Knowledge that Transforms

UMEROUS theories of commercial bank N behavior have been proposed. In all of them, some form of profit maximization has been posited, either explicitly or implicitly, as the motivating force. Therefore, the rates of return, positive and negative, which a bank realizes from its assets and liabilities are important determinants of a bank's portfolio composition. Conversely, the composition of a bank's portfolio is an important determinant of its profits.' The relevant rates of return on earning assets, of course, are not easily observed nominal rates; servicing and processing costs must be deducted. Similarly, the relevant rates for liabilities are not observable interest payments per dollar; servicing costs net of service charges to depositors must be added. The relevant rates of return are net rates, and to apply a theory of bank behavior it is necessary to have estimates of these net rates. The purpose of this paper is to provide empirical estimates of the net rates of return which banks realize on various elements of their portfolios. Regression methods are utilized to allocate revenue and cost among the elements of bank portfolios.2 Thus, given observations of a cross section of banks. least-squares regressions of net current operating income (and other variants of profit) on various assets and liabilities are computed. The coefficients are estimates of net rates of return. The first section of the paper explains the analytical framework underlying the study and describes the data. The second and third sections report applications of the model to different samples of banks. By far the richest set of data concerns member banks in the Tenth Federal Reserve District, which is analyzed in section II. In section III, data for Connecticut commercial banks are studied. The fourth section of the paper briefly compares the estimates of net rates of return at Tenth District and Connecticut banks.

CONVENTIONAL price theory predicts that industries in which output is produced by a few dominant firms may, in the long run, earn higher rates of return on the owners' investment than the opportunity cost of the equity capital, commonly called the normal or competitive rate of return. The emphasis on the long run recognizes that actual profit rates differ from normal in the short run for reasons independent of the number of sellers, e.g., changes in demand or cost which raise or lower profits until the reallocation of resources pushes the industry toward long-run equilibrium. The word may indicates that seller concentration is a necessary, but not sufficient, condition. For instance, if the few sellers fail to cooperate with regard to price and output, profits well turn out to be normal. Or, if entry is relatively easy, the oligopolists set a price close to the competitive level in order to discourage potential entrants. A price policy so designed is called pricing, the limit being that price above which entry would be attracted.' Joe Bain has examined the latter possibility by measuring the influence of barriers to entry, classified as very high, substantial, and moderateto-low, on the profit rates of the leading firms in a sample of oligopolistic industries for the periods 1936-1940 and 1947-1951.2 He expected that the price and the monopoly price would probably coincide in the very high barrier class while oligopolists in markets with substantial or moderate barriers might find it profitable to set an entry-forestalling price below the monopoly level, a price which approaches the competitive price as entry barriers decrease. Therefore, profit rates should decline as barriers to entry decrease. Bain found a distinct difference between the average profit rates of those industries in the very high barrier category and those in the other classes. No such clear difference appeared between the substantial and the moderate-to-low barrier classes. He further found . . that seller concentration alone is not an adequate indicator of the probable incidence of extremes of excess profits and monopolistic output restriction. The concurrent influence of the condition of entry should clearly be taken into account.' The purpose of this paper is to present the results of research into the relationship between seller concentration, barriers to entry, and profit rates for 1950 to 1960 to determine whether the pattern Bain found holds for a period of time that was not part of the Great Depression or of rapid postwar inflation. The findings support Bain's results, suggesting that a beginning has been made toward the accumulation of some evidence regarding the influence of two major aspects of market structure on rates of return.

The report presents a new theoretical model of military alliances and other international organizations. The assumptions basic to the model are that nations act in their own best interests and that there is a 'public goods' aspect to all joint undertakings. The main conclusions drawn from the analysis are that (1) a less than optimal amount of resources will be devoted to an alliance or other international organization; (2) the burden of an alliance will be borne in a disproportional way, the larger members paying more than their proportional share. Empirical data from NATO and the United Nations are presented in support of these conclusions.

Journal Article A Generalization of the Composite-Good Theorem for Imperfect Markets Get access Nissan Liviatan Nissan Liviatan The Hebrew University of Jerusalem Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 33, Issue 1, January 1966, Pages 45–56, https://doi.org/10.2307/2296640 Published: 01 January 1966