This article shows that correlated errors in news about fundamentals are an important, rational determinant of excess comovement. Individual analysts’ forecast errors tend to be correlated across stocks. Using a proxy for correlated forecast errors based on analyst coverage, I find that stocks with similar sets of analysts exhibit more excess comovement, controlling for industry and other variables. Exogenous changes in commonality in analyst coverage around i) brokerage firm mergers and ii) additions to an index lead to changes in excess comovement. This information channel explains 10% to 25% of the increase in comovement around additions to the S&P 500 index.

A recent line of research has exposed some technological determinants of the structure of industries that produce more than one good. The analyses of both multiproduct perfect competition and natural monopoly require a generalized notion of average cost and, in addition, several newly identified technological characteristics pertinent only to joint production. This paper provides an overview of these new results, and suggests a unifying framework in which the theory can be further developed.

I began my article Consumer's Surplus Without Apology (henceforth, CSWA) with the words The purpose of this paper is to settle the controversy surrounding consumer's surplus... (p. 589). That is my purpose here, as well. However, George McKenzie's published comments have taught me that if articles and careful analyses settle controversies, they only do so very slowly. McKenzie makes sweeping and attacking statements about CSWA but fails to substantiate them. He scatters birdshot criticisms at CSWA that are based on misreadings of rather clear material. He offers an example in which he miscalculates multiproduct consumer's surplus. Finally, he contends that his own (with Ivor F. Pearce) approach to welfare analysis is preferable to the consumer's surplus approach. In this reply, to keep the record straight, I show in Section I that each of McKenzie's strongly worded attacks is unsubstantiated and invalid, and that each of his more technical sounding criticisms rests only on misreadings of CSWA. More interestingly, in Section II, I summarize some of the theory of multiproduct consumer's surplus that is needed to understand the calculatiop error in and proper interpretation of the example that McKenzie proffers. In Section III, I argue that the approach to welfare analysis advocated by McKenzie and Pearce is far less useful than the consumer's surplus methodology.

In an important article in this Review, William Brainard and James Tobin have emphasized the role played by the wealth constraint in systems of asset demand equations. The wealth constraint gives rise to consistency conditions which must be satisfied by the demand functions when such a system is specified and estimated. As Brainard and Tobin caution, care must be taken to ensure that unrealistic coefficients are not inadvertently imposed on omitted equations by failure to recognize the consistency conditions.' Noting that the wealth constraint applies out of, as well as in, portfolio equilibrium, Brainard and Tobin focus attention on systems in which actual and desired stocks of assets differ. They specify a multivariate stock adjustment model wherein the desired change in holdings of any asset depends in general upon all asset stock disequilibria; the existence of such stock disequilibria can be implicitly rationalized on the basis of costs of adjustment which impinge on the rate of change of at least some assets. In this framework they show that the stock adjustment coefficients must also satisfy certain consistency conditions to ensure that the wealth constraint is satisfied. An important feature of their analysis is that the total change in wealth (savings plus capital gains) is treated as exogenous to the financial sector, and the asset flow demands described above are conditional upon the exogenously given change in wealth. This strategy of separating the portfolio balance decision from the consumption-saving decision is one that Tobin has explicitly used and justified in his 1969 article (especially pp. 15-16), and is one that has been widely and effectively used in modern macroeconometric models. The central argument of the present paper is that this of flow-allocation and stock-allocation decisions is not legitimate in the presence of adjustment costs attached to changing the level of individual asset holdings. The existence of adjustment costs means that there is no portfolio balance problem per se (in the sense of allocation of a given level of wealth), but rather a (longer run) problem of determining an optimal time path for each asset and for the level of consumption. Thus a natural extension of the Brainard-Tobin model is to treat saving and portfolio decisions in an integrated fashion.2 Note that the Brainard-Tobin model is perfectly consistent with any model of savings behavior and hence no logical con*Queen's University, and Cowles Foundation for Research in Economics, Yale University. I am grateful to Adrian Pagan, Gordon Sparks, and James Tobin for helpful discussions, and especially to Gary Smith who, as well as patiently discussing many of the issues, provided detailed comments on earlier drafts of this paper. This research was partially supported by a National Science Foundation grant to the Cowles Foundation and by a Canada Council grant to the author. Remaining mistakes and opinions are my own. I This also has implications for the common practice in macro-economic models of leaving the bond market as implicit. Care must be taken to ensure that silly behavior is not inadvertently attributed to bondholders. William Silber, Tobin, and Alan Blinder and Robert Solow have initiated research which reintroduces the bond market into macroeconomic models. 21t appears to be a fairly general result that the existence of adjustment costs leads to integrated behavior. M. Ishaq Nadiri and Sherwin Rosen have established a similar result for the theory of the firm, and Robin Mukherjee and Edward Zabel have recently shown that the separation theorem prominent in the finance literature on the mean-variance approach to optimal consumption-portfolio behavior fails to hold when transactions costs are introduced. In my 1975 paper (Appendix), I have argued that the integration of saving and portfolio balance decisions also applies in continuous-time models, even though such models are characterized by separate stock and flow budget constraints.

sex-typing should be ended, women should receive equal pay for equal work, and women should do less unpaid work at home and men should do more.' This paper offers a theory of household formation which makes it possible to predict the impact of changes in economic conditions, including those proposed by the Women's Liberation Movement, on household behavior. The ideas presented in this paper grew from my attempt to explain why a wife chooses to work in the market economy, in the home and/or in community service

Utilizing a cross-sectional trade flow model of the type developed by Hans Linnemann and Jan Tinbergen, this study attempts to isolate empirically the major forces which have shaped European trade relations over the period 1951-67. We first estimate via the use of dummy variables the impact of the European Economic Community (EEC) and the European Free Trade Association (EFTA) on member trade. For each year of the European integration period (1959-67), a crosssectional equation is estimated ancl used to test for the existence and approximate size of the respective integration effects. The equation is also calculated for the eight years prior to the integration period to obtain a clear picture of the forces which were at work before the formation of the EEC. Secondly, a base year equation is used to make projection estimates of the gross trade creation and European trade diversion effects of the two communities.