Rising educational attainment and research intensity in recent decades suggest that the U.S. economy is far from its steady state. This paper develops a model reconciling these facts with the stability of U.S. growth rates. In the model, long-run growth arises from the worldwide discovery of ideas, which depends on population growth. Nevertheless, constant growth can temporarily proceed at a faster rate, provided research intensity and educational attainment rise steadily over time. Growth accounting reveals that these factors explain 80 percent of recent U.S. growth, with less than 20 percent coming from world population growth.

Stocks can be overpriced when short-sale constraints bind. We study the costs of short-selling equities from 1926 to 1933, using the publicly observable market for borrowing stock. Some stocks are sometimes expensive to short, and it appears that stocks enter the borrowing market when shorting demand is high. We find that stocks that are expensive to short or which enter the borrowing market have high valuations and low subsequent returns, consistent with the overpricing hypothesis. Size-adjusted returns are 1–2% lower per month for new entrants, and despite high costs it is profitable to short them.

Credit rationing is a common feature of most developing economies. In response to it, the governments of these countries often operate a number of programs intended to expand the supply of credit to the private sector. Expansionary monetary policy is often seen as a way of reducing the extent of credit rationing. We examine the consequences of a common policy tool in these economies: the use of expansionary monetary policy combined with direct central bank lending to inject credit. In the context of a small open economy we show that such a policy increases long-run production if and only if the economy is in a development trap. Moreover government credit programs often lead to endogenously arising aggregate volatility. Thus the case for government intervention in credit markets relies largely on the notion that output is artificially low because the economy is in a development trap. However, it is the case that the kind of policy we consider can be used to eliminate certain indeterminacies of equilibrium created by endogenous credit market frictions. Journal of Economic Literature Classification Numbers: E44, O16, O42.

In this study we examine whether managers’ affective reactions influence their risk–taking tendencies in capital budgeting decisions. Prior research on risky decision making indicates that decision makers are often risk averse when choosing among alternatives that yield potential gains, and risk taking when the alternatives yield losses. The results reported here indicate that negative or positive affective reactions can change this commonly found risky behavior. Managers were generally risk avoiding (taking) for gains (losses) in the absence of affective reactions, as predicted by prospect theory. However, when affect was present, they tended to reject investment alternatives that elicited negative affect and accept alternatives that elicited positive affect, resulting in risk taking (avoiding) in gain (loss) contexts. The results also indicate that affective reactions can influence managers to choose alternatives with lower economic value, suggesting that managers consider both financial data and affective reactions when evaluating the utility of a decision alternative. These findings point to the importance of considering affective reactions when attempting to understand and predict risky decision making in accounting contexts.

An unresolved problem in Bayesian decision theory is how to value and price information. This paper resolves both problems assuming inexpensive information. Building on Large Deviation Theory, we produce a generically complete asymptotic order on samples of i.i.d. signals in finite–state, finite–action models. Computing the marginal value of an additional signal, we find it is eventually exponentially falling in quantity, and higher for lower quality signals. We provide a precise formula for the information demand, valid at low prices: asymptotically a constant times the log price, and falling in the signal quality for a given price.

Treasury Regulations typically require a firm to use its manufacturing cost as one input in calculating the transfer price to be used for tax purposes. Because the characteristics of the firm's capital assets determine the realized manufacturing cost, the firm has an incentive to distort its investment choices in order to receive a more favorable tax transfer price. This represents an ex ante form of shifting income across divisions. Practical difficulties in enforcing the regulations provide the firm with another way to shift income. In particular, regulators often can identify only a range of acceptable transfer prices. As a result, the firm will not use the true “arm's length” transfer price, but will instead choose a transfer price that is more favorable for tax purposes. I find that the opportunity to shift income ex post in this manner may reduce the value of investment-based ex ante income shifting. That is, if the firm has more discretion over the ex post transfer price, then it may invest more efficiently ex ante. Although it is commonly perceived that ex post income shifting is purely deleterious, the analysis shows that it may have benefits.