38 distributions and low transactions costs, as in the United Kingdom and the United States. Adjustment to a change in such returns is generally rapid. This implies an efficient allocation of funds. These results do not all hold where transactions costs are high and regulations are strict - e.g., in Germany, Japan, and Canada. In these countries adjustment to a change in returns is somewhat slower and allocation of funds less efficient. The results also contrast with those for households and companies (Davis (1986)) where adjustment to changes in returns tends to be slow, due to higher transactions costs and poorer information.

Most of the literature suggests that institutionalization has a signiflcant but not major effect on total personal saving, increased saving via institutions being partly offset by declining discretionary saving, (see Feldstein (1978), Munnell (1986) and the review in Smith (1990).) although some recent studies, such as Hubbard (1986) suggest a much larger effect. In theory, while the scale of benefits of a pension system may have an effect on personal saving, funding as such should not. (As noted, funding is rather a transfer of securities from the sponsoring firm to the market, which collateralises the liabilities, reduces risk of non-payment (because of diversification) and gives scope for voluntary increase in pensions when returns are high.) The effect that does occur may result from liquidity constraints on some individuals (especially the young), who are unable to borrow in order to offset obligatory saving via pension funds early in the life cycle. Pension saving may be partly offset at a national level by tax subsidies to private saving, especially if they are financed by public dissaving. However, a switch from social security to funding would probably have a major effect on saving, given the former has been shown significantly to depress saving in a number of countries.' Bernheim and Shoven (1988) show that pension funds may change the volatility and relation between saving and real interest rates. Data from the US show that a rise in real rates may reduce saving if it makes more schemes fully funded (target saving) and reduces the need for contributions. There is also evidence for this in the UK in the 1980s.

# (d) Volatility and Short Termism

A further qualitative question is whether institutionalization increases capital _mut_ volatiljty. Some commentators in the Unit States blamed fund managers' portfolio insuran strategies for causing volatility at the time of the 1987 Crash, although this is disputed. Regul performance checks against the market (as frequently as monthly in the United States, b less in the United Kingdom) may induce "herding" among funds to avoid performing significantly worse than the median fund. The Japanese also appear to suffer from such herding, despite a less competitive environment for managers.

Interviews with fund managers suggests this ma be an important cause of volatility not only i domestic but also in international markets. S- Davis (1988) (1991). As noted in Howell an Cozzini (1991), the rise of global asset allocatio as a tool of fund management, and the development of markets such as those for stock index futures have stimulated and facilitated massive increases in short term cross borde equity flows. One equity transaction in three in Europe now involves a foreign transactor; and trading in stock index futures often far exceeds that in the underlying. Although the investors desire to reduce risk by adopting such strategies, the focus of funds on a small number of leveraged instruments often leads to destabilization of markets and sharp swings in asset prices. Nor need the behavior be confined to equity markets. Besides the fact that equity flows themselves have a direct effect on the exchange rate, evidence in mid-1992 suggests that fund managers switched to cash in the light of relative returns, and were at least partly responsible for the prevailing exchange rate tensions (a forex manager in a bank has around $20 million at his disposal; a fund manager can have billions). Indeed Howell and Cozzini (op cit) suggest that international regulatory bodies need to tighten supervision of international securities flows, to prevent deleterious effects on real economies.

Regular performance evaluation is also said to