Traditional asset pricing models predict that covariance between prices of different assets should be lower than what we observe in the data. This paper introduces markets for information that generate high price covariance within a rational expectations framework. When information is costly, rational investors only buy information about a subset of the assets. Because information production has high fixed costs, competitive producers charge more for low-demand information than for high-demand information. The low price of high-demand information makes investors want to purchase the same information that others are purchasing. When investors price assets using a common subset of information, news about one asset affects the other assets' prices; asset prices comove. The cross-sectional and time-series properties of comovement are consistent with this explanation.

The aggregate rate of R&D in a competitive economy is compared with the optimal rate. The optimal rate of R&D is shown to be the same for all preferences in a broad family, while the competitive rate is sensitive to the form of substitutability among products and so can vary dramatically within a family. The second-best level of R&D is shown to be also common within a family and equal to the optimal rate. Numerical examples suggest that diminishing returns in the innovation technology is the most important potential source for excessive R&D in a competitive economy.

In the model of monopolistic competition on the circle, a product is identified by a single locational characteristic representing its brand or variety. The ability of a variety to compete with other varieties a given distance away (its specialization as quantified by transportation losses) is exogenously given in the standard model. Here, specialization is a choice variable selected by the firm. An equilibrium is derived, where the degree of specialization is endogenously determined. The effect of endogenizing specialization makes the Hotelling-Lancaster-Chamberlin model of monopolistic competition isomorphic to the Dixit-Stiglitz-Ethier formulation, without sacrificing the appealing concept of product 'distance.'

North-South trade is studied in a model of vertical product differentiation. The South produces a low-quality spectrum of goods and the North a high-quality spectrum. An increase in the South's population lowers its relative wage, expands the spectrum of Southern goods at the top, and shifts the Northern spectrum upward. An increase in Northern labour productivity raises its relative wage. If the increase is neutral or export-biased, then the South's terms of trade improve, the spectrum of Northern products expands, the spectrum of Southern products contracts, and the volume of trade grows. If it is biased against Northern exports, these effects are reversed. Similar results hold for neutral increases in Southern productivity.

Journal Article On the Ricardian Theory of Value: A Note Get access Luigi L. Pasinetti Luigi L. Pasinetti Università Cattolica, Milan Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 48, Issue 4, October 1981, Pages 673–675, https://doi.org/10.2307/2297210 Published: 01 October 1981 Article history Received: 01 April 1981 Accepted: 01 July 1981 Published: 01 October 1981

Although an income tax is often a government's most important instrument for raising revenue and redistributing income, its potential usefulness for either of these purposes is limited by its negative impact on work incentives. The implications of the incentive effect have been studied by examining optimal tax structures under a variety of assumptions about preferences, the distribution of wage rates, and the form of the social welfare function. Much of this work has been done using models that include interpersonal variation in ability (wage rates), but in which no saving or dissaving occurs, i.e. in which the consumption of each individual is exactly equal to his labour income net of taxes within the time period (Mirrlees (1971), Sheshinski (1972a), (1972b), Atkinson (1973a), (1973b), Phelps (1973), Cooter and Helpman (1974), Itsumi (1974), Sadka (1976)). While the latter assumption might be innocuous if wage rates were approximately constant over an individual's lifetime, so that there was little incentive to borrow or save, or if capital markets were non-existent, so that borrowing and saving were impossible, wage profiles are in fact quite steep and most individuals make use of (admittedly imperfect) capital markets. Multiperiod models incorporating consumption-saving decisions have been used to study the effects on capital accumulation of wage, interest, capital gains, and other taxes, but even those models that include variation in ability have in general assumed that labour is supplied at a constant rate over the individual's working years (Ordover and Phelps (1975), Sheshinski (1976), Feldstein (1974)). A life-cycle model of individual behaviour that includes both labour supply and consumption decisions is used below. Although a general equilibrium framework is used, for simplicity real capital is ignored; labour is the only factor of production and government debt is the only asset available to savers. Only steady states and only linear tax schedules are considered, and the utilitarian social welfare function is used throughout. First, the conditions under which the life-cycle model reduces to the one-period case are derived, as well as the conditions under which the first-best tax policies for the two are identical. Next it is shown that if all individuals are identical, the optimal policy consists of lump-sum taxes together with an interest rate equal to the rate of pure time preference. The non-optimality of the biological interest rate proposed by Samuelson (1958) in his Exact Consumption-Loan Model is discussed. Finally, an upper bound on the optimal marginal tax rate is derived. This bound depends on the elasticity of total labour supply and on the elasticity of demand for debt.

Journal Article Vertical and Horizontal Communication in Economic Processes Get access Robert L. Welch Robert L. Welch University of Kentucky Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 47, Issue 4, July 1980, Pages 733–746, https://doi.org/10.2307/2296939 Published: 01 July 1980 Article history Received: 01 July 1976 Received: 01 September 1979 Published: 01 July 1980

Journal Article Economics of Depletable Resources: Market Forces and Intertemporal Bias Get access James L. Sweeney James L. Sweeney Federal Energy Administration and Stanford University Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 44, Issue 1, February 1977, Pages 125–141, https://doi.org/10.2307/2296977 Published: 01 February 1977 Article history Received: 01 August 1974 Accepted: 01 February 1976 Published: 01 February 1977

Journal Article Money Wage Inflation in Industrial Countries: An Alternative Explanation Get access R. L. Thomas R. L. Thomas University of Salford Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 43, Issue 3, October 1976, Pages 551–552, https://doi.org/10.2307/2297235 Published: 01 October 1976 Article history Received: 01 August 1975 Accepted: 01 December 1975 Published: 01 October 1976

Journal Article Incidence of a Capital Income Tax in a Growing Two-Class Economy Get access Kanhaya L. Gupta Kanhaya L. Gupta University of Alberta Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 43, Issue 3, October 1976, Pages 561–562, https://doi.org/10.2307/2297238 Published: 01 October 1976 Article history Received: 01 April 1975 Accepted: 01 February 1976 Published: 01 October 1976