This paper addresses the First Theorem of Welfare Economics in a moral hazard environment. An entrepreneur sells equity in a firm which he supplies with an unobservable, costly input. How much equity he retains determines his incentives and is observed by investors. The investors have rational expectaions which cause the equity price to increase in the amount of equity the entrepreneur retains. This gives the entrepreneur an incentive to retain equity and hence supply input. The entrepreneur may also be bound by an explicit incentive contract. In this framework, not all competitive equilibria are efficient, as defined relative to the moral hazard constraint. However, equilibria can be inefficient only if the entrepreneur's optimal input is nonunique or exhibits positive income effects.

This paper examines three possible specification problems with the research on information content of earnings disclosure. The first deals with the extent to which contemporaneous prediction errors are good surrogates for revisions of future earnings expectations and, hence, distributions of cash flows. This problem is elucidated by evaluating analysts' revisions of future earnings expectations as “relevant omitted variables.” The results show that the quality of such surrogation is high in the first quarter but low in the second. The second problem concerns the degree to which analysts' earnings forecasts are good surrogates for the market's own earnings expectations. Unbiasedness and orthogonality are the two properties examined. Although analysts' forecasts satisfy the unbiasedness property, the necessary condition of orthogonality is not satisfied. Hence, analysts' earnings forecasts are not Muthian rational expectations (i.e., they are not good surrogates for market forecasts). Consequently, the explanatory power of known empirical results is likely to be understated. The third specification issue is the significance of the self‐selection bias resulting from endogenous partitioning of samples into, say, good‐ and bad‐news portfolios. The Heckman‐Lee method of correcting for this type of selection (truncation) bias is applied. The results show significant self‐selection bias in both quarters but more so in the first than in the second quarter. Although applying the correction for this sample did not alter the general inferences, it did alter the marginal contribution of each explanatory variable and the explanatory power of the models. The results indicate that the information news about quarterly earnings is not homogeneous across different quarters in a fiscal period. The possibility that a “quarter effect” exists needs further investigation. Résumé. L'auteur se penche sur trois problèmes de spécification possibles en ce qui a trait à la recherche sur le contenu informatif des bénéfices publiés. Le premier de ces problèmes porte sur la mesure dans laquelle les erreurs prévisionnelles actuelles sont des substituts efficaces aux ajustements des bénéfices éventuels prévus et, partant, aux distributions de flux monétaires. On élucide ce problème grâce à l'évaluation des ajustements des bénéfices éventuels prévus effectués par les analystes, à titre de « variables pertinentes omises ». Les résultats de l'étude montrent que la qualité de cette substitution est élevée pour le premier trimestre mais faible pour le second. Le deuxième problème a trait à la mesure dans laquelle les prévisions de bénéfices des analystes sont des substituts efficaces aux prévisions de bénéfices au marché. L'auteur se demande si les prévisions des analystes sont non biaisées et orthogonales. Bien qu'elles se révèlent en effet non biaisées, elles ne respectent pas le critère d'orthogonalité. Les prévisions de bénéfices des analystes ne sont donc pas des prévisions rationnelles de Muthian (c'est‐à‐dire qu'elles ne sont pas des substituts efficaces aux prévisions du marché). On peut donc penser que le pouvoir explicatif des résultats empiriques connus est sous‐estimé. Le troisième problème de spécification est celui de la signification de la distorsion d'autosélection résultant du découpage endogène des échantillons, par exemple sous forme de portefeuilles dont les comptes rendus sont favorables ou défavorables. L'auteur applique la méthode de correction Heckman‐Lee prévue pour ce genre de distorsion de sélection (tronquée). Les résultats révèlent une importante distorsion d'autosélection pour les deux trimestres, plus marquée toutefois dans le premier que dans le second. Bien que l'application de la méthode de correction à cet échantillon n'ait pas modifié les inférences générales, elle a modifié la valeur explicative marginale de chaque variable et le pouvoir explicatif des modèles. Les résultats obtenus indiquent que l'information relative aux bénéfices trimestriels n'est pas homogène dans les différents trimestres d'un exercise financier. L'existence possible d'un « effet trimestre » doit faire l'objet de recherches plus approfondies.

This paper has two objectives: (1) providing a method to evaluate directly the costs (benefits) of knowledge spillovers arising from purchasing MAS from the incumbent auditor, and (2) examining the effect of estimates of the cost of auditor change on clients' ability to capture the resulting cost savings. The first is achieved by using self‐selection bias parameters estimated from switching regressions. The latter is based on data generated from clients' assessments of auditor change costs and the related economic conditions. For a sample of 84 companies, the results indicate that purchasing MAS from the incumbent auditor does not have a bearing on audit fees. The paper also provides an application of the Heckman‐Lee method of correcting for self‐selection bias. Résumé. L'auteur vise deux objectifs: 1) présenter une méthode permettant l'évaluation directe des coûts (et des avantages) de la mise à contribution des connaissances acquises découlant du recours aux conseils de gestion du vérificateur en titre et 2) analyser l'incidence de l'estimation des coûts que suppose un changement de vérificateur sur la capacité du client de réaliser les économies qui devraient en résulter. Pour atteindre le premier objectif, l'auteur utilise des paramètres de distorsion d'autosélection estimés à partir de la commutation de régressions. Pour atteindre le second, il se fonde sur des données produites à partir de l'évaluation par les clients des coûts que suppose le changement de vérificateur et sur la conjoncture économique qui s'y rattache. Pour un échantillon de 84 entreprises, les résultats indiquent que le recours aux conseils de gestion du vérificateur en titre n'a pas d'incidence sur les honoraires de vérification. L'auteur applique également la méthode Heckman‐Lee de correction de la distorsion d'autosélection pour évaluer les avantages de la mise à contribution des connaissances acquises.

Two implications of received theory are (1) mineral net prices rise at the riskless interest rate, and (2) in-ground value is equal to the current net price. Both propositions are false. A correct theory has been joined to mistaken premises. Mineral resources are inexhaustible. The economic problem is not the intertemporal allocation of a stock but coping with the cost of a flow of reserve accretions. Mineral scarcity and price are the uncertain fluctuating result of a tug-of-war between diminishing returns versus increasing knowledge. Hence minerals are risky assets. Development cost, finding cost, and user cost (the penalty for development/production today instead of tomorrow) are all substitutes. Hence change in any one is a proxy for change in any other. Development cost is observable, and has been stable in many countries for pro- longed periods. User cost was also stable in the USA. There is no sign of any pattern of gradual depletion and rising cost. A simple model of an individual reservoir explains observed relations of value and price. The rate of interest has both a positive and negative effect upon the rate of reservoir depletion. The net effect of a change is therefore weak. Expropriation of low-cost oil fields, had they been operated independently to maximize value, would have led to drastic increases in depletion rates. The fact of decrease proves collusive restriction of output to maintain prices.

IN AN IMPORTANT recent contribution, Persson, Persson, and Svensson (1987) (hereafter PPS) suggest that through careful restructuring of its nominal and real debt obligations, a government may be able to induce future governments to follow the monetary and fiscal policies that it regards as optimal today. The PPS argument builds on Lucas and Stokey's (1983) demonstration that in a special nonmonetary setting, the time inconsistency of optimal fiscal policy can be avoided through managing the term structure of real government obligations to the public. The basic idea of the PPS scheme for monetary economies is disarmingly intuitive: in addition to continually restructuring nominal and real debt obligations a la Lucas-Stokey, each government must ensure that the next government inherits a stream of nominal claims on the public whose present discounted value equals the stock of money. This equality, PPS argue, removes the incentive for surprise inflation or deflation, because such surprises would not affect the real net worth of the government. This note shows that the PPS prescription for avoiding time inconsistency, appealing as it is, is not generally sufficient. Even under the debt restructuring they recommend, optimal policy is likely to be time inconsistent. The main reason why their scheme fails is that the restrictions it imposes on government asset stocks satisfy first-order but not second-order conditions for an optimum. Because of the complex interactions between the current price level and future interest rates, a government can raise its objective function by moving several variables at once away from the levels planned by the previous government, even though price-level changes alone would not affect government net worth. We develop our argument using the model, notation, and equation numbers of PPS, to which the reader is referred for details. The maximization problem associated with

This study constructs dynamic welfare measures for a system of futures markets that express the allocative efficiency of a particular market as a function of its accuracy and speed of adjustment following a shock to the system. The system comprises futures prices for T-bills, exchange rates (German mark, British pound, Canadian dollar and yen), and agricultural commodities (corn, wheat, and cotton) for delivery in 1981 and 1982. The results suggest that, although agricultural, exchange, and financial markets allover-react to a disturbance, agricultural markets do so to a much greater degree. Owing to their much greater size, however, the welfare loss arising from the overshooting is likely to be much larger for interest rate and exchange markets.