We compare free trade reached through expanding regional trading blocs to free trade accomplished by multilateral negotiation. With sunk costs, the outcomes are different. Trade in an imperfectly competitive good flows disproportionately more between the original members of a regional agreement even after free trade is reached. They secure a higher welfare level from regionalism than from free trade achieved multilaterally; nonmembers, however, reach a lower welfare level. A surprising result is that world welfare during free trade is greater when it is achieved by the regional path. We conclude with some empirical evidence from the European Union that is consistent with the model.

This paper examines the effect of several factors on the market share of investment banks that act as book managers in initial public offerings (IPOs) between 1984 and 1995. For established banks, IPO first-day returns, one-year abnormal performance, abnormal compensation, industry specialization, analyst reputation, and association with withdrawn offers have a significant impact on changes in market share. These factors have a more significant effect on market share changes in low-volume IPO markets. These factors have a less significant effect on market share, statistically and economically, for less established banks, consistent with the notion that less reputation is placed at risk.

Equity financing is modeled when cash flows and asset values are not verifiable. Investors have enforceable property rights to the firm's assets, but cannot prevent insiders (managers or entrepreneurs) from capturing cash flow. Insiders must coinvest and pay in each period a dividend sufficient to ensure outside investors' participation for at least one more period. Intervention by the investors must be limited by an agreement with insiders or by costs of collective action. Basic models are extended to show why firms go public and why agency costs necessarily arise when the act of investment is not immediately verifiable.

Myers and Majluf [Myers, S.C., Majluf, N.S., 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics 13, 187–221.] showed that mispriced securities can lead managers with private information to invest inefficiently. It seems plausible that this problem would disappear in a fully revealing equilibrium, since information asymmetries are resolved and securities are priced correctly. In fact, Constantinides and Grundy [Constantinides, G.M., Grundy, B.D., 1989. Optimal investment with stock repurchase and financing as signals. Review of Financial Studies 2, 445–465.] claim that, in their model, any fully revealing equilibrium has efficient investment. This claim is incorrect, as infinitely many inefficient equilibria exist for the very example they work out. The inefficient outcomes survive the standard signaling-game equilibrium refinements. There are also examples that have fully revealing equilibria with inefficient investment but none with efficient investment.

This paper explores a monetary-policy model with habit formation for consumers, in which consumers' utility depends in part on current consumption relative to past consumption. The empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous confidence, largely because the habit-formation model captures the gradual hump-shaped response of real spending to various shocks. The paper then embeds the habit-consumption specification in a monetary-policy model and finds that the responses of both spending and inflation to monetary-policy actions are significantly improved by this modification. (JEL D12, E52, E43)

This paper introduces a new cost dataset for a commercial aircraft firm and uses this data to analyze the dynamics of learning in commercial aircraft production. This dataset is found to be inconsistent with the simple learning hypothesis, and particularly the prediction that a firm's unit cost must decline with its cumulative production. Instead, strong support is found for the hypothesis of organizational forgetting, a more general learning model where unit costs are similarly dependent on a firm's past production experience, but where that experience depreciates over time. Additionally, it is found that some, but not all, of a firm's production experience transfers from one generation of an aircraft to the next. This evidence adds to our understanding of productivity in industries with learning and thus has implications to many fields of economics.

The proposed budget for 2000 in Table 1 projects an operating loss of $736 thousand, investment income of $598 thousand, and an overall deficit for the year of $138 thousand.Net

The Finance Committee of the American Economic Association met at the Chicago Club, Chicago, IL, at 12:30 P.M. on December 9, 1998. Present were John Cochrane, Robert Dederick, Robert Hamada, C. Elton Hinshaw (Chair) , and John Siegfried (Secretary of the Association ) ; Representing Stein Roe & Farnham, investment counsel for the Association, were Robert McNeill, Scott W. Vogg, and Debbie Jansen. In 1987, the Committee reviewed recommendations presented by the AEA Committee on indexing Association funds concerning the long-term allocation of the Association’s investment assets. As a result of that recommendation, it was agreed that the Association’s portfolio comprise a combination of an S&P 500 Index Fund, Stein Roe & Farnham’s specialty equity mutual funds, and a bond portion managed by Stein Roe & Farnham. This restructuring took place at the end of June 1988. The current portfolio includes holdings in the Vanguard Index Trust Fund, as well as several special Growth Funds and an International Fund, under the supervision of Stein Roe & Farnham (SRF) . The Fixed Income portion of the portfolio is currently invested in SRF’s Intermediate Term Government and Corporate taxable funds. With respect to the calendar-year 1998 performance of the Association’s portfolio, the total return including cash, bonds, and equity holdings was approximately 17.2 percent. The benchmark, which consisted of 5 percent cash, 25 percent Lehman G/C Intermediate Bond Index, 60 percent S&P 500 Index, and 10 percent EAFE index returned 16.7 percent. The returns from the AEA portfolio have now outperformed the benchmark portfolio for six years in a row. The Committee discussed a change to the allocation of the portfolio and the benchmark. It was approved that the benchmark portfolio would become 0 percent cash, 25 percent Lehman G/C Intermediate Bond Index, 60 percent S&P 500 index, 5 percent Russell 2000 index, and 10 percent EAFE index. Additionally, it was agreed to move 5 percent of the assets in the S&P 500 Index Fund into the bond portion of the portfolio immediately. Members can obtain a list of the assets in the portfolio by writing the Treasurer.