tax adjusted duration for amortizing debt instruments this research provides improved techniques for analyzing the after tax risk exposure of taxable institutions holding amortizing instruments such as commercial real estate and consumer loans we derive after tax duration for amortizing instruments and analyze it for sensitivity to tax rates coupon and maturity taxable investors who hedge and ignore the effects of taxes on amortizing instruments will underestimate differences in durations on bonds versus amortizing instruments of equal maturities bond durations increase much faster as tax rates increase one unexpected result shows that unlike bond duration amor tizing instrument duration often increases with coupon rate and sometimes is independent of coupon rate

estimation of the tenants benefits residing in public rental housing with unit size constraint in korea summary hicksian income equivalent variation ev has often been used to measure tenants benefits in evaluating public housing programmes a number of papers have so far attempted to apply hicksian ev under the implicit assumption of no constraint on unit size of public housing as a result overestimation of tenants benefits probably occurs where unit size constraints exist as in korea s public housing programme thus the purpose of the paper is to measure hicksian ev with the constraint in unit size of public housing by formulating a revised hicksian ev equation and comparing the result with constraint free cases it is found that hicksian ev with constraint in unit size decreases relative to that of the constraint free cases the extent of ev decrease depends on the income elasticity of demand for housing and the difference between the optimum consumption of public housing under rent support demand wanted and the actual constraint of unit size demand fulfilled

a general equilibrium theory of firm formation based on individual unobservable skills abstract a model of firm formation is built along the lines of knight 1921 contrary to kihlstrom and laffont 1979 the individuals are risk neutral but have different productive efficiencies we suppose that the individuals who are the more efficient workers are also the more efficient entrepreneurs each agent chooses the activity which gives her the larger expected income in equilibrium the more efficient people become entrepreneurs and under a special kind of increasing returns to scale assumption this is also what is implied by efficiency considerations however we show that the equilibrium number of entrepreneurs is always larger than the pareto optimal one a simple uniform lump sum tax on firms together with redistribution of the tax revenue to workers is nevertheless sufficient to restore efficiency

alas my home is my castle on the cost of house ownership as a screening device abstract this paper analyzes a model in which housing tenure choice serves as a means of screening households with different utilization rates if the proportion of low utilization types is small there is a separating equilibrium at which tenure choice acts as a screening device consistent with empirical evidence low utilization households buy a house while high utilization types rent otherwise there is a pooling equilibrium the reason why contrary to standard screening models a pooling equilibrium possibly exists is indivisibility of home ownership which makes it a very costly screening device introducing partial ownership restores the standard results non existence of a pooling equilibrium and possible non existence of equilibrium

arbitrage clientele effects and the term structure of interest rates this paper derives a new and intuitive estimation procedure for the term structure under potential tax arbitrage no a priori assumptions regarding the equality of the prices and present values of bonds are made the data are employed to determine whether this equality holds and an appropriate estimator is thereby endogenously derived the suggested estimator is based on the optimizing behavior of an investor in a market with frictions and emerges directly from the solution of the dual of the no arbitrage optimization problem in addition the proposed estimator benefits from being both theoretically sound and straightforward to apply

valuing swiss default free callable bonds abstract a model to price the call features embedded in swiss riskless callable bonds is developed the model accounts for the time dependent variance of bond returns the specific exercise conditions of this long term non traded call option and the incompleteness of the swiss bond market empirical results show that the call feature s price is particularly sensitive to the riskless rate and variance specifications illiquidity explains some cross sectional call pricing biases found in this study but the underpricing of ordinary versus callable bonds cannot be excluded

a theory of sticky rents search and bargaining with incomplete information abstract this paper offers the first theoretical explanation of housing rent stickiness and differential stickiness by housing structure type key features of rental markets worldwide previous theoretical work on the subject is sparse and explains why some landlords charge below market rents not stickiness apart from its interest for understanding housing markets and overall inflation rent stickiness is intriguing because it shows that stickiness can emerge in markets where the typical menu cost logic does not apply and where market participants typically engage in repeated bargaining over contracts our model involves search and bargaining with incomplete information in a two period game and generates stickiness in a novel manner the key decision is the landlord s choice of whether to renegotiate or not crucially landlords do not know tenant perceptions of unit quality the key force generating stickiness is that offering the identical contract preempts tenant search thus limiting tenants outside options and resolves uncertainty early risk aversion reinforces this mechanism and yields differential stickiness by landlord type renegotiation risk for large landlords disappears because the different outcomes rent increase rent decrease and vacancy average out landlords who manage only one unit loathe vacancy and are highly motivated to avoid renegotiation

on the imputation of rental prices to owner occupied housing this paper challenges the usual objections to the possibility of applying the rental equivalent approach to determine the weight that nonrental housing services should have in the consumer price index cpi using data from two spanish household budget surveys it is shown that market rents can be well represented in terms of an index of housing quality two geographical variables and the year of occupancy this parsimonious empirical model is used to impute a rental value to nonrental housing units taking into account the possible selection bias induced by systematic differences in housing characteristics between the market rental sector and the nonrental stock on average the estimated hedonic values are relatively close to the self imputations provided in the household surveys by the occupants of such dwellings therefore using either of the two alternatives to assess the importance of nonrental housing services in the cpi have small consequences for inflation instead dropping these services from the cpi creates a downward bias in the measurement of inflation of 0 33 percentage points per year during 1985 1992 and an upward bias of 0 38 percentage points per year during 1993 to 2000 jel c43 d12 r21 c21 e31

depreciation of housing an empirical consideration of the filtering hypothesis a ssumptions regarding the depreciation ax rate for housing play an important role in the urban economics literature 1 the notion that houses filter down from higher to lower quality is prevalent in both academic and policy discussions of the nature of urban problems yet there has been no attempt to specify which depreciation rates are appropriate to these discussions and little empirical investigation of depreciation in housing this paper presents estimates of depreciation rates for housing which are appropriate to consideration of the filtering hypothesis estimates of these depreciation rates must be pursued differently from estimates of the depreciation rates for the aggregate capital stock of housing a brief review of previous studies which points out some of the difficulties which confound observation of depreciation rates is presented in section i section ii discusses specification and section iii describes the data and estimation technique used results are presented in section iv section v is a brief conclusion

compatibility and bundling of complementary goods in a duopoly this paper presents a simple model of compatibility and bundling in industries where consumers assemble several necessary components into a system that is close to their ideal the authors show that for a wide range of parameters firms will choose to produce compatible components but will offer discounts to consumers who purchase all components from the same firm however firms would be better off if they could commit not to provide such discounts furthermore the equilibrium tends to involve socially excessive bundling finally mixed bundling strategies tend to increase the range of parameters over which socially excessive standardization occurs copyright 1992 by blackwell publishing ltd

measuring the cost of shelter for homeowners theoretical and empirical considerations recent economic developments have aroused substantial interest in the treatment in the consumer price index cpi of the cost of shelter for homeowners from december 1977 when the latest version of the cpi was introduced until december 1980 the all items cpi increased at an average annual rate of 11 6 while the homeownership component increased at an average annual rate of 16 2 relative to all of the other goods and services in the cpi the homeownership component has increased by 17 5 over the same time period if the relative price of homeownership had remained constant the growth rate of the cpi would have been reduced to 10 1 the question which has been raised is whether the rapid relative increase in the homeownership component which has had such an important impact on the cpi truly reflects changes in the cost of shelter this question is not only important but difficult encompassing many subsidiary questions and auxiliary issues the purposes of this paper are threefold 1 to outline briefly a conceptual framework for the cpi which leads to a straightforward specification of what the shelter component of the cpi should measure 2 to evaluate the theoretical properties of alternative procedures designed to approximate this measurement objective and 3 present empirical evidence on the operational difficulties involved in pursuing a new approach to shelter cost measurement two main conclusions are reached first on both theoretical and empirical grounds a rental equivalence approach to measuring shelter costs for owner occupants is preferred second an estimated rental equivalence measure has grown more slowly over at least the past six years than the official cpi homeownership component given the way in which the cpi is used to escalate both private and public expenditures these results demonstrate that the choice of measurement technique has important distributional implications

a dynamic global portfolio immunization strategy in the world of multiple interest rate changes a dynamic immunization and minimax theorem man 5 and khang 9 demonstrate that it is possible to immunize a portfolio of default free assets against unexpected interest rate changes so that at the end of the planning period the investor will realize at least the returns expected at pur chase however this immunization strategy is applicable for the case in which the change in unexpected interest rate occurs only once at the instant after the purchase of the asset obviously the case depicted above is not likely to resemble the real world situation in at least two respects first the interest rate change is likely to occur at any time and second the interest rate change is likely to occur many times during the investor s planning period bierwag 4 deals with the case in which the interest rate change may occur many times during the planning period each occurring at the instant after the beginning of each time period and shows that provided the interest rate changes are small the investor can at the end of the planning period realize the returns expected at purchase by constructing the portfolio whose duration at the begin ning of each period is equal to the length of the remaining planning period thus bierwag s 4 immunization theorem is a local theorem bierwag makes a conjecture that the theorem is not likely to hold true globally this paper shows that the strategy of keeping the portfolio duration calcu lated on the basis of the term structure observed at each moment of time equal to the length of the remaining planning period during the entire planning period guarantees at least the returns expected or promised at purchase regardless of when and how many times interest rate changes occur during the planning period and regardless of sizes of change in the interest rate structure thus the theorem proven in the paper is a global theorem in a very general setting as opposed to bierwag s 4 local theorem a corollary is that bierwag s unconditional im munization policy does not immunize unless all changes in the term structure are university of oregon the author expresses thanks to an anonymous referee whose careful reading of the paper resulted in an improvement

duration measures immunization and utility maximization abstract this paper explores the conditions under which a risk averse investor behaves like an immunizer in choosing the maturity structure of a balance sheet the setting is similar to grove s study in that the liabilities are assumed fixed but differs in the assumed evolution of interest rates m a grove on duration and the optimal maturity structure of the balance sheet bell journal of economics and management science 5 1974 696 709 it transpires that the circumstances under which a risk averse investor behave like an immunizer are not as limited as concluded in grove s study the model thus explains the extensive use of immunization by the business community

bundling as a facilitating device a reinterpretation of leverage theory tying good monopolists that extract full consumer surplus from independent sales of their tying good may nevertheless choose to bundle in order to induce a favorable response by their tied market rivals in particular bundling may facilitate supracompetitive prices for the tied good copyright 1991 by the london school of economics and political science

a risk minimizing strategy for portfolio immunization consider a fixed income portfolio whose duration is equal to the length of a given investment horizon it is shown that there is a lower limit on the change in the end ofhorizon value of the portfolio resulting from any given change in the structure of interest rates this lower limit is the product of two terms of which one is a function of the interest rate change only and the other depends only on the structure of the portfolio consequently this second term provides a measure of immunization risk if this measure is minimized the exposure of the portfolio to any interest rate change is the lowest the traditional theory of immunization as formalized by fisher and weil 6 defines the conditions under which the value of an investment in a bond portfolio is protected against changes in the level of interest rates the specific assumptions of this theory are that the portfolio is valued at a fixed horizon date that there are no cash inflows or outflows within the horizon and that interest rates change only by a parallel shift in the forward rates under these assumptions a portfolio is said to be immunized if its value at the end of the horizon does not fall below the target value where the target value is defined as the portfolio value at the horizon date under the scenario of no change in the forward rates the main result of this theory is that immunization is achieved if the duration of the portfolio is equal to the length of the horizon the assumption that interest rates can only change by a parallel shift that is by the same amount for all maturities has been the subject of considerable concern bierwag 1 2 bierwag and kaufman 3 khang 7 and others have postulated alternative models of interest rate behaviors each of these specifications implies a different measure of duration with immunization attained if this duration measure is equal to the horizon length a limitation of this approach is that the portfolio is protected only against the particular type of interest rate change assumed in a more recent development cox et al 5 brennan and schwartz 4 and others have investigated immunization conditions when interest rates are governed by a continuous process consistent with a market equilibrium depending on the specilfication of the interest rate process there is a duration like measure possibly multidimensional as in brennan and schwartz such that the portfolio is immunized if a proper value of this measure is maintained this assumes a continuous rebalancing of the portfolio again immunization is achieved only if interest rate changes conform to the specific process assumed in this paper we wish to pursue a different approach if it turned out that the

the demand for residence site characteristics the analysis of residential site choice is the primary concern in urban economics research on this problem is deficient in that rigorous theoretical models concentrate almost exclusively on access to the central business district cbd in this decision process while empirical models have been specified in a manner that is inconsistent with standard demand theory although these models possess the power of simplicity they are unable to explain the non monotonic location patterns which characterize urban areas without resorting to ad hoc theorizing this article develops and tests a model which is consistent with demand theory and is also capable of explaining non monotonic location patterns the hedonic rent function is seen as an intermediate step in the analysis of location which allows one to construct the complete data matrix necessary for the estimation of a set of demand functions for location specific traits the analytical importance of the functional form of this hedonic function is briefly noted finally the empirical analysis notes the importance of children in determining residential preferences with special attention being directed to the endogeneity of children with respect to the process of residential choice the traditional location model is generally tested by regressing some transformation of the annual rental payments or alternatively property value r on access or lack of access to the city center acc a vector of other locational traits z income i and a race variable mc

residential hedonic models a rational expectations approach to age effects abstract this paper develops a rational expectations framework for interpreting the coefficient on age in a standard hedonic model the model demonstrates that there are two components to the age coefficient a pure cross sectional depreciation component and a demand side component that changes over time we also show that a constant quality price index with age constant can be estimated by using any repeat sales database that contains the year of construction or property age when fairfax county data are fitted to the model the time series of age coefficients is non stationary they change from negative in the early 1980s to positive in the late 1980s we infer that the demand side component dominated in the latter period

product bundling and incentives for mergers and strategic alliances this paper analyzes firms choice between a merger and a strategic alliance in bundling their product with other complementary product we consider a framework in which firms can improve profits only from product bundling while mixed bundling is not profitable pure bundling is because pure bundling reduces consumers choices and thus softens competition among firms firms benefit the most from this reduced competit ion if they form an alliance firms do not gain as much from a merger because internalizing the complementarity between the two products a merged firm is inclined to pursue aggressive pricing to gain market share yet firms may be motivated to choose a merger over an alliance because of foreclosure possibility as foreclosure is not possible under strategic alliance however in response unmerged rivals can use a strategic alliance to avert foreclosure hence the possibility of counter bundling via strategic alliance by rivals reduces the incentives for merger in equilibrium

non profit cost adjusting with quality as a private good nonprofit firms that produce multiple outputs may lower service intensity for one patient group in response to lower reimbursements for another group this is termed cost adjusting behaviour cost adjusting implies a serious welfare transfer the results of this analysis suggest that the potential for this welfare transfer exists however the ability of a firm to exploit this welfare transfer depends largely on the demand conditions present in the market an empirical analysis finds evidence that nonprofit hospitals in washington state do practise cost adjusting

designing an immunized portfolio is m squared the key abstract the theoretical and empirical properties of m squared a measure of cash flow dispersion used in designing duration hedged portfolios are examined contrary to prior research minimizing m squared is not independent of the stochastic process and the minimum m squared portfolio is a bullet only under a specific convexity condition derived in the paper using a data base of default free government of canada bonds to set up minimum m squared duration matching portfolios we find that the convexity property does not hold in general and that minimum m squared portfolios fail to hedge as effectively as portfolios including a bond maturing on the horizon date

the effect of taxation on immunization rules and duration estimation investments in default free bonds can be insulated from financial loss due to interest rate changes via additive shock by a process known as immunization the literature on this process ignores taxes this manuscript focuses on three issues the first is the development of the tax adjusted immunization process with a comparison to the existing literature the second issue is the microeconomic effect of a shift in only the individual s tax rates on immunization and investment behavior the third issue is the macroeconomic effect of an across the board shift in tax rates on immunization and investment behavior there is general recognition among investors that a portfolio of default free bonds is not entirely riskless the owner of such a portfolio is subject to risk of financial loss due to interest rate changes occurring over the investment holding period to attenuate these financial losses the bond holder can hedge or immunize his investment by adjusting the average duration of the aggregate bond portfdio including reinvested interest and principal payments to equal exactly the remaining length of his investment holding period the bond duration equation utilized in the immunization process depends on the nature of the stochastic process generating the changes in interest rates therefore if an investor is to successfully immunize his portfolio that is earn income at the end of the period no less than the income promised by the market at the beginning of the period the investor must correctly identify the stochastic process and then employ the appropriate duration measure to obtain the average duration of his aggregate bond portfolio since in reality each investor s income is subject to taxes the immunization process should preserve his desired after tax income furthermore not all investors in the united states are subject to the same tax regulations interest and capital gain income earned by institutions with corporate or mutual forms of ownership such as insurance companies and banks are taxed at a common fixed rate however interest and capital gain income earned by trust institutions such as investment funds and trusts are taxed separately with capital gain income taxed at a lower rate than that applied to interest further complicating the tax treatment of investment income is the ability of the investor to amortize or not to amortize any tax liabilities or tax shields arising from purchasing a bond at a discount or a premium because of the variable nature of the united states tax structure several questions arise which are addressed in this paper how are both the immunization process and the duration estimation altered by the presence of different tax rates applied to interest and capital gains income further how are both duration

tax effects in term structure estimation this study is a refinement and an extension of an earlier study by mcculloch of tax effects in the regression equation for term structure estimation this study includes tests for tax effects and heteroskedasticity a reconsideration of the need for an instrumental variable and a search for the capital gains tax rate in addition to the ordinary income tax rate there are two major findings 1 statistically significant taxinduced bias in the non tax adjusted equation and 2 evidence that the capital gains tax is misspecified in the tax adjusted equation it is well known e g see 4 2 pp 727 30 and 25 that the yield curve is an imperfect surrogate for the term structure of interest rates and various methods have been developed to estimate the term structure directly by regressing prices on payments in a sample of default free securities 1 since investors are concerned with the after tax payments on securities it is desirable to incorporate tax effects in term structure estimation mcculloch 22 and schaefer 26 29 have employed different approaches to the tax effect problem mcculloch employed the regression approach and searched for a single tax rate

an international study of tax effects on government bonds it is shown that coupon bonds alone are not sufficient to span time dated claims on ordinary income capital gains and non taxable wealth in an incomplete bond market where the pure dated claims are not spanned by existing bonds marginal rates of substitution between present consumption and pure dated claims on ordinary income capital gains income and non taxable wealth respectively can differ across bondholders however the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major non tax exempt holders of government debt

cross tenure differences in home maintenance and appreciation this paper investigates the relative maintenance levels of owner and renter occupied housing by examining their short and long run appreciation rates we modify the standard repeat sales estimation procedure to test whether owner occupied housing appreciates faster than renter occupied housing this procedure holds constant all structural factors except for aging hence appreciation is estimated net of physical depreciation i e routine aging deficient and deferred maintenance we find only weak evidence to support the notion that long term rates of appreciation and maintenance levels are substantially different between owner and renter occupied housing

a note on market efficiency institutional practice and economic constraints in the experience of the canadian bond market abstract for many years government of canada bonds with high coupons traded at much higher yields than those with lower coupons this apparent market inefficiency virtually disappeared over a short period of time during 1993 several events occurred in 1993 which relate to the narrowing of the spread this paper shows the earlier yield spread to be consistent with restrictions on the trading of strip bonds it also finds it difficult to defend the hypothesis that the higher yield spread represented unexploited profit opportunities

hedonic pricing with redevelopment options a new approach to estimating depreciation effects abstract the standard hedonic model of durable assets is a special case of a more general model that contains two additive terms 1 use value of the existing hedonic vector and 2 the value of the option to reconfigure hedonic characteristics one empirical implication is that the two parts of value are related e g use value increases with interior area whereas option value decreases with intensity the ratio of structure value divided by land value increases in building age reduce use value but increase option value data from greenwich connecticut indicate that intensity has the expected negative effect coefficients on building age are shown to be better measures of depreciation when intensity variables are included in the regression

alternative duration specifications and the measurement of basis risk empirical tests dramatic increases in interest rate levels and volatility since the early 1970s have renewed interest in fixed income securities and have motivated much study of the appropriate measure of risk for bonds many authors have expanded on macaulay s 1938 concept of duration as a surrogate for risk measurement and have developed a variety of new measures of duration numerous commercial duration based immunization programs are now available purporting to explain returns to provide good measures of risk and to protect fixed income portfolios from volatile interest rates e g leibowitz 1979 leibowitz and weinberger 1981 this paper tests the explanatory power of a number of recently proposed duration measures we show that despite the flood of articles and commercial programs claiming superiority for particular measures of duration the measures studied were virtually indistinguishable empirically in fact none of them did much better than this paper empirically investigates seven duration measures and their role in explaining price volatility caused by interest rate movements that is basis risk the data analysis does not support the important testable implications of the various durations as measures of basis risk all seven durations fail linearity and single risk factor tests from which their advantages are supposed to derive fixed income performance comparisons and immunization strategies based on these durations have not been worthwhile

negative cash flows duration and immunization a note the bond immunization literature has developed two well known results regarding duration namely that duration is no greater than a bond s term to maturity and that duration determines the holding period for which portfolio value is immunized against particular types of interest rate changes this note demonstrates that these results may not hold if portfolio assets generate both cash inflows and cash outflows cash outflows could occur if the setting is expanded to include taxes short selling margin buying or financial futures contracts in each of these cases negative cash flows are directly associated with the asset portfolio rather than with an independent liability a taxable zero coupon bond example serves to illustrate the effects of negative cash flows on duration and their consequences for immunization in particular it is shown that after tax duration does not determine an immunized holding period for the investor in a single zero coupon bond but does determine an immunized holding borrowing period for the issuer 1 duration can be defined as

age time vintage and price indexes measuring the depreciation pattern of houses age time and vintage are key determinants of house prices yet they cannot be included together linearly or as dichotomous variables in hedonic regressions as construction time age of house sale time we introduce a method where the estimates of the age time and vintage effects on prices are obtained in a flexible manner without requiring us to specify a pre determined functional form for either of these variables applying our method to dutch data we find that the estimated depreciation pattern over the life of houses does not follow the functional forms typically specified for the age of houses in hedonic regressions

optimal bundling and pricing under a monopoly contrasting complements and substitutes from independently valued products we develop an analytical model of contingent valuations and address two questions of import to a monopolist i should a given pair of complements or substitutes be sold separately pure components together pure bundling or both mixed bundling and at what prices ii how do optimal bundling and pricing strategies for complements and substitutes differ from those for independently valued products we find that the combination of marginal cost levels and the degree of complementarity or substitutability determines which of the three bundling strategies is optimal complements and substitutes should typically be priced higher than independently valued products

sample selection and biases in local house value indices abstract analysis of cross sectional or intertemporal variations in house values among localities requires reliable house value indices however prior studies applying the hedonic method to transaction data have reported price series that may be biased our paper investigates a possible cause of bias and uses a censored regression technique extended to an intertemporal model to derive an unbiased index we apply our method to 1971 1991 data from the miami florida msa and find evidence in time varying amounts of bias our results suggest that prior studies using the hedonic method and samples consisting only of sold houses have understated the intertemporal variability of house prices

estimating capital asset price indexes this paper introduces an improved procedure for estimating capital asset price indexes we jointly estimate conventional hedonic and repeat sales models via maximum likelihood procedures thereby taking advantage of the unique features of the individual models and using all the data that are available our model captures depreciation within the repeat sales model and accounts for serial correlation in hedonic data the improvement in precision obtained by estimating the joint model is illustrated by smaller standard errors and narrower interval estimates for the resulting price indexes we also carry out a simulation experiment that shows estimation errors significantly smaller using the joint estimation technique than either of the individual models or the gls estimator of case and quigley 1991

tying foreclosure and exclusion in recent years the leverage theory of tied good sales has faced heavy and influential criticism in an important sense though the models used by its critics are actually incapable of addressing the leverage theory s central concerns here the author reconsiders the leverage hypothesis and argues that tying can indeed serve as a mechanism for leveraging market power the mechanism through which this leverage occurs its profitability and its welfare implications are discussed in detail copyright 1990 by american economic association

measuring asset values for cash settlement in derivative markets hedonic repeated measures indices and perpetual futures two proposals are made that may facilitate the creation of derivative market instruments such as futures contracts cash settled based on economic indices the first proposal concerns index number construction indices based on infrequent measurements of nonstandardized items may control for quality change by using a hedonic repeated measures method an index number construction method that follows individual assets or subjects through time and also takes account of measured quality variables the second proposal is to establish markets for perpetual claims on cash flows matching indices of dividends or rents such markets may help us to measure the prices of the assets generating these dividends or rents even when the underlying asset prices are difficult or impossible to observe directly a perpetual futures contract is proposed that would cash settle every day in terms of both the change in the futures price and the dividend or rent index for that day this paper concerns problems in the measurement of asset values or present values problems that if solved may facilitate the creation of new hedging vehicles new cash settled futures options and other derivative financial products the greatest components of world wealth are not hedgeable at all and

grants and cost shifting in outpatient clinics cost shifting for a non profit revenue maximizing healthcare provider which faces a constraint that profit must be non negative is examined focusing on fixed payment programmes like medicare in addition how grant money affects cost shifting and extend the empirical analysis of cost shifting to outpatient clinics using data from publicly funded clinics in california is explored the results are consistent with cost shifting and indicate that the cause may be that the medicare payment system cuts revenues more than costs forcing clinics to subsidize the care of medicare patients by increasing prices to other patients

tax induced clientele effects in the market for british government securities abstract this paper develops a new methods for measuring tax effects in bond markets and presents empirical results for british government securities the basic idea is to construct a least cost portfolio which for investors in a given tax bracket dominates a given bond a portfolio is said to dominate a bond if it provides cash flows which are at least as great in every period and has a lower price in effect our method calculates an upper bound on the value of a bond to investors in a given tax bracket the results demonstrate i the existence of clientele effects and ii the absence of an effective tax rate

rents have been rising not falling in the postwar period abstract until the end of 1977 the u s consumer price index cpi for rents tended to omit rent increases when units had a change of tenants or were vacant biasing inflation estimates downward beginning in 1978 the bureau of labor statistics bls implemented a series of methodological changes that reduced this nonresponse bias but substantial bias remained until 1985 we set up a model of nonresponse bias parameterize it and test it using bls microdata from 1940 to 1985 the official bls cpi for urban wage earners and clerical workers cpi w price index for tenant rents rose 3 6 annually we argue that it should have risen 5 0 annually

pricing by non profit institutions the case of hospital cost shifting abstract this paper shows that a hospital whose objective function includes output as well as profits may raise price to private paying patients in response to cuts in the price it receives for madicaid or medicaid patients evidence is presented to show that hospitals in illinois cost shifted in this manner in response to substantial reductions in medicaid payments in the early 1980s as private sector pricing becomes more competitive however the ability and willingness of hospitals to cost shift will wane

an econometric and cultural analysis of rent control in kumasi ghana an empirical analysis of rent control in kumasi ghana is presented based upon a consumer demand model for housing controlled rent to income ratios are exceptionally low for a developing country moreover the asante housing market exhibits unusual cultural attributes and problems in estimating the without rent control situation benefits and costs of rent control are presented by housing types and income levels and distributional impacts assessed

a maxmin policy for bond management a simple immunization problem is formulated as a maxmin optimal control problem and analytically solved by means of dynamic programming the optimal control law namely the immunization policy turns out to be quite different from any duration based immunization policy moreover it is seemingly able to discriminate between favourable and unfavourable changes in the yield curve

the existence of equilibrium in discontinuous economic games i theory the article presents information about the existence of equilibrium in discontinuous economic games in this paper and its sequel presents study the existence of nash equilibrium in games where agents payoff functions are discontinuous the enquiry is motivated by a number of recent studies that have uncovered serious existence problems in seemingly innocuous economic games in the sequel to this paper authors have explained the utility function in the economic games referred to earlier are neither continuous nor quasi concave however they demonstrate that the payoff functions in mildly modified versions of these constructs exhibit two weaker forms of continuity which together with the requirement of quasi concavity suffice for the existence of an equilibrium from this one may conclude that at least in the modified versions of these models discontinuities in the payoff functions are not the real source of the problem rather it is the failure of the payoff functions to the quasi concave which is responsible for the non existence of equilibrium these observations bear on the existence of nash equilibrium in pure strategies

immunization in markets with tax clientele effects evidence from the canadian market empirical immunization studies have considered the efficacy of immunization strategies in which the durations of assets and of liabilities are equated against a strategy involving maturity matching however all these studies have ignored tax effects in the presence of tax clientele effects immunization requires that the portfolio consists only of bonds that are correctly priced for a particular clientele testing for these effects therefore requires the identification of the correctly priced bonds for the investors in the clientele however since bond prices contain noise determining these bonds is still an unresolved problem consequently an empirical test of the magnitude of the error caused by ignoring taxes may be an impossible task in some markets and indeed has never been conducted the canadian bond market provides perfect laboratory conditions for such a test tax clientele effects are present in the canadian market and among the clienteles is a representative clientele this paper examines the tax effects on immunization strategies the results show that the error caused by ignoring tax effects is not negligible and practitioners should use immunization with reference to tax effects

optimal bundling strategies in multiobject auctions of complements or substitutes we consider a problem at the interface of auctions and bundling our revenue maximizing seller seeking to auction one unit each of two complements or substitutes in the best of three formats the auction of the bundle separate auctions of the individual items and a combinatorial auction we draw on an analytical model to address the following questions i which of the auctioning strategies is optimal under the second price sealed bid format ii what is the optimal strategy for the bidders iii when the objects are asymmetrically valued e g super bowl ticket versus souvenir what is the optimal auctioning sequence under the pure components strategy our results suggest that separate auctions of the two objects are superior to the auction of the bundle for most substitutes and even moderate complements when there are at least four bidders the auction of the pure bundle is better suited for strong complements or with too few bidders when the combinatorial auction is an available option it weakly dominates the auction of the pure bundle but has domains of inferiority relative to the separate auctions when the objects are asymmetric in value it is optimal to auction the higher valued object first

should the cost of living index provide the conceptual framework for a consumer price index in some countries the cost of living col index serves as the conceptual framework for the cpi but it has been rejected in others this paper reviews issues that have arisen in the statistical agency debate and in the economics literature on the col index including rhetorical matters which have influenced the debate i contend that col theoiy is useful as a decision making framework in estimating components of the cpi and that col index theory provides appropriate guidance for measuring consumer inflation contrary to the view that has been adopted for the european hicp and expressed by an advisory committee for the rpi in several countries the united states netherlands sweden the theory of the cost of living col index provides the conceptual framework for the country s consumer price index cpi see united states department of labor 1997 balk 1994 and dalen 1999 others reject the cost of living index framework an example is the australian bureau of statistics 1997 rejection of the col index is also explicit in an rpi advisory committee recommendation in the united kingdom in still other countries canada being an example official documents for the cpi are ambiguous about the role of the col index statistics canada 1995 the international guideline for consumer price indexes the ilo manual turvey 1989 does not even mention the col index the question has taken on heightened interest recently part of the stimulus comes from the european union s relatively new harmonised indexes of consumer prices hicp for the hicps eurostat has rejected the col

a strategic motivation for commodity bundling the analytical literature on commodity bundling explains the practice of selling two or more differentiated products in a single package as a surrogate for direct price discrimination in contrast this paper shows that imperfect competition creates a strategic incentive to bundle the profitability of bundling whether it adversely affects rival producers and whether it yields an overall efficiency gain depends inter alia on the nature of product market competition the role of complementarity in explaining why firms bundle is also explored copyright 1990 by blackwell publishing ltd

bond pricing in markets with taxes abstract two types of equilibrium models in bond markets with taxes exist the clientele model by schaefer and the litzenberger rolfo s model this paper reviews the two models in two frameworks utility arguments and no arbitrage arguments both show that schaefer s is more realistic

measurement bias in the hicp what do we know and what do we need to know the harmonized index of consumer prices hicp is the primary measure of inflation in the euro area and plays a central role in the policy deliberations of the european central bank ecb the ecb defines its treaty mandate of price stability as a year on year increase in the harmonised index of consumer prices hicp for the euro area of below 2 to be maintained over the medium term among the rationales given for defining price stability as prevailing at some positive measured inflation rate is the possibility that the hicp as published incorporates measurement errors of one sort or another that may cause it to systematically overstate the true rate of inflation in the euro area this paper reviews what currently is known about the scope of measurement error in the hicp we conclude that given the vague conceptual framework of the hicp the scant research on price measurement issues in the eu and the ongoing improvements in the hicp there is very little scientific basis at this time for a point or even an interval estimate of a positive bias in the hicp copyright blackwell publishers ltd 2004

the theory of state owned enterprises in market economies abstract four topics are covered the circumstances under which state owned enterprises soes are more effective than private firms the different approaches to modelling public and private firms the performance of soes and strategies including privatization to limit their more damaging effects it is argued that ideological or development motives are important in their genesis but that if efficiency and innovation are key considerations the normative case for their existence is more doubtful various types of soe model are identified deriving from the variety of circumstances in which they operate and the theoretical perspective of the modeller these include the property rights school the public choice tradition neoclassical behavioural and budget maximizing approaches all models assume the existence of monitoring problems created by informational asymmetry the consequences can include high non pecuniary benefits for managers a concentration on monitored activities and lower innovation levels and efficiency than private firms curiously this is not necessarily reflected in higher prices or costs possible remedial strategies include a change of ownership a change of objectives the introduction of incentive compatible payment schemes improved performance indicators and privatization

a multivariate repeat sales model for estimating house price indices abstract in the case shiller repeat sales housing price index method the effect of age is embedded into the model s estimates of the time effect this paper develops a multivariate repeat sales model that is able to separately control for the effects of age and time as well as other assets with changing attributes in the construction of price indices the ability to control for an asset s pattern of depreciation should lead to a superior price index when compared to a traditional repeat sales price index the degree of bias between the traditional and multivariate repeat sales models is dependent on the level of price change with respect to age with minimal additional assumptions a pure time time varying age constant price index and a depreciation time constant age varying price index can be constructed using the multivariate repeat sales framework

ascap versus bmi versus cbs modeling competition between and bundling by performance rights organizations andrew n kleit bundling has been a long standing issue in industrial organization in recent years bundling has gained renewed controversy as it has been employed by computer software manufacturers this article examines bmi v cbs 1979 which dealt with bundling by performance rights organizations pros a model of competition between pros using blanket licenses is presented the usage of blanket licenses is shown to generate both higher profits for pros and higher costs for the users of musical compositions when there are a small number of competing pros in addition the model explains why blanket licenses are observed in unregulated pro markets jel l41 k21 i introduction the question of bundling has been a longstanding issue in industrial organization economics dating back at least to stigler 1963 this article looks at bundling in the context of the famous antitrust case bmi v cbs 441 u s 1 1979 the defendants in the case were two performance rights organizations pros the american society of composers and publishers ascap and broadcast music inc bmi pros monitor the usage of copyrighted songs by users of music collect fees from those users and pay member composers whose songs are played pros have historically offered blanket licenses where for a certain fixed fee a station can use all the music in a pro s catalog blanket licenses are thus equivalent to bundling or block booking at issue in the case was cbs s petition to require pros to switch from offering blanket to per use licenses where a station would pay per usage for each composition here i will model competition between pros using either blanket or per use licenses pros will compete against each other both for the compositions of songwriters and for offering their products licenses for compositions to producers of television programs i will show the circumstances under which the usage of blanket licenses generates higher profits for the pros and or higher costs for the users of musical compositions i will also show which license is likely to arise in equilibrium helping explain why cbs felt compelled to sue bmi of which it was a part owner as well as the reluctance of ascap to issue attractive per program licenses as an antitrust consent decree nominally requires it to do bundling in general and the economic questions raised by the bmi case are staples in the economics of industrial organization and antitrust see for example kaserman and mayo 1995 173 4 yet up to this time there has apparently been little modeling of bundling of several products by competing firms in addition there has been little written on competition between pros an important exception being besen et al 1992 even that article does not formally examine the competition between pros and the differentiated products they sell to their users this article attempts to fill this void the remainder of the article is organized as follows section ii briefly describes the origins of the major pros and the questions raised by the bmi litigation section iii generates a market equilibrium for pros using blanket licenses section iv generates an equilibrium using per use licenses and compares that equilibrium to the one derived in section iii section v discusses which form of license will arise in equilibrium and section vi contains some concluding remarks ii the origins of pros and the cbs litigation the origins of pros pros exist because of the following problem copyright owners of compositions have property rights to their material and therefore no one is allowed to use that material without the payment of agreed on fees thus any time a copyrighted song is played for commercial purposes the copyright owner is entitled to compensation but it would be very costly for live theater owners and later radio and television stations to locate and pay the copyright owner of each score just as it would be very difficult for copyright owners to monitor users to determine if their compositions are being played

a new linear programming approach to bond portfolio management this paper derives and tests a new linear programming lp approach to bond portfolio management the model elicits possible tax clientele effects in the pricing of u s gov ernment coupon bonds and simultaneously derives the optimal tax specific bond portfolio analytically the model derives these results by exploiting for a given tax bracket the price differential of an after tax stream of cash flows it accomplishes this objective by purchasing at the ask price underprieed bonds for the specific tax bracket while sim ultaneously selling at the bid price overpriced bonds the model requires that the net cash flow inclusive of purchased and sold bonds be nonnegative at all future dates the problem s formulation standardizes the position taken in each bond to a maximum of one unit one of the model s appealing features is the parsimonious number of required calcu lations only one lp program need be run per tax bracket in addition to obtaining an optimally chosen tax specific bond portfolio the model also measures the after tax term structure of spot u s government interest rates for both tax exempt and taxable investors finally the superior monthly holding period rates of return on the optimal taxspecific bond portfolio demonstrate an important property ofthe model s output

a survey of measurement biases in price indexes abstract this paper reviews the literature on measurement error in the major us price indexes the consumer price index cpi the producer price index rpi and the gross domestic product gdp deflators we take as our point of departure triplett s 1975 survey and focus on the studies of measurement error that have appeared since then we review the problems of substitution bias quality bias new goods bias and outlet substitution bias that are generally considered to be the main sources of error in price indexes the bulk of the paper is devoted to problems in the cpi and ppi as the gdp deflators tend to be based mainly on the components of these series we find that there has been surprisingly little work on the problem of overall measurement error in any of these price indexes and we conclude that there is very little scientific basis for the commonly accepted notion that measured inflation at 2 to 3 percent a year is consistent with price stability

immunizing default free bond portfolios with a duration vector dissatisfaction occasionally has been expressed with traditional measures of duration for immunization on conceptual grounds however more elegant duration measures have not been found to be superior to the traditional ones in empirical tests of immunization efficacy under the assumption that the term structure of continuously compounded interest rates can be expressed as a polynomial chambers and carleton 1981 demonstrate that the finite and noninstantaneous return of a default free bond can be expressed as a vector product of a duration vector and a shift vector this study derives immunization strategies from the model and tests them the results of the portfolio tests indicate that the tradi tional duration approach of macaulay provides enhanced immunization relative to matu rity approaches or naive approaches however the duration vector approach produces further improvements

housing depreciation and aging bias in the consumer price index i use hedonic regression methods to estimate average rental housing physical depreciation for areas of the united states i estimate downward quality bias of the u s consumer price index cpi caused by rental housing physical depreciation and i develop methods to correct the cpi for such aging bias my physical depreciation estimates imply that recent percentage changes in the u s cpi shelter cost indexes are downward biased by 3 to 4 annually such bias is nonnegligible because recent annual changes in the cpi shelter cost indexes have ranged between 3 5 and 6 8 for various regions my results also imply that rent controlled housing has depreciated faster than other rental housing

microeconomic estimates of housing depreciation measuring economic depreciation in residential real estate is important for deepening our understanding of housing market behavior and for assessing a variety of public policies independent estimates of depreciation rates for many metropolitan areas provide a rich data base for analyzing the interaction between structure depreciation and for example suburbanization also public policies such as rent control and tax incentives for construction could be better evaluated and designed with improved estimates of depreciation for example in an attempt to stimulate construction in 1981 congress cut allowable depreciation for tax purposes from something like 30 years to 15 years then in 1986 in response to apparent over building congress raised the depreciation rate back to 27 5 years better estimates of depreciation rates could have contributed to better targeting of incentives a literature survey indicates significant variation in estimates of depreciation rates for residential real estate the variation in reported results seems to be due to differences in the definition of depreciation employed in the models and data used to estimate depreciation rates and in some cases the condition of the real estate market examined at the time of the study a primary objective of this paper is to establish that rates of economic depreciation vary spatially by using the same hedonic model and representative data from each of 59 metropolitan areas we are able to eliminate differences in models and data as the only source of variation in estimated depreciation rates and attribute some of the observed variation to differences in housing markets this paper reports estimates of metropolitan area specific rates of economic depreciation for residential real estate obtained using the hedonic pricing methodology separate h donic equations were estimated for owneroc upied and renter occupied properties for each of 59 metropolitan areas with the exception of variables that identified particular locations within the urban area the same hedonic equation was used to estimate tenure spec f c depreciation rates that is the same hedonic specification was used for each of the 59 metropolitan areas to estimate depreciation rates for owner occupied and for renteroccupied housing we define economic depreciation to be the decline in asset price or shadow price due to aging hulten and wykoff 1981 85 our hedonic equation for renter occupied housing therefore examines how the current market price of the flow of rental housing services varies with dwelling age rents might be expected to change as the flow of housing services decreases as the unit deteriorates the market value of owner occupied residential real estate on the other hand reflects the present value of future housing services as well as current services hence changes in any of the determinants of present value will have a significant impact on the current market value of owner occupied housing

measuring changes in local house prices an empirical investigation of alternative methodologies abstract this paper investigates whether reliable house price indices can be constructed using a limited set of descriptive variables on a large number of observations four primary index methods are compared 1 median sale price 2 restricted hedonic 3 repeat sales and 4 the assessed value technique the paper examines the precision and accuracy of each of the alternative indices

when can you immunize a bond portfolio abstract this paper presents a condition equivalent to the existence of a riskless shadow asset that guarantees a minimum return when the asset prices are convex functions of interest rates or other state variables we apply this lemma to immunize default free and option free coupon bonds and reach three main conclusions first we give a solution to an old puzzle why do simple duration matching portfolios work well in empirical studies of immunization even though they are derived in a model inconsistent with equilibrium and shifts on the term structure of interest rates are not parallel as assumed second we establish a clear distinction between the concepts of immunized and maxmin portfolios third we develop a framework that includes the main results of this literature as special cases next we present a new strategy of immunization that consists in matching duration and minimizing a new linear dispersion measure of immunization risk

arbitrage pricing transaction costs and taxation of capital gains abstract this paper examines one of the few cases of seemingly redundant securities sets of three government bonds with the same maturity date within the bounds on relative bond prices established by tax exempt investors in a market with proportional transaction costs the taxation of capital gains on the basis of realization has a significant impact on relative prices the empirical evidence supports the tax option effect discussed by constantinides and ingersoll but does not generally support the segmented tax clientele equilibrium discussed by schaefer

immunization as a maxmin strategy the purpose of this paper is to broaden the analysis of immunization when it is viewed as amaxmin strategy several results are demonstrated which provide a new interpretation of maxmin strategy by using a more general theory of lagrangians we clarify the exact assumptions required for the duration strategy and the maxmin strategy to be equivalent in a world with taxes it is shown that in a world with taxes the immunization strategy requires the portfolio to satisfy a constraint about the bond to be included in addition to the duration constraint

valuation of risky assets in arbitrage free economies with frictions this paper derives a framework for arbitrage models in markets with frictions it generalizes the existence of a valuation operator to such markets as in perfect markets the valuation operator is a linear operator and its existence is implied by the no arbitrage condition in imperfect markets the valuation operator is individual specific and depends on the agent s position in the market the methodology employed in the paper is duality in convex programming

quantifying quality growth we introduce an instrumental variables approach to estimate the importance of unmeasured quality growth for a set of 66 durable consumer goods our instrument is based on predicting which of these 66 goods will display rapid quality growth using pooled cross relatively sections of households in the 1980 through 1996 u s consumer expenditure surveys we estimate quality engel curves for 66 durable consumer goods based on the extent richer households pay more for a good conditional on purchasing we use the slopes of these curves to predict the rate of quality upgrading just as if households are ascending these quality engel curves over time we find that the average price paid rises faster for goods with steeper quality slopes bls prices likewise increase more quickly for goods with steeper quality slopes suggesting the bls does not fully net out the impact of quality upgrading on prices paid we estimate that quality growth averages about 3 7 per year for our goods with about 60 of this or 2 2 per year showing up as higher inflation rather than higher real growth

the leverage theory of tying revisited evidence from newspaper advertising data from the canadian newspaper advertising industry is used to assess the private profitability of tying in a market where the standard efficiency motives e g price discrimination cost saving and quality control are unlikely to apply the empirical assessment is based on a model of leveraging in which suppliers of the tied good are paid a commission rather than a fee for service this model demonstrates that tying is profitable under a wide range of circumstances furthermore it is found that with newspapers tying and monopoly power go hand in hand

working to improve the consumer price index he recent report of the advisory commission appointed by the u s senatefinance committee begins with one overarching recommendation thebls should establish a cost of living index coli as its objective in mea suring consumer prices u s senate 1996 p 2 this seems basically right to us indeed the bls has long said that the cost of living framework guides operationaldecisions about the construction of the index gillingham 1974 u s bureau oflabor statistics 1984 1988 1992 1997a putting things slightly differently if thebls staff or other technical experts knew how to produce a true cost of living indexon a monthly production schedule that would be what we would produce althoughwe have no fundamental disagreement with the commission about what the objec tive of the cpi program ought to be we may disagree to some extent about theapproaches and methods that are appropriate and feasible in working toward thatobjective this is a point to which we will return below our rst purpose in the present paper is to comment on the advisory com mission s report and the recommendations it contains