The issue of dynamic efficiency is central to analyses of capital accumulation and economic growth. Yet the question of what characteristics should be examined to determine whether actual economies are dynamically efficient is unresolved. This paper develops a criterion for determining whether an economy is dynamically efficient. The criterion, which holds for economies in which technological progress and population growth are stochastic, involves a comparison of the cash flows generated by capital with the level of investment. Its application to the United States economy and the economies of other major OECD nations suggests that they are dynamically efficient.

The end of favorable tax treatment for long‐term capital gains caused investors to reassess traditional tax‐induced trading strategies. This study compares trading behavior in December 1986 and January 1987 with previous years. Our results indicate that these tax code changes had a powerful effect on trading behavior. Relative trading volume was considerably higher in December 1986 for long‐term winners but not significantly lower for long‐term losers. Results also indicate altered trading patterns based on short‐term gains in December 1986 and for long‐term winners in January 1987.