Knowledge that Transforms

elements which can be specified. When equation (4) was tested, the variables used to measure financial leverage, size, operating leverage, and growth were all significant at least at the 5% level, in the expected direction, but the market power variable then lost significance. In the absence of an integrated theoretical model, the relationship between market power and systematic risk can only be studied empirically. The statistical results reported here suggest that powerful firms do not have any unusual ability to influence their cost of equity capital. Market power appears to have an impact on equity yields because of investors' rational evaluation of managers' operating and financial policies.

The theory of the user cost of capital is used to estimate the demand for new and used cars in Israel. The results demonstrate that the price of operating costs must be included in the demand function. They also show that the importance of gasoline price increases with engine size. Income elasticities are higher for new than for old cars, and increase with engine size. The inevitability of further increases in gasoline prices implies a further reduction in the average size of cars and a possible decline in the number of cars in the economy unless the trend is moderated by an acceleration in economic growth. The future of the US auto industry will depend to a large extent on its ability to compete in the small- and medium-car markets. 13 references, 3 tables.

Michael Thomson, Peter Schmidt, A Note on the Comparison of the Mean Square Error of Inequality Constrained Least Squares and Other Related Estimators, The Review of Economics and Statistics, Vol. 64, No. 1 (Feb., 1982), pp. 174-176

Michael McAleer, Gordon Fisher, Paul Volker, Separate Misspecified Regressions and the U.S. Long-Run Demand for Money Function, The Review of Economics and Statistics, Vol. 64, No. 4 (Nov., 1982), pp. 572-583

T HE effectiveness of affirmative action efforts has been a topic of some controversy and the literature is unclear about whether women and/or minorities benefit. One source of confusion is that in some models the economywide effect can be in a different direction than the effect upon regulated (or covered) individuals and firms. In a sense this is much like the minimum wage in that, while some individuals benefit, there is considerable controversy about the gains for target groups as a whole. What is more surprising, however, is that the affirmative action literature is unclear about whether the programs achieve their goals for firms which are covered. Again, in part, this confusion is theoretical for wage and hiring directives may provide conflicting incentives (Beller, 1978). Another difficulty is methodological in that measures of affirmative action activity tend to be indirect. 1 This last point, as we shall see, is especially true for studies of the Federal Contract Compliance Program. This paper assesses the effectiveness of the Federal Contract Compliance Program, which is administered by the Office of Federal Contract Compliance (OFCC) in improving opportunities for women. Rather than focusing on wage growth or the sex composition of occupations (or firms) as have all the previous studies, we examine quit rates. Quits are a useful measure of people's perceptions about their opportunities, and effective affirmative action programs may improve intra-firm opportunities for advancement. As a result, subject to some caveats discussed below, we expect that program effectiveness is captured by a reduction in quit rates from previous levels. In addition, this paper employs a more defensible measure of OFCC activities than is typical in most studies. Part I of the paper develops the model. Part II introduces the data and the specifications. The basic results are presented in part III. Two major conometric difficulties-whether the OFCC variables are actually proxies for other industry effects and the possible endogeneity of OFCC activity-are addressed in part IV, and the results are summarized in the final section.

THE efficiency implications of telecommunications service pricing are analogous to a puzzle whose parts are beginning to be assembled. Recently, Mitchell (1978) has examined the efficiency implications of alternative local service pricing approaches. He contrasts the welfare effects of a flat monthly rate with measured service pricing under an optimal two part tariff with an access line charge and a per call charge. Daly and Mayor (1980) have examined the efficiency implications of free directory assistance, contrasting it to marginal cost pricing and found large welfare losses. The efficiency implications of long-distance telecommunications service, which in 1975 accounted for almost one-half of the Bell System revenues,' remains to be placed in the puzzle. The primary purpose of this paper is to examine the efficiency implications of the pricing of local service vis-h-vis conventional long-distance service referred to as Message Telecommunications Service (MTS), which constitutes the bulk of long-distance service. Excluded from this analysis are WATS and private line service. As demonstrated by Rohlfs (1979), substantial cross subsidization occurs between local service, which is priced approximately 50% below marginal cost, and long-distance, which is priced two to three times above marginal cost. Nevertheless, cross subsidization need not imply inefficiency in a second best pricing framework for several reasons (Baumol and Bradford, 1970). First, subsidization of local service can be justified due to access externalities, arising because the value to potential callers is not internalized in the subscriber's price. Second, even in the absence of access externalities, if the price elasticities of both services tend to be very inelastic, cross subsidization may have negligible efficiency effects. The optimal second best pricing approach depends critically on the deviation of price from marginal costs, the extent of the access externality, and the relative price elasticities for local and long-distance service. In this exercise, the welfare effects are particularly sensitive to the price elasticity of MTS service, thereby justifying the empirical focus on the price elasticity of MTS. The MTS demand relationship estimated in this paper contains advances in several respects. First, unlike previous pure time series or cross sectional studies,2 the data set consists of pooled quarterly data (1966 to 1978) for five southwestern states. The analysis of intrastate long distance demand3 offers a much more robust data source than national interstate demand owing to the limited price variation in the latter. The pooled model features polynomial distributed lags and an error structure which corrects for both autocorrelation and heteroskedasticity. Also, the model includes a unique and superior measure of television advertising effects, an index of gross rating points, reflecting the actual frequency with which television advertising is viewed by the public. The use of gross rating points avoids the distortion implicit in the substantial volume discounts reflected in expenditure data.4 The subsequent section outlines the simple theoretical model, which is the basis for econometric estimation and the pooling techniques. Section III reports the empirical results. In section IV, we examine the price elasticity implications for optimal pricing of MTS service. Section V recapitulates the major conclusions and suggests directions for future research. Received for publication September 29, 1980. Revision accepted for publication April 20, 1981. * University of Houston. The author wishes to acknowledge the collaboration of Bruce Egan in the econometric modelling section of this paper. In addition, numerous helpful comments were provided by George Daly, Thomas Mayor, Jeffrey Rohlfs, William Taylor, and an anonymous referee. I See Rohlfs (1978), table III-1. 2 For a review, see Taylor (1980) and Lowry (1976). 3 Taylor notes that from the view of demand, the distinction between interstate and intrastate MTS is purely artificial. See Taylor (1980), p. 97, and table 5.1 4 Comanor and Wilson (1967) note that volume discounts may give rise to increasing marginal returns to advertising expenditures.

THE effectiveness of programs designed to improve the housing of low-income renter households by increasing their demand for housing through income supplements or price discounts has recently been questioned, based largely on the results of the Experimental Housing Allowance Program (EHAP). The results from EHAP generally indicate small consumption responses on the part of low-income households (i.e., inelastic price and income elasticities of demand for housing; see Friedman and Weinberg (1978), Mulford (1979), and Hanushek and Quigley (1979)). However, using a cross section of households sampled before the experiment began and a static linear expenditure specification, Cronin (1979) obtains static price elasticity estimates substantially exceeding in absolute value those estimated with experimental data (i. e., 0.53 to 1.00 for the former versus -0. 16 to -0.21 for the latter). The estimates of static current income elasticities (about 0.2 to 0.3) were similar to those found in EHAP. This paper extends the previous analysis by obtaining dynamic estimates of housing income and price elasticities from the linear expenditure system. Results indicate that the responsiveness of households may be greater than previously indicated. Short-run elasticities are found to be highly inelastic. However, when households are stratified by the time period since their move to allow for varying adjustment toward equilibrium, long-run elasticities are often found to approach unity. The conceptual framework for the analysis is presented in section II. Data, samples of households and definitions of variables are discussed in the first part of section III; results are presented and discussed in the second part.

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