The diffusion of industrial technology through its principal agents (firms) can have far-reaching effects on factor productivity, economic growth, and inflation in a market-oriented economy. Because of this, studies have sought to discover the conditions most favorable to technically-progressive decisions by individual firms. This paper, by exploring some important empirical relationships affecting the propensity of American textile mills to purchase textile machinery innovations in the postwar period, offers the opportunity to discover additional insights into the area from a new and extensive body of industry data, as well as to verify (or disavow) some earlier findings where economists have had only limited observations and industries to study. Moreover, a unique exposure to the process is provided by conducting an examination of a traditional, fragmented industry rather than the usual hightechnology, capital-intensive industry. The analysis begins by relating some important economic attributes of firms to decisions regarding adoption, and the timing of adoption, of thirty-three textile machinery innovations. The often dominating firm-size factor is examined along with the firm's competitive environment, its labor costs, and its foreign activity involvement. The paper then estimates the concentration of progressive behavior in textiles to determine if the same firms have repeatedly been the pioneers. This concentration is contrasted with experiences established in other industries. Finally, the timing of overall industry adoption is related to the industry's business cycle, to determine where in the cycle it is typical for firms to proceed with modernization efforts.

An unusually rich data set was tapped to explore the relationship between research and development (R and D) and productivity growth. The most-important finding is that, with disaggregated data, the wrong lag hypothesis is not supported: there is no clear indication that the productivity slump of the 1970s resulted from a decrease in the marginal productivity of R and D. Also important is the evidence of substantial returns to used R and D, i.e., from internal-process work and the purchase of R and D-embodying products, but not (at least in industries with productivity indices based upon physical output or comprehensive price deflators) to the performance of product R and D. Given the fact that three-fourths of all industrial R and D is product-oriented, studies that fail to distinguish between the origination and use of R and D may suffer from appreciable specification errors. Further research using improved R and D and (especially) productivity data is plainly needed, among other things, to clarify the mystery of why estimated R and D-productivity relationships differ for productivity-data subsets of varying quality. 15 references, 3 tables.

Separate demand equations for imports from less-developed countries (LDCs) and imports from developed countries (DCs) were estimated for each of eleven representative product groups. Imports were found to compete quite readily with domestically produced goods, with plausible own-price and cross-price elasticities. Whereas the quantity of each type of import was found to be quite responsive to changes in the price of US home goods, each appears to be less sensitive to the price of the alternative import. An explanation that is consistent with this observation, and that finds support from detailed industry information, is that DCs and LDCs supply goods that are at different stages in the product or technology cycle, whereas US producers compete in all submarkets. This suggests that trade creation rather than trade diversion provides the predominant inroad for LDCs into the US market. 25 references, 3 tables.

N this paper I investigate proposition that price-cost margin of a producer goods industry will vary systematically with what I call industry's importance of its output in costs of its industrial customers. The empirical results indicate that price-cost margins are indeed negatively associated with cost-importance, particularly in highly concentrated industries. In these industries at least, evidence seems to confirm the importance of being unimportant. In section I, I present relationship between derived demand elasticity for an industry's output and cost-importance of its output, and also analyze ways in which industry pricing coordination and transaction costs of changing input suppliers interact with cost-importance to influence industry price-cost margins. In sections II and III I describe process of sample selection and a method for calculating a measure of cost-importance for producer goods industries. In section IV I present empirical results of estimating relation between price-cost margins and cost-importance for a broad sample of producer goods industries, and in section V I summarize my findings and suggest some promising avenues for future research.

George M. von Furstenberg, The Effect of the Changing Size and Composition of Government Purchases on Potential Output: A Reply, The Review of Economics and Statistics, Vol. 64, No. 3 (Aug., 1982), pp. 527-528

Recent economic literature has given a great deal of attention to the behavior of the firm under a regulatory constraint. Such efforts include theoretical extensions of the classic article by Averich and Johnson (1962) by Kennedy (1977), as well as empirical tests of the overcapitalization hypothesis by Leland (1974), Smithson (1978) and Spann (1974). In addition, there have been notable attempts to provide a general theory of regulation by Stigler (1971) and Peltzman (1976). Against this background, surprisingly little attention has been paid to the effect of regulation on the compensation of chief executive officers. The effect of regulation on executive rewards strikes at the heart of why regulated firms appear to behave differently than their less regulated counterparts. The only explicit attempts to relate executive compensation to the presence of regulation appear to be the work of Smyth, Boyes and Peseau (1975) and Ciscel (1977). The apparent oversight of this issue is perhaps best explained by the persistence of the controversy over the nature of the objective function of corporate decision makers introduced as the maximization' hypothesis by Baumol (1967). For the last two decades, the debate over whether corporate decision makers maximize sales or maximize profits has been couched in either-or terms. Proponents of each side of the debate, like Smyth, Boyes and Peseau (1975) and Ciscel (1974) on the managerialist side, and Lewellen and Huntsman (1970) and Masson (1971) on the neoclassical side, have produced evidence for their respective positions. Ciscel and Carroll ( 1980) provide an econometric resolution of the conflict, pointing out the compatibility of the data with both hypotheses, given a proper specification of the compensation-performance equations. Consideration of the impact of regulation on executive rewards has significance for understanding the different rewards in the regulated sectors and it illuminates the implicit incentives for executive behavior in regulated and unregulated firms. Maximum profits or optimal sales can never be directly observed. All that can be measured is whether or not the pattern of executive compensation is consistent with such maximization objectives. This aspect of economic analysis is particularly important when gauging the effect of regulation on executive pay. The impact of the absence of regulation on compensation can be contrasted to two alternatives: regulation establishes maximum prices as is the case in utilities, while regulation prescribed minimum prices as was the case in the transportation sector (see Jordan, 1972). Executive compensation reflects not only incentive changes brought about by the existence of regulation, but also the form regulation takes.

John M. Trapani, C. Vincent Olson, An Analysis of the Impact of Open Entry on Price and the Quality of Service in the Airline Industry, The Review of Economics and Statistics, Vol. 64, No. 1 (Feb., 1982), pp. 67-76

EVERYBODY talks about the relation of industries' profit rates to their markets' rates of growth, but nobody does anything about it. Specifically, researchers have confirmed the effect of the growth of nominal output on profits in many multivariate studies, without specifying closely the hypothesis under test or the measure of demand growth appropriate to test it. A profits-growth relationship could stem from several mechanisms-the lagged adaptation of capacity to unexpected changes in demand, reactions of oligopolists to disturbances in their consensus, etc. These mechanisms-how and where they work-hold their own normative interest. Therefore, knowing what behavior (and what structure, lying behind it) accounts for the profits-growth relationship should do more than improve the specifications of our studies of allocative efficiency. It should also expand our knowledge of adaptive processes that are important and hard to observe directly. In this paper we shall synthesize the available explanations of why changes in market demand should affect an industry's profits, then present a statistical test of the relative significance of the competing explanations.

A recent survey on models of agricultural supply equations listed over 500 studies in which variants of Nerlove's adaptive expectations model were employed.' One might naively assume that the scientific evidence overwhelmingly favored the adaptive expectations hypothesis, but this inference would not be warranted. In particular, there have been very few studies which have even attempted to estimate a expectations version of the traditional agricultural supply models and none that have explicitly tested the expectations hypothesis.2 In this paper we estimate a model of agricultural supply and demand for the chicken broiler industry under the maintained assumption of expectations in the sense of Muth (1961) and provide a series of tests of the model specification. We find that, in this case, the hypothesis of Muth rationality receives strong support. In recent years there has been increasing interest in models in which economic actors are assumed to form expectations of variables rationally. For the most part, empirical applications of the expectations hypothesis have employed single-equation econometric methods. These methods have permitted consistent estimation of equations under the assumption of the expectations hypothesis but do not allow for any explicit testing of the maintained hypothesis of rationality. This paper presents estimates of a simultaneous equation model of the chicken broiler industry using maximum likelihood methods and provides a joint test of the expectations hypothesis and the model specification. Our econometric procedure is related to the recent theoretical work of Wallis (1980) and combines time series analysis with traditional econometric estimation techniques. Under the assumption of expectations, the model can be solved for the expected price as a function of the expected values of the exogenous variables. This function can then be substituted into the model leading to a specification which contains the original endogenous and exogenous variables plus the expected values of the exogenous variables. In general, following this substitution, the model will contain overidentifying restrictions. Time series analysis is utilized to generate the necessary forecasts of the exogenous variables. The complete system of equations is estimated by full-information maximum likelihood, and the constraints are tested by a log-likelihood ratio test. The overidentifying constraints arise in the model because the suppliers are assumed to act as if they know both the underlying structure of the model and the stochastic processes governing the exogenous variables, the two requirements of expectations. While the expected price enters only the supply equation of our model, it is necessary, in the econometric formulation, to specify the demand equation. The instrumental variable procedures of McCallum (1976) and Nelson (1975b) are single-equation methods and do not permit a test of the expectations hypothesis. By specifying the complete model, the additional structure imposed on the problem allows us to estimate the coefficients and test the implied restrictions. There has not been universal agreement that the expectations hypothesis is the best theoretical device to model rational behavior. According to Muth's original formulation, economic actors forecast endogenous variables according to the true reduced form equations of the model. DeCanio (1979) and Friedman (1979) have argued that the economic actors actually Received for publication August 24, 1981. Revision accepted for publication March 2, 1982. ' University of New Mexico and University of California, Davis, respectively. We wish to thank G. King, R. L. Huntzinger, R. Pope, and L. Wegge for advice on this project. A. Nelson and E. Shaw contributed useful research assistance. I The paper by Askari and Cummings (1977) provides references for these studies. 2 Huntzinger's (1979) paper is one of the first attempts at estimatitng a expectations model of agricultural supply.