The optimal bond-stock mix is examined in light of an apparent inconsistency between the Tobin Separation Theorem and the advice of popular investment advisors which has been pointed out by Canner et al. (1997).It is shown that the apparent inconsistency is largely explicable in terms of the hedging demands of optimising long-term investors in an environment in which the investment opportunity set is subject to stochastic shocks. The analysis points to the importance of considering investors' time horizons in analyzing optimal portfolio policies.

In this article, I evaluate the hypothesis that firms respond to negative demand shocks by assigning workers to tasks that require less skill than the tasks they normally carry out. Using changes in employment in state‐industry cells as a measure of demand conditions facing individual firms, I provide evidence in favor of the hypothesis. Furthermore, the skill requirements of the tasks carried out by workers are procyclical. The results are consistent with a specific capital model where employers move workers between tasks so that layoffs are concentrated on workers with low levels of firm‐specific human capital.

We provide evidence on the validity of the it conglomeration hypothesis versus the strategic focus hypothesis for financial institutions using data on U.S. insurance companies. We distinguish between the hypotheses using profit scope economies, which measure the relative efficiency of joint versus specialized production, taking both costs and revenues into account. The results suggest that the conglomeration hypothesis dominates for some types of financial service providers and the strategic focus hypothesis dominates for other types. This may explain the empirical puzzle of why joint producers and specialists both appear to be competitively viable in the long run. Journal of Economic Literature Classification Numbers: G22, G28, G34, L23, L89.

This paper reviews research that uses longitudinal microdata to document productivity movements and to examine factors behind productivity growth. The research explores the dispersion of productivity across firms and establishments, the persistence of productivity differentials, the consequences of entry and exit, and the contribution of resource reallocation across firms to aggregate productivity growth. The research also reveals important factors correlated with productivity growth, such as managerial ability, technology use, human capital, and regulation. The more advanced literature in the field has begun to address the more difficult questions of the causality between these factors and productivity growth.

This paper derives the optimal size of the financial sector using a general equilibrium framework that is an extension of the paper of Holmstrom and Tirole (1997) [Quarterly Journal of Economics 112, 663–691]. We show that the financial sector has a unique optimal size relative to the size of the economy as a whole. Creating and maintaining this sector requires diversion of some physical capital from production of output to monitoring that production. However, the efficiency gain in output production brought about by monitoring warrants the diversion. It is also found that the optimal size of the financial sector is independent of the state of the economy and does not vary over the business cycle.

In the field of economics, perhaps the most important break with the past—one that leaves open huge areas for future work—lies in the economics of information. It is now recognized that information is imperfect, obtaining information can be costly, there are important asymmetries of information, and the extent of information asymmetries is affected by actions of firms and individuals. This recognition deeply affects the understanding of wisdom inherited from the past, such as the fundamental welfare theorem and some of the basic characterization of a market economy, and provides explanations of economic and social phenomena that otherwise would be hard to understand.

This study investigates the relationship between economic conditions and health. Total mortality and eight of the ten sources of fatalities examined are shown to exhibit a procyclical fluctuation, with suicides representing an important exception. The variations are largest for those causes and age groups where behavioral responses are most plausible, and there is some evidence that the unfavorable health effects of temporary upturns are partially or fully offset if the economic growth is long-lasting. An accompanying analysis of micro data indicates that smoking and obesity increase when the economy strengthens, whereas physical activity is reduced and diet becomes less healthy.

Partisan politics and random election outcomes generate policy uncertainty and partisan business cycles. To reduce policy uncertainty, society must design the policy-making environment to overcome electoral uncertainty and partisanship. I show that delegating policy to an independent policy board with discretionary powers will produce substantial policy smoothing and lower policy uncertainty relative to a simple model in which elected officials set policy. Board members are chosen in a partisan, noncooperative environment; yet in the benchmark model, policy variability is eliminated, and the cooperative bargaining solution is replicated.