Knowledge that Transforms

This paper extends the martingale analysis of no arbitrage pricing to worlds with taxation. The absence of arbitrage is shown to imply the existence of different shadow prices for income streams that are subject to differing tax treatments. For example , no arbitrage implies the existence of different martingale measures for capita l gains and for ordinary income when they are differentially taxed, andfor item s such as depreciation expenses that influence only after- tax cash flows. The analysis is applied to several topics in finance including the debt/equity decision, tax options, and the taxation of dividends and pensions.

This paper demonstrates how changes in untied, lump-sum government grants or income from unrestricted endowments will affect the behavior of charities operated by managers with s trong philosophical or professional commitments. An increase in such funds will reduce the charity's accountability to private donors and lower its fund-raising activities. The grant will not be spent entire ly on raising the quantity of output. Instead, it will permit the cha rity manager to reduce his or her dependence on the costly solicitati on of donors who do not completely share the manager's preferences.

It is shown that Leon Walras developed two separate theories of tatonnement. One is a disequilibrium-production model. The other is a pledges model, in which transactions and production occur only at the equilibrium set of prices. These models are explained, and the manner in which they appear in the vari ous editions of Walras's Elements is used to account for the developm ent of conflicting interpretations of his writings on tatonnement. It is shown that the disequilibrium-production model is more representa tive of Walras's work than the pledges model and that the latter is i ncompatible with the theories of particular aspects of economic behav ior on which the Elements depends for its verisimilitude and explanat ory power.

This paper looks into the history of economic thought to examine the forerunners of the "new monetary economics." This approach emphasizes the role of regulations on private financial intermediation in determining the particular institutional arrangements that contemporary monetary theory treats as data. The "new view" investigates the possibility that under laissez-faire the unit of account and means of payment, traditionally bundled together in the item called "money," may become separated. The earlier writers who share this perspective have been overlooked by historians of economic thought as well as by recent contributors to the new monetary economics. Many of the insights of these theorists are relevant to modern monetary theory.

Relative price variability has been studied at the cross-sectional (intermarket) level. This paper addresses the equally important phenomenon of intramarket variability: the dispersion of commodity price movements around the industry average. Using quarterly price data for eighty disaggregated commodity groups in the United Kingdom from 1974 to 1984, the paper investigates the determinants of intramarket price variability and replicates some previous cross-sectional tests for the United Kingdom. Intramarket price variability is found to be positively related to inflation. Intramarket variability is found to be positively related to the average (market) rate of price change.

The business cycle analysis of Arthur F. Burns and Wesley C. Mitchell and the National Bureau of Economic Research presumed that aggregate economic variables evolve on a time scale defined by business cycle turning points rather than by months or quarters. Do macroeconomic variables appear to evolve on an economic rather than a calendar time scale? Evidence presented here suggests that they do. However, the estimated economic time scales are only weakly related to business cycle time scales, providing evidence against the view underlying traditional business cycle analysis.

This paper examines a system of governments that finance public expenditures with taxes on mobile capital. Unlike previous research on "tax competition," expli cit consideration is given to the general-equilibrium determination o f the prices at which goods are traded between regions. The analysis identifies inefficiencies in government behavior that are not apparen t in models in which the terms of trade are exogenously given. Capita l taxation is shown to create an inefficient distribution of public-g ood outputs across regions, accompanied by an inefficient pattern of trade. A model is presented in which the chosen levels of public-good outputs differ across regions containing identical residents and pro duction possibilities.

Public goods can be financed by direct taxation or a subsidy to private spending. This paper examines the relative efficiency and distributional consequences of the two methods. Efficiency is shown to depend on the price elasticity of private spending and the trade- off between public and private spending. When this trade-off is dollar for dollar, however, a subsidy is always more efficient than direct taxation. The gains from a subsidy are larger for a mixed good than for a pure public good. Looking a t distributional effects, the author shows when richer taxpayers may prefer a tax credit to deductibility, even though they face lower prices with deductibility, and also shows when richer taxpayers prefer direct taxation to either type of subsidy.