Knowledge that Transforms

Markets for many products are dominated by small group of states or countries with a natural advantage in the marketplace because of some initial endowment of resources, favorable climate, or location. The purpose of this paper is to explore how such markets involving a few political jurisdictions interact noncooperatively. We examine how such a market might be structured and operate and the extent of monopoly rent that can be extracted in the absence of collusion. We answer these questions for an empirically estimated model of western U.S. coal in which two states (Montana and Wyoming) dominate production. We demonstrate that in this market the amount of rent that can be extracted is greatly reduced through competition (relative to a cartel). Nevertheless, even with two producing states competing against each other, significant rents can be captured--significant enough to refute the contention that little rent can accrue without a cartel.

This paper examines the relation between nominal and real interest rates, and the nominal and real term structure under uncertainty. We show that two separate risk terms cause the Fisher theorem to fail. One risk term is related only to the variability of money prices, while the other is related to the purchasing power riskiness of the nominal bond. Monetary policy can affect the value of both these risk terms. We also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia. Even if the economy is neutral with respect to monetary policy, monetary policy can alter the nominal term structure.

This paper examines the existence of competitive equilibria in markets for exhaustible resources where there are initial economies of scale in either the extraction of the resource or the utilization of the resource as an input in production. In such instances, which are fairly common, we find that the classic Hotelling rule for competitive extraction does not apply, since competitive price equilibria generally do not exist. This is in marked contrast to static markets where the usual textbook example of firms with U-shaped average cost curves is not inconsistent with the existence of competitive equilibria. Furthermore, oligopolistic market equilibria in which resource firms act as Nash producers may also fail to exist when there are returns to scale in production.

Numerous authors, including Shiller, LeRoy and Porter, and Singleton, have reported empirical evidence that stock prices and long interest rates are more volatile than can be justified by standard asset-pricing models. This paper shows that in small samples the "volatility" or "variance-bounds" tests tend to be biased, often severely, toward rejection of the null hypothesis of market efficiency. Thus the apparent violation of market efficiency may be reflecting the sampling properties of the volatility measures, rather than a failure of the market efficiency hypothesis itself. The paper also reports some unbiased estimates of the bounds on holding period yields and long interest rates. Much of the evidence of excess volatility disappears when the tests are corrected for small sample bias.

It is often argued that separation of public spending and taxing decisions engenders in the voter overoptimistic hopes that someone else will bear the cost of public services, thereby inducing an increase in the size of government. But are perceived tax prices systematically and persistently reduced by separation? Although in stock markets all agents' expectations may be unbiased, they may or may not be unbiased in political markets. This paper analyzes the separation created in federal states when the central government finances local expenditures. Evidence from a dynamic decisive-voter model is presented that indicates that the separation introduced by federal grants to Canadian provinces did in fact reduce the perceived tax price of provincial public services and raise provincial expenditures. The results suggest also that the effect of separation diminished over time.

This paper considers how estimates of the market model beta parameter can be biased by friction in the trading process (information, decision, and transaction costs) that (a) leads to a distinction between observed and ‘true’ returns; (b) causes observed returns to be generated asynchronously for a set of interdependent securities; and (c) thereby introduces serial cross-correlation into security returns. Several propositions are derived from which consistent estimators of beta are obtained, and the effect of differencing interval length on beta estimates is specified. The formulation is contrasted with the related analyses of Scholes-Williams (1977) and Dimson (1979).

The Arbitrage Pricing Theory is extended to a setting where investors possess information about future asset returns. A no-arbitrage pricing restriction is obtained with arbitrage conditioned on an investor's information. The pricing restriction contains unconditional factor loadings and either conditional or unconditional expected returns. Thus, tests of the theory can be based solely on time-series estimates of unconditional moments. Additional tests based on conditional expected returns are also appropriate.

We measure the impact of acquisitions activity on firm value by differentiating between specific merger events and programs of acquisition activity. Based on a sample of conglomerate acquirers, we find significantly positive abnormal performance associated with the announcement of acquisitions programs and significantly negative performance associated with certain institutional changes of 1967–1970 relating to acquisition activity (the Williams Amendments, the 1969 Tax Reform Act, and APB Opinions 16 and 17). Our results support the hypotheses that acquisitions activity had a favorable ex ante impact on the value of firms announcing an intention to engage in acquisitions, and that some of the institutional changes reduced the expected profitability of future acquisitions activity. The basic results of studies of mergers and tender offers are reviewed and their consistency with our findings highlighted.

This paper studies the net effects of the long-run sequence of events leading to merger, and of merger per se, on shareholder wealth. The appropriate measure of the wealth effect is shown to be the abnormal dollar return cumulated over time. Using this measure, the long-run wealth effect of the event sequence culminating in merger is significantly negative for acquiring firms. For acquired firms, the effect is negative, but not significant. The immediate impact of merger per se is positive and highly significant for acquired firms but larger in absolute value, and negative for acquiring firms. The evidence also reveals that measured abnormal rates of return to acquiring firms are sensitive to a slight variation in model specification and dependent on firm size, with smaller firms earning significantly negative post-merger returns.