Within a hierarchical firm structure, this paper details how the composition of a worker's skills and the non-observability of a worker's ability affect wage and promotion paths. Promotion-based compensation schemes derive naturally from the worker's asymmetrically observed ability. Promotion takes place over time and is inefficient since employers strategically exploit their knowledge of an able worker's ability. Conversely, employers may be unable to efficiently demote and retain bad managers without paying bonuses. Employers are led to promote educated employees before their equally or more able, but uneducated, counterparts. Explanations for fast-track promotions plans, and other empirical regularities are provided.

Longstaff (1992) and Edleson, Fehr, and Mason (1993) examine option values implicit in callable Treasury bonds and report a significant puzzle: implied option values are frequently negative. Using an alternative approach, we reexamine this issue and find that implied option values are generally positive, and, in contrast to previous studies, instances of option values sufficiently negative to overcome the bid-ask spread are rare. We explain the findings in other studies by showing that the method used may lead to the appearance of a negative option value when the true value is positive.

The Capital Asset Pricing Model predicts that investors will hold diversified portfolios, but many households actually hold very few assets. The paper examines the asset pricing implications of one possible explanation for this phenomenon, fixed costs of holding assets. While earlier authors found the exact asset pricing effects of such costs in single-period models under restrictive assumptions, I derive a general upper bound on these effects that is also valid in continuous time. Illustrative calculations reveal that large holding costs must be postulated to generate significant asset pricing effects.

We develop an empirical model of adolescent premarital childbearing in which a woman's decisions affect a sequence of outcomes: premarital pregnancy, pregnancy resolution, and the occurrence of marriage before the birth. State welfare, abortion, and family planning policies alter the costs and benefits of these outcomes. For white adolescents welfare, abortion, and family planning policy variables have significant effects on these outcomes consistent with theoretical expectations. Black adolescents' behavior shows no association with the policy variables. The different racial results may reflect differences in sample size or important unmeasured racial differences in factors that influence fertility and marital behavior.

The effects of seat-belt regulations on automobile-related fatality and injury rates have been of great interest to economists and policy-makers over the past few years.' The effects of the laws have been evaluated by various statistical techniques using timeseries data for particular states and pooled time-series data for national models.2 The results of these studies provide some evidence that seat-belt laws (SBL) reduce injury and fatality rates. However, the effects of seat-belt laws vary across states and time periods as well as across the levels of injuries. This study assesses the effects of the Texas seat-belt law on injury rates using policereported accident data. The data are from the U.S. Department of Transportation State Traffic Accident Files and are compiled monthly for the period 1982-1987 for driver-involved accidents. Furthermore, the data comprise singleand multiple-vehicle accidents. Only accidents involving towed vehicles are used in the analysis so as to normalize for changes in accident-reporting thresholds over time.3 The analysis was conducted for several sets of injury classifications using the KABCO scale, which indicates the numbers of fatalities (K), severe injuries (A), moderate injuries (B), complaints of injuries (C), and no injuries (0).

This article presents evidence suggesting that the relationship that existed between the partnership of J. P. Morgan and its client firms partially resolved the latter's external financing problems by diminishing the principal-agent and asymmetric information problems. I estimate and compare investment regression equations for a sample of Morgan-affiliated companies and a control group of nonaffiliated companies. The econometric results seem to indicate that companies not affiliated to the House of Morgan were liquidity constrained.

This article presents evidence suggesting that the relationship that existed between the partnership of J. P. Morgan and its client firms partially resolved the latter's external financing problems by diminishing the principal‐agent and asymmetric information problems. I estimate and compare investment regression equations for a sample of Morgan‐affiliated companies and a control group of nonaffiliated companies. The econometric results seem to indicate that companies not affiliated to the House of Morgan were liquidity constrained.

Foreign exchange returns exhibit behavior difficult to reconcile with standard theoretical models. This article asks whether the recent findings of long swings in exchange rates between appreciating and depreciating periods affect estimates of the foreign exchange risk premium. We demonstrate how the “peso problem” introduced by expected shifts in exchange rate regimes can affect inferences about the risk premium in at least two ways: (1) it can make the foreign exchange risk premium appear to contain a permanent disturbance when it does not; and (2) it can induce bias in the foreign exchange return regressions such as in Fama (1984).

Wholesale trade in used cars is conducted by ascending bid auctions, with sale subject to the seller's acceptance of the winning bid. One out of three times the seller rejects the bid, and no trade takes place. I model the seller's decision as the outcome of search, and thus determined by the winning bid distribution, and a reported retail price. This market is ideal for testing search theory since all offers, whether or not accepted, are observed. Qualitative predictions of the theory, in particular the role of the variance, are confirmed. The quantitative results are more ambiguous. One out of every three times, seller and buyer fail to trade at wholesale auto auctions. Instead, the seller exercises his right to refuse the winning bid. This paper shows how search theory can explain the sale rate and its variation across different types of automobiles. Few readers will find intrinsic interest in wholesale auto auctions. The value to studying them lies instead in the opportu-nity to observe all offers to trade in an environment that neatly

Earnings announcements, Block trades, Information asymmetry, Permanent price effects