Knowledge that Transforms

Heterogeneity on both sides of the labor market implies that the correct matching of individuals to firms is of importance. If there is uncertainty about individual productive characteristics, there are both private and social returns to activities that generate information facilitating the assortative matching process. A model of individual investment in information is presented and analyzed. A key assumption is that there are no individuals who have an absolute advantage in all jobs. Under this assumption, all individuals view more accurate information as beneficial and therefore invest in its production. Comparative statics are derived and the model is compared to human capital and signaling-screening models.

This article examines the effects of an experiment in the indexation of bank deposits in Hungary during 1946. It is argued that this experiment reduced substantially the tax base against which the inflation-tax rate, determined by the issue of government currency, could be applied. Consequently, indexation was the decisive mechanism making the Hungarian hyperinflation of 1945-46 atypical of other hyperinflations. It is suggested that contemporary indexing strategies should exclude demand deposits from indexation, especially in countries where a substantial amount of government revenue is collected from new money issue.

The authors previously had extended the theoretical put-call parity models developed by Stoll (1969) and Merton (1973) to include a dividend term. Ex post tests of the models were generally consistent with market efficiency, but a sufficient number of hedges had high enough returns to warrant analysis of ex ante results. The purpose of this study was to construct hedges 5 and 15 minutes after they were initially identified as having an ex post return in excess of $20 per hedge. The results indicate that mispriced options adjust and that economic profit is sensitive to the level of transaction costs and unlikely even for member firms.

The equilibrium value of a levered firm facing growth opportunities is shown to involve the valuation of a lottery over (cooperative) games rather than a lottery over specific monetary outcomes. In the absence of assumptions about negotiating risk, the value of the firm's claims is seen to be ambiguous even with zero transactions costs. This ambiguity is compounded if the core of the game is empty. This paper rationalizes specific financial instruments and institutions as means for attenuating negotiation costs and core existence problems. Furthermore, the valuation of these instruments requires determining the certainty-equivalent of a lottery over games.

We embed the Sharpe-Lintner, two-parameter asset pricing theory in an intertemporal general equilibrium model. The investment opportunity set changes stochastically over time; in general the short-term and long-term interest rates and the distribution of the rate of return of the market portfolio are non-stationary. This non-stationarity, which is admissible in the Sharpe-Lintner model, has two implications: First, it may bias econometric methods which fail to explicitly take into account the non-stationarity. Second, the sequential application of the Sharpe-Lintner model in the discounting of stochastic cash flows becomes computationally complex and of little practical use.