Knowledge that Transforms

Another point: Meeks says that we did not include a variable reflecting differences in economic structure. He tried urbanization, found that has no effect on the results, and states that this provides confirmation for the generality of our In fact, the original authors had examined the effect of urbanization, and found (as did Meeks) that did not alter the results. Hence was not mentioned in our article. We therefore do not understand how this provides additional confirmation of his results. A last point: Meeks speculates that it could be that the expenditure effects at other levels take the form of quality rather than quantity changes. But there are some data that rebut that speculation. In a study of school age population, enrollment rates, expenditures per student, and student-teacher ratios (the latter an index of the quality of education) Billsborrow concluded: The empirical results indicate that population growth has not been systematically associated with growth in enrollment rates nor in qualitative deterioration in the education systems of developing countries in the period 1950-1970 (1978, p. 229). In conclusion, we read the data as showing that in MDCs population growth depresses educational expenditures for students, but much less so or not at all in LDCs. We do not know why this difference in results occurs, but differences in the quality of data might play a role. In future work, Meeks' specification of income per adult should be used.

Malthusian theory asserts that high population growth in poor countries retards economic development. 2 authors Simon and Pilarski have recently challenged this theory on the basis of their own research; it is their contention that previous studies of population growth and education (1 of the principal modes by which the Malthusian mechanism is assumed to operate) have been flawed. The defect is felt to lie in the assumption of simple rather than partial associations of the 2 variables education and population growth. On the basis of their tightened specifications they have found demographic variables to be nonsignificant in explaining educational expenditures per child once other relevant regressors have been introduced. Similarly little effect of the demographic variable on primary and tertiary school enrollment rates were found although an effect for secondary school enrollment rates was found. On examination of the theoretical framework and the several explanatory variables however the author concludes that a crucial variable which is sure to have a vital bearing on the conclusions reached has been misspecified in the equations. Further the author asserts that a more thorough specification of the tests of the hypothesis (i.e. that high population growth retards educational investment) actually provides additional support for the Malthusian conclusion on educational expenditures despite unpromising initial indications.

Blinder, Alan S., and Robert M. Solow, 'Does Fiscal Policy Matter?,'' Journal of Public Economic.s 2 (Nov. 1973), 319-337. Christ, Carl, Some Dynamic Theory of Macroeconomic Policy Effects on Income and Prices Under the Government Budget Restraint, Journal o1 Monetary Econo0lmicis (1978), 45-70. Fair, Ray C., A Model of AMI(Horoelonlmi ActivitY (Cambridge, MA: Ballinger Publishing Company, 1976). Kennedy, Peter E., Direct Wealth Effects in Macroeconomic Models: The Saving vs. the Definitional Approach, Journal ,f Monv., Crcdt, and Banking 10 (Feb. 1978), 94-98.

SOME economists have ignored corporate financing decisions on the assumption that they do not affect the investment and production decisions of firms. Yet even if this extreme position is accepted, firms must still make financing decisions which in turn have impacts on other sectors of the economy. Since interest payments on corporate debt are tax deductible, the reliance of firms on debt as opposed to equity financing directly affects the revenue the federal government collects through taxation of corporate profits. The corporate presence in bond markets and corporate borrowing from banks can be expected to affect both interest rates and the demand for money. Thus any large macro model must somehow account for the borrowing behavior of firms. Yet in assessing this portion of the 1965 Brookings Quarterly Econometric Model of the United States, de Leeuw (1965, p. 506) writes that the regressions for business borrowing are the least successful of the model. In this paper we derive an equation for the long-term debt ratio (capital structure) of a firm which can be estimated using available data. Unlike some recent qualitative studies' on the aggregate corporate debt ratio as related to inflation and taxation over time, our primary aim is to explain differences in the debt behavior among individual firms. Tobit estimation results, explicitly allowing for the fact that some firms have no long-term debt, are presented for both U.S. and Japanese firms. Our theoretical model implies that the long-term debt ratio which maximizes the present value of the existing stockholder's equity depends positively on the cost of equity and negatively on the cost of debt, capital productivity, and retained earnings. Our estimation results are generally in agreement with these expectations. In particular, we find that capital productivity, which has not been included as an explanatory variable in most previous studies,2 and the cost of equity capital are both important determinants of the firm's capital structure. Our empirical results also support the view put forward by Komiya3 that debt ratios for Japanese firms are higher than those for U.S. firms in part because the cost of equity has been historically higher in Japan than in the United States in relation to the cost of debt. Other important attempts to explain the debt ratio as a behavioral function of the price of debt and other variables include the studies of de Leeuw (1965) and Goldfeld (1969).4 Certain conceptual problems mar these studies, however. Short-term and long-term debt are not distinguished, despite the fact that long-term debt is usually used to finance capital spending while short-term debt is used to finance inventory and

This paper explores the implications of regional income convergence for measures of inequality at the national level. In general, such convergence occurs as poorer regions overtake more developed ones. It is difficult to imagine any realistic scenario in which rising incomes in poorer regions would not have the effect of reducing absolute poverty. At the same time, it seems reasonable to assume that national inequality would fall as the mean incomes in the various regions converge. Given these general presumptions, the recent economic history of regional convergence between the southern United States and the rest of the nation is quite puzzling. Over the last twenty-five years mean family income in the southern United States has gone from about 80% of the national mean to about 93%. At the same time inequality in the South and that in the non-South have been changing only slightly when measured by Gini coefficients. Under these circumstances with no serious deterioration in intraregional measures of inequality, we would expect to observe a substantial reduction in national inequality as these two broad regions converge in mean incomes. Nevertheless, there has been no significant decline in the national Gini coefficient.' This apparent paradox is in contrast to an earlier period in U.S. history in which regional convergence occurred while national inequality was falling (Smolensky, 1961, 1963). The purpose of this paper is to demonstrate that the relationship between regional convergence and overall inequality is far from obvious. In particular, we shot that the convergence of mean incomes among regions, ceteris paribus, is not a sufficient condition for a reduction in common measures of ov erall inequality such as the Gini coefficient. The ceteris paribas conditions here are that the distribution of population across regions and the relative distribution of income within each region are held constant. The proof of this assertion is made in section II. In section III, we demonstrate the relevance of this analysis to the U.S. case. We show that the simple mean convergence of family incomes between the southern United States and the rest of the nation over the last twenty-five years should not have been expected to have a direct effect on national inequality. The naive link between regional income convergence and national income distribution does not hold up in this important case. Hence the arguments of section II are more than analytical curiosa. In a situation where the direct effects of income convergence are insufficient to reduce overall inequality there is the possibility that the broader process of regional convergence achieves this result more indirectly. Regional convergence may involve economic changes that work on intra-regional income distributions or the distribution of population across regions in ways favorable to greater national equality. In section IV we speculate on such indirect effects. From a theoretical point of view we conclude that the direction and extent of such interactions are not obvious.

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.

elements which can be specified. When equation (4) was tested, the variables used to measure financial leverage, size, operating leverage, and growth were all significant at least at the 5% level, in the expected direction, but the market power variable then lost significance. In the absence of an integrated theoretical model, the relationship between market power and systematic risk can only be studied empirically. The statistical results reported here suggest that powerful firms do not have any unusual ability to influence their cost of equity capital. Market power appears to have an impact on equity yields because of investors' rational evaluation of managers' operating and financial policies.

The theory of the user cost of capital is used to estimate the demand for new and used cars in Israel. The results demonstrate that the price of operating costs must be included in the demand function. They also show that the importance of gasoline price increases with engine size. Income elasticities are higher for new than for old cars, and increase with engine size. The inevitability of further increases in gasoline prices implies a further reduction in the average size of cars and a possible decline in the number of cars in the economy unless the trend is moderated by an acceleration in economic growth. The future of the US auto industry will depend to a large extent on its ability to compete in the small- and medium-car markets. 13 references, 3 tables.