Knowledge that Transforms

W HILE many aspects of conglomerate firms have been studied, empirical tests of their performance remain limited. Most of the studies to date test aspects of mergers generally.' Professor Eamon Kelly (1967) compared a sample of 21 firms which grew 20 per cent or more by acquisitions during the period from 1946 to various terminal dates through 1963, with firms of similar size and products but with growth mainly internal (Kelly, 1967). He found no significant difference in profitability between the two groups. Gort and Hogarty (1970) also examined a number of general aspects of mergers. Their statistical analysis indicated that the stockholders of acquired firms gained on the average, while the owners of acquiring firms lost on the average. They found that mergers have an approximately neutral effect on Ithe aggregate worth of firms that participated in them (Hogarty, 1970). Reid's studies (1968) included data evaluating a sample of conglomerate firms for the decade ending in 1961. He utilized three measures which he characterized as reflecting the interests of managers, and three reflecting the interests of stockholders. Reid concluded that more actively merging firms and firms that diversified to a greater extent in their merging activity scored higher on the criteria related to managers' interests and lower on criteria related to stockholders' interests. Lorie and Halpern (1970) studied the performance of 117 mergers taken from the Federal Trade Commission listing for 1954-1967 of all mergers in manufacturing and mining in which the acquired firm had assets greater than 10 million dollars. In the Lorie and Halpern study, the focus was particularly on the possibility of deception of investors. The mergers which they studied, therefore, were ones in which the shareholders of the acquired company received relatively complex instruments such as convertibles or warrants.2 The investment return to, stockholders of the acquired firms was analyzed on various bases measured in the period six months prior to the merger to two years after the merger. In general, the investment return performance to stockholders of the acquired firms was superior to the market performance of broad market indexes for comparable periods of time. For example, the mean rates of return for the 12and 14-month periods subsequent to the mergers were 9.34 per cent and 9.52 per cent, respectively, while corresponding rates for the market index were 7.73 per cent and 7.38 per cent. Hogarty (1970) analyzed the success of 43 mergers by the criteria of post-merger investment performance (capital gains plus dividend returns) adjusted by an Investment Performance Index (IPI) for the industry of the acquiring company. Using measurements including reinvestment of dividends, he classified 14 failures (F), 24 ambiguous (A), and 5 successes (S). For an IPI of 10 per cent, a failure was defined as a return of 9 per cent or less, a success was a return of 11 per cent or more, and the ambiguous category represented returns between 9 and 11 per cent. Not assuming reinvestment of dividends, the distribution was 3 S, 19 A and 21 F. Hogarty found these Received for publication April 5, 1971. Revision accepted for publication June 21, 1972. * This study was supported by the Research Program in Competition and Business Policy, UCLA. We appreciate the helpful suggestions of the reviewer. ' The 1171-page special edition of the Spring 1970 St. John's Law Review on conglomerate mergers contains no article with empirical data on the comparative performance of conglomerate firms. Two empirical articles in the volume deal with other aspects of performance. The S. E. Boyle paper analyzes the premerger growth and profitability characteristics of acquired companies. The paper by T. F. Hogarty reviews earlier historical studies of the success of mergers generallv. 2 Since this kind of funny money (Lorie and Halpern's term) was alleged to be characteristic of conglomerate mergers, their sample of firms is presumed to be of conglomerates. However, no formal criteria for selection were emnlnved .

'N our society work is invariably prescribed as the path out of poverty. However, for a significant proportion of the poor this remedy falls on deaf ears, since they work but are poor. The working poor earn their poverty! Perhaps this segment of the poor has been neglected precisely because its existence belies our belief that work is the panacea for all social ills.' The focus of this study is the individual full-time wage earner and the forces affecting his/her wage income. In particular, we are interested in evaluating the relative importance of the individual characteristics of workers and the structure of the labor market in which they work. The first section contains a review of the theory of individual wNage dete-rmination in prep)aration for the exposition of the model of wage determination (section II). In section III we p)resent the empirical results of the investigation, and in section IV we evaluate public policy as it has been applied to the poor and the low-wage worker in our society.

Stephen J. Turnovsky, Michael L. Wachter, A Test of the "Expectations Hypothesis" Using Directly Observed Wage and Price Expectations, The Review of Economics and Statistics, Vol. 54, No. 1 (Feb., 1972), pp. 47-54

EMPIRICAL analyses in the private sector have disclosed significant economies of scale (e.g., Adams (1967) and Johnston (1960)). Interest naturally turned to an examination of the possibilities for scale economies in the public sector. This issue is particularly important as local governments encounter greater difficulties in financing the services demanded by their residents.1 The increased financial pressures arise from a larger number of residents demanding services of a better quality as well as the limited ability of fragmented governmental units to raise revenue. Likewise, inflation has taken a heavy toll on municipal budgets (Walzer 1971). Municipal services are largely of a personal nature and significant increases in productivity may not be easily achieved (Baumol 1967). This is especially important in police protection where wages and salaries account for almost 90 per cent of total expenditures. The labor-intensiveness of police services has led researchers to doubt the presence of significant scale economies. The claim has been made that extra costs of maintaining substations and precinct headquarters will offset cost reductions from mass purchases, etc.2 However, a large police department can concentrate more resources on a particular neighborhood during critical periods such as during expected criminal activity. Also, neighborhoods can be sealed off after a crime has been committed and research has suggested that immediate investigation by police officers substantially increases the likelihood of apprehending the offender (Challenge of Crime, 1967). Since lengthy investigations are time-consuming and thus very expensive, large police departments should have a decided cost advantage. Larger departments are also able to employ computerized data storage-retrieval systems and specialized personnel to a greater extent. On an a priori basis, one might expect specialized investigators to solve cases more quickly than would relatively inexperienced officers. This paper reviews some of the earlier findings on scale economies in police protection, suggests a new measure of scale, and reports the results of an empirical investigation on a sample of Illinois cities. Finally, an expenditure per capita and population analysis is conducted on the same sample to determine whether the observed declining average cost curve results from sample differences or variations in measurement techniques.

T HE of the role of foreign assistance in economic development in terms of two gaps a savings gap and a trade gap has by now become quite commonplace among development economists.' The basic notion underlying analysis is that there are at least two independent resource constraints on the growth of an underdeveloped economy. The first of these is the savings constraint: the growth of the economy is limited by the availability of savings for investment. The second is the trade constraint: the growth of the economy is also limited by the availability of foreign exchange for importing specific commodities required for current production and investment. Since foreign assistance can add both to the availability of savings and to the availability of foreign exchange, and since in a two-gap disequilibrium situation only one of the two constraints is likely to be binding at any particular time, the productivity of foreign assistance depends critically on which constraint is in fact binding. The determination of the binding constraint is also essential for the empirical implementation of two-gap planning models. Such models involve among other things aggregative functions describing the savings behavior and the import requirements of an economy. In a twogap situation, observed savings may or may not equal desired savings, and observed imports may or may not equal required imports, depending on whether the savings or the trade constraint is binding. In order to estimate savings and/or import functions from historical time series data, one must make a judgment about which constraint was in fact binding during the period used for estimation.2 Accepting the general framework of two-gap analysis, this paper is addressed to the problem of determining statistically which of the two constraints was dominant in a given country during a given historical time period. The objective of the paper is to develop and apply an econometric method that can be used systematically to classify countries according to their dominant constraint over varying periods of time. Given the importance of the problem for twogap analysis, it is surprising that very few attempts have been made to test systematically for the dominant constraint. Case studies of individual countries have often led to conjectures about binding constraints, but this author is aware of only three attempts to classify a large number of countries by dominant constraint.1 The present paper attempts to develop a more satisfactory method of classification. In

SEVERAL writers have argued that real money balances are a factor of production.1 No one, however, has directly tested the hypothesis that real money balances are a factor input.2 The purpose of our paper is to report the results of such a test. We find that real money balances, regardless of definition, enter significantly in a Cobb-Douglas production function fitted to annual data over the period 1929-1967 for the private domestic sector of the United States economy. Quantity indices of output, capital and labor, published by Christensen and Jorgenson (1970) and adjusted both for quality changes and rates of utilization, are employed to estimate the production function. Data for nominal money balances are taken from Friedman and Schwartz (1970). Our results have important implications for production function analysis, the explanation of total factor productivity, and monetary growth theory. The plan of the paper is as follows. Section II deals with a brief discussion of the rationale for the presence of real balances in the production function. In section III we present the production function used in the study and discuss the data employed. Results are given in section IV. A summary and conclusions follow in the final section.

I BELIEVE it a safe guess that wage-price policy will assume, in the 1970's, a position of coordinate importance with employment policy, both in the United, States, and in most other industrialized countries which rely on reasonably free markets. Committed, as they are, to the maintenance of full employment, these economies will remain prone to a degree of intermittent and creeping inflation which, although modest by comparison with celebrated inflations of the past, will nevertheless be exceedingly visible. Even if the costs in economic terms of such inflation may be judged tolerable, I doubt that its costs in social and political terms will permit any government simply to ignore it, or to rely on policies that appear ineffective. Today's endemic inflationary problem is obviously no simple phenomenon. Its causes'> surely relate to fairly stable aspects of labor and product markets (of the sort analyzed by Phelps, Mortenson, Holt, Tobin et al.), the effects of which depend on the degree of resource utilization which we can assume will usually be high. Another important element is the dynamic mechanism through which current of price and income changes are generated from past events.1 But in addition to these basically economic elements, the process involves major sociopsychological and political aspects. My vision of the type of inflationary process which now concerns us sees it as essentially the by-product of a struggle over income distribution, occurring in a society in which most sellers of goods and services possess some degree of market power over their own wages or prices (in money terms). The extent of each firm's or union's power at any given time is affected by structural and market factors; the manner in which that power is used is affected by of what is happening, and by political attitudes and social norms. Market power is used both in an attempt to increase real incomes, and, defensively, in an effort to protect real incomes from past and expected increases in production or purchase costs. An inflationary process can be tripped off in any of a number of ways. And, once it begins, most increases in wages and prices are basically defensive made in an effort not to fall behind. Yet every defensive wage or price increase threatens the real incomes of other sectors, and prompts an endless chain of further defensive moves. Although some groups achieve relative gains and others experience loss of position during such a price-war spiral, the main effect is simply to raise the entire level of prices and money incomes. In my view, this model of an inflation-generating struggle to increase or protect income shares -although here grossly oversimplified provides a substantially meaningful description of wage and price behavior in a modern industrial economy. But what is most significant is that the problem it describes appears to have become aggravated in recent years, as the social norms regulating group behavior have for various reasons become more tolerant of -or even now encourage an increasingly aggressive use of market power. Moreover, there is an increasing sophistication of business and union leadership, along with better and prompter measurements of relative positioni.e., the perception-generating mechanism is altering. And recent experience with inflation has substantially heightened the sensitivity of most groups to actual or potential losses of relative position. For these reasons, there is a tendency to react more quickly, more fully, and frequently preemptively. The more prompt and complete are the defensive reactions to inflation, the faster is its rate that is, the more there is to defend against. 'I use the word perceptions rather than expectations. There has been debate whether the inflationary process basically involves efforts to catch up with past changes, to keep up with other current changes, or to anticipate future changes. Since any systematic explanation of expectations derives only from past and present events, the argument makes no operational difference. But, in fact, what influences current decisions is a complex perception of an on-going process, involving past, present, and future values. The perception-generating mechanism may not only be nonlinear, but also quite unstable.