Knowledge that Transforms

The optimal level of Social Security benefits depends on balancing the protection that these benefits offer to those who have not provided adequately for their own old age against the welfare costs of distorting economic behavior. The primary such cost is the distortion in private saving. The present paper derives the level of Social Security benefits that is optimal in three basic cases. In the first section of the paper, the optimal level of benefits is derived for an economy in which all individuals do not anticipate retirement at all and therefore do not save. The second and third sections then derive the optimal benefits for economies with two different definitions of attitudes toward retirement and saving.

This paper presents a macroeconomic model containing optimizing, inventory-holding firms that is consistent with a number of prominent empirical regularities concerning fluctuations in output, exchange rates, relative prices, and money. Prices are sticky, but they are not predetermined. Still, our model is consistent with exchange rate overshooting in the sense of Dornbusch. Typical sticky-price models allow a divergence between current production and current demand, but this divergence is never allowed to feed back into the model. Our optimal inventory adjustments reconcile divergences between current demand and production, and the inventory stock movements provide expected future dynamics.

Modern neoclassical business cycle theories posit that the observed fluctuations in consumption and employment correspond to decisions of an optimizing representative individual. We estimate three first-order conditions that represent three tradeoffs faced by such an optimizing individual. He can trade off present for future consumption, present for future leisure, and present consumption for present leisure. The aggregate U. S. data lend no support to this model. The overidentifying restrictions are rejected, and the estimated utility function is often convex. Even when it is concave, the estimates imply that either consumption or leisure is an inferior good.

An overlapping generations model incorporating returns to specific experience is used to demonstrate how three salient phenomena in land-scarce developing countries—the predominance of intergenerational family extension, cost advantages of family relative to hired labor, and the scarcity of land sales—may be manifestations of an optimal implicit contract between generations that maximizes the gains from farm-specific, experientially obtained knowledge. A method for estimating the contribution to agricultural profits of the farm experience embodies in elderly kin based on a three-year panel of household data from India is proposed and implemented. Implications of the theory for market transactions in land and for family extension are also tested using individual farm data and time-series information on rainfall. Why is the aged husbandman more skillful in his calling than the younger beginner, but because there is a certain uniformity in the operation of the sun, rain, and earth, towards the production of vegetables; and experience teaches the old practitioner the rules, by which this operation is governed and directed? David Hume [1758, p. 106]

Popular arguments in the management literature advocate the implementation congruity and complementarity of zero-base budgeting (ZBB) with an established management-by-objectives (MBO) system. The present study examined management perceptions on 28 ZBB implementation variables for MBO users and non-MBO users which were gathered from 153 managers at two hierarchical levels within a single private sector organization. Results from both univariate and multivariate tests indicate that ZBB implementation was not facilitated by the existence of an MBO system for either lower level management or for upper level management. The evidence obtained here strongly suggests that the purported conventional rationale underlying ZBB coupling with an extant MBO system is seriously defective; ZBB design implementation issues need to be thoroughly re-assessed, with the emphasis on matching compatible systemic properties between information sub-systems.

This paper explores the rationales offered by participants for the accounting and management control practices in which they are involved. An analysis of these rationales emphasis four characteristics of current practices. Firstly, financial planning and control systems do not appear to be a dominant mode of organisational control for the organisation investigated, physical production planning appearing to be more important. Secondly, the parts of the whole organisation appear to be only loosely coupled, thereby insulating the various parts from each other, and from pressures for change. Thirdly, in such a context, accounting and information generally may be managed either (or both) to enhance ambiguity or to provide legitimacy in (and about) the organisation. The paper concludes, fourthly, by noting the pressures for change which appear to operate through the finance function, thereby enhancing that function's organisational role. The observations and analysis of the paper are based on an in-depth observational study of an Area (i.e. geographical division) of the National Coal Board, in the U.K., and on a detailed study of that organisation's history and environment.

The purpose of this note is to examine, theoretically, why the market risk premium (R^_ g\ raa y influence tests of asset pricing models with higher moments. When moments of higher order than the variance are added to a pricing model developed within the usual two-fund separation assump- tions, the market risk premium enters the pricing equation in a nonlinear fashion and is implicit in the estimation of each moment's coefficient.

ABSTRACT Derivation of the capital asset pricing model requires various assumptions including normality or quadratic preference. The objective of this note is to show that the normality or quadratic preference assumption can be replaced by the fair game condition that assets' residual returns have zero mean conditional upon the return of the market portfolio.

The purpose of this note is to examine, theoretically, why the market risk premium (R^_ g\ raa y influence tests of asset pricing models with higher moments.When moments of higher order than the variance are added to a pricing model developed within the usual two-fund separation assump- tions, the market risk premium enters the pricing equation in a nonlinear fashion and is implicit in the estimation of each moment's coefficient.Unless this nonlinearity is recognized, incorrect conclusions regarding the tests of such models may result.

ABSTRACT The purpose of this article is to compare the Perrakis and Ryan bounds of option prices in a single‐period model with option bounds derived using linear programming. It is shown that the upper bounds are identical but that the lower bounds are different. A comparison of these bounds, together with Merton's bounds and the Black‐Scholes prices in a lognormal securities market, is presented.