computational analysis of the accession of chile to the nafta and western hemisphere integration we present the results based on the michigan computational general equilibrium model of western hemisphere economic integration it is shown that tariff elimination will have beneficial effects for most countries involved although the benefits as well as the costs of liberalizatio n are small however if a hemispheric treaty were to stimulate an increase in the capital stocks of the major south american economies the welfare gains would be substantial sensitivity tests reveal that the model exaggerates the likely gains from economies of scale due to liberalization but the error is small in this context because the impact of trade liberalization is small when econometric estimates of scale economies are incorporated into the model the welfare gains due to capital flows nevertheless remain robust a comparison of results for chile using different databases indicates that the impact of regional liberalization using a 1980 database may overstate the impact on the nonferrous metals sector in particular and manufacturing more generally nonetheless when using a 1990 database the change in output of the nonferrous metals sector remain larger than for any other sectors in the chilean economy

taxes tariffs and transfer pricing in multinational corporate decision making three interrelated aspects of u s multinational corporation activity are analyzed here the ability to shift profits from high tax countries to low tax countries the impact of host country taxes and tariffs on the distribution of real capital and the influence of these policies on international trade patterns of the united states and host countries the cross sectional empirical analysis indicates that the observed pattern of reported profits in high and low tax countries is consistent with income shifting behavior and that real investment responds to host country effective tax rates and tariffs the united states appears both to import more from and export more to low tax countries where mnc investment is greater but this bilateral focus must be amplified to consider multilateral effects if trade benefits are to be projected copyright 1991 by mit press

taxation of capital gains on owner occupied homes the paper compares taxation on realization with taxation on accrual in the context of owner occupied housing it considers a model where the utility a household derives from housing relative to other consumption varies over the life cycle as there are sizeable transaction costs housing consumption will not even in the absence of taxes be adjusted continuously but at discrete intervals the focus of the paper is on tax effects on the length of these intervals the following results are shown u taxing true economic appreciation at the same rate as imputed rental income and other capital income will lead to a shortening of the intervals if the capital gains are taxed on accrual an increase in this tax rate holding other rates constant will lead to a shortening of the intervals if the capital gains are taxed only as they are realized an increase in this tax rate holding other rates constant may either lead to a lengthening or a shortening of the holding period shortening is more likely if transaction costs are large whereas lengthening will occur if the rate of price increase is high

economic news exchange rates and interest rates the paper esamines the post october 1979 response of exchange rates and interest rates to the new information contained in the first announcement of fifteen us macroeconomic series illarkets respond primarily to monetary news but also to news about the trade deficit domestic inflation and variables that reflect the state of the business cycle for all fifteen macroeconomic variables an increase decrease in interest rates is accompanied by an appreciation depreciation of the dollar which is consistent with models that stress price rigidity and absence of purchasing power parity the effect of economic news on asset prices has received increasing attention in the economic literature because an outcome of the efficient markets rational expectations hypothesis is that flesible asset prices change the moment new information about future fundamentals arrives in the market in the exchange rate literature the role of news has gained importance because structural models have failed to predict most of the variation in exchange rates during the 1970s see imeese and rogoff 1983 researchers were naturally led to investigate the types of news that make exchange rates so volatile and to utilize news in order to test which model of exchange rate determination is consistent with the floating eschange rate experience notable studies are those of dornbusch 1980 frenkel 1981 edwards 1982a b 1983 copeland 1984 and rose 1984 in this paper i also examine the effects of macroeconomic news on eschange rates but i adopt a different more direct strategy one that complements previous work avoids some of its shortcomings and promises interesting conclusions i examine the instantaneous response of exchange rates the moment a piece of economic news hits the market if one can isolate the exact time during a business day when news arrives it is straightforward to examine the response of exchange rates because financial data are continuously available the advantages of the present methodology are many first it is possible to identify the exact types of economic news and how they affect exchange rates second the simultaneity bias which plagues the previous literature on exchange rates and news is not present here the independent variables that represent news can be interpreted as causal the paper was presented at the 1985 meeting ofthe american economic association the author wishes to thank sebastian edwards r w hafer nicholas karamouzis andrew rose and two anonymous referees for helpful comments kim rupert of the money market services for providing the survey data soo kounne for able research assistance and barnard college for research support

the endowment effect as blessing we study the idea that seemingly unrelated behavioral biases can coevolve if they jointly compensate for the errors that any one of them would give rise to in isolation we pay specific attention to barter trade of the kind that was common in prehistoric societies and suggest that the endowment effect and the winner s curse could have jointly survived natural selection together we develop a new family of hybrid replicator selection dynamics and show that under such dynamics even if biases only partially compensate for each other individuals with both biases can survive in the population in the long run

perceiving prospects properly when an agent chooses between prospects noise in information processing generates an effect akin to the winner s curse statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal the optimal perception patterns share key features with prospect theory namely overweighting of small probability events and corresponding underweighting of high probability events status quo bias and reference dependent s shaped valuations these biases arise to correct for the winner s curse effect

globalization derailed multinational investors response to the 1997 denial of fast track trade negotiating authority is globalization being derailed by opponents results of this event study analysis of the 1997 fast track denial suggest that investors 1 may have perceived fast track as a debate on globalization and 2 appear to have expected financial losses to result from the failure to enact fast track regression results further support the event study findings

political risk and foreign exchange rates an efficient market approach this paper examines the reaction of the foreign exchange market to the announcement of changes in the business environment of a country our results suggest that sampled political risk news conveys important information about a country s investment climate and causes its currency s exchange rate to vary it appears however that the reaction of the foreign exchange market is more dramatic for unfavorable events than for favorable events the evidence presented is also consistent with the hypothesis that the foreign exchange market is efficient in interpreting the type of event considered in this study

prospect theory as efficient perceptual distortion the paper proposes a theory of efficient perceptual distortions in which the statistical relation between subjective perceptions and the objective state minimizes the error of the state estimate subject to a constraint on information processing capacity the theory is shown to account for observed limits to the accuracy of visual perception and then postulated to apply to perception of options in economic choice situations as well when applied to choice between lotteries it implies reference dependent valuations and predicts both risk aversion with respect to gains and risk seeking with respect to losses as in the prospect theory of kahneman and tversky 1979

location and the multinational enterprise a neglected factor this article first traces the changing world economic scenario for international business over the past two decades and then goes on to examine its implications for the location of foreign direct investment and multinational enterprise activity it suggests that many of the explanations of the 1970s and early 1980s need to be modified as firm specific assets have become mobile across natural boundaries a final section of the article examines the dynamic interface between the value added activities of multinational enterprises in different locations

the s shaped value function as a constrained optimum almost since the expected utility hypothesis euh was first introduced evidence has accumulated that decision makers systematically violate it in various ways one early response to the evidence was to develop ad hoc alternatives the best known of which is prospect theory daniel kahneman and amos tversky 1979 1 more recent responses have relaxed the independence axiom or other axioms underlying the euh see mark machina 1987 for a very readable survey of the evidence and responses despite the high intellectual caliber of much of this work there is an important sense in which it has been retrograde theory is adjusted to the evidence by weakening not strengthening its predictive power in other areas such as the theory of the firm or the theory of money economists have followed a different research strategy more subtle constraints such as transactions costs or informational imperfections are sought to explain data that seem anomalous according to received theory when successful such a strategy more clearly delineates the realm in which the older theory is applicable and makes new testable predictions outside that realm thus theory is progressively strengthened to my knowledge only jonathan leland 1986 1988 has adopted such a progressive strategy in a theoretical investigation of euh anomalies the key assumptions of his approximate expected utility theory aeu are 1 inexperience and or cognitive limitations make the true utility function inaccessible so some approximation must be used but 2 decision makers efficiently allocate finite resources so as to minimize the resulting errors he formalizes these assumptions which he applies to probability assessments as well as to utilities in terms of a constraint on the number n of steps allowed in a step function approximation with the optimal approximation defined as that minimizing expected squared error his aeu theory is able to explain many of the major euh anomalies and reduces to ordinary euh in areas in which relevant experience accumulates for example in competitive markets as noted by peter knez vernon l smith and arlington w williams 1985 and don l coursey john l hovis and william d schultze 1987 the prevalence and magnitude of anomalies seems to decline in such settings the purpose of this note is to present a variant on leland s aeu i propose an approximate utility function or value function in which utility increments are weighted by a sensitivity function the resource constraint is that overall sensitivity is limited but prior to observable decisions it can be allocated freely along the continuum of potential wealth increments my approach has three advantages it predicts an s shaped value function when agents maximize expected sensitivity at actual choice opportunities given very plausible assumptions regarding the distribution of such opportunities recall that the assumption that decision makers maximize an s shaped value function such as that depicted in figure 1 is the centerpiece of prospect theory economics department university of california santa cruz ca 95064 i appreciate the comments of jonathan leland amos tversky and two anonymous referees on earlier drafts of this paper the usual caveat definitely applies ithe authors of prospect theory call their model descriptive as opposed to normative but do not consider it ad hoc because of its connections with the psychophysical literature however no substantial connections of prospect theory with generally accepted economic principles for example optimality have previously been demonstrated it is in this narrow economist s sense that i use the term ad hoc the more recent work of ariel rubinstein 1988 and tversky and kahneman 1986 underscores the difficulty of reconciling such a descriptive approach to the expected utility hypothesis

sterling and oil discoveries the mystery of nonappreciation abstract this paper analyzes the impact of north sea oil discoveries on the value of sterling by looking at market reactions to announcements of oil discoveries it shows there is no evidence for the common view that oil discoveries led to an appreciation of sterling it also explores alternative explanations for the nonappreciation of sterling

how basic are behavioral biases evidence from capuchin monkey trading behavior behavioral economics has demonstrated systematic decision making biases in both lab and field data do these biases extend across contexts cultures or even species we investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys and recovering their preferences over a range of goods and gambles we show that capuchins react rationally to both price and wealth shocks but display several hallmark biases when faced with gambles including reference dependence and loss aversion given our capuchins inexperience with money and trade these results suggest that loss aversion extends beyond humans and may be innate rather than learned

internalization an event study test abstract the internalization theory of multinational firms proposes that direct international investment occurs when a firm has information related intangible assets with public good properties we find that firms with characteristics suggesting the presence of information based assets experience a significantly positive stock price reaction upon announcing a foreign acquisition on the other hand firms apparently lacking such assets experience at best zero abnormal returns upon announcing overseas acquisitions

capital gains taxation in an economy with an austrian sector abstract this paper examines the effects of a proportional capital gains in an economy with an austrian sector with wine and trees and an ordinary sector we analyze the effect of capital gains taxation on both an accrual and a realization basis on the efficiency with which resources are used within the austrian sector since time is the only input which can be varied in the austrian sector this amounts to looking at the effect of capital gains taxation on the harvesting time or selling time of assets accrual taxation decreases the selling time of austrian assets realization taxation decreases the selling time of some austrian assets and leaves it unchanged for others inflation further reduces the selling time of assets taxed on an accrual basis often but not always inflation increases the selling time of austrian assets taxed on a realization basis we also examine the effect of the special tax treatment of capital gains at death and find that the current u s tax system under which capital gains taxes are waived at death encourages investors to hold assets longer in contrast to these results which suggest that the capital gains tax can reduce the holding period of an asset we show that there is a sense in which such taxes at least when levied on a realization basis discourage transactions and increase holding periods it is never profitable to change the ownership of an austrian asset between the time of the original constraint and the ultimate harvesting of the asset for final use capital gains taxation diverts resources from the austrian sector to the ordinary sector the effects on the efficiency of the allocation of investment between sectors are complicated and not easy to summarize

russia s resource capitalism market vs political signalling since the early post soviet era when many strategically important russian oil and gas fields were sold on unfavourable terms the state has been seeking to regain control of these strategic assets with putin s return to the presidency in 2012 russia s u turn over oil and gas privatizations has again caused market consternation we examine strategic asset acquisitions by russian o g companies during putin s first terms as president and suggest that there should however be few surprises under putin strategic deals in russia are often informal dominated by russian partners subject to internecine rivalries and we show are somehow known by markets prior to promulgation findings suggest that in russia deals of strategic substance are recognized by financial markets prior to the announcement of political policy

the wealth effect of merger activity and the objective functions of merging firms abstract this paper studies the net effects of the long run sequence of events leading to merger and of merger per se on shareholder wealth the appropriate measure of the wealth effect is shown to be the abnormal dollar return cumulated over time using this measure the long run wealth effect of the event sequence culminating in merger is significantly negative for acquiring firms for acquired firms the effect is negative but not significant the immediate impact of merger per se is positive and highly significant for acquired firms but larger in absolute value and negative for acquiring firms the evidence also reveals that measured abnormal rates of return to acquiring firms are sensitive to a slight variation in model specification and dependent on firm size with smaller firms earning significantly negative post merger returns

on the presence of risk premiums in foreign exchange markets abstract this paper provides evidence that for most currencies the exchange risk premium as identified in grauer litzenberger and stehle 1976 is highly volatile random and on average equal to zero further investigation suggests that this volatility can be traced to the fact that our index of world market performance does not adequately represent the common element of variance among currencies in the light of this evidence we investigate the existence of an exchange risk premium in the framework of an alternative model the arbitrage pricing theory proposed by ross 1976 is a particularly appropriate alternative since it does not accord an essential role to the market portfolio the results of our tests suggest the presence of an exchange risk premium

mergers and the market concentration doctrine evidence from the capital market the last 3 decades of vigorous enforcement of u s antimerger laws is based on the market concentration doctrine one of the oldest and most controversial propositions in industrial economics this doctrine which is an implication of oligopoly models in the tradition of cournot 1838 1927 and nash 1950 holds that the level of industry concentration is a reliable index of the industry s market power the empirical implication is that a relatively high level of industry concentration which in the presence of entry barriers is believed to facilitate intraindustry collusion or dominant firm pricing should be associated with relatively large industrywide monopoly rents following bain 1951 numerous the market concentration doctrine predicts that a horizontal merger is more likely to have collusive anticompetitive effects the greater the merger induced change in industry concentration since a collusive anticompetitive merger generates an increase in the industry s quality adjusted product price or a decrease in factor prices it also follows from the doctrine that the mergerinduced expected benefits to the product market rivals of the merging firms should be an increasing function of the concentration change the empirical results of this paper which are based on the industry wealth effect of a large sample of horizontal mergers including cases found in violation of antimonopoly laws fail to support this prediction this conclusion is robust with respect to assumptions concerning the probability that a proposed merger will be prevented by the law enforcement agencies and it continues to hold after transforming the industry wealth effect into a hypothetical constant expected change in the industry s product price the results imply that the levels of concentration and market shares found in the department of justice s merger guidelines are unlikely to identify truly anticompetitive mergers i wish to thank paul asquith gregg jarrell rex thompson walter vandaele the participants of the economics workshop at the antitrust division of the u s department of justice and a referee of this journal for helpful comments earlier drafts were presented at the 1983 meetings of the european association for research in industrial economics and at the 1984 meetings of the western finance association financial support from the social sciences and humanities research council of canada grant no 494 83 0091 and the u s federal trade commission is also gratefully acknowledged 1 a closely related but somewhat less general prediction is that high levels of concentration should be associated with relatively high supracompetitive product prices although

progressive taxation in sequential decisionmaking deterministic and stochastic analysis abstract this paper investigates the effect of progressive taxation on sequential decisionmaking the decision is the archetypical problem of capital theory determining the optimal cutting time for a tree that grows according to either a deterministic or stochastic process for the deterministic model the optimal cutting time is unaffected by proportional taxes but decreases as taxes become more progressive for the stochastic model the major finding is that uncertainty can partially offset the inefficiency induced by progressive taxation when this result holds the government benefits from increased uncertainty whereas the taxpayer is harmed one noteworthy example of this is when the tree s growth is governed by brownian motion

parent firm performance across international joint venture life cycle stages the benefits that firms obtain from investing in international joint ventures ijvs can be reinforced or reduced by the management of later stages of collaboration this paper presents an analysis of the shareholder wealth effects of ijv formation and five types of ijv termination the empirical findings challenge common assumptions in the ijv literature contrast prior evidence on the performance implications of market entry and exit through acquisitions and divestitures and demonstrate the value of integrating ijv life cycle stages in future research

an income tax wedge between buyers and sellers values of forests although forestry s long production period is seen as a discouragement to reforestation some economists have noted that selling immature timber for future harvest can shorten the payoff period for the original owner this paper shows how income taxes may inhibit such sales of immature forests documenting a type of lock in effect to date not quantified under several types of local government taxes theoretical curves of willingness to pay for immature even aged timber have been derived klemperer 1976 these models showed that the seller s asking price should equal the buyer s bid if both parties have the same view of the future use the same interest rate and face the same local government taxes however income taxes were not included after income taxes kovenock and rothschild 1983 have shown that for assets such as aging wine and timber the asking price will exceed the bid at ages between initial investment and final sale for consumption this paper derives equations for ask and bid prices for even aged forests of any age after income taxes allowing for inflation and separation of land and timber values potential differences between ask and bid are computed using yield functions for loblolly pine pulpwood and douglas fir with a longer sawtimber rotation results show that under certain plausible conditions the mid rotation asking price for forested properties can be from 30 to over 40 percent above the highest bid when ask and bid are computed to guarantee buyer and seller the same after tax real rate of return while these findings are based on restrictive assumptions the general importance for market decisions is discussed relevance of this work can be seen in the unusually large acreage of forested tracts sold or offered prior to harvest date in the early and mid 1980s duke university 1984 1986 numerous forest products firms sought to reduce their capital investment and improve cash flows speculating that enough timber would be available on the open market in the future

dynamic portfolio choice and asset pricing with narrow framing and probability weighting this paper shows that the framework proposed by barberis and huang 2009 to incorporate narrow framing and loss aversion into dynamic models of portfolio choice and asset pricing can be extended to also account for probability weighting and for a value function that is convex on losses and concave on gains we show that the addition of probability weighting and a convex concave value function reinforces previous applications of narrow framing and cumulative prospect theory to understanding the stock market non participation puzzle and the equity premium puzzle moreover we show that a convex concave value function generates new wealth effects that are consistent with empirical observations on stock market participation

event studies in management research theoretical and empirical issues we examined the use of event studies in management research and found that there was inadequate attention paid to theoretical and research design issues this lack of attention may lead to false in

evolution of time preferences and attitudes toward risk this paper explores a general model of the evolution and adaption of hedonic utility it is shown that optimal utility will be increasing strongly in regions where choices have to be made often and decision mistakes have a severe impact on fitness several applications are suggested in the context of intertemporal preferences the model offers an evolutionary explanation for the existence of conflicting short and long run interests that lead to dynamic inconsistency concerning attitudes toward risk an evolutionary explanation is given for s shaped value functions that adjust to the decision maker s environment jel d81 d83 this paper is based on the hypothesis that individual decisions are guided by hedonic util ity an individual who faces several alternatives will choose the one that promises the greatest pleasure or happiness then given that the properties of a hedonic utility function determine individual behavior and individual behavior determines biological fitness evolutionary forces will have shaped our utility during the long time in which the modern human being evolved in this sense hedonic utility can be considered as a reward system that induces individuals to make optimal choices a view that is supported both by theory and evidence from neuroscience 1 as irving kupfermann eric r kandel and susan iversen 2000 express it pleasure is unques tionably a key factor in controlling the motivated behaviors of humans 1007 for the econo mist the interesting question is then about the properties of the evolutionary optimal reward system and how these properties adapt to the environment in which individuals make choices the present paper reconsiders and solves a general model of the evolution of utility suggested by arthur j robson 2001a which predicts how cardinal properties of utility functions should adapt to the decision environment it turns out that the optimal utility function will be steep in regions where decisions have to be made frequently and where wrong decisions would lead to large losses in fitness in those regions even small changes in consumption will cause large changes in happiness the evolution of context specific utility functions is then shown to be optimal whenever the decisions our ancestors had to make arrived in distinct choice situations the model can also be extended to incorporate learning about evolutionary relevant attributes of available options

examining event study methodologies in foreign exchange markets a brown and warner 1980 1985 event study methodology is applied to the foreign exchange area comparisons of the performance of four abnormal return models are examined with simulations under different experimental conditions such as choice of foreign currency or numeraire level of abnormal shock sample size length of estimation period market return proxy and time period examined the results provide practical suggestions on the selection of an event study methodology and demonstrate that some of the findings of brown and warner are not generalizable to the foreign exchange area

does multinational activity displace trade kimberly a clausing using two panel data sets on the operations of u s multinational firms abroad and the operations of foreign multinational firms in the united states this article examines the empirical relationship between international trade and multinational activity the evidence supports the conclusion that multinational activity and trade are complementary activities particularly multinational activity and intrafirm trade this empirical result is consistent with the theoretical reasons one might expect a complementary relationship between the two activities and is also robust to different approaches and specifications jel f23 i introduction in recent years foreign direct investment fdi has become an increasingly important part of world integration flows of fdi have been increasing faster than trade flows which in turn have been growing faster than income 1 in addition multinational firms play a very large role in world trade for the united states 83 of exports in 1994 were either intrafirm shipments between multinational parents and their affiliates 36 or arms length trade between multinationals and unaffiliated buyers 47 2 although it is clear that multinational firms have an important role in world trade it is certainly less clear what the relationship is between production abroad and trade for multinational firms the popular press often assumes that multinational investment by u s firms replaces u s exports and in fact some economists have assumed that the rapid growth of foreign direct investment in recent years implies that multinational activity will eventually displace trade 3 this article examines the empirical relationship between multinational activity and trade and finds that there is evidence that multinational activity complements rather than displaces trade the article utilizes two panel data sets constructed from aggregate survey data published by the bureau of economic analysis bea the data vary by country and over time the first data set is used to study the relationship between u s exports and the activities of u s affiliates abroad this data set is constructed from data describing the operations of u s multinational firms in 29 host countries between 1977 and 1994 together with data on u s exports both intrafirm and arms length the second data set is used to study the relationship between u s imports and the activities of foreign affiliates operating in the united states it uses data describing operations in the united states by foreign affiliates of firms based in 29 home countries between 1977 and 1994 together with data on u s imports both intrafi rm and arms length most previous studies of this question have examined the relationship between multinational activity and trade for a cross section of countries by using data that also vary over time it is possible to explore more thoroughly the relationship between multinational activity and trade and how this relationship evolves it is also possible to control for fixed country effects that may be influencing the observed relationships previous studies have tended to focus on the relationship between outward multinational activity and exports this article looks as well at the relationship between inward multinational activity and imports finally this article considers the question of complementarity between multinational activity and trade in two ways in addition to looking at the relationship between the quantities of multinational activity and trade the article also studies complementarity much as one might think of complementarity in a demand study by considering cross price effects in particular the article includes an analysis of the relationship between price variables that measure the cost of multinational activity abroad and exports since the price of operating abroad is negatively related to exports this is further evidence of a complementary relationship between trade and multinational activity

trade liberalization comparative advantage and scale economies stock market evidence from canada abstract the canada united states free trade agreement fta provides an excellent opportunity to analyze the impact of a comprehensive trade liberalization in this paper a stock market event study is employed to capture investors expectations about the consequences of this agreement for manufacturing firms in canada the primary question addressed is whether abnormal stock market returns corresponding to news about the fta are consistent with hypotheses based on comparative advantage and economies of scale the results indicate that both comparative advantage and scale economies played a role in determining investors perceptions of the impact of the fta

alliances in international governmental organizations regional trade agreement formation and multinational enterprise regionalization strategy abstract drawing from political science alliance theories we explain why countries are likely to enter regional trade agreements we argue that the probability that this will happen is higher if the countries are allies in the same international governmental organizations igos as such alliances can help build trust and reduce political risk our results show that igo scope and also partner reliability and influence in the igo network play important roles our findings provide guidance to multinational enterprises in formulating regionalization strategies

event studies in economics and finance the event study is an important research tool in economics and finance the goal of an event study is to measure the effects of an economic event on the value of firms event study methods exploit the fact that given rationality in the marketplace the effects of an event will be reflected immediately in security prices thus the impact can be measured by examining security prices surrounding the event in this paper event study methods are described including some of the potential complications an example is included to illustrate the approach