Knowledge that Transforms

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Empirical tests of the Sharpe [36]–Lintner [23]–Black [3] Capital Asset Pricing Model (CAPM) have generally concluded that there is a positive, approximately linear, trade-off between average return and systematic risk (beta) for portfolio returns of common stocks. Most of the empirical studies, however, have reported data for short, usually monthly, time intervals. Exceptions to this rule include Blume and Friend [8] and Sharpe [38, pp. 289–292]. Their data provide evidence that long-term wealth ratios are concave, possibly nonmonotonic, functions of beta. These data are surprising since, if returns are intertemporally independent and the linear return model of CAPM is correct, expected multiperiod terminal wealth is a convex, monotone increasing function of beta. The results of this paper provide a theoretical framework for interpreting the long-term empirical data which does not violate the notion of a monotone increasing expected terminal wealth-beta relationship.

The usual assumptions in the continuous-time contingent claims pricing of risky debt are (1) the firm is in default only when the value of its remaining assets falls short of the currently due promised payment and (2) the firm value follows continuous diffusion-process dynamics. It is the joint relaxation of these two simplifying assumptions that motivate this paper in its study of the valuation of risky debt and safety covenants when the firm value follows (possibly) discontinuous sample paths. Explicit solutions are derived and compared to the work of Black and Cox (1976).

The primary purpose of this paper is to test for the use of the representativeness heuristic by auditors in situations in which its use will lead to judgments that systematically depart from the Bayesian optimal responses. No explicit representation of payoffs was made, nor were subjects typically asked to choose a course of action. Thus it cannot be concluded that use of the representativeness heuristic in the experimental situations tested is not cost effective. To the extent, however, that one is willing to assume that action choices are sensitive to judgments of outcome probabilities, and these action choices have differential expected payoffs, a finding of extensive heuristic use by auditors would suggest further research to assess the economic consequences of such use.

Auditors are faced with the task of formulating opinions about the fairness of their clients' financial statements. In doing so, they use their professional judgment to determine the type and amount of information to collect, the timing and manner of collecting it, and the implications of the information collected. This information is rarely, if ever, perfectly reliable or perfectly predictive of the "true" state of a client's financial statements. Nevertheless, auditors may be held liable at common law or under the federal securities laws should the audited financial statements prove to be unrepresentative of this true state. Thus, it is important for auditors to have the ability to formulate appropriately judgments based on probabilistic data. In this paper, we describe the results of experiments designed to assess whether auditors formulate judgments in accordance' with normative principles of decision making or whether a particular alternative to the normative model of decision making under uncertainty 's employed. In the next section, we discuss several alternatives to normative decision models, focusing on the anchoring and adjustment heuristic which forms the basis for our experiments.

The sequential nature of activities like research, development, or exploration requires optimal funding criteria to take account of the fact that subsequent funding decisions will be made throughout the future. Thus, there is a continual possibility of reviewing a project's status, based on the latest information. After setting up a model to capture this feature, optimal funding criteria are investigated. In an important special case, an explicit formula is derived. As well as throwing light upon the nature of development activities, the analysis is also relevant to the general theory of information gathering processes.

Agricultural and Food Policy, Research Methods/Statistical Methods

This paper presents the classical theorem on the existence of equilibrium as it was proved in the 1950's with the various improvements that have been made since then.In particular, the elimination of the survival assumption and of the requirement of transitive preferences are carried through with a proof that uses a mapping of social demand.This approach favors intuitive understanding and generalization of the results.Finally, the role of the firm and the introduction of external economies are critically viewed. MYPURPOSE IS TO DISCUSS the present status of the classical theorem on existence of competitive equilibrium that was proved in various guises in the 1950's by Arrow and Debreu [1], Debreu [5, 6], Gale [8], Kuhn [14], McKenzie [17, 18, 19], and Nikaido [22].The earliest papers were those of Arrow and Debreu, and McKenzie, both of which were presented to the Econometric Society at its Chicago meeting in December, 1952.They were written independently.The paper of Nikaido was also written independently of the other papers but delayed in publication.The major predecessors of the papers of the fifties were the papers of Abraham Wald [31, 32] and John von Neumann [30], all of which were delivered to Karl Menger's Colloquium in Vienna during the 1930's.The paper of von Neumann was not concerned with competitive equilibrium in the classical sense but with a program of maximal balanced growth in a closed production model.However, he first used a fixed point theorem for an existence argument in economics and provided the generalization of the Brouwer theorem that was the major mathematical tool in the classical proofs.Wald achieved the first success with the general problem of the existence of a meaningful solution to the Walrasian system of equations.The proofs which were published used an assumption that later became known as the Weak Axiom of Revealed Preference.This axiom virtually reduces the set of consumers to one person, since it is equivalent to consistent choices under budget constraints.In a one consumer economy the existence of the equilibrium becomes a simple maximum problem and advanced methods are not needed.When many consumers with independent preference orders are present, it has been shown (Uzawa [29]) that fixed point methods are necessary.Wald also wrote a third paper whose main theorem was announced in a summary article [33], but which never reached

International audience

Let Y=(Y 1 ,Y 2 , .Yn) -0 be an income distribution pattern ton-"income receiving units" which may be n-persons, n-farnilies, n-states of the same country or n-countries.Abstractly, a fiscal program is a course of action, undertaken by social conseasus, under which portions of the incomes of certain receiving units are transferred to other receiving units to render the income distribution more equitable.The most familiar example of such a fiscal program is the collection of taxes from individuals (or individual families) with the revenue being paid out as.welfare payments by the government.As another example, the Federal government may collect taxes from the states only to give some of the revenue back to the states under a "revenue sharing" program.An international consortium or the World Bank may work out a formula under which contributions will be solicited from the wealthy countries or "donors" to provide foreign aid or make concessionary loans to the poor countries.This paper is concerned with the principles governing the design of such equity oriented fiscal programs.The first general principle concerns the "rationality" of the fiscal program.Suppose the income level of "i" is higher that that of "j".On the one hand, a principle of "minimally progressive" suggests that, in case "i" and "j" are taxpayers, "i" should pay no less taxes than "j" and, in case "i" and "j" are recipients of welfare payments "i" should receive no more than "j".On the other hand, a principle of "incentive perservation" suggests that the disposable income of "i" should be no less than that of "j"--i.e. the fiscal program clearly should not reverse their relative income ranks in order to preserve the incentive for the individuals .,. ..