technological diffusion and asset prices in this paper we demonstrate that the gradual diffusion of technology causes the stock market to exhibit a cyclical behavior more importantly we attribute sharp declines and increases in the stock market such as the ones that occurred in the early 1970s and mid 1990s in the united states to expected rapid technological diffusion

steady state price distributions in a noisy search equilibrium abstract in a model of noisy search where customers repeat purchase this paper characterises an equilibrium where each store changes its price as its stock of regular customers changes through time as stores in the market are of different size and age price dispersion is an equilibrium outcome along the equilibrium path smaller younger stores announce lower prices and grow faster than larger established stores furthermore the youngest stores set prices below marginal cost to build business up quickly each is willing to take an early operating loss to attract customers quickly in anticipation of extracting customer switching rents in the future journal of economic literature classification numbers d40 l10

discrete equilibrium price dispersion an explicit solution of an equilibrium model with price setting firms and searching customers makes possible a number of comparativestatics predictions about how cost differences among firms search costs of customers and taxes will affect the mean and variance of the distribution of market prices another implication of the model is that a firm s demand depends on the difference between its price and the average price in the market

price dispersion price flexibility and repeated purchasing this paper presents a search model in which consumers repeatedly purchase a commodity the repetition of purchases leads to the formation of implicit contracts with sellers which generate a kink in the demand curve facing each seller these kinks can generate equilibrium price dispersion under conditions where single purchase search models predict no price dispersion despite the kinks prices are at least partially flexible in that some and possibly all sellers change their prices in response to changes in production costs or demand dispersion de prix flexibilite des prix et achats repetes ce memoire presente un modele de recherche dans lequel les consommateurs font des achats repete s d un bien la repetition de l achat entraine la formation de contrats implicites avec les vendeurs ceci cree un pli dans la cedule de demande a laquelle chaque vendeur fait face ces plis peuvent engendrer une dispersion des prix d equilibre alors que le meme modele ne predirait aucune dispersion de prix en l absence d achats repet s malgre les plis les prix sont au moins partiellement flexibles puisque certains vendeurs tous peut re peuvent changer leurs prix en reponse a des changements dans les cofuts de production ou dans la demande

did the us consumer overreact a test of rational expectations abstract using data for the us economy from 1995 to 2008 i estimate a business cycle model in which consumers form expectations rationally and an alternative model that explicitly allows for deviations from rational expectations in the form of overreaction to noisy signals the second model does not have any advantage in explaining the movements in consumption and productivity in this period therefore i cannot reject the hypothesis that consumers behaved rationally the rather exuberant movements of this episode are rationalized by a story in which permanent income consumers find it hard to distinguish between permanent movements in productivity and temporary ones consumers who update their beliefs about trends in productivity on the basis of fairly noisy signals adjust their behavior very slowly after the 1995 2000 productivity boom consumers learnt very slowly about a subsequent decline in productivity growth which led to financial and trade imbalances that ended in a correction starting around 2007 the whole boom bust cycle was long taking about 14 years to complete

auctions with a stochastic number of bidders abstract auction theory is generalized by allowing the number of bidders to be stochastic in a first price sealed bid auction with bidders having constant absolute risk aversion the expected selling price is higher when the bidders do not know how many other bidders there are than when they do know this thus the seller should conceal the number of bidders if he can moreover a bidder s ex ante expected utility is the same whether or not there is a policy of concealing the number of bidders concealment therefore pareto dominates announcement with risk neutral bidders the optimal auction is the same whether or not the bidders know who their competitors are

creative destruction and firm specific performance heterogeneity traditional u s industries with higher firm specific stock return and fundamentals performance heterogeneity use information technology it more intensively and post faster productivity growth in the late 20 th century we argue that this mechanically reflects a wave of schumpeter s 1912 creative destruction disrupting a wide swath of industries with successful it adopters unpredictably undermining established firms this validates endogenous growth theory models of creative destruction e g aghion and howitt 1992 and suggests intensified creative destruction as explaining findings associating greater firm specific performance variation with higher per capita gdps economy growth rates accounting standards financial system development and property right protection

aggregate consequences of limited contract enforceability we study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts because of enforceability problems contracts are constrained efficient we show that limited enforceability amplifies the impact of technological innovations on aggregate output this implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility a key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market

speculative growth hints from the u s economy we propose a framework for understanding episodes of vigorous economic expansion and extreme asset valuations we interpret this phenomenon as a high valuation equilibrium with a low cost of capital based on optimism about future funding the key ingredient for such equilibrium is feedback from increased growth to a decline in the long run cost of capital this feedback arises when an expansion comes with technological progress in the capital sector when fiscal rules generate procyclical fiscal surpluses when the rest of the world has lower expansion potential or high saving needs and when financial constraints are relaxed by the expansion itself

stabilizing non fundamental asset price movements under discretion and limited information abstract inflation output and interest rate stabilization are all potential central bank objectives we explore whether monetary policy should respond to asset price fluctuations when they are driven by irrational expectational shocks to the future returns to capital in our model an optimistic shock to future returns generates both an increase in equity prices and physical investment the increased investment is inefficient and thus a central bank optimally responds to this expectations shocks this induces a trade off between stabilizing nominal prices and non fundamental asset price movements we compare the optimal policy under different assumptions full versus limited information and commitment versus discretion if the central bank has limited information about whether an asset price movement has a fundamental or non fundamental origin then the central bank responds less aggressively to the non fundamental exuberance shocks than under full information without commitment a central bank responds more aggressively to non fundamental exuberance shocks

multiproduct equilibrium price dispersion abstract the model of burdett and judd econometrica51 1993 955 969 is generalized to the case of may goods consumers choose the best price observed for each good there are two classes of equilibria those that involve constant expected profits for each good independently of price and those with increasing profits for each good in price a continuum of the latter type always exists these equilibria are qualitatively different than the unique equilibrium of the single good case journal of economic literature classification numbers d83 d43 l13

behavioral responses to inheritance tax evidence from notches in france abstract for the first time we exploit quasi experimental variation to investigate the impact of inheritance taxation on wealth accumulation using bunching and difference in differences methods we directly estimate several behavioral responses during lifetime rather than relying solely on observations at death our empirical findings shed new light upon wealth accumulation and bequest motives taken together the small responses to inheritance tax estimated cannot be supported by the desire to retain control over wealth

technological change and the stock market tobin s average q has usually been well above 1 but fell below 1 during 1974 1984 our model explains this pattern and reconciles it with unchanging aggregate investment the stock market value in the numerator of q reflects ownership of physical capital and knowledge but the denominator measures just physical capital therefore q is usually above 1 periodic arrivals of important new technologies such as the microprocessor in the 1970 s suddenly render old knowledge and capital obsolete causing the stock market to drop national accounts measures of physical capital miss this rapid obsolescence then q appears to drop below 1 jel e44 o3 o41

new evidence on altruism a study of tiaa cref retirees this paper investigates the role in household wealth accumulation of saving for bequests it employs data from a 1988 survey of tiaa cref annuitants designed to measure pension and other net worth as well as lifetime earnings about half of the households in the data plan to leave estates and the authors find that their behavior conforms with theoretical altruistic models for the same families the amount of wealth that the authors attribute to estate building is large nevertheless altruism towards one s children does not seem to be the major explanation of saving in the overall sample copyright 1996 by american economic association

the new economy in europe 1992 2001 despite the fast catching up in ict diffusion experienced by most eu countries in the last few years information technologies have so far delivered little productivity gains in europe in the second half of the past decade growth contributions from ict capital rose in six eu countries only the uk denmark finland sweden ireland and greece quite unlike the united states this has not generally been associated to higher labour or total factor productivity growth rates the only exceptions being ireland and greece particularly worrisome the large countries in continental europe germany france italy and spain showed stagnating or mildly declining growth contributions from ict capital together with definite declines in tfp growth compared to the first half of the 1990s it looks like that the celebrated solow paradox on the lack of correlation between ict investment and productivity growth has fled the us to migrate to europe

wasteful public spending and state aid control the conventional academic rationale for supranational intervention to curb state aids to industry appeals to transfrontier spillovers however competition policy practitioners often speak in terms of curbing wasteful spending regardless of whether or not any international spillovers are involved although it is often argued that such wasteful spending calls not for supranational state aid control but rather for better domestic political accountability this paper argues that wasteful spending may be a by product of accountability not a symptom of its absence specifically we describe a model in which politicians fund projects that are wasteful as a way to signal their diligence and voters rationally reward them for this we discuss implications for the role of state aid control mechanisms 2006 by the european economic association

turnover externalities with marketplace trading this article considers equilibrium decentralized trade when there is a marketplace where buyers and sellers meet costlessly since buyers have idiosyncratic match payoffs for each seller s good some buyers rather than trade with the current stock of sellers wait for new sellers to enter the marketplace to obtain a good they like a turnover externality exists where all traders are better off with higher entry rates of new traders furthermore this turnover externality supports multiple pareto rankable equilibria this provides new insights into similar results obtained in the random matching literature

innovation and idiosyncratic risk an industry and firm level analysis recent studies find that idiosyncratic risk ir the degree to which firm specific returns are more volatile than aggregate market returns has increased since the 1960s and attribute this to economy wide factors such as the role of the it revolution yet no innovation data is used in these studies to gain further insights into the relationship between technology and ir our aricle studies whether firms and industries that are more r d intensive are in fact characterized by higher ir due to how innovation affects the uncertainty of expected future profits while the industry level results prove inconclusive a clear relationship is found between firm level r d intensity and firm level volatility of returns

tax avoidance and intra family transfers to what extent do people avoid taxes on intra family transfers be quests and gifts and how would integration unification of the dif ferent transfers taxes affect tax avoidance these issues are important for families and their welfare as well as for governments and their pos sibilities of raising revenue from transfer taxes in this paper we study the effects of transfer taxes on altruistic parents transfers to their chil dren using a theoretical model we find that altruistic parents do not necessarily tax minimize however in some cases when they do there is an infinitely large excess burden of a transfer tax we also find that integration of transfer taxes reduces tax avoidance all tax avoidance is eliminated with complete integration

spatial growth and industry age between 1970 and 2000 employment growth across u s counties exhibited very different patterns in manufacturing and services whereas manufacturing employment growth was negatively related to initial manufacturing employment across the entire distribution of counties service employment growth was positively related to initial service employment for intermediate sized counties this paper presents a theory to rationalize these facts local sectoral growth is driven by technological diffusion across space and depends on the age of the sector the theory correctly predicts the relation between county employment growth and initial county employment in manufacturing at the turn of the 20th century

how strong are bequest motives evidence based on estimates of the demand for life insurance and annuities this paper presents new empirical evidence in support of the view that a significant fraction of total saving is motivated by the desire to leave bequests specifically i find that social security annuity benefits significantly raise life insurance holdings and depress private annuity holdings among elderly individuals these patterns indicate that the typical household would choose to maintain a positive fraction of its resources in bequeathable forms even if insurance markets were perfect evidence on the relationship between insurance purchases and total resources reinforces this conclusion

how inheriting affects bequest plans we present and test the idea that bequest planning is linked with the experience of inheriting we consider a family tradition of bequeathing as a channel through which the intention to bequeath is moulded by and is positively correlated with the experience of inheriting using data from the survey on health ageing and retirement in europe share we find that the experience of inheriting enhances the intention to bequeath independently of the positive impact of wealth we also find that the expectation of inheriting has a positive impact on the intention to bequeath controlling for the expected increase in wealth on account of future inheritances

returns to investors in stocks in new industries i introduction one thousand dollars invested in america online s initial public offering ipo in march 1992 became 295 545 by the end of 2000 when aol was purchased by time warner this is an extraordinary payoff for shareholders over 5 per month while this investment has an outstanding return new industries have high risk and their stocks are likely to have high expected returns on the other hand the extraordinary behavior of dot corn stocks makes this conclusion less than obvious the stratospheric prices of dot corn stocks and returns to some shareholders suggest that expected returns in a new industry may well be dominated by forces not common in more mature industries one possibility is euphoria or craziness an explanation given more plausibility by the boom and bust in dot corn stock prices another explanation is that such stocks are similar to options and lottery tickets this possibility has occurred to many observers among them alan greenspan who observed that when you are dealing with stock the possibilities of which are either it s going to be valued at zero or some huge number you get a premium in that stock price which is exactly the same sort of price evaluation process that goes on in the lottery blumberg capital 1999 perhaps stocks in new industries have a distribution of returns that includes the possibility of large gains and small losses if so then investors may buy stocks for the same reasons that people are willing to pay for lottery tickets this explanation could be consistent with high valuations and even negative expected returns because investors are willing to pay on average to have a small probability of a large gain 1 indeed the limited history of dot corns suggests realization of substantial negative returns the geometric return to shareholders averaged across dot coms is 4 3 per month even so the history of dot coms probably is too short to deliver very reliable evidence on the expected return in new industries this average return to stockholders is based on the same firms as in the study by hand 2001 but there are only five firms in the center for research in security prices crsp data for these firms as recently as 1995 and the financial crisis of 2007 and 2008 would suggest ending the data in 2006 we estimate expected returns in new industries by examining new industries with longer experiences than dot coms many analogies have been drawn between dot coms and earlier industries as far back as railroads and telegraphs for example in business week mandel 1999 hof and hamm 2002 the economist 2000 nairn 2002 and perez 2002 2 among these analogies is the importance of network effects network effects are important for dot coms and they are important for some of the industries examined in this paper industries examined in this paper include network industries if a network industry is defined as one in which a standard for the product or the availability of complementary inputs has high marginal value for the industry one such industry is the automobile industry which standardized on gasoline engines instead of electricity or steam another is the telegraph industry for which interconnection is as crucial as for the internet while it is less obvious interconnection is an important issue for railroads as well when differences in track width gauge are large enough connections across lines can require unloading and reloading railroad cars gauge was not standardized in the united states until the 1880s and even today gauge in spain and portugal is different than in the rest of europe in this paper we examine the returns in major new industries in the united states and summarize the distribution of returns over the period of the industry s development our paper is related to papers by fama and french 2001 and gompers and lerner 2003 fama and french 2001 examine the returns on newly listed firms in the crsp data set from 1926 to 2000 and find that these firms returns are similar to their benchmark returns

investment options and the business cycle abstract this paper extends r mehra e c prescott recursive competitive equilibrium the case of homogeneous households econometrica 48 1980 1365 1380 to a production economy with two capital goods it is an rbc model in which each unit of investment requires a new idea an option when options are scarce new capital is harder to put in place and the value of old capital rises thus the stock market and tobin s q are negative indexes of intangibles during a boom q rises gradually as options are used up because investment represents an exercise of options it has an intertemporal substitution tradeoff that is absent from the adjustment cost model equilibrium may be efficient even without markets for knowledge the stock market may suffice

oligopolistic pricing with heterogeneous consumer search abstract a finite number of identical stores sell a homogeneous good to consumers with heterogeneous search costs who search sequentially with perfect recall and without replacement consumers search rules are optimal with respect to the stores pricing strategies and consumers must visit a store to obtain information about its actual price a symmetric nash equilibrium sne always exists the model exhibits a variety of equilibrium behaviors between monopoly pricing and marginal cost pricing the competitiveness of a market depends crucially on the shape of the search cost distribution moreso than on the number of competing firms

bequest behavior and the effect of heirs earnings testing the altruistic model of bequests that parents transfer resources to children because of altruistic concern is a reasonable a priori assumption however economic theories of altruistic transfers have produced many counterintuitive conclusions and consequently much debate when applied to bequests these theories predict that inheritances will compensate for earnings differences between siblings as well as between parents and children this paper tests these implications using a new data set centered on federal estate tax returns little support can be found for an altruistic theory of bequests this finding has implications for macroeconomic policy government transfer programs and inequality copyright 1996 by american economic association

equilibrium price distributions equilibrium price distributions for a homogeneous product consistent with individual incentives are investigated they arise in informationally imperfect markets in which the only primitive datum is the distribution of search costs it is shown that single multi and continuous price distributions are all viable long run phenomena depending on the nature of search costs a method for computing equilibrium price distributions is also provided jevons law of one price has long been an accepted dictum in economic theory in a classroom presentation it still serves sometimes implicitly as a major premise in many micro models of market interaction much of the descriptive theory as well as welfare analysis hinges on this assumption yet one s day to day experience reveals that price differentials are a viable phenomenon and that looking for lower prices may very well be a rewarding activity the prospects of eventually hitting a bargain and the resulting price reduction would more than compensate for the cost incurred during the search process moreover the existence of price dispersions appear to be an empirically stable phenomenon snapshots of markets for relatively homogeneous products reveal substantial and recurring price differentials stigler 1961 and pratt wise and zeckhauser 1979 for example report some evidence supporting this claim an important article by stigler 1961 focused economists attention on the crucial role played by the informational structure of markets it gave rise to the study of the

mood swings and business cycles evidence from sign restrictions this paper provides new evidence that bouts of optimism and pessimism are an important source of u s business cycles using the identification schemes based on sign restrictions we document that identified optimism and pessimism shocks account for about 30 of u s business cycle fluctuations in hours and output in addition our empirical findings are consistent with the intensive and extensive margin adjustments in the u s labor market over business cycles providing further support to optimism shocks being an important source of u s business cycles the identified optimism shocks are at least partially rational as total factor productivity is found to rise 8 12 quarters after an initial bout of optimism while this later finding is consistent with some previous findings in the news shock literature we cannot rule out that such episodes reflect self fulfilling beliefs

oligopolistic pricing with sequential consumer search n identical stores compete by choosing prices for a homogeneous good with constant marginal costs consumers search sequentially with perfect recall for the lowest price one class of consumers called shoppers have zero search costs while all other consumers have a positive search cost c there is a unique symmetric nash equilibrium price distribution with the property that it changes smoothly from marginal cost pricing when all consumers are shoppers and or c 0 and monopoly pricing when no consumers are shoppers remarkably as the number of stores increases the nash equilibrium becomes more monopolistic copyright 1989 by american economic association

diagnosis murder the death of state death taxes since 1976 more than 30 states have eliminated their death taxes and many others have reduced them this unexplored case of interstate tax competition presents a unique opportunity to develop a new more satisfying definition of competitor based on historical elderly migration patterns using data from 1967 onward we outline the recent history of state death tax competition and present a spatial econometric analysis interstate tax competition is evident and grows stronger when using migration based definitions of competitors the article concludes with still more evidence of interstate tax competition the recent movement by states to effectively revive their death taxes jel h7 d7 i introduction the federal estate tax has received wide attention especially because its elimination has been a centerpiece of president george w bush s tax proposals 1 largely overlooked however is the quiet revolution that has been taking place at the state level since 1976 31 of the 48 contiguous states have repealed their death or estate inheritance and gift eig taxes instead relying only on the pick up tax whereby states capture a portion of the federal estate tax liability but do not increase the overall liability of the estate 2 of the remaining 12 states that still have eig taxes 2 have enacted legislation that will eliminate them by 2005 and others are considering doing so beyond the outright elimination of eig taxes many states have also acted to reduce them in a variety of ways such as exempting certain beneficiaries such as the spouse this trend is noteworthy for several reasons foremost it appears to us a prime example of intense interstate tax competition due to the growing size and political influence of the elderly population there is additional political pressure because states may worry that high eig taxes will drive the high income elderly to move to bordering states or retirement havens the stakes may be substantial for example longino and crown 1989 estimate that florida had a net gain of 5 billion in income from the elderly migrants it received between 1985 and 1990 and sastry 1992 73 estimates that one new job is created for every 2 5 elderly migrants it receives state eig tax competition also provides us with a unique opportunity to explore alternative definitions of competitor states beyond simple geography because the movements of the tax base the elderly are fairly easy to track via historical migration data yet no research to our knowledge has explored interstate eig tax competition furthermore these widespread changes in state eig taxes provide substantial cross sectional and time series variation that has been mostly overlooked by researchers interested in the behavioral effects of estate taxes 3 state eig tax policy is also still in flux current and proposed changes in the federal estate tax have substantial revenue consequences for states effectively eliminating eig tax revenues for those that rely solely on the pick up tax how will the states react to this change at present several states have enacted or are considering legislation that would effectively decouple their eig taxes from the federal estate tax and so would preserve the revenue source indeed as the federal estate tax is slowly eliminated eig taxes in states that continue to use them may be the only remaining taxes on bequests yet little is known about them our research seeks to fill this void using state level data from 1967 to the present we first describe the brief history and geographical pattern of these widespread reductions in state eig taxes to our knowledge ours is the first research to document in a systematic way this phenomenon we begin with a chronology of the states that eliminated completely their eig taxes thereby choosing to rely instead only on the pick up tax however there are many other ways that the states may reduce their eig taxes such as increasing exemptions or reducing tax rates

technological change entry and stock market dynamics an analysis of transition in a monopolistic industry we consider the share price dynamics induced by changes in technological progress perhaps due to the introduction of a new technology or institutional reforms and the resultant entry of firms the focus is not so much in comparing the steady states before or after the change but rather on the transitional dynamics of the industry or economy as it adjusts the model is one with efficient markets and perfect foresight where fundamentals drive the stockmarket value should we expect technological progress to lead only to increases in the level of the stockmarket monotonic dynamics or should we expect nonmonotonic behavior of boom followed by partial bust a u shaped or overshooting dynamic is it possible to have share values falling even when the underlying technology is improving we model a stylized monopolistic industry or economy in a continuous time generalequilibrium setting with no uncertainty and perfect foresight we adopt a model of entry found in sanghamitra das and satya p das 1997 datta and dixon 2000 and marta aloi and dixon 2001 in which the cost of entry is increasing in the flow of entry due to some congestion effect or other externality the flow of entry is determined by an intertemporal arbitrage condition that equates the cost of entry with the present value of incumbency this gives rise to a dynamic zero profit condition the present value of incumbents in each instant is equal to the cost of entry we first consider the case of a step increase in the level of technology with no other underlying growth when an unanticipated technological improvement occurs it causes a stock market boom there is a jump in the share value the current profitability of incumbents and an increase in the flow of entry however eventually entry drives the profit level back to zero and shares decline back to the initial value the initial boom is followed by a bust we next consider the case of an economy with constant exponential technology growth what happens when the pace of technological change unexpectedly increases there is an upward jump in the stock market value of firms this can overshoot the new balancedgrowth path with the possibility that there will be a u shaped dynamic the initial boom is followed by a slump before tracking back to the higher growth rate if the initial jump overshoots the new balanced growth path there is a downward pull of share prices toward the new balanced growth path which may dominate this stock market behavior reflects the behavior of entry after an initial rush there is a temporary slowdown before eventually getting back on track a similar pattern can occur if the change is anticipated we believe that this might be some part of the explanation of the behavior of the stock market in the late 1990 s although real life is much more complicated see jeremy greenwood and boyan jovanovic 1999 the initial technological change causes a bonanza of profitable investment opportunities resulting in high profits for incumbents and many new firms being set up the increase in entry reduces profitability and this may cause the flow of entry to reduce if only in the short run finally however the long run growth opportunities begin to come through and the economy gets onto the new higher growth path

financing development the role of information costs to address how technological progress in nancial intermediation aects the economy a costly state veri cation framework is embedded into the standard growth model the framework has two novel ingredients first rms dier in the risk return combinations that they oer second the e cacy of monitoring depends upon the amount of resources invested in the activity a nancial theory of rm size results undeserving rms are over nanced deserving ones under funded technological advance in intermediation leads to more capital accumulation and a redirection of funds away from unproductive rms toward productive ones quantitative analysis suggests that nance is important for growth

technological revolutions and the three great slumps a medium run analysis abstract the great recession the great depression and the japanese slump of the 1990s were all preceded by periods of major technological innovation which happened about 10 years before the start of the decline in economic activity we estimate a model with noisy news we find that beliefs about long run income adjust to permanent shifts in productivity with an important delay the estimation tells a common and simple story for the observed dynamics of productivity and consumption on a 20 to 25 year window our analysis highlights the advantages of a look at this data from the point of view of the medium run

growth opportunities strategic savings and the dot com boom and bust data from the dot com boom bust episode suggest that growth opportunities played an important role in explaining firms financing strategy during this understudied episode the low leverage of this sector was mainly driven by high growth firms which increased their leverage following the crash despite suffering a much larger fall in their market value we present a parsimonious dynamic firm financing model where growth opportunities alone can generate the heterogeneous patterns in the financing and performance between high and low growth information technology firms prior to and following the market crash the calibrated model also sheds light on the role played by monetary policy during that episode jel g32 e22 e5

identifying the role of risk shocks in the business cycle using stock price data i introduction the finance literature on the forecastibility of stock returns has concluded that stock market movements are by and large not because of changes in the expected future cash flow of firms but are primarily because of changes in the risk premium that is how the expected cash flows are discounted by stock market participants cochrane 2011 1 these changes in risk premia also have important implications for real variables in the economy especially for consumption and investment an increase in the risk premium prompts households to reduce current consumption as they start to discount expected future income more heavily more importantly changes in the required return on equity alter the cost of capital of corporations when they finance new investment for firms that rely on external debt to finance marginal investment a lower stock price translates into lower net worth and therefore a higher cost of borrowing bernanke gertler and gilchrist 1999 similarly firms that rely on new equity issues are able to raise less funds from each new share when their stock price is lower even for firms that finance investment exclusively through internal funds i e retained earnings plus depreciation allowance the required return on existing shares reveals the opportunity cost of internally financed investment tobin 1969 tobin and brainard 1977 this is because at least in principle these funds can be returned to existing shareholders as dividends and new funds can then be raised from the markets through new equity shares for which investors would demand a risk premium figure 1 omitted in the aggregate u s corporations are predominantly financed through equity the dotted line in figure 1 plots the credit market liabilities of u s non financial corporations as a percent of the sum of equity and credit market liabilities in their balance sheets 2 by this measure debt financing accounts for about a third of total financing averaged over the whole sample and equity financing accounts for about two thirds the solid line in figure 1 provides an alternative measure which takes into account all financial liabilities including items such as trade payables but nets out financial assets to obtain a measure of net debt mcgrattan and prescott 2005 now debt financing accounts for only 15 of total financing in the post war period and its importance has declined in the last two decades note that both of these series are stock measures as opposed to flow measures that is they refer to financing of all past investments and do not necessarily reflect how corporations are financing investment at the margin these measures can also be biased against debt financing because most debt items are recorded on a book value basis in the flow of funds but equity is recorded on a market value basis to overcome these caveats i consider the flow components of sources of funds i e internal funds net new equity and net new debt as a share of corporate tangible investment in figure 2 several patterns emerge first the ratio of internal funds to gross capital expenditures has been close to 1 throughout the post war period in other words at least in the aggregate u s corporate investment has been by and large financed internally second new equity issuance has not been an important source of financing in fact net new stock issues have been mostly negative in the latter part of the sample this mainly reflects the preference of corporations to distribute resources to shareholders through stock buybacks rather than ordinary dividend payments because of the preferential tax treatment of long term capital gains third net new debt has contributed to about a third of aggregate financing assuming that the discrepancy in the flow account is distributed proportionally to each financing component as internal funds and net new stock issues are fairly reliable data series we can reasonably lump the rather large discrepancy item in the ffa data with net debt

making the transition to prepaid medicare the medicare system is facing a financial crisis brought on by a combination of factors 1 a financing system that relies on intergenerational transfers from workers to the elderly as its major source of revenue 2 a payment scheme that traditionally has provided neither the demand nor the supply side of the market with strong incentives to hold down costs and 3 the penchant of congress to expand the coverage of the system over time every time a worthy cause or group can be identified the expansion of medicare benefits began almost immediately after the passage of the legislation in 1967 just one year after medicare had passed congress increased the number of days of in patient hospital care covered by the program in 1972 payment for the services of interns and residents in podiatry training was added to the benefit package also medicare coverage was extended to disabled persons under age 65 who were eligible for benefits under social security or railroad retirement and to certain other individuals under age 65 suffering end stage renal disease later medicare benefits were extended to state and local government employees not covered by social security and then coverage was extended to spouses of workers who were not yet covered but would be eligible to be covered in 1980 unlimited home health visits were covered as was the use of alcohol detoxification facilities in 1985 medicare provided payment for liver transplant services 1 there is current political pressure to

to own or not to own your life insurance policy abstract life insurance proceeds are generally subject to the estate tax an exception is when the policy is owned by the beneficiaries and the insured gives up ownership and control including the ability to change beneficiaries should the insured strategically own the policy contract and potentially subject proceeds to estate and inheritance taxes or relinquish control with the beneficiaries owning the policy and escape such transfer taxes this paper addresses how the estate tax influences the choice of life insurance ownership using samples of estate tax returns the empirical evidence suggests that those facing high estate tax rates are more likely to forgo ownership and have proceeds excluded from their estates and provides further evidence on the incentive effect of taxes and in support of the strategic bequest motive

venture capital and the macroeconomy i develop a model of venture capital vc intermediation that quantitatively explains central empirical facts about vc activity and can evaluate its macroeconomic relevance the impact of vc backed innovations is significantly larger than suggested by observed aggregate venture exit valuations even after accounting for large exposures to systematic and uninsurable idiosyncratic risks the risk properties of venture capital play a quantitatively important role in both explaining empirical regularities and shaping the value of ventures contributions to economic growth the model is analytically tractable and yields exact solutions despite the presence of matching frictions imperfect risk sharing and endogenous growth received january 16 2018 editorial decision november 7 2018 by editor stijn van nieuwerburgh

bequest taxes inter vivos gifts and the bequest motive abstract this paper investigates the existence of an operative bequest motive by testing whether state bequest taxes influence the giving of inter vivos gifts a significant positive relation between bequest tax rates and both the probability and level of inter vivos gifts is found suggesting that at least some portion of bequests is intentional

a simple model of price dispersion abstract this article considers a simple stock flow matching model with fully informed market participants unlike the standard matching literature prices are assumed to be set ex ante when sellers pre commit themselves to sell their products at an advertised price the unique equilibrium is characterized by price dispersion due to the idiosyncratic match payoffs in a marketplace with full information this provides new insights into the price dispersion literature which instead commonly assumes that buyers are not perfectly informed and engage in a costly search

the information technology revolution and the stock market evidence since 1968 the ratio of stock market capitalization to gdp has varied by a factor of 5 in 1972 the ratio stood at above unity but by 1974 it had fallen to 0 45 where it stayed for the next decade it then began a steady climb and today it stands above 2 we argue that the it revolution was behind this and moreover that the capitalization gdp ratio is likely to decline and then rise after any major technological shift the three assumptions that deliver the result are

women wealth and mobility using estate tax returns data we observe that the share of women among the very wealthy in the united states peaked in the late 1960s at nearly one half and then declined to one third we argue that this pattern reflects changes in the importance of dynastic wealth with the share of women proxying for inher ited wealth if so wealth mobility decreased until the 1970s and rose thereafter such an interpretation is consistent with technological change driving long term trends in mobility and inequality as well as the recent divergence between top wealth and top income shares documented elsewhere jel d31 j16 j62 033 the extent of and changes in intergenerational mobility of wealth are central to understanding dynamics of wealth inequality but are hard to measure in this paper we argue that the share of women among the wealthiest americans can be used as a proxy for the importance of inherited rela tive to self made wealth this approach assumes that women tend to inherit rather than make great fortunes if so a higher share of women among the wealthy would reflect a rise in inherited wealth at the top and thus lower wealth mobility conversely higher wealth mobility where self made wealth replaces inherited wealth would result in more men at the top of the wealth distribution judged by this proxy and corroborated by various data sources wealth mobility decreased in the period 1925 1969 and increased thereafter such a pattern is consistent with an important role for technological change in shaping the wealth distribution and can provide an explanation for why wealth concentra tion has remained stable despite increasing income concentration in the last three decades over the past century the share of women among the very wealthy followed an inverse u pattern peaking in the late 1960s according to estate tax returns in 1925 one quarter of the wealthiest 0 01 percent were women this fraction rose rapidly through world war ii wwii and then more slowly to peak in 1969 when women neared parity with men since then the decline has been marked by 2000 women s share had fallen to one third its prewar level while the rise was evident among all wealth groups in the top 1 percent of the wealth distribution the decline was confined to the very top figure ia graphs the share of women for four different groups in the top 1 percent among decedents by year figure ib does the same for the living population with the help of estate multipliers a method that treats death as a random sampling device and uses mortality rates by age and gender to infer the distribution of wealth among the living as described in the data appendix while the rise in the share of women among the wealthy until the 1960s could reflect improve ments in women s economic status labor market gains work against the recent decline for instance since the 1970s the share of women among top earners top 0 1 percent has risen by

putty clay technology and stock market volatility abstract firms first order conditions imply that stock returns equal investment returns from the production technology much applied work uses the adjustment cost technology which implies that the realized return is high when the investment capital ratio is high this paper derives for an arbitrary stochastic discount factor the investment return implied by the putty clay technology the combination of capital heterogeneity and irreversibility creates a novel channel for return volatility the investment return is high when the ratio of investment to gross job creation is low empirically the putty clay feature helps account for u s stock market data

contracting productivity growth in this paper we analyze the interactions between growth and the contracting environment in the production sector allowing incompleteness in contracting implies that viable production relationships for firms and workers and therefore the profitability of industries depend on the rates of innovation and growth the speed at which new innovations arrive in turn depends on the profitability of production for the usual reasons examined in the endogenous growth literature we show that these interactions can have important implications which are consistent with observed phenomena in both the micro and macro environment in particular we demonstrate that a technological shock increasing productivity of research can through this interaction lead to a productivity slowdown and a shift in labor market contracts away from firms providing implicit guarantees of lifetime employment and towards shorter term contractor type arrangements we show the consistency of an increase in the proportion of the labor force under short term employment increased relative returns of workers in high productivity sectors and increased income inequality with a productivity slowdown of finite duration

planned and unplanned bequests we distinguish between bequests that are planned as part of a lifetime optimization process and those that are the unplanned result of errors in forecasting the date of death given the initial endowment we expect a positive relation between the bequest and the planning horizon and a negative relation between unexpectedly long life and the bequest a unique data set on wealthy decedents and their parents provides measures of expected horizons based on parents longevity both predictions are confirmed and there is an especially large and significant positive relation between the bequest and the length of the planning horizon

goodwill intertemporal price dependence and the repurchase decision stigler s i96i pioneering article on the economics of information directed economists attention to market situations where the classical assumption of perfect knowledge could not be supported his theory pictured a world in which prices were not known to the consumer a priori information being scarce was also costly but information had clear economic value to those wishing to possess it focus of the new theory thus came to be on an individual optimising over benefits expected price reductions and costs time spent canvassing to the activity of information gathering or search whilst this new direction taken by consumer theory has been towards greater descriptive realism the attendant drawbacks have been several technical complexities of formulation have commonly resulted in highly simplified models with utility linear in prices and purchase restricted to a single unit of the good even when time has been explicitly taken into account an invariable assumption has been the independence of prices from one period to the next 2 after twenty years stigler still remains alone in the literature as having made an attempt to integrate the idea of intertemporally correlated prices with the important economic concept of goodwill the present paper is an attempt to remedy within the context of a single model the above mentioned deficiencies the main emphasis of the paper as the title suggests is on the role of goodwill and intertemporal price dependence in the repurchase decision the decision whether or not to buy again at the same store or to look around the framework proposed is a dynamic one in which the consumer has in each period to a finite horizon an ex post and ex ante utility maximisation problem the ex post problem concerns her consumption decision in any period once prices are known the ex ante problem her decision as to how much

the life cycle of a competitive industry firm numbers first rise then later fall as an industry evolves this nonmonotonicity is explained using a competitive model in which innovation opportunities fuel entry and relative failure to innovate prompts exit equilibrium time paths for price and quantity also share features of the data the model is estimated using data from the u s automobile tire industry a particularly dramatic example of the nonmonotonicity in firm numbers

volatility and slow technology diffusion abstract i study the effects of uncertainty on technology adoption and thereby on volatility and growth i present an analytically tractable model in which i uncertainty about the returns to adoption delays technology diffusion and ii the mean and volatility of output growth are jointly determined in equilibrium i then test the key predictions of the model by studying the introduction of three major information and communication technologies icts computers internet and cell phones i find that countries with more volatile growth rates of real gdp per capita have higher time adoption lags and lower average growth as predicted by the model

varying heterogeneity among u s firms facts and implications abstract u s firms stock return volatility rose fivefold from 1971 through 2000 and then reverted to near 1971 levels by 2006 this was driven mainly by a rise and fall in the firm specific rather than systematic component of volatility firm level total factor productivity growth volatility exhibited a similar pattern we hypothesize that firm heterogeneity reflected in firm specific volatility rises as a new general purpose technology gpt propagates across the economy and then ebbs once the gpt is widespread measuring gpt adoption by information technology capital intensity we find robust cross industry empirical evidence supporting the hypothesis

intergenerational transfers and the accumulation of wealth h t ouseholds acquire wealth from two sources they save out of income they have earned and they receive transfers from other people the first method of wealth accumulation goes under the name of life cycle saving in which people save during their working lives and dissave after retirement the second involves either an inter vivos transfer that is a transfer between living people or a bequest a transfer that occurs at the death of the donor while inter vivos transfers and bequests will arise in dynastic models where preferences include a taste for the well being of one s descendents few empirical life cycle models reflect these concerns indeed a sharp debate has arisen over the ability of the simple life cycle model to explain observed wealth accumulation understanding the relative sizes of these sources of wealth accumulation affects a variety of issues for example the effects of government debt social insurance public transfer programs estate taxes and incentives for charitable giving depend to some extent on the magnitude and nature of private saving and transfers of wealth analyses of the inequality of wealth may depend on whether most of wealth is earned or received as transfers appropriate policies for encouraging private saving may look rather different depending on whether most saving is to be consumed later in life or passed along to the next generation finally evidence on transfer patterns relates to more fundamental

choosing between gifts and bequests how taxes affect the timing of wealth transfers abstract a number of theories have been advanced to explain the size and timing of intergenerational transfers one factor only recently explored is the effects of taxes and in particular the estate tax on such transfers this paper represents the first attempt to explore how capital gains and gift taxes in addition to the estate tax interact to influence incentives in the timing of transfers using estate tax data and exploiting variations in state inheritance gift and capital gains tax rates this paper finds taxes to be an important consideration in the choice between gifts and bequests in particular each of capital gains and gift taxes are found to be important determinants of the timing of transfers these findings are robust to a number of specifications that control for borrowing charitable bequests marital status and the portfolio composition of wealth transfers

the role of investment efficiency in the industry life cycle this article studies a dynamic model of an industry life cycle based on increasing returns in the cost of growth whereby large firms can grow more easily when there are strong increasing returns in the adjustment cost function the model exhibits multiple rest points and firms do not necessarily all end up in the same state the model generates typical life cycle stages including a shakeout the likelihood of survival is positively correlated with the entering size an implication that fits empirical findings that exiting firms are small not only just prior to exit but also at the time of entry the model also explains newer findings on the evolution of moments an increase in the skewness and the spread of firm size distribution before the shakeout and a decline in these with the start of the shakeout copyright 2010 the author 2009 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

the information technology revolution and the stock market technological progress comes in waves the british industrial revolution 1760 1850 ushered in cort s puddling and rolling process for making iron crompton s mule for spinning cotton and the watt steam engine the second industrial revolution 1890 1930 witnessed the rise of electricity the internal combustion engine and the chemical industry the birth of information technology it may herald the start of a third industrial revolution a new technology or product is often developed by the single entrepreneur who initially finds it hard to get funds develop the product and find customers but if the product is good customers eventually line up and investors flock in other firms then move in to make the product and may drive the innovator out or acquire him whether he reaches the initial public offering ipo stage or is acquired by a listed firm though it takes time for the innovator to add value to the stock market indeed the innovation may at first reduce the market s value because some firms usually large or old will cling to old technologies that have lost their momentum figure 1 plots the market value of u s equity relative to gdp this paper argues that a the market declined in the late 1960 s because it felt that the old technologies either had lost their momentum or would give way to it and that b it innovators boosted the stock market s value only in the 1980 s if the stock market provides a forecast of future events then the recent dramatic upswing represents a rosy estimate about growth in future profits for the economy this translates into a forecast of higher output and productivity growth holding other things equal such as capital s share