earnings management the shapes of the frequency distributions of earnings metrics are not evidence ipso facto we provide evidence that the shapes particularly around zero of the frequency distributions of earnings metrics examined in the extant earnings management literature are affected by 1 deflation using for example price or market capitalization 2 sample selection criteria that lead to differential inclusion exclusion of observations to the left of zero versus observations to the right of zero implicit in studies focusing on firms followed by i b e s and explicit in studies partitioning on a variable differing between loss observations and profit observations 3 differences between the characteristics of observations to the left of zero and observations to the right of zero such as market pricing and analyst optimism pessimism or 4 a combination of these factors since the shapes of the frequency distributions of earnings metrics at zero are likely due to one of the above effects we conclude that the shapes cannot be used as ipso facto evidence of earnings management

dynamic efficiency in overlapping generations models with stochastic production abstract we consider an overlapping generations economy as in diamond amer econ rev 55 1965 1126 1150 with stochastic production we define two types of efficiency for feasible production consumption allocations using first and second degree stochastic dominance we obtain a complete characterization of inefficiency of type i in this model for each given sequence of strictly concave utility functions for all generations the existence of a competitive equilibrium is proved it is shown that each competitive allocation is short run efficient of type ii

fiscal policy with agents differing in altruism and ability this paper presents an overlapping generations model of growth with individuals differing in productivity and altruism within such a model wealth is entirely held in the steady state by the families with the highest degree of altruism we then look at the macroeconomic and distributive effects of three fiscal policies public debt pay as you go social security and estate taxation under plausible assumption we show that both public debt and social security are neutral a la ricardo but increase inequality we also show that a estate taxation can be pareto worsening even though it can foster income equality

critical remarks on piketty s capital in the twenty first century this article discusses the central macroeconomic claims that are made in thomas piketty s book capital in the twenty first century the article aims to show that piketty s contentions are not only logically flawed but also contradicted by his own data

the distribution of wealth with imperfect altruism abstract in this paper we study the distribution of wealth in an economy with infinitely lived families individual generations of each family may or may not be altruistic this is represented as a preference shock which follows a first order markov process within each family a feature representingimperfect altruism altruistic individuals care about the welfare of their children and are likely to leave bequests selfish ones do not this results in a non trivial distribution of wealth among families at any point in time we study an economy with a risk free linear production technology and show that a stationary distribution of wealth exists this distribution is discrete and approximates the pareto distribution under additional restrictions we also characterize conditions on the production technology which yields perpetual growth with increasing inequality journal of economic literatureclassification numbers d31 d91 e21

taxation bequests and short and long run timber supplies an overlapping generations problem this paper uses an overlapping generations model with one sided altruism to study the effects of several forest taxes that target bequests and affect timber supply unlike previous work we investigate bequests and timber supply in both the short and long run when bequests are costly e g taxed the landowner s problem is examined in the short run while the government s problem is examined in the long run assuming the existence of a steady state we also consider taxes targeting harvests growth savings and bequests several new results are established concerning the interactions of taxes that might be used by a government to alter short and long run forest capital stocks i the presence of a forest bequest tax affects the neutrality of harvest tax in both the short and long run ii in the long run the bequest tax decreases bequests and timber supplies when the bequest tax is not present the capital income tax is neutral with respect to bequest and timber supply while the harvest tax is neutral only if forest productivity is also not taxed finally iii in the short run the substitution and total effects of taxes in landowner decisions generally depend on the presence of the bequest tax the results have implications for pigouvian tax design and second best tax choice

dynamic tax incidence and intergenerationally neutral reform the paper proposes a basic definition of intergenerational neutrality in the overlapping generations model when agents have a pure life cycle motive of savings the derivation of intergenerationally neutral tax effects provides a redistribution free benchmark case that isolates the relative price effects of taxes and the deadweight losses associated with them the paper clarifies the intergenerational incidence which has to be determined simultaneously with the substitution effects of taxes on savings a tax reform example demonstrates how taxes with diverging intergenerational incidence may be combined to achieve intergenerational neutrality finally the paper extends the analysis of generational tax incidence to the case of a small open economy

government intervention as a bequest substitute abstract a subsequent generations model is used in order to characterize consumption allocation under the future generation s income uncertainty altruistic concerns towards future generations give rise to precautionary bequests which act as a hedge on risk it is shown that given a first order correlation between mean future income and the present generation s income government can provide a pareto improvement through a tax transfer policy with universal participation this policy acts as a substitute for precautionary bequests distributional aspects of government tax transfer policy are also discussed

inefficiency of subgame optimal entry regulation the literature on excess entry shows that the free entry equilibrium number of firms may be greater than is socially optimal and proposes government entry regulation as a remedy this article tries to show that such a policy recommendation is misleading a two period three person entry game model which explicitly includes second best government shows that entry regulation aimed at preventing excess entry actually induces the incumbent to behave strategically against the government and makes the final outcome socially suboptimal compared to cases in which there is no government intervention entry regulation is subgame optimal however it is globally suboptimal

altruism intergenerational transfers of time and bequests abstract this paper uses a standard two period overlapping generation model to examine the behavior of an economy where both intergenerational transfers of time and bequests are available while bequests have been examined extensively time transfers have received little or no attention in the literature assuming a log linear utility function and a cobb douglas production function we derive an explicit solution for the dynamics and show that altruistic intergenerational time transfers can take place in presence of a binding non negativity constraint on bequests we also show that with either type of transfers capital is an increasing function of the intergenerational degree of altruism however while with time transfers the labor supply of the young increases with the degree of altruism with bequests it may decrease

public pensions and growth abstract this paper investigates the relationship between the size of an unfunded public pension system and economic growth in an overlapping generation economy in which altruistic parents finance the education of their children and leave bequests unlike the existing literature we model intergenerational altruism by assuming that children s income during adulthood is an argument of parental utility unfunded public pensions can promote growth when families face liquidity constraints preventing them from investing optimally in the education of their children we consider two alternative ways of financing a public pension system either by levying social contributions in a lump sum manner or in proportion to labour income we find that there is no case for unfunded public pensions in economies where bequests are operative by contrast there exists a growth maximising size of the public pension system in economies where bequests are not operative and individuals are sufficiently patient

renewable resource use and nonseparable amenity benefits we incorporate amenity benefits into an overlapping generations model with a renewable resource as a factor of production source of amenity benefits and store of value unlike the conventional renewable resource problems studied under the assumption of additive consumption and amenity benefits we let amenity benefits affect the utility of consumers in a nonseparable fashion we examine the role that weights given to consumption and amenities have for harvesting and the resource stock we characterize dynamics and stability of steady state equilibria with a logistic resource growth function we demonstrate in parametric and numerical models that the weights given to consumption and amenities in the utility function matter substantially for the steady state equilibrium stock and its stability and dynamics both conventional saddle point equilibria and indeterminacy with infinite number of equilibria and saddle node bifurcation is possible depending on the weights given to consumption and amenities in addition we show that for each inefficient equilibrium stock there is a unique subsidy rate that can move the economy from an inefficient equilibrium to an efficient one the presence of indeterminacy provides a challenge to resource policies because the system becomes unpredictable therefore expectations and market psychology may play an important role in resource utilization and provision of amenities

resource allocation to defensive marketing and manufacturing strategies abstract in this paper we investigate the coordinated use of marketing and manufacturing strategies to formulate a defensive business strategy for an incumbent firm upon market entry while defensive marketing strategies have been researched extensively little has been done on defensive manufacturing strategies and even less on coordinating these two we propose a formulation for the joint formation of a defensive strategy by the marketing and production functions under budget constraint considerations the incumbent firm may allocate its resourcesto advertising and distribution expenditures as well as to manufacturing investments to reduce the unit production cost the incumbent firm has also the option of simply allocating all of its resources purely to advertising and distribution we show that while there exist cases where the optimal reaction to entry involves investments in manufacturing improvements there are also cases where defense is in marketing strategies alone we identify the market conditions that promote such reactions to entry and also provide sensitivity analysis

the power of love abstract we show that the presence of at least one individual who loves its children whatever the intensity of this love allows to avoid a possible global contraction of the economy

bequest intentions of forest landowners theory and empirical evidence this article studies in an overlapping generations forest economy the conditions under which money and or timber bequests occur across generations assuming the usual case of one sided altruism we assume nonindustrial landowners have preferences for consumption and for amenities from unharvested forest stock within this framework we examine conditions under which landowners choose to leave timber or money bequests and we show how taxation is important to these conditions empirical evidence from bequests decisions for a cross section sample of nonindustrial landowners in virginia is then used to investigate the hypotheses suggested by the model with regard to the motive to leave bequests the results are broadly consistent with the theoretical findings

profit raising entry common wisdom suggests that entry reduces profits of incumbent firms on the contrary we demonstrate that if the incumbents differ in marginal costs and the entrants behave like stackelberg followers then entry may benefit the cost efficient incumbents while hurting the cost inefficient ones and the total outputs of all incumbents may be higher under entry

entry and managerial incentives abstract this paper presents a two period full information model of entry where owners of incumbent and entrant firms endogenously select the incentive schemes for their managers it is shown that when output decisions are delegated to managers the incumbent s owner chooses to base incentive schemes only partly on profit but if output decisions are reached via nash bargaining between managers the incumbent s owner will base the reward on profit alone the entrant never bases the incentive scheme solely on profit if there is a sufficiently high fixed cost of entry then the incumbent can deter entry by providing management with appropriate incentive schemes

fiscal policy in a growth model with both altruistic and nonaltruistic agents this paper examines the long run behavior of an overlapping generations model with a population consisting of altruistic and nonaltruistic agents it also studies the effect of fiscal policy on aggregate capital accumulation and on the welfare of both types of agents it shows that an increase in the relative number of nonaltruists is pareto improving in the steady state it also shows that the introduction of public debt or unfunded social security has no effect on the longrun equilibrium but implies a transfer of resources from the nonaltruistic to the altruistic agents finally it indicates that inheritance taxation hurts not only the altruists but also the nonaltruists

on barro s theorem of debt neutrality the irrelevance of net wealth the effects of national debt on real economic activity has been a recurring topic in the literature on macroeconomic policy analysis since the time of adam smith the problem is usually stated as follows for a given level of government spending is the economy sensitive to the financing mix between tax and debt historically attention has focused on the question of whether or not individuals perceive government bonds as net wealth the link between wealth and real activity being taken as given the main point of debate is well established the issue of bonds raises private assets by the full value of the bonds the corresponding tax liabilities for interest payments and retirement of the debt extend indefinitely into the future the perception of bonds as net wealth would then appear to depend on the length of the individual s optimization horizon the most recent contribution to this debate was made by robert barro 1974 in which he argued that despite the limitation of finite lives bonds will not be regarded as net wealth in a system characterized by operative intergenerational transfers the essence of his argument is that inclusion of a bequest motive effectively converts a finite horizon into an infinite one in that paper barro acknowledged a potential limitation on his proof of the neutrality result it was only valid for bonds that are redeemed at a known point in the future this limitation was raised again in a subsequent exchange with martin feldstein in which barro 1976 agreed that for a growing economy an increase in steady state per capita debt will generate net wealth if the rate of growth is greater than the interest rate however he argued that such a steadystate growth situation would not be consistent with rational utility maximizing behavior the main theme of this paper is that the literature has focused attention on the wrong question the real effects of national debt are independent of whether or not individuals perceive the debt as net wealth the correct question is whether or not changes in the level of debt force individuals into patterns of intertemporal consumption that they are unable to neutralize by adjustments in their portfolio behavior viewing neutrality in this light leads to some reinterpretation of the conditions under which neutrality is likely to hold my analysis starts where barro and feldstein leave off within the framework of the overlapping generations model with gift and bequest motives i show that steady state equilibrium growth is consistent with a growth rate in excess of the interest rate indeed without specific knowledge of the parameters of the economy there are no a priori grounds on which to expect any particular relationship between the growth and interest rates more importantly so long as it is valid to view the aggregate economy as behaving like a composite individual changes in the steady state level of government debt are neutral regardless of which relationship prevails provided one or the other of the intergenerational transfer motives is operative i will refer to this as the extended neutrality theorem section i presents an analysis of steadystate growth with gift and bequest behavior the steady state growth path is shown to lie above the golden rule solution if the gift

the cass criterion the net dividend criterion and optimality abstract abel mankiw summers and zeckhauser assessing dynamic efficiency theory and evidence rev econ stud 56 1989 1 20 propose the net dividend criterion as an easy to use sufficient condition for optimality in general stochastic overlapping generations economies with production we provide examples based on the criterion due to cass on capital overaccumulation in the aggregative neoclassical model of economic growth a complete characterization j econ theory 4 1972 200 223 and its extensions the usual tools for such problems to show that the net dividend criterion need not give the right answer we identify the flaw in their proof we also provide an alternative condition which by an argument unrelated to theirs is a sufficient condition for optimality when dividends are nonnegative and then argue that the condition is not innocuous since it cannot be verified in actual economies

optimality in stochastic olg models theory for tests we consider general olg economies under uncertainty with short maturity assets and with dividend paying assets of infinite maturity and fiat money and study the optimality properties of equilibria with a sequence of asset markets that are sequentially complete we provide necessary and sufficient conditions in terms of asset prices and dividends for equilibria to be conditionally pareto optimal these results provide a theoretical basis for empirical investigation

the learning curve market dominance and predatory pricing sufficient conditions for id and iid are given in the case of two step learning in which a firm reaches the bottom of its learning curve after just two sales however examples are also constructed for the two step learning case in which neither id nor iid holds it is also shown that in equilibrium iid implies that learning is privately disadvantageous although it is socially advantageous finally introducing avoidable fixed costs and possible exit into the model yields a new theory of predatory pricing based on the learning curve hypothesis

capacity outpl t and sequential entry comment two behavioral assumptions that are often made in the industrial organization literature are that an established firm or group may deter entry either through limit pricing the sylos postulate or by holding excess capacity the excess capacity hypothesis in an interesting recent article in this review 1981 daniel spulber examines these behavioral assumptions to see whether they are consistent with rational behavior by an established firm spulber s analysis is based on a two firm two period game model in which the established firm is given a first in advantage by introducing this dynamic element into the model spulber is able to explicitly address the issue of the optimality of entry deterring behavior spulber finds that the use of limit pricing and or excess capacity to deter entry is rational only under a very limited set of circumstances in particular when the second period outcome is determined by a cournot nash equilibrium he derives the following results 1 the first period output of the established firm is always less than or equal to the first period output produced by a firm not anticipating entry the established firm essentially accommodates entry and limit pricing does not occur 2 the established firm never holds more capital than the amount that would minimize its production costs given its output choices in periods one and two this comment takes issue with spulber s conclusions about the cournot nash case it will be shown that the two results cited above may be reversed when the production technology is characterized by variable proportions this reversal hinges on the particular type of nash equilibrium employed in the analysis of the two period model spulber implicitly uses a nash equilibrium that is not subgame perfect 2 it is shown below that when one requires the nash equilibrium to be subgame perfect both limit pricing and excess capital investment outcomes are possible for the variable proportions technology case the subgame perfection property thus seems to capture an important strategic element in decision making for the established firm in some cases this type of strategic behavior leads to entry barriers that would not exist under innocent profit maximization by the established firm strategic entry barriers are discussed by steven salop 1979 spulber s notation and assumptions about demand and costs are adopted below

dynamic efficiency in the gifts economy abstract in the standard analysis of overlapping generations economies with gifts from children to parents each generation takes the actions of other generations as given the resulting equilibrium is dynamically inefficient in reality however parents realize that children will respond to higher parental saving by reducing gifts for a broad class of gift economies this implicit tax on saving pushes the equilibrium to dynamic efficiency this result reestablishes the potential relevance of the gift model to the us economy renders moot an important part of the ricardian equivalence debate and provides a motivation for a type of social security system

earnings management and accounting income aggregation quarterly earnings allow aggregation into annual earnings in four different ways fiscal year earnings is one measure of annual earnings the others being earnings for annual periods ending at interim quarter ends we investigate earnings management in fiscal year earnings relative to these alternative measures of firms annual earnings we confirm prior findings in burgstahler and dichev 1997 earnings management to avoid earnings decreases and losses journal of accounting and economics 24 99 126 of discontinuities around zero and prior year earnings in histograms of earnings subsequent research questions whether these discontinuities are evidence of earnings management using histograms of our alternative annual earnings measures we offer evidence suggesting earnings management is responsible for the discontinuities

evidence that the zero earnings discontinuity has disappeared abstract discontinuities in earnings distributions at zero have been widely cited as evidence of earnings management but not without controversy recent research suggests discontinuities may be mere artifacts of certain research design choices we find that the well known zero earnings discontinuity disappears soon after passage of the sarbanes oxley act sox and has not returned we also find that neither the discontinuity nor its disappearance require the effects of widely cited alternative non earnings management explanations for the zero earnings discontinuity

rounding up in reported eps behavioral thresholds and earnings management abstract reported earnings per share eps are frequently rounded to the nearest cent this paper provides evidence that firms manipulate earnings so that they can round up and report one more cent of eps specifically we examine the digit immediately right of the decimal in the calculated eps number expressed in cents evidence is presented that firms are more likely to round up when managers ex ante expect rounding up to meet analysts forecasts report positive profits or sustain recent performance further investigation provides evidence that working capital accruals are used to round up eps

management by the numbers a formal approach to deriving informational and distributional properties of unmanaged earnings we explore the theoretical relation between earnings and market returns as well as the properties of earnings frequency distributions under the assumption that managers use unbiased accounting information to sequentially decide on real options their firms have and report generated earnings truthfully with the market pricing the firm based on those reported earnings we generate benchmarks against which empirically observed earnings returns relations and aggregate earnings distributions can be evaluated this parsimonious model shows a coherent set of results reported losses are less persistent than reported gains decision making diminishes the s shaped market response to earnings and earnings relate to returns asymmetrically in the way documented by basu 1997 furthermore the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily single peaked instead it may exhibit a kink at zero and look similar to the plots reported by burgstahler and dichev 1997 however within our model none of these phenomena are due to reporting noise bias or some undesirable strategic managerial behavior they are the natural consequences of using past earnings as the basis for value increasing managerial decision making that in turn generates the future earnings on which future decisions will be based

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

estate taxes consumption externalities and altruism we study how the introduction of consumption externalities affects the efficiency of the dynamic equilibrium in an economy displaying dynastic altruism when the bequest motive is inoperative consumption externalities affect the intertemporal margin between young and old consumption and thus modify the intertemporal path of consumption and capital the optimal tax policy that solves this intertemporal inefficiency consists of a tax on capital income and a pay as yougo social security system the later solves the overaccumulation of capital due to the inoperativeness of the bequest motive and the former solves the inefficient allocation of consumption due to consumption externalities when the bequest motive is operative consumption externalities only cause an intratemporal inefficiency that affects the allocation of consumption between the generations living in the same period but do not affect the optimality of the capital stock level this suboptimal allocation of consumption implies in turn that the path of bequest is also suboptimal the optimal tax policy in this case consists of an estate tax and a capital income tax the estate tax corrects the intratemporal inefficiency but generates an intertemporal inefficiency which is corrected by means of an appropriate capital income tax

demonstration effect and dynamic efficiency can dynamic inefficiency be remedied by intergenerational family transfers the issue matters for the connection between fiscal policy and economic growth yet family transfers have mostly been narrowly cast as altruistic i show that an alternative motive the demonstration effect whereby parents transfer to mold preferences of children can generate vastly different results family transfers are positive under dynamic inefficiency these transfers are instrumental to depress capital accumulation so as to approach the golden rule capital stock intuitively family transfers from youth to old age reduce capital accumulation however family transfers are nil under dynamic efficiency unlike public debt both capital accumulation and welfare are not worsened

earnings management erroneous inferences based on earnings frequency distributions a vast literature following hayn 1995 and burgstahler and dichev 1997 attributed the so called discontinuities in earnings distributions around zero to earnings management despite recent evidence that these discontinuities are likely caused by other factors researchers and teachers continue to point to the shapes of these distributions as evidence of earnings management we provide three sets of further evidence that these discontinuities are likely caused by factors other than earnings management 1 we provide as an example a detailed analysis of the severe effects of sample selection in a recent study this study erroneously concludes that the shape of an earnings distribution is evidence of earnings management 2 we provide a simple explanation for the shape of the earnings distribution that is most often cited as evidence of earnings management the relation between earnings and prices differs with the magnitude and the sign of earnings and 3 we provide further examples that support the main point of our paper evidence beyond the mere shape of a distribution must be brought to bear before researchers can draw conclusions regarding the presence absence of earnings management

concurrent renting and selling in a durable goods monopoly under threat of entry this article analyzes the choice of contract sales or rental of a durable goods monopolist facing a threat of future entry although in the absence of such a threat a monopolist would prefer to rent his entire output we show that the threat of entry alters that preference there is an optimal preentry contract mix involving both rental and sales if both firms behave as cournot duopolists after entry the optimal choice of preentry contracts enables the erstwhile monopolist to gain the same profits as he would if he behaved as a von stackelberg leader

intergenerational transfers and the fertility income relationship evidence from cross sectional data reveals a negative relationship between family income and fertility this article argues that constraints to intergenerational transfers are crucial for understanding this relationship if parents could legally impose debt obligations on their children to recover the costs incurred in raising them then fertility would be independent of parental income a relationship between fertility and income arises when parents are unable to leave debts because of legal enforcement or moral constraints this relationship is negative when the intergenerational elasticity of substitution is larger than one a case in which parental consumption is a good substitute for children s consumption

the incidence of entry in 3 oligopoly models three of the least satisfactory features of oligopoly theory are that the beliefs of firms are frequently arbitrary that the solution concept which reflects these beliefs used is taken as exogenous and that its role in conditioning the results is neglected the first criticism has been resolved to a large extent in the recent consistent conjectures literature bresnahan 1981 perry 1981 ulph 1983 for critical views see laitner 1980 or boyer and moreaux 1983 which characterizes equilibria having the property that firms hold locally correct conjectures about rivals reactions yet however satisfactory they are on the question of arbitrariness consistent conjectures unfortunately run afoul of the exogeneity criticism for it is by no means clear how firms come to possess the information needed to form such beliefs quite clearly the complete answer to the exogeneity question lies in models of information acquisition and evaluation by firms nevertheless it would be unwise to abandon static models wholesale for they can be useful if supplemented by a set of comparative static exercises revealing how variations in the solution concept itself conditions the results this paper advances the case for such a comparative statics with respect to solution concept primarily by discussing a somewhat unusual illustration much recent work has been devoted to entry and its effects on market performance but relatively little is known about how putative entrants are attracted to the market how much entry occurs in particular types of markets how fast it occurs how incumbents anticipate putative entrants and their speed of reaction thus while we have some feel for how variations in solution concept affect the market share or profits of a given set of firms in post entry equilibria e g shubik 1980 ulph and folie 1980 dixit 1980 spulber 1981 we have very little in the way of answers to questions like is there more entry when firms play cournot than when one firm acts as a stackelberg leader vis a vis the rest or does successful entry and even displacement of relatively inefficient incumbents occur more or less rapidly when firms behave as cournot than when industry conduct is described by some other solution concept such questions are natural for example if one is interested in the persistence of market power and its speed if any of decline section ii contains some slightly startling results which emerge from considering what is very much a special case of an entry process while the main interest in the results arises because they underline in a particularly emphatic manner the sort of interesting phenomena that can be revealed by such comparative static exercises i shall in section iii pursue these results as having interest in their own right and speculate on their robustness to various extensions of the model section i commences the whole discussion with some methodological remarks

debt neutrality theory and evidence from developing countries this paper reviews the ricardian barro hypothesis and tests the basic postulate of the model for a sample of developing countries including mexico and venezuela two specifications are utilized the first is based on the simple consumption model associated with the work of kormendi 1983 the alternative is based on a model developed by haque and montiel 1987 the outcome of the two stage least square estimation technique rejected the hypothesis in mexico trinidad and tobago and venezuela all countries which underwent adjustment programmes however these results were reversed when the alternative model was utilized due to liquidity constraint and possibly the yaari blanchard effect the contradictory outcome alludes to the sensitivity of the results to the model specified

optimal sequential investment when capital is not readily reversible when investment opportunities arrive one at a time and are reviewed sequentially a corporation s optimal policy differs from a standard net present value rule if the corporation exercises control over an industry state variable and control is costly the first condition presupposes a degree of market power for the firm the second occurs if corporate investment decisions are imperfectly reversible to address the problem of optimal investment in this context a firm s investment decisions are modeled as a markov reward process the causes of economic irreversibility are discussed and general propositions concerning the optimal investment policy are derived these propositions are then applied to the optimization of an exploration program by an oligopolistic firm a price leader under particular demand and distributional assumptions solutions for the optimal decision rule and the value of the exploration program are obtained and their properties examined current investment may affect future opportunities by creating growth opportunities as defined by myers 16 see also spence 25 or by reducing the value of an existing opportunity set despite the known potential for these interactions capital budgeting techniques such as net present valuation scenario planning and monte carlo simulation focus exclusively on the stand alone value of an investment the capacity for modeling interactions is present in the multiperiod models of merton 16 bogue and roll 5 and others the absence of applications however is evidence that actual economic interactions between current and future opportunities are not well understood this paper develops a model of a firm facing a sequence of interdependent growth opportunities opportunities have positive net present values because the firm exercises market power in its product market current investment changes the value of future opportunities through its effect on a product market variable the model is used to examine the impact of demand industry structure and technology on optimal investment rules and on the value of aggregate growth

public debt voluntary intergenerational transfers and overlapping generations abstract this paper deals with the characterization of overlapping generations models with voluntary intergenerational transfers when altruism is one sided it is argued that the qualitative conclusions derived about debt neutrality do not depend on the way the intergenerational concern is modelled with operative bequests gifts the steady state interest rate is greater less than the population growth rate regardless of whether individuals have a concern about a representative descendant s ancestor s utility or the total welfare enjoyed by all their children parents when the criterion of total utility of the ancestors is adopted their utility must not be discounted but compounded since otherwise the model has no significant solution although there must be effective discounting of a representative ancestor s utility

a bequest constrained economy welfare analysis bequest constraints have played a major role in discussions of debt neutrality but their welfare implications were not sufficiently dealt with in the literature in this paper we focus on the welfare implications of bequest constraints we found that when institutional constraints to the transfer of resources from children to their parents exists the welfare of the parents generation may be improved by an old age security scheme such a scheme is justified not by income redistribution consideration as is typically the case but rather on pure efficiency grounds due to its intergenerational transfer role the social security scheme is pareto improving with altruistic parents if in addition the real income effect which tends to raise children consumption is relatively strong this abstract was borrowed from another version of this item

determinacy of equilibrium in an overlapping generations model with heterogeneous agents abstract we study the determinacy of perfect foresight equilibrium near a steady state in an overlapping generations model with production and both altruistic and non altruistic agents having distinct utility functions the proportion of each type of consumer is exogenously given our main results show that when there are positive stationary bequests some standard assumptions on preferences and technology rule out local indeterminacy for any positive value of the proportions in the particular case of a separable utility function for altruistic agents we prove that the determinacy property does not depend on the size of the infinite lived altruistic dynasties journal of economic literature classification numbers c62 d91 o21 o41

ricardian equivalence long run leviathan abstract this paper presents a heterogenous overlapping generations with altruism model in which intergenerational discounting is stochastic the model nests three popular macroeconomics models those of ramsey economic journal 38 152 1928 543 559 diamond american economic review 55 1965 1126 1150 and a variant of the blanchard journal of political economy 93 2 1985 223 247 buiter the economic journal 98 391 1988 279 293 weil journal of public economics 38 2 1989 183 198 model it is shown that under a mild condition originally derived by weil journal of monetary economics 19 3 1987 377 391 the long run capital intensity is robust to practically every popular theoretical criticism of the standard ricardian model these criticisms include the imperfect inheritability of time preference parameters and hence finite horizons on the part of all households myopia in the form of overly discounting the future borrowing constraints distortionary labor taxation exchange strategic bequest motives common cultural constraints egalitarian bequests and primogeniture endogenous fertility and joy of giving while precautionary saving can theoretically violate long run neutrality the asymptotic capital intensity is still bounded below by preference parameters the overall conclusions are sharply at odds with those found in most articles dealing with the theoretical foundations of ricardian equivalence

gdp management to meet or beat growth targets abstract we apply the discontinuity methodology from the accounting literature to a political economy setting of gdp reporting and examine whether chinese local governments manage regional gdp numbers we find strong evidence of discontinuities around zero in the distribution of actual minus target gdp growth rates the frequencies of just meeting or beating gdp growth targets are about five four times the frequencies of just missing targets at the prefecture province level the results are stronger for governors with longer tenures and those without political connections to higher level officials as well as for local governments with more resources under their control

government debt redistributive fiscal policies and the interaction between borrowing constraints and intergenerational altrusim abstract we show how borrowing constraints intergenerational altruism and their interaction shape the aggregate savings response to government debt and fiscal policies that redistribute resources between living generations we also characterize the conditions under which borrowing constraints bind and the altruistic transfer motive operates in terms of the strength of the altruism motive the shape of the lifetime productivity profile the willingness to substitute consumption intertemporally and other factors finally we characterize the dynamic response of aggregate savings to nonneutral government debt policies in economies with binding borrowing constraints

pay as you go social security and the distribution of altruistic transfers this paper studies the impact of an unfunded social security system on the distribution of altruistic transfers in a framework where savings are due to both life cycle and random altruistic motivations we show that the effect of social security on the distribution of these transfers depends crucially on the strength of the bequest motive in explaining savings behaviour we measure this strength by the expected weight that individuals attach to the utility of future generations on the one hand if the bequest motive is strong then an increase in the social security tax raises the bequests left by altruistic parents on the other hand when the importance of altruism in motivating savings is sufficiently low the increase in the social security tax could result in a reduction of the bequests left by altruistic parents under some conditions on the attitude of individuals toward risk and on the relative returns associated with private saving and social security some implications concerning the transitional effects of introducing an unfunded social security scheme are also discussed

efficiency in economic growth models under uncertainty abstract we consider an infinite horizon economy with stochastic production and consumption we define efficiency of feasible production consumption programs without referring to a particular utility function using stochastic ordering a complete characterization of inefficiency of type i is obtained equivalence between type ii efficiency and a certain optimality notion when decision makers are risk averse is proved when the number of states of nature is finite at each date

earnings quality evidence from the field abstract we provide insights into earnings quality from a survey of 169 cfos of public companies and in depth interviews of 12 cfos and two standard setters cfos believe that i above all high quality earnings are sustainable and repeatable specific characteristics include consistent reporting choices backing by actual cash flows and absence of one time items and long term estimates ii about 50 of earnings quality is driven by non discretionary factors such as industry and macro economic conditions iii in any given period about 20 of firms manage earnings to misrepresent economic performance and for such firms 10 of eps is typically managed iv earnings manipulation is hard to unravel from the outside but peer comparisons and lack of correspondence between earnings and cash flows provide helpful red flags in addition cfos disagree with current standard setting on a number of issues including the sheer number of promulgated rules the top down approach to rule making the neglect of the matching principle and the emphasis on fair value accounting they indicate that a rules based culture makes the audit function centralized and mechanical and hinders the development of audit professionals a summary impression from our work is that cfos view earnings quality as more of a single and unconditional characteristic in contrast to current research where measures of earnings quality are strongly conditional on the decision setting this cfo view is related to their idea of one number a single earnings metric that shapes both their interactions with external stakeholders and internal decision making

endogenous fertility ricardian equivalence and debt management policy abstract the paper develops a model in which dynastic families optimally determine fertility government debt represents a tax on future generations and on childbearing the ricardian equivalence hypothesis does not hold debt is welfare reducing in that it distorts the fertility decision an increase in government debt induces a decline in fertility and an increase in the steady state capital labor ratio if a government inherits an existing stock of debt the first best policy is to eliminate the debt immediately in other situations the optimal debt management policy will not in general entail a total elimination of the debt

the role of multiple potential entrants sequential entry in noncooperative entry deterrence a number of authors have recently considered whether the free rider problem is exhibited in models characterized by multiple potential entrants sequential entry bernheim 1984 and eaton and ware 1987 find that the free rider problem is not an important factor while mclean and riordan 1989 find that it is in this article i identify a general property whose presence is important for whether a model of noncooperative entry deterrence exhibits a free rider problem and in this way help clarify why the above mentioned authors reach these diverse conclusions the article also demonstrates that quite plausible changes in the specifications of both bernheim and eaton and ware lead to incumbent firms underinvesting in entry deterrence

second best public debt with human capital externalities this paper studies optinnal public debt in a dynastic model with human capital externalities that cause human capital investment fertility to be below above its socially optimal level by reducing fertility and raising human capital investment the optimal debt can exceed 10 of output for plausible parameterizations

do scaling and selection explain earnings discontinuities abstract earnings distributions commonly exhibit statistically significant discontinuities at zero earnings which are widely interpreted as evidence of earnings management to avoid a loss in contrast durtschi and easton 2005 durtschi and easton 2009 assert that discontinuities are instead explained by some combination of prior researchers choice s of scaling and sample selection as well as a scaling related effect due to a systematic relation between the sign of earnings and market prices resolution of the conflicting interpretations of discontinuities is important because 1 it affects how investors regulators and scholars view earnings management and 2 it demonstrates the importance of a close linkage between theory and research design choices we point out that de provide no evidence that scaling or selection create discontinuities but only evidence showing that changes in scaling or selection eliminate discontinuities we demonstrate why the research designs used by de eliminate discontinuities and why alternative designs using the same data yield statistically significant discontinuities that cannot be attributed to either scaling or selection

strategic learning and entry equilibrium abstract this paper describes the nature of equilibrium for a dynamic game between a monopolist and an entrant who adopts a learning strategy for cost reduction the learning process is characterized as a continuous time poisson process where each success reduces a part of the entrant s cost difference with the incumbent the entrant chooses a stream of expenditure after every success to control the instant probability of the next success the techniques of semi markov decision processes are used to characterize equilibrium learning decisions at every stage distribution of entry times and the effects of subsidies technical progress etc on pre entry and post entry learning strategies

earnings management to avoid earnings decreases and losses this paper provides evidence that firms manage reported earnings to avoid earnings decreases and losses specifically in cross sectional distributions of earnings changes and earnings we lind unusually low frequencies of small decreases in earnings and small losscs and unusually high frequencies of small increases in earnings and small positive income we find evidence that two components of earnings cash flow from operations and changes in working capital are used to achieve increases in earnings we present two theories based on stakeholder use of information processing heuristics and prospect theory about the motivation for avoidance of earnings decreases and losses

scale economies and existence of sustainable monopoly prices abstract the size of the firm relative to market demand is crucial to a determination of whether there exist sustainable monopoly prices in the one product case the size of the firm is its minimum efficient scale in the multiproduct case size is defined by a set of outputs at which cost complementarities are present the analysis shows that when the size of the firm is sufficiently large there exist anonymously equitable aumann shapley prices further at these prices natural monopoly is sustainable against rival entry the aumann shapley price are also shown to be quantity sustainable in the sense of brock and scheinkman

sunk capacity costs long run fixed costs and entry deterrence under complete and incomplete information this article considers a three stage extensive form game where capacity once installed is sunk but where fixed costs are not sunk we show that there may be multiple perfect equilibria of the complete information game when the entrant is incompletely informed about the incumbent s cost the entrant may use the incumbent s capacity choice as a signal of the incumbent s cost we present an example where the incumbent prefers a noninformative capacity signal since this has the effect of reducing the scale of entry we present a second example where the entrant is incompletely informed because the incumbent makes a choice over production technologies that is unobservable to the entrant

the effect of audit adjustments on earnings quality evidence from china we examine how adjustments to earnings during year end audits affect measures of earnings quality there are four key findings first audit adjustments cause earnings to become smoother and more persistent second the adjustments result in higher accrual quality third audit adjustments have a larger negative effect on signed accruals than absolute accruals fourth the adjustments do not reduce the discontinuity in the earnings distribution around zero these findings are of interest to researchers who use earnings properties as proxies for earnings quality and audit quality however we caution that our findings for china may not generalize to other countries

excess capacity and limit pricing an empirical test entry may be inhibited by expectations that incumbents have lower marginal costs incumbents may be able to use limit pricing or excess capacity to further this expectation we construct an empirical model of oligopoly capacity and pricing decisions and of entrant responses the results support the hypothesis that both lower prices and greater excess capacity inhibit entry they further support limit pricing but provide no evidence that oligopolies deliberately install excess capacity to deter entry the results suggest however that limit pricing firms may exploit the entry inhibiting effects of unintended excess capacity by raising their limit prices

growth effects of taxation under altruism and low elasticity of intertemporal substitution an increase in the tax rate on capital income may raise the rate of economic growth when the elasticity of intertemporal substitution is low and intergenerational transfers are absent since the strength of the bequest motive depends on tax rates this paper provides conditions under which taxing capital income and then reducing the labour income tax is more growth enhancing than the classical policy of zero taxes on capital income and vice versa this paper analyses the effects of different taxes on the rate of economic growth we consider an economy in which public spending is a fixed fraction of the gnp and the government can obtain revenues from proportional taxes on both labour and capital income obviously the growth effects of these two instruments will depend on the assumptions made about the economic environment in the standard overlapping generations olg model with production diamond 1965 an increase in capital income taxes allows a reduction in labour income taxes and thus agents will enjoy more income when they are young since in the olg model young agents must purchase the total stock of capital installed in the next period and saving is increasing in young income higher taxes on capital income may lead to faster capital accumulation in order to complete the argument we must ensure that the associated decrease in the after tax interest rate does not lead to a reduction in saving which would outweigh the previous income effect in other words we need a sufficiently low elasticity of intertemporal substitution the argument is thus similar to the one of jones and manuelli 1992 who have already pointed out that if the technological environment makes sustained growth feasible then taxing the old agents and subsidising the young ones may increase the rate of economic growth however the situation is completely different if we consider instead an economic environment in which the life cycle considerations are absent for instance in endogenous growth models with a representative agent or dynasty and infinite life span an increase in the capital income tax rate typically translates into lower growth see for instance sato 1967 feldstein 1974 stiglitz 1978 and the more recent contributions of lucas 1990 and rebelo 1991 a way to give a unified treatment to these two alternative models is by means

holding idle capacity to deter entry in this journal dixit i980 carefully analysed the extent to which an established firm facing a prospective entrant might make an investment in capacity beyond that which is optimal for its pre entry output in his model both the established firm and prospective entrants understand that a quantity setting nash equilibrium would be established in any post entry game dixit showed that spence i977 had studied an imperfect equilibrium that is an equilibrium that depended upon a threat that was not credible to obtain his result that firms might hold excess capacity to deter entry in a perfect equilibrium a firm would not wish to install capacity that would be left idle if entry did not occur dixit s conclusion however depends on his assumption that each firm s marginal revenue is always decreasing in the other s output this is quite a restrictive assumption for example it is never satisfied in the relevant range for economists second favourite demand curve constant elasticity demand the basic point is unchanged if the firms anticipate price competition with differentiated products rather thanquantity competition in any post entry game under quite plausible conditions rational firms facing rational potential entrants may install capacity that will certainly be left idle we are thus able to rehabilitate spence s original proposition in a perfect equilibrium setting

capacity output and sequential entry two crucial assumptions frequently made in industrial organization are that an established firm deters entry either by a constant high output the sylos postulate or by high excess capacity the excess capacity hypothesis these assumptions may be an accurate description of the observed conduct of firms in some industries however when the rules of the post entry game are clearly specified the optimal output and investment strategies of an established firm may depart considerably from these behavioral assumptions because of this possible inconsistency with rational behavior any conclusions about the formation of industry based upon either assumption are highly suspect what is more these assumptions avoid the main issue of whether entry deterrence is worthwhile at all this paper presents a dynamic model of entry in which established firms pursue a cournot nash alternatively stackelberg strategy toward a potential entrant the entrant behaves in cournot nash fashion and chooses output on the basis of expected postentry profits at the equilibrium of the post entry game within this framework a constant output entry deterring strategy would involve maintenance of an entry deterring output level before and after entry is threatened an excess capacity entry deterring strategy would involve holding excess capacity at an entry deterring level and increasing output to that level after entry is threatened special conditions are presented under which the sylos postulate or the excess capacity hypothesis will accurately describe optimal entry deterring strategies in addition special conditions are examined under which the established firm maintains a constant output or holds pre entry excess capacity when large scale entry does in fact take place the analysis shows that in general established firm reactions to entry are quite different from these special cases the sylos postulate see joseph bain paolo sylos labini franco modigliani 1958 asserts not only that potential entrants expect established firms to maintain their output constant as entry occurs but that established firms keep output constant at a level that deters entry whether or not it is profitable to do so hailed as a welcome major breakthrough on the oligopoly front modigliani 1958 the sylos postulate underlies many papers in the large theoretical and empirical literature on limit pricing yet the sylos postulate ignores both the strategic interaction between firms and the dynamic aspects of entry 2 unless the established firm s monopoly output exceeds the entrydeterring level the established firm with a general cost function able to choose an entry deterring output level will instead always desire a lower output level before entry for the special case where capacity is an upper bound on output and the established firm is a stackelberg leader in the post entry game

ricardian equivalence in the presence of capital market imperfections abstract it is a common claim that ricardian equivalence fails if capital markets are imperfect the validity of this claim is examined for the case of informationally imperfect capital markets we present three alternative models of adverse selection and analyze the effects of debt finance in these models it is shown that a debt financed tax cut can lead to pareto improvement in some cases in the theoretically most preferable model however ricardian equivalence survives in spite of genuine imperfections in the capital market the results point to the importance of specifying the exact nature of imperfection

economic analysis and the quest for competitive advantage curred in the past decade between applied microeconomists and those who study business strategy business strategists have cast up a series of questions for industrial economists who have responded with numerous applications of economic theory and quantitative research methods this interchange has been fruitful and indeed more fruit remains for the picking i shall argue for centering the collaborative effort on what may be called committed competition rivalrous moves among incumbent producers that involve resource commitments that are irrevocable for nontrivial periods of time most concerns of business strategy are with policy choices that

does the european natural gas market pass the competitive benchmark of the theory of storage indirect tests for three major trading points this paper presents the first comparative analysis of the relationship between natural gas storage utilization and price patterns at three major european trading points using two indirect tests developed by fama and french 1987 1988 that are applied in other commodity markets we impose the no arbitrage condition to model the efficiency of the natural gas market the results reveal that while operators of european storage facilities realize seasonal arbitrage profits substantial arbitrage potentials remain we suggest that the indirect approach is well suited to provide market insights for periods with limited data we find that overall market performance differs substantially from the competitive benchmark of the theory of storage

dominant firms and their alleged decline abstract by way of a survey of recent literature on the theory of strategic competition this paper focuses on the question of whether dominant firms decline the traditional argument suggesting decline is found to be based on a rather unsatisfactory modelling of dominance and more acceptable conceptualizations suggest that such privileged positions will persist

on debt neutrality in life cycle models abstract a parallelism is established between pure life cycle models and those in which altruism is one sided in the discussion of the public debt neutrality it is argued that when indiduals behave as pure life cyclers the coercive transfers necessary to offset the effects of the debt have the same nature and take place under the same conditions as the voluntary intrafamily bequests and gifts which constitute the usual basis for the ricardian equivalence theorem

investment decisions with economies of scale and learning economists in an antitrust case have at their disposal quite a large bag of tools and truisms but for the most part these are derived from studies of static models in many industries the policy issues concern the implications of firm behavior on market structure and performance over time a case in point is a recent federal trade commission complaint against the dupont corporation the ftc alleged that dupont had engaged in a strategy designed to monopolize the market for titanium dioxide better known as the coloring agent in white paint the alleged strategy was in essence what some would recognize as the boston consulting group story when a firm has a lead in an industry with significant learning economies the firm should price below competitors costs and expand to take further advantage of learning effects and in the process to increase market share this paper summarizes the results of an analysis of dynamic competition with scale and learning effects the research is a preliminary exploration all results are obtained under rather special assumptions about the production technology the effects of experience on costs and the strategic interactions between firms two kinds of strategic behavior are considered in the first case each firm takes the production decisions of competitors as given the nash assumption in the second case firms consider pre emptive capacity investments taking into account that competitors will alter their future investment plans to achieve nonnegative profits we call this a competitive stackelberg cs game using the maximization of net surplus as a socially optimal benchmark neither form of competition yields an efficient outcome when new investment exhibits increasing returns to scale in the absence of learning effects smaller firms in a nash competition have a greater incentive to add new capacity than do larger firms and the equilibrium industry structure approaches equal market shares introducing learning effects in the nash game causes a tendency toward increased concentration but monopoly is not an inevitable consequence the cs game is more competitive than the nash game in the sense that firms compete for the right to invest at each instant of time with identical firms and no learning effects the market structure in a cs equilibrium is indeterminate although the sequence of industry investments is well defined introducing firm specific and nonstochastic learning has a dramatic effect on the cs equilibrium all new investment is undertaken by a single firm even if the learning economies are small moreover the level of output could be lower and price higher in a cs equilibrium than it would be in a nash equilibrium in this sense more competition can lead to a lower rate of output over time

birth death and taxes abstract this paper analyzes the effects of lump sum tax policy in an overlapping generations model in which consumers have uncertain longevity it extends previous analyses by considering the case in which private insurance arrangements are actuarially unfair in addition it considers the polar case of actuarially fair insurance and the polar case of no insurance a general condition for debt neutrality is derived this condition depends explicitly on the degree of actuarial unfairness in insurance and on the extent to which parents care about the utility of their children

learning and the behavior of potential entrants this is the publisher s version also available electronically from https editorialexpress com cgi bin rje online cgi action view year 1984 issue sum page 281 tid 120733 sc 7okbhr2g

bequest motives social security and economic growth junxi zhang this article conducts a systematic analysis of four bequest motives in a simple model of endogenous growth it analyzes how bequest motives affect fertility savings growth and the effects of pay as you go social security it is found that altruistic and exchange motives give equivalent outcomes if the discount factors are set the same the outcome under the joy of giving motive may involve a higher bequest ratio higher saving and better growth rates than that under altruism if bequests are accidental the equilibrium values will depend on the probability of survival moreover the results provide testable implications on bequest motives jel d1 d9 h55 j1 i introduction although the importance of bequests in aggregate savings has been established by kotlikoff and summers 1981 who reported that 80 of u s household wealth is inherited wealth what bequest motives lead to inheritance remains an unsolved problem yet it is well known that bequest motives have important implications for the behavior of financial markets the macroeconomic impacts of fiscal policies and the intergenerational transmission of inequality in the distribution of wealth at least four hypotheses for the existence of bequests have been discussed in the literature 1 bequests may arise from intergenerational altruism that is parents obtain utility from their heirs utility as well as from their own consumption barro 1974 2 the prospect of bequests is used by parents to induce children to behave as desired by parents bernheim et al 1985 3 bequests may arise from the joy of giving that is parents leave bequests simply because they obtain utility directly from the bequest yaari 1964 1 and 4 bequests may be the unintentional by product of precautionary savings and a stochastic date of death in the absence of an annuity market abel 1985 following barro 1974 and becker 1974 the altruistic bequest motive has been used most frequently however the enormous empirical work using micro data has not led to conclusive evidence on the one hand bernheim et al 1985 cox 1987 and cox and rank 1992 show that bequests are more consistent with exchange than altruism altonji et al 1992 1997 also show that altruism is decisively rejected moreover wilhelm 1996 finds little support for an altruistic theory of bequests on the other hand a recent reexamination of the exchange motive by perozek 1998 shows that the finding of bernheim et al is not robust laitner and juster 1996 find some evidence of altruistic bequests therefore a definite conclusion on bequest motives seems far from over indeed though altruism has not been supported by most of those empirical studies it remains a plausible hypothesis and continues to be used frequently see e g coate 1995 and davies and zhang 1995 abel 1985 argues theoretically that although the simple life cycle model without bequest motives is an inadequate description of the savi ng behavior in the united states as found in kotlikoff and summers 1981 accidental bequests by selfish consumers can account for a sizable fraction of aggregate wealth however little formal empirical work has been done to test whether bequests are accidental or arise from joy of giving given the lack of consensus on bequest motives it is interesting to conduct a systematic theoretical analysis of different bequest motives in a particular context becker et al 1990 and caballe 1995 assume altruism in their models of economic growth wiedmer s 1996 analysis of social security and growth does not consider bequests except ihori 1994 there seems to be no analysis of other bequest motives in the context of economic growth the purpose of this article is to analyze how different bequest motives affect fertility savings and economic growth the article will also examine how the effects of pay as you go social security depend on bequest motives

the ricardian approach to budget deficits persistent budget deficits have increased economists interest in theories and evidence about fiscal policy this paper develops the ricardian approach and contrasts it with standard models the discussion considers from major theoretical objections to ricardian equivalence finite lifetimes imperfect capital markets uncertainty about future taxes and incomes and the distorting effects of taxation the paper then considers empirical evidence on interest rates consumption and saving and current account deficits the conclusion is that the ricardian approach is a useful first order approximation and that this approach will probably become the benchmark model for assessing fiscal policy this abstract was borrowed from another version of this item

government debt in an overlapping generations model with bequests and gifts in 1974 robert barro argued that if individuals in successive generations were linked by bequests changes in the stock of government debt or in social security programs would have no effect on the steady state capital stock barro assumed that individuals held static expectations and that the size of the population was constant martin feldstein 1974 1977 had concluded that social security would reduce the capital labor ratio in models that did not admit a bequest motive and in his 1976 comment on barro argued that the introduction of government debt or social security into a perfect foresight dynamic growth model with bequests would still reduce the capital labor ratio barro replied that feldstein s criticisms were invalid if the steady state capital labor ratio were smaller than the golden rule level but would be correct if the opposite were true barro did suggest however that the latter possibility with overaccumulation of capital might be ruled out in his model as it was in miguel sidrauski 1967 but he was unable to demonstrate that the required behavior would be consistent with utility maximization by finite lived individuals 1976 p 345 although recent work by willem buiter 1979 jeffrey carmichael 1979 1982 truman bewley 1981 a b and others has helped to elucidate the nature of overlapping generations models with bequests and gifts and the issues in the barro feldstein debate they remain far from clear the purpose of this paper is to shed a little more light on the subject in what follows i contend that some of the authors cited above either have specified the individual s optimization problem in an asymmetric way or have failed to impose necessary conditions for a sensible optimization problem or both there is a natural specification of the barro model 1 that emphasizes the similarity between this model and optimal growth models see for example david cass 1965 peter diamond 1973 here in steady state equilibrium the aftertax interest rate r must equal the rate at which individuals discount the utility of their heirs p r p has become known as the modified golden rule and a meaningful individual optimization problem requires that p exceed n the natural growth rate of the economy my results confirm barro s hunch about his model in a barro model r must exceed n much of the barro feldstein 1976 interchange which assumed that r could have any relation to n is wrong headed barro and feldstein reach different conclusions about the effects of government debt and social security because they assume different individual utility functions also my results contrast sharply with those of buiter and carmichael for example carmichael concluded that with intergenerational transfers from parents to children bequests r must exceed n but with transfers in the opposite direction n must exceed r 1982 pp 205 06 indeed i believe that the buiter carmichael representation of the barro model is logically faulty see section ii in section i i outline an overlapping generations model with gifts and bequests and derive its steady state properties in the next section i discuss the shortand long run effects of introducing government debt into the model and contrast my results with those

aspirations habit formation and bequest motive we analyze how the presence of endogenous preferences affects the altruistic bequest motive from parents to children we will show that the existence of habits raises the threshold value of the intergenerational discount factor above which altruistic bequests are positive while aspiration formation could push this value down therefore the dynamic inefficiency of the economy with no altruism is not sufficient to prevent the bequest motive from being operative under aspiration formation we also discuss the implications of public debt when the bequest motive is inoperative and preferences exhibit habit and aspiration formation

lumpy investment in a growing differentiated market optimum consider now a growing differentiated market that is a market for a chamberlinian group of differentiated commodities which is expanding over time as the size of the market increases it will be profitable for new firms to enter with new varieties of the industry product the same strategic considerations apply as with a homogeneous industry investment in new products involves irreversible and indivisible costs thus decisions of a potential entrant depend on the past decisions of earlier entrants and on the decisions of future entrants as to entry date price and type of product produced in this way the equilibria that we consider here differ from nash equilibria in static models in that the profit flows accruing to incumbent firms depend on the behaviour of future entrants one consequence of this for example is that the nash equilibrium we consider here involves pure profit for all producing firms when a reasonably large number of products is established in the market the industry can be regarded as monopolistically competitive it is appropriate then to pose in this context traditional questions concerning the welfare optimality of monopolistic competition will there be too much variety with each product produced inefficiently the dynamic aspect of the problem means that it is perfectly possible in principle to have excessive variety at one stage in the growth of a market and insufficient variety at some different stage note that one relevant decision variable is the introduction date of a new product or of a whole sequence of products provided that variable costs can be covered a particular product once introduced will not leave the set at a later date thus if we take any given chronological sequence of product types and

love thy children abstract this paper proves that barro s 1974 debt neutrality proposition whose relevance hinges in an economy with bequest motives on bequests being operative in the economy without public debt is not applicable to a wide class of overlapping generation economies those with a weak bequest motive in particular it is shown that the bequest motive is always too weak and public debt therefore non neutral when non physical assets have a well defined function reducing oversavings in the corresponding economy without bequest motive i e when the non altruistic economy is dynamically inefficient

capacity and entry under demand uncertainty this paper examines the decision to enter into a sector dominated by a monopoly if demand is random at entry time given a two period world the monopolist enters initially and enjoys an uncontested monopoly for one period while the entrant may enter and compete during the second period demand is random one period earlier and independently distributed in both periods and enitry corresponds to an irreversible capacity choice made under certain deimand all other production decisions take place after demand has been revealed risk neutrality is assumed on both sides if entry occurs then there is a cournot duopoly in the second period it is shown that concurrently with this cournot production game there is a separate stackelbergtype game with capacities as decision variables entry deterrence conditions are derived under general demand and cost assumptions it is shown that demand uncertainty changes several of the results of similar certain demand models

ricardian equivalence are the required assumptions defensible abstract ricardian equivalence re requires universal provision of bequests for purely altruistic reasons this paper argues that no defensible set of values for relevant parameters is consistent with this requirement hence observed bequests must at least partly reflect motives inconsistent with re