Knowledge that Transforms

EVERYBODY talks about the relation of industries' profit rates to their markets' rates of growth, but nobody does anything about it. Specifically, researchers have confirmed the effect of the growth of nominal output on profits in many multivariate studies, without specifying closely the hypothesis under test or the measure of demand growth appropriate to test it. A profits-growth relationship could stem from several mechanisms-the lagged adaptation of capacity to unexpected changes in demand, reactions of oligopolists to disturbances in their consensus, etc. These mechanisms-how and where they work-hold their own normative interest. Therefore, knowing what behavior (and what structure, lying behind it) accounts for the profits-growth relationship should do more than improve the specifications of our studies of allocative efficiency. It should also expand our knowledge of adaptive processes that are important and hard to observe directly. In this paper we shall synthesize the available explanations of why changes in market demand should affect an industry's profits, then present a statistical test of the relative significance of the competing explanations.

This paper critically examines a number of maintained hypotheses that are necessarily being tested along with the basic notion derived from the rational expectations (RE) formulation of Lucas (1972) (19 73) that only unanticipated money matters. The trend stationary representation of secular real output of Lucas and others is replaced by a difference stationary representation found by Nelson and Plosser (1980) to be consistent with U. S. historical data. The impact of inflation uncertainty on real activity is considered. Attention is paid to possible mis-measurement of agents' ex ante -- anticipated money growth. It is found that three alternative measures of anticipated money growth produce a stable impact on growth of output and employment. Contemporaneous and lagged values of unanticipated money growth have no significant additional explanatory power in the presence of any one of the three measures of anticipated money growth. Beyond this, it is impossible to reject the hypothesis that the initial positive real impact of anticipated money is not temporary. Inflation uncertainty is found to act as a significant depressant of real economic activity in the presence of all tested combinations of anticipated and unanticipated money growth.

THROUGH cross-sectional analysis of the asset holdings of individual households, this study adds to the evidence available on relative risk aversion. It utilizes the National Longitudinal Surveys (NLS)1 which have advantages over the data bases used in previous studies. Assumptions about relative risk aversion are made in a number of theoretical economic and financial models.2 An empirical study by Cohn, Lewellen, Lease, and Schlarbaum (CLLS, 1975) concluded that relative risk aversion declined as wealth increased across households, while a second empirical study by Friend and Blume (F&B 1975) concluded from mixed evidence that relative risk aversion remained relatively constant as wealth increased. The present study finds that by restricting the sample to higher wealth households and by defining wealth narrowly, patterns consistent with decreasing or constant relative risk aversion emerge and these are compatible with the earlier studies. However, the use of a broader based sample and a more comprehensive measurement of wealth alters the conclusions and a pattern indicative of increasing relative risk aversion emerges. Thus, the paper cautions that constant or decreasing relative risk aversion assumptions in theoretic models may not be realistic descriptions of the risk attitudes of typical U.S. households. First, the literature on relative risk aversion will be reviewed. Second, the model used to estimate the coefficient of relative risk aversion will be discussed. The third section will present empirical results and contrast them with those of earlier studies. Finally, the material will be summarized and the conclusions indicated.

In previous work I have developed an equation explaining votes for president in the United States that seems to have a remarkable predictive ability. In this paper the equation is updated through the 1984 election and then used to predict the 1988 election.

D ESPITE the abundance of literature on mergers, relatively little has been written specifically on the subject of diversification. Noteworthy exceptions are Gort (1962), Berry (1975), Caves (1975), Caves et al. (1977, 1980), and Hassid (1975). But regression analyses of outbound diversification have tended to yield unsatisfactory results, both in terms of the degree of significance of coefficients and in terms of overall explanatory power. In this paper I propose to consider diversification from a different point of view, by looking at patterns of diversification or, to be more specific, at pairs of origin-target industries. This approach emphasizes the role of a class of variables describing a relationship between origin and target industries. A number of such variables are specified, and some supporting empirical evidence is offered. The paper is organized as follows: section I gives definitions and presents the theoretical background; section II discusses the data; section III describes the specification; section IV analyzes the results; and section V summarizes findings.

FOR the economy to work well, resources should flow freely from one industry to another in response to changing demands and costs. In textbooks, this process is via the capital market and entry and exit of firms. But entry can be by new firms or existing ones through diversification. Williamson (1970) and Weston (1970) stress advantages of internal capital transfers over the market.' Gort (1962, p. 4) and Rumelt (1974, p. 2) state multimarket operation of firms will speed redeployment of resources in response to profitable opportunities. They would be right if multimarket operation were not coincident with multimarket contact. While diversified companies may have advantages that would facilitate the movement of capital, they have enhanced opportunity for coordination if they meet in several markets. I term multimarket grouping the phenomenon of groups of diversified firms whose activities span to a significant extent the same markets. Multimarket grouping of sellers could reduce the flow of resources, thereby inhibiting a socially desirable competitive process, if it proceeded until mutual dependence among diversified sellers was recognized and reduction in competition coordinated, tacitly or otherwise. In short, where sellers have grown large through diversification, resources may not be efficiently reallocated among markets in response to changing conditions because interdependent groups of sellers recognize that reduces their profits. Even then, in a frictionless world, sellers other than those in the multimarket group could move resources into profitable areas. I reject such a frictionless world given evidence such as Mueller's (1977b) and the general theory of barriers to mobility (Caves and Porter, 1977). Those sellers having grown interdependent across markets are those who would have been most likely to enter given new profitable opportunities. Capacity expansion given such opportunities should be less rapid than if the multimarket interdependence did not exist. Is it in fact that just as with market concentration, not only the philosophy embodied in the Jeffersonian ideal, but economic efficiency provides grounds for concern about aggregate concentration when it coincides with multimarket grouping? This paper introduces methodology for measuring the significance of grouping and shows that when significant and coincident with high seller concentration, multimarket grouping does have economic implications. That coincidence, ceteris paribus, leads to higher profits. The question is whether those profits result from coordinated behavior or lower costs or both. The evidence suggests they are the result of economies of multimarket operation and barriers to the mobility of resources from outside the interdependent groups of sellers. Profits are lower for lines of business where multimarket contact is high but seller concentration is low, but higher when both contact and concentration are high than when concentration alone is high.