthly price data for 13 uniquely defined goods sold in israel between 1971 and 1984 price dispersion is shown to be positively related to the rate of market price inflation since inflation is an unlikely proxy for changes in perceived characteristics the findings support price dispersion theories based on optimally imperfect decision making

credible entry threats into contestable markets a symmetric multi market model of contestability the theory of contestable markets emphasizes potential competition yet it is reticent on the identity of potential entrants recent literature discusses the im possibility of hit and run entry for several types of entrants r d cairns and d mahabir 1988 argue that existing firms in related markets are most likely to be capable of hit and run entry but unlikely to be motivated this paper expands their arguments by sketching a multimarket framework and by discussing a model that captures most of the current debate the model marks a first step into revising contestability theory along the lines of this debate copyright 1992 by the london school of economics and political science

economic integration and the sustainability of multimarket collusion abstract we examine the impact of and links between two types of economic integration on the stability of multimarket collusion when firms interact in quantities in segmented markets 1 multilateral trade liberalization captured by a reduction of trade costs across all markets and 2 preferential trade liberalization captured by an expansion in the size of individual markets while holding the level of external trade costs tariffs constant in general collusive stability is non monotonically related to economic integration in the case of multilateral liberalization the effect depends on the initial level of trade costs and the extent of liberalization however on the average the complete elimination of trade costs is pro competitive when these costs are sufficiently high initially in the case of regional integration the effect of liberalization is pro competitive when external trade barriers are sufficiently high but anti competitive when these barriers are sufficiently low

residual securities and personal taxes abstract this paper suggests that a residual security should have a tax advantage in a model which includes personal taxes and admits the possibility of low income states

reciprocity in international business a study of telecommunications alliances and contracts reciprocity has been identified as a messy concept to study within international cooperative ventures theoretically grounded in international cooperation transaction cost theory and economic anthropology reciprocity is operationalized and explored in this study specifically the effects of cultural distance economic nearness country level risk and governance mechanisms are analyzed in relationship to three distinct measures of reciprocity the international long distance industry provides the research setting during the 1980s and 1990s as this industry has become more competitive within the united states foreign partners have been slow to reciprocate regarding the sharing of revenues derived from increased overseas calling to study reciprocity between u s international long distance carriers and their partnering foreign entities a pooled time series cross sectional technique is used 11 years of contractual arrangements between the u s firms and the telecom administrations of 109 countries are analyzed governance mechanisms test as highly significant with all measures of reciprocity while the other independent variables exhibit varying degrees of significance with the respective dependent measures

relative price variability and inflation in europe the relationship between inflation and the relative variability of prices has been the subject of careful investigation in the united states using data for product groups at the city level yet in europe where the relationship could have profound effects on the viability of monetary integration no attempt has been made to study the relationship this paper fills the gap by examining data disaggregated to the commodity level across 10 eu countries evidence is found for logistic smooth transitions in the relative price variability measures within countries and within product groups when this deterministic component is removed the stochastic element is not persistent and does not always have the positive relationship with inflation commonly found in us city data

sectoral variability and the foundations of optimal inflation rate abstractthe recent monetary search models argue that the real effects of inflation on economic activity can be gauged through relative price variability rpv our study uses a large panel data of

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

on the stability of multimarket collusion in price setting supergames abstract in this paper we examine how trade liberalization affects collusive stability in the context of multimarket interactions the model we consider is a segmented markets duopoly with differentiated goods in which price setting firms pool their incentive constraints across markets to sustain their most collusive outcome we find that when goods are very close substitutes and trade costs are sufficiently high a marginal reduction in trade costs facilitates collusion exactly the opposite is true if for any given degree of product substitutability trade costs are sufficiently low we also study the dependence of multimarket collusion on product differentiation

cartel stability and tariff policy abstract in this paper we investigate the effect that tariff policy has on the ability of firms to collude in oligopolistic industries we find that small tariff rates lead to an industry structure more conducive to collusive behavior while large tariff rates weaken cartels there exists a critical tariff rate which has no effect on the cartel s stability this critical value is found to be a decreasing function of n the number of firms in the industry and n d n the proportion of firms that are domestic

inflation price dispersion and market integration through the lens of a monetary search model monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and thus on the level of market integration for less integrated markets the inflation price dispersion nexus is predicted to be asymmetrically v shaped which results in an optimal inflation rate above zero for highly integrated markets with low search costs however the impact of inflation on price dispersion should only be small using price data of the european union member states this paper is the first that tests and confirms these predictions of monetary search theory

technology debt and the exploitation of growth options abstract this paper analyzes the effect of the firm s technology on the agency costs of debt it is shown that for an important class of technologies agency costs are not a uniformly rising function of leverage for these technologies relatively high leverage can be consistent with a small tax subsidy the effect of technology on the exploitation of real options by a levered firm is examined the analysis provides a framework for a direct test of the agency cost of debt hypothesis using cost data

interactions of corporate financing and investment decisions a dynamic framework this article analyzes the interaction between a firm s dynamic investment operating and financing decisions in a model with operating adjustment and recapitalization costs using numerical analysis we solve the model for cases that highlight interaction effects we find that higher production flexibility due to lower costs of shutting down and reopening a production facility enhances the firm s debt capacity thereby increasing the net tax shield value of debt financing while higher financial flexibility resulting from lower recapitalization costs has a similar effect production flexibility and financial flexibility are to some extent substitutes we find that the impact of debt financing on the firm s investment and operating decisions is economically insignificant

taxes capital structure choices and equity value we use a multitude of tax reforms across the organisation for economic co operation and development oecd countries as natural experiments to estimate the market value of the tax benefits of debt financing we report time series evidence that tax reforms are followed by large changes in the value of corporate equity however the impact of tax reforms is greatly mitigated by the presence of leverage the value of debt tax savings is greater among top taxpayers among highly profitable firms and in countries where tax laws are more strongly enforced importantly the value of debt tax savings is in line with the benchmark implied by a traditional approach

the impact of debt financing on entry and exit in a duopoly this article investigates the interaction between market entry company foreclosure and capital structure in a duopoly we find that the order in which firms foreclose is determined not only by differences in firm specific factors but also by common economic factors such as the interest rate and the market profit volatility we extend the exit model by allowing financially distressed firms to renegotiate their debt contracts through a one off debt exchange offer we find that firms with high bankruptcy costs or with prospects of profit improvement can get bigger reductions on their debt repayments investigating market entry we find that financial vulnerability of the incumbent induces earlier entry article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

economies of scale household size and the demand for food household scale economies are plausibly attributed to shared household public goods that make larger households better off at the same level of per capita resources larger households should therefore have higher per capita consumption of private goods such as food provided that they do not substitute too much toward the effectively cheaper public goods the evidence shows exactly the opposite data from rich and poor countries indicate that at constant per capita total expenditure the per capita demand for food decreases with household size and that it does so most in the poorest countries where substitution should be the least

input choices and uncertain demand the theory of the firm under demand uncertainty has to date assumed that the firm s input decisions are unaffected by the stochastic nature of demand this assumption is not usually made explicitly but it is implied by the assumption that the firm s cost function presumably derived by finding the minimum cost combination of inputs for any given level of output is unaffected by the uncertainty however if firms must choose some of their inputs before the uncertainty regarding demand is resolved then different input decisions may involve different levels of risk since firms decisions regarding price and output are affected by demand uncertainty and non linear risk preferences as previous authors have shown it seems reasonable to suspect that their input decisions will also be affected but if input decisions are affected then firms cost functions are not invariant to uncertainty and the results of previous studies must be reexamined three different types of firms are considered in this paper the competitive firm the quantity setting imperfect competitor and the price setting imperfect competitor input decisions of the competitive firm and the quantity setting imperfect competitor are shown to be unaffected by demand uncertainty and hence the assumption of an unchanging cost function is appropriate in these cases for the price setting imperfect competitor however input decisions are influenced by demand uncertainty and an unchanging cost function is therefore not appropriate this case is considered in some detail and conditions under which results can differ from those previously reported in the literature are examined

import share under international oligopoly with differentiated products japanese imports in u s manufacturing this paper seeks to identify the determinants of the japanese impor t share in the u s market from the assumptions of international oligopoly and internationally differentiated products a theoretical model is developed where import share is considered as a cournot nash equilibrium the relative position of the reaction functions is determined by the previous commitments of both domestic and foreign firms on advertising r d and tangible investment as well as by artificial and natural trade barriers using a sample of twenty four three digit import competing u s industries matched to japanese industries the empirical analysis provides evidence supporting the model s predictions that the relative strategic expenditures and market structures of both partners explain the japanese import share in u s markets copyright 1988 by mit press

dumping and signaling abstract a model of predatory dumping based upon incomplete and asymmetric information is developed the foreign firm may induce exit by the home firm through acting like a low cost competitor irrespective of its actual costs the home firm must infer the foreign firm s cost through its export price by tying the export price to the price that the foreign firm charges in the foreign market a home county antidumping law raises the cost of signaling low production costs to the home producer the law has signal enhancing or inhibiting effects which may adversely affect the home firm with ambiguous welfare consequences

the impact of the degrees of operating and financial leverage on systematic risk of common stock the capital asset pricing model postulates that the equilibrium return on any risky security is equal to the sum of the risk free rate of return and a risk premium measured by the product of the market price of risk and the security s systematic risk in the capital asset pricing model beta as an index of systematic risk is the only security specific parameter that affects the equilibrium return on a risky security

is there any asymmetry in the effect of inflation on relative price variability abstract it is widely perceived that relative prices are more dispersed in periods of price decreases than in periods of price increases we show that the asymmetry results from misspecifying the true u shaped underlying model with a piecewise linear regression model

the ambiguous consequences of anti dumping laws the anti dumping law is most often applied in oligopolistic industries while most analyses focus on the monopoly model i analyze a duopoly model where a foreign firm engages in price based dumping under cournot behavior the anti dumping law has ambiguous price and welfare effects when the home firm is a stackleberg leader two disquieting effects emerge first the home firm can use the anti dumping law to curtail competition even when the foreign firm does not initially engage in dumping second the anti dumping law can increase profits of both firms at the expense of domestic consumers

inflation fixed cost of price adjustment and measurement of relative price variability theory and evidence in an interesting paper julio rotemberg 1983 extends the works of eitan sheshinski and yoram weiss 1977 and michael mussa 1981 to examine the aggregate consequences of monetary growth in an economy in which sellers incur a fixed cost of price adjustment the fixed cost prevents a continual adjustment of individual prices so each seller keeps his price constant in periods of discrete length increasing his price in discrete jumps at the end of these periods a central feature of the inflationary process is therefore that relative prices become dispersed around their means and the theory predicts that even a fully anticipated inflation increases the variability of relative prices the empirical evidence on this point does however appear to be mixed on the one hand richard parks 1978 and stanley fischer 1981a b 1982 conclude that anticipated inflation does increase relative price variability which fischer interprets as providing empirical support for the theory on the other hand mario blejer 1981 1983 and blejer and leonardo leiderman 1982 find that anticipated inflation has no effect or only a very weak effect on relative price variability which makes john taylor 1981 doubt the quantitative significance of the theory 2 this paper uses rotemberg s theoretical framework to demonstrate that the proxy for relative price variability adopted in the empirical literature does not properly capture the relative price variability that is caused by a fixed cost of price adjustment the methodology of the above cited studies is therefore not appropriate for evaluating the empirical relevance of the fixed cost theory and the divergence of their results is not surprising specifically the proxy which consists of the variance of the rates of price change between successive observations does not always increase with the anticipated inflation even with disaggregate data 3 the proxy decreases with the anticipated inflation in approximately half of any interval of inflation rates for which a seller adjusts his price no more than a given number of times between successive observations moreover the relationship between the anticipated inflation and the proxy depends on such extraneous factors as the timing of the observations a change in the timing may change a positive relationship between the anticipated inflation and the proxy to a negative one and vice versa the paper also proposes alternative more satisfactory measures of relative price variability and provides empirical support for the theoretical conclusions

inflation and relative price variability in the short and long run new evidence from the united states this paper presents new evidence that a positive association exists between inflation and relative prices and relative inflation rates in very disaggregated data for the united states over the period 1975 through 1992 there is also evidence that the response of relative prices and relative inflation rates to inflation varies inversely with the information content of a given shock to inflation the relationship is studied from two cross sectional perspectives using individual price series collected from forty eight u s cities evidence on the persistence of the effects of inflation on relative prices is also presented results here demonstrate the absence of a long run relationship between inflation and relative price dispersion i e the two series are not cointegrated finally results from vector autoregressions further imply the effect is smaller than indicated by typical estimates copyright 1996 by ohio state university press

on the asymmetric u shaped relationship between inflation inflation uncertainty and relative price skewness in the uk we investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross sectional distribution of relative prices using a modified calvo pricing model with regime dependent price rigidities calibration experiments reveal that the inflation standard deviation and inflation skewness relationships exhibit u shaped asymmetries around the historical mean inflation rate uk sectoral data support our results we conclude that monetary policy should target an inflation rate proximate to the common minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments

taxes and capital structure evidence from firms response to the tax reform act of 1986 while the theoretical relation between taxes and capital structure has been extensively analyzed the empirical evidence on this issue has thus far been inconclusive one of the main difficulties confronting previous empirical studies of the cross sectional relationship between taxes and leverage was the control of intervening variables the tax reform act of 1986 tra which drastically changed the tax regime provides a unique opportunity to assess the interaction between taxes and leverage decisions in a controlled environment the authors test the relationship between leverage and certain tax related variables for a large sample of companies in the years surrounding the enactment of tra the results support the tax based theories of capital structure the findings indicate that there exists a substitution effect between debt and nondebt tax shields and that both corporate and personal tax rates affect leverage decisions coauthors are dan givoly aharon r ofer and oded sarig 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 taxes and depreciation on corporate investment and financial leverage this paper provides an analysis of the effect of corporate and personal taxes on the firm s optimal investment and financing decisions under uncertainty it extends the deangelo aad masulis capital structure model by endogenizing the firm s investment decision the authors results indicate that when investment is allowed to adjust optimally the existing predictions about the relationship between investment related and debt related tax shields must be modified in particular the authors show that increases in investment related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level in cross sectional analysis firms with higher investment related tax shields normalized by expected earnings need not have lower debt related tax shields normalized by expected earnings unless all firms utilize the same production technology differences in production technologies across firms may thus explain why the empirical results of recent cross sectional studies have not conformed to the predictions of deangelo and masulis

trade flows in a spatial oligopoly gravity fits well but what does it explain large distance and border effects on trade flows in some industries may result from the collusive division of geographic markets in the brazilian cement industry traditional gravity equations fit the data well yet limited regional flows are due to firms strategic behaviour thanks to a unique institutional setting and an unusually rich data set i directly control for trade costs which despite their importance cannot account for the observed segmentation of local markets at current prices the paper highlights how collusive behaviour can magnify the effects of distance as firms use geography to coordinate on higher prices and less cross hauling les effets de grande distance et de frontieres sur les flux de commerce dans certaines industries peuvent etre le resultat d une division collusive des marches geographiques dans l industrie bresilienne du ciment les equations de gravite s ajustent bien aux donnees mais les flux regionaux limites entre regions sont attribuables au comportement strategique des firmes gr ce a un contexte institutionnel unique et a une base de donnees inhabituelles l auteur a pu prendre en compte directement les couts du commerce qui malgre leur importance ne peuvent pas expliquer la segmentation observee des marches locaux aux prix courants le memoire met en lumiere comment le comportement de collusion peut magnifier les effets de distance a proportion que les firmes utilisent la geographie pour assurer une coordination fondee sur des prix plus eleves et moins de transport transfrontalier

the effect of leverage on bidding behavior theory and evidence from the fcc auctions this is an exploration of how bidding behavior of firms in various auctions is affected by their capital structure the theoretical model considers a first price sealed bid and an english auction we find that as debt levels increase firms tend to reduce their bids the lower bids give the competition incentives to reduce their bids as well these results are investigated empirically using data from the 1994 1995 fcc spectrum auctions consistent with the theoretical model higher debt levels of the bidding firm and of the competition tend to lead to lower bids additional determinants of bidding behavior in these auctions are also analyzed copyright 2002 oxford university press

capital intensity and the firm s cost of capital recent reports of negative capital intensity coefficients in struct ure performance equations support allegations of gross measurement error in accounting based measures of economic profitability this paper explores whether specification errors rather than measurement errors alone may explain this anomalous empirical result within a simultaneous equations model of capital intensity cost of capital and price cost margins the author employs hausman specification tests to demonstrate a negative bias on capital intensity and a positive bias on concentration when one omits firm specific cost of capital from price cost margin equations the roles of cost of capital and capital intensity are derived from formal structure performance theory copyright 1988 by mit press

relative price variability and inflation a disaggregated analysis relative price variability has been studied at the cross sectional intermarket level this paper addresses the equally important phenomenon of intramarket variability the dispersion of commodity price movements around the industry average using quarterly price data for 80 disaggregated commodity groups in the united kingdom from 1974 to 1984 the paper investigates the determinants of intramarket price variability and replicates some previous crosssectional tests for the united kingdom intermarket price variability is found to be positively related to inflation which confirms previous results for the united states and other countries intramarket variability is found to be positively related to the average market rate of price change but the strength of this relationship appears to be inversely related to the level of industry concentration these results generally support the propositions and findings reported by stigler and kindahl

repeated games and the reciprocal dumping model of trade abstract a repeated game version of the basic brander and krugman 1983 model is analyzed in the brander krugman model rivalry among oligopolistic firms gives rise to international trade it is now shown that no trade which is welfare reducing when transportation costs are negligible is a strong nash equilibrium of the supergame the threat strategies that support no trade the discount rate and the crucial role of transportation costs are discussed extending the branderkrugman analysis in a natural way

the effect of competition on trade evidence from the collapse of international cartels how do changes in competitive intensity affect trade patterns some cartels may find it advantageous to eliminate cross hauling and divide markets geographically we exploit a quasi natural experiment associated with increased antitrust enforcement to determine if market division strategies were used in seven recently prosecuted international cartels since antitrust activity is unlikely to affect spatial patterns of demand and supply other than through its effect on the competitive environment enforcement induced changes are ideally suited to study the effect of competition on trade patterns analyzing the cartels individually and as a group we find no significant change in spatial patterns of trade following cartel breakup in particular there is no systematic change in the effect of distance on trade these results suggest that cross hauling is not uncommon under collusion and hence that the existence of cross hauling by itself does not provide evidence of effective competition

on the stubbornness of sticky prices this paper presents a simple menu cost example in which there is a clear distinction between price stickiness and downward rigidity of prices while price stickiness may or may not exist in menu cost models downward rigidity shows up whenever there is a reduction of the expected rate of inflation this reduction changes the optimal target and threshold for each firm for some it also implies an immediate increase of their own price this upward jump of prices in case of a disinflationary attempt is interpreted as downward rigidity since there are no symmetric forces when expected inflation increases copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimality of the friedman rule in economies with distorting taxes abstract we find conditions for the friedman rule to be optimal in three standard monetary models our main contribution is to shed light on two issues in the literature first the conventional view maintains that when money is a final good its services should be taxed moreover if money demand is interest inelastic its services should be taxed heavily we show that this view is incorrect second there is an ongoing controversy about whether the optimality of the friedman rule is connected to the intermediate goods result from public finance we resolve this controversy by showing a deep connection between these results

inflation inflation uncertainty and relative price variability this paper tests three models that predict a relationship between the variability of relative price changes rpv and aspects of inflation such as expected inflation unexpected inflation and inflation uncertainty these are respectively the menu costs model the lucas barro signal extraction model and the hercowitz cukierman extension of the lucas barro model that allows for different price elasticities of supply across markets the results imply rejection of the hypothesis that any one of the models entirely explains the relationship between inflation and rpv and also imply rejection of the hypothesis that the three models together jointly explain the relationship

consumer surplus enhancing collusion and trade that collusion among sellers hurts buyers is a central tenet in economics we provide an oligopoly model in which collusion can raise consumer surplus a differentiated product duopoly operates in two geographically separated markets each market is home to a single firm but can import at a cost from the foreign firm under some circumstances a perfect cartel relative to duopolistic competition raises the price of the imported good and lowers the price of the home good this raises welfare for most consumers and increases aggregate consumer surplus a similar possibility result applies to autarky our analysis applies beyond the spatial setting

interactions of the firm s real and financial decisions this paper provides an integrated approach to the theory of the firm under technological uncertainty corporate taxes risky debt and risk neutrality it is shown that the firm s investment production and financing decisions are made simultaneously it is demonstrated that the relationship between optimal capital or labour and debt is not strictly negative as in dotan and ravid 1982 nor strictly positive as in hite 1977 the direction of this relationship depends on the characteristics of debt and the characteristics of the firm s production function given the simultaneity of the real and financial decisions it is shown that an interior optimum exists for the firm s value as a function of debt

interactions of corporate financing and investment decisions the effects of agency conflicts abstract we examine interactions between flexible financing and investment decisions in a model with stockholder bondholder conflicts over investment policy we find that financial flexibility encourages the choice of short term debt thereby dramatically reducing the agency costs of under and overinvestment however the reduction in agency costs may not encourage the firm to increase leverage since the firm s initial debt level choice depends on the type of growth options in its investment opportunity set the model has a number of testable predictions for the joint choice of leverage and maturity and how these choices interact with a firm s growth opportunities

price controls and the variability of relative prices recent literature that explains relative price variability within a partial inforrnation multimarkets framework typically assumes that prices in all markets are deterrnined by market clearing 1 however in many countries a certain number of prices is either directly set by the government or regulated by it in israel for example the government is directly involved in setting the prices of some basic foodstuffs fuels electricity public transportation and a number of other items 2 adjustments in the prices of these goods are made at discrete intervals and are widely and instantaneously disseminated by the media as a result individuals in all markets have up to date inforrnation on that component of the general price level which is set by the government in terrns of the islands paradigm this means that the component of the general price level which is confused with relative price movements is smaller than the same component in an economy in which all prices are freely deterrnined by the market the purpose of this article is to explore the implications of this modified inforrnation structure for relative price variability within a partial inforrnation framework

entry and entry deterrence in penetrable markets this paper presents a game theoretic model of entry a potential entrant into a given market is postulated to be a currently produci ng firm whose product is a substitute on the production side for the good being sold in the market an entrant is capable of switching pr oduction between markets faster than firms in general can adjust thei r total outputs to some extent a market faced with entry as such wi ll resemble a contestable market and limit pricing behavior will occ ur copyright 1988 by the london school of economics and political science

investment and financing decisions with learning curve technology abstract the learning curve has a significant impact on production cost hence corporate profit in a number of industries while the learning curve is well recognized in the economics literature and its effect on operating costs and production decisions widely studied its effect on corporate investment has been largely unexplored to our knowledge there is one paper that examines this issue but it is limited to unlevered firms we therefore examine a levered firm s optimal investment and financing choices when using learning curve technology the main findings are as follows the effect of leverage on the investment decision depends on the level of debt using the optimal debt level will result in earlier and larger investment thus leverage has a positive effect on investment overall and the difference between levered and unlevered firm is an increasing function of learning speed the optimal leverage ratio without a borrowing constraint is an increasing function of learning speed with a borrowing constraint the investment decision is similar to the unconstrained borrowing case but the leverage ratio is initially increasing and subsequently decreasing in learning speed moreover it is a decreasing function over a wider range for a more stringent borrowing constraint for decreasing returns to scale technology and for a less volatile product market