Knowledge that Transforms

This paper empirically examines one motive for takeovers: to change control of firms that make acquisitions that diminish the value of their equity. Firms that subsequently become takeover targets make acquisitions that significantly reduce their equity value, and firms that do not become takeover targets make acquisitions that raise their equity value. Within the sample of acquisition by targets, the acquisitions that reduce equity value the most are those that are later divested either in bust-up takeovers or restructuring programs to thwart the takeover. This evidence is consistent with theories advanced by Marris, Manne, and Jensen concerning the disciplinary role played by takeovers.

Public-service output depends on input expenditures, on own personal characteristics, and on the characteristics of the other residents in the community (the peer group effect). In a community model with public expenditures set by voting, with migration between communities, and with land price differentials (capitalization), it is shown that communities may become heterogeneous in composition and (second-best) inefficient. This equilibrium occurs when the peer group effect is neither "too strong" nor "too weak." The inefficiency arises because an externality is created by migration. The land price differential does not play the part of the "price" of the better peer group but of a transfer payment.

Contrary to theoretical expectations, measures of willingness to accept greatly exceed measures of willingness to pay. This paper reports several experiments that demonstrate that this "endowment effect" persists even in market settings with opportunities to learn. Consumption objects (e.g., coffee mugs) are randomly given to half the subjects in an experiment. Markets for the mugs are then conducted. The Coase theorem predicts that about half the mugs will trade, but observed volume is always significantly less. When markets for "induced-value" tokens are conducted, the predicted volume is observed, suggesting that transactions costs cannot explain the undertrading for consumption goods.

In this paper we evaluate the impact of the Tax Reform Act of 1986 on U.S. economic growth. We first calculate effective tax rates on income from capital employed in corporate, noncorporate, and household sectors. We then project the future growth of the U.S. economy with and without the 1986 tax reform. We find that much of the potential gain in welfare was dissipated through failure to index the income tax base for inflation. The most promising avenue for future reform is to include income from household assets in the tax base, while reducing tax rates on business income.

A monetary model of asset pricing is used to explain observed correlations between money velocity and stock prices. Output stocks cause velocity and nominal stock prices to move in opposite directions but may cause velocity and deflated stock prices to move in the same direction. Although monetary shocks are neutral, changes in monetary expectations have real effects because of their impact on the expected purchasing power of money balances carried into the future. Thus changes in expected monetary growth alter expected real equity returns and inflation, and changes in monetary uncertainty alter the equity risk premium.

This paper examines the entry implications of physician advertising. Evidence suggests that advertising inhibits entry into this market. Nevertheless. experienced physicians (incumbents), to whom advertising would offer the greatest financial benefit, in fact advertise less--a paradox that may be explained by nonfinancial concerns, such as unwillingness to break well-internalized professional norms against advertising. Physician advertising has risen sharply in recent years, and it appears that this trend will continue. If incumbents increasingly resort to advertising, there could be a substantial redistribution of income from less-well-established physicians to better-established ones.

This paper develops a theory of job matching in which matching information has both job-specific and occupation-specific components. If occupational matching is significant, then the theory predicts that for those who have switched jobs but remained in the same occupation, increased tenure in the previous job lowers the likelihood of separation from the current job. These predictions are tested using job tenure data from the National Longitudinal Survey's youth cohort. In general, the data are consistent with the occupational matching hypothesis.

We consider a model in which the market period is divided into T rounds of trading, with the arrival of consumers determined exogenously. A monopolistic market maker sets the bid-price and the ask-price in each round, accepting all trades at the stated prices. Optimal prices remain constant when the aggregate supply and demand are known to the market maker, even if supplies and demands within individual rounds are not known. Examples illustrate the endogenous determination of inventory holding costs. The viability of a market-maker system is compared to an auction market with and without a “sophisticated” trader.