There has been an enormous increase in auditing and accounting standards and in litigation against auditors. This paper examines some of the consequences of these changes by developing a model of the audit market relating auditors' liability to auditing standards. The paper demonstrates how equilibrium audit fees depend on both the informational value of the audit and the option value of the claim financial statement users have on the auditor's wealth in the event the audit is determined to have been substandard. Auditors' attitudes toward and responses to auditing standards are studied, and characteristics of optimal liability rules are evaluated.

This study finds a significant negative effect of proportional income taxation on human capital. Of the few earlier studies to address this issue, most suggested a negligible effect of taxation on investment in human capital. This earlier conclusion is shown to be incorrect by using a model that is more general in several respects than the models used previously.

An empirical investigation of trade-offs between number of children and their scholastic performance confirms that family size directly affects children's achievement. Though parents show no favoritism to first-born children, being early in the birth order implies a distinct advantage, entirely because of the higher probability of being in a small family. Recent large changes in family size explain a portion of aggregate test score declines, but increased divorce rates and market work by mothers have no apparent impact. Finally, teachers are shown to differ enormously, even though performance differences are poorly captured by commonly measured teacher characteristics. The evidence supports a teacher skill interpretation of differences in classroom achievement.

This paper explores one possible explanation for the apparent excess volatility of production relative to sales: nonconvexities in the technology facing firms. It is shown that if firms operate in a region of declining marginal costs, then small shifts in demand can cause production to jump substantially. Estimates for six production-to-stock industries as well as the automobile industry suggest that all these industries behave as if they were operating in the region of nonconvex costs. The results have important implications not only for inventory investment but also for the cyclical behavior of productivity and prices.

This paper explores one possible explanation for the apparent excess volatility of production relative to sales: nonconvexities in the technology facing firms. It is shown that if firms operate in a region of declining marginal costs, then small shifts in demand can cause production to jump substantially. Estimates for six production-to-stock industries as well as the automobile industry suggest that all these industries behave as if they were operating in the region of nonconvex costs. The results have important implications not only for inventory investment but also for the cyclical behavior of productivity and prices.

This paper interprets seventeenth-century mercantilism in light of recent theories of strategic trade policy. Long-distance international commerce during the mercantilist period was undertaken chiefly by state-chartered monopoly trading companies and was therefore conducted under conditions of imperfect competition. The economic structure of the Anglo-Dutch rivalry for the East India trade provides an excellent illustration of an environment in which the profit-sharting motive for strategic trade policies exists. Dutch supremacy in the early East India trade was facilitated by a managerial incentive scheme in the monopoly charter that enabled it to achieve a Stackelberg leadership position against the English. Using data from the East India trade around 1620 in a Cournot duopoly model, I find that the managerial incentives yielded greater Dutch profits than would have been obtained from a standard profit-maximizing objective and that the scope for other strategic trade policies was clearly present.

Classical stable population theory, the standard model of population age structure and growth, is ill suited to addressing many issues that concern economists and demographers because it is a "one-sex" theory. This paper investigates the existence, uniqueness, and dynamic stability of equilibrium in the birth matrix-mating rule (BMMR) model, a new model of age structure and growth for two-sex, monogamously mating, populations. The paper shows, by means of examples, that the BMMR model can have multiple nontrivial equilibria and establishes sufficient conditions for uniqueness. It generalizes a theorem of W. Brian Arthur to nonlinear systems and uses it to establish sufficient conditions for local dynamic stability.

Classical stable population theory, the standard model of population age structure and growth, is ill suited to addressing many issues that concern economists and demographers because it is a "one-sex" theory. This paper investigates the existence, uniqueness, and dynamic stability of equilibrium in the birth matrix-mating rule (BMMR) model, a new model of age structure and growth for two-sex, monogamously mating, populations. The paper shows, by means of examples, that the BMMR model can have multiple nontrivial equilibria and establishes sufficient conditions for uniqueness. It generalizes a theorem of W. Brian Arthur to nonlinear systems and uses it to establish sufficient conditions for local dynamic stability.

Despite the widespread belief that entrepreneurship is a key factor in economic development, there have been few attempts to develop formal models to analyze the phenomenon. This paper presents a model in which endogenous entrepreneurial activity is a key determinant of economic growth. The theory also differs from standard models in that growth is driven by the imitative activities of entrepreneurs. Previous theories have focused on the direct production of knowledge, underemphasizing the importance of imitation in the growth process. The paper also examines external effects arising from these entrepreneurial activities--effects distinct from those studied by Paul Romer.

Despite the widespread belief that entrepreneurship is a key factor in economic development, there have been few attempts to develop formal models to analyze the phenomenon. This paper presents a model in which endogenous entrepreneurial activity is a key determinant of economic growth. The theory also differs from standard models in that growth is driven by the imitative activities of entrepreneurs. Previous theories have focused on the direct production of knowledge, underemphasizing the importance of imitation in the growth process. The paper also examines external effects arising from these entrepreneurial activities--effects distinct from those studied by Paul Romer.