Knowledge that Transforms

Considerable debate has raged over the economic assumption that the large corporation, through the decisions of its managers, attempts to maximize its profits. Closely related to the notion of profit maximization is expense behavior of managers which would indicate a preference for expenses over firm profit. This study examines the market structure effects on expense behavior and, for the first time, tests are made using data which unambiguously reflect market structure differences between firms in the sample. The results provide evidence that is contrary to the expense hypothesis. 1E~ CONOMISTS have long been interested in managerial motivation. As Ciscel and Carroll ((1980); Carroll and Ciscel (1982)) recently explain, considerable debate has raged over the economic assumption that the large corporation, through the decisions of its managers, attempts to maximize its profits. Closely related to the notion of profit maximization is expense behavior of managers which would indicate a preference for expenses over firm profits. The tension between profit maximization behavior and expense behavior of managers has been discussed by Larner (1970). One condition which could affect a firm's ability and willingness to engage in expense behavior is the market structure in which it operates. This study examines the market structure effects on expense behavior and, for the first time, tests are made using data which unambiguously reflect market structure differences. The results provide evidence contrary to the expense hypothesis and the findings are quite consistent with the previous research of Ciscel and Carroll (1980), Larner (1970), Rhoades (1980), and Glassman and Rhoades (1980).

A bstractUsing the trucking industry as an example, this paper extends the empirical research on multiproduct firms to analyze the efficient numbers of firms in the industry. The paper first considers the issue of size related economies and argues that although there are limited economies of scale, economies of scope appear to be sufficiently strong to explain the observed large number of mergers and acquisitions that have occurred in the industry. The paper then considers the efficient number of firms in the industry. Using the concept of ray-average cost, it shows that for the output combinations observed in the industry, the efficient number of firms required to serve industry output is quite large.

In the standard model of labor supply, each worker is a price taker, where the relevant price is an hourly wage rate which is fixed in the short run, and which does not depend upon the number of hours supplied.With this basic assumption, the wage can be regarded as exogenous for the purpose of estimating a labor supply function.This paper proposes and implements a pair of tests for the exogeneity of wages in a longitudinal labor supply model, and for the particular failure of exogeneity associated with jobs that offer wage-hour packages.The first test is very simple--it amounts to a test of whether hours Granger-cause wages at the individual level.The second test involves a simultaneous estimation of labor supply and wage offer equations.Both tests indicate that the offered wage is related to hours worked, though the offer locus is, for this sample, very flat.The principal conclusion is that labor supply equations cannot properly be estimated in isolation from the process generating wages, even when long time series are available on a sample of individuals.

In this paper we explore the role of transitory income in the housing purchase decision. Because of moral hazard considerations banks typically require downpayments to be financed internally, hence transitory income is potentially important in overcoming the downpayment constraint. Using a novel approach to the measurement of permanent and transitory income, we estimate a two-stage model in which households decide whether to purchase housing in the first stage and the quantity to be purchased in the second. The results indicate a significant role for transitory income in both decision stages.

Stock adjustment models of money demand have employed either the nominal or real adjustment process, but they have not been tested statistically due to their nonnestedness. This paper formulates a general stock adjustment model which includes both nominal and real adjustment processes as its nested subsets. Each process is then tested against the general specification. The paper also examines the homogeneity of money demand with respect to price level and income in the general model.

According to unpublished data compiled by BLS, productivity in the construction industry reached a peak in 1968 and, except for a brief and small upturn between 1974 and 1976, has been falling ever since. This paper examines the sources of this productivity decline between 1968 and 1978 by estimating a production function to assign weights to various factors responsible for productivity change and deriving a new price deflator for construction which does not rely on labor or material cost indexes, thus eliminating a systematic bias toward overstating the rate of growth of prices.

The paper focuses on the benefits derived from public elementary and secondary education; monetary values of households' perceived benefits from operating expenditures are estimated. Information concerning the preference mappings of citizens is obtained using a random utility model to analyze micro voting data. The estimated model in turn provides information concerning the efficiency and distributional consequences of public education expenditures. The conclusion is that operating expenditures exceed the estimated efficient level. Furthermore, it may be difficult to justify the inefficiently large expenditures on equity grounds since the estimated distribution of households' perceived benefits, net of local taxes, is pro-rich. G~ OVERNMENT provision of goods and I J~ services has the potential of greatly affecting the welfare of citizens. This paper focuses on the benefits derived from one such service, public elementary and secondary education; monetary values of households' perceived benefits from public education expenditures are estimated. Information concerning the preference mappings of citizens is obtained using a multinomial probit, random utility model to analyze micro voting data. The estimated model in turn provides information concerning the efficiency and distributional consequences of public education expenditures. The conclusion is that operating expenditures exceed the estimated efficient level. Furthermore, it may be difficult to justify the inefficiently large expenditures on equity grounds since the estimated distribution of households' perceived benefits, net of local taxes, is pro-rich. In contrast to this study, a number of studies employ ad hoc rules to measure citizens' benefits from public elementary and secondary education. Initially total benefits are assumed to equal the cost of educational services; this input cost measure of benefits is then allocated to households using some unproven rule of thumb.' When an ad hoc rule is used to allocate a questionable measure of total benefits, the results are even more suspect. Conceptually, it is quite odd to determine (assume) total benefits and then allocate the total to individuals or households. The correct method is first to obtain estimates of individuals' or households' benefits. These estimates can then be used to determine the magnitude of total benefits and analyze how the benefits are distributed across the population. Aaron and McGuire (1970) criticize ad hoc benefit measures and propose the income value measure. For X' units of the politically allocated good X this measure is IV = MRSj X' where MRSj is the marginal rate of substitution of X for a composite commodity evaluated at X' and one's aftertax income. This measure is comparable to measures of the income values of goods purchased in private markets. While Aaron and McGuire argue for preferencebased benefit measures, the lack of information concerning preference mappings necessitates that they assume the shape of the utility function. Even though the results by Maital (1973), based on a similar method, are slightly less restrictive, a number of restrictive assumptions are common to both studies. Not only are households assumed to have identical, separable utility functions, but the existing levels of politically allocated goods are assumed to be efficient, implying the total income value equals the input cost. Also, the allocation of benefits from mixed goods (e.g., public education) between public and private components is based on ad hoc rules. The major contribution of the current study is that the benefit estimates are based on information concerning the preference mappings of individuals as revealed through referenda voting.2 The estiReceived for publication March 9, 1983. Revision accepted for publication June 4, 1984. *State University of New York-Albany. This paper was improved as a result of the advice and encouragement of Kenneth Wertz, John Akin, David Guilkey and James Wilde, as well as the helpful comments of two referees. Financial support for this research was, in part, provided by a Dissertation Research Fellowship from the Brookings Institution. 1 An example is the 1967 Tax Foundation Study. 2NMicro voting data are also used by Rubinfeld (1977) to obtain information about citizens' preferences for public school expenditures; he uniquely estimates the parameters of a demand function up to an unknown multiplicative constant. A micro demand function for education is uniquely estimated by Bergstrom, Rubinfeld, and Shapiro (1982), using a different type of survey data. While the method used here is to directly estimate preference mappings, the information concerning such mappings embedded in such a demand function provides an

Pradumna B. Rana, J. Malcolm Dowling, Jr., Inflationary Effects of Small but Continuous Changes in Effective Exchange Rates: Nine Asian LDCs, The Review of Economics and Statistics, Vol. 67, No. 3 (Aug., 1985), pp. 496-500

In Lintner's model of dividend behavior of firms change in dividends is a function of current earnings and lagged dividends. We show that under a rational expectations hypothesis of management behavior change-individends equation should include lagged earnings as an additional explanatory variable, and that expected sign of coefficient of lagged earnings variable is positive. Fama and Babiak predicted opposite sign for a lagged earnings variable in such an equation. Estimation and simulation results based on panel data for U.S. and Japanese firms provide modest econometric support for our Rational model. A good descriptive model of firms' dividend policies is useful, for example, for portfolio managers and for studying aspects of firm behavior such as interactions between investment and financing decisions and the management's transmissions of signals concerning changes in expected future earnings.' The econometric specifications of dividend behavior favored in literature are Lintner model (Lintner (1956)) and its FamaBabiak (FB) variant (Fama and Babiak (1968)). In Lintner model change in dividends is regressed on current earnings and lagged dividends. Fama and Babiak (1968) note that forecasting ability of Lintner's model is increased by adding lagged earnings as a regressor. We show that under a rational expectations hypothesis dividend behavior of firms may be described by an extension of Lintner's model, that we call Rational model, that includes lagged earnings as an additional explanatory variable. An important empirical difference between our Rational model and FB model is that expected sign of coefficient of lagged earnings variable is negative in Rational model while in FB model it is implied to be positive (see Fama and Babiak (1968, equation 10)). Our results based on panel data for U.S. and Japanese firms provide modest support for Rational model.2 I. The Rational Model of Dividend Behavior Our point of departure is partial adjustment model of dividend behavior of a firm (Lintner (1956)) given by AD, = aO + c(D,* D,-) + u,; t= 1,2,...,T (1) where A Dt = Dt -Dtdenotes change in dividends, Dt is dividends paid out in time period (year) t, Dt* is unobserved target dividend payout, c is speed of adjustment to difference between target dividend payout and last year's payout, ao is a constant and ut is an error term often assumed to be independently and normally distributed with zero mean over time periods. In Lintner model target dividend payout is replaced by Dt* = ryt which means that desired dividend payout is a fraction r of current earnings (yt). Thus Lintner's model is A Dt= a0 + cryt cDt+ Ut. (2) This model fits U.S. data (at both aggregate and disaggregate levels) quite well. Suppose instead that management determines target dividend payout by

Stock adjustment models of money demand have employed either the nominal or real adjustment process, but they have not been tested statistically due to their nonnested- ness. This paper formulates a general stock adjustment model which includes both nominal and real adjustment processes as its nested subsets. Each process is then tested against the general specification. The paper also examines the homogeneity of money demand with respect to price level and income in the general model.