Since the publication (1976) of the classic Lucas critique, researchers in empirical macroeconomics have endeavored to specify models that capture the underlying dynamic decision-making behavior of consumers and firms who require forecasts of future events. Recently, a number of researchers have developed simple models that have become the workhorses for monetary policy analysis. The models vary considerably with regard to optimizing foundations and explicit treatment of expectations. However, relatively little effort has been devoted to testing the empirical importance of the Lucas critique for these simple models. Can one find specifications that are policy-invariant? This paper develops and implements a set of tests for several monetary policy models used extensively in the literature. In particular, we attempt to test the robustness of optimizing versus nonoptimizing models to changes in the monetary policy regime. We present evidence that shows that some forward-looking models from the recent literature may be less stable than their better-fitting backward-looking counterparts.

Much literature before and after the privatization of Mexico's commercial banking system in 1991–1992 argued that the system was collusive and noncompetitive and would likely continue to be for years. Banks would collude to underloan so that – at least in comparison with what would happen in a competitive system – they could overcharge. Because a parallel literature on lending after bank privatization suggests that the problem is often not too little, but too much, we resolved to test for competitive behavior in the Mexican banking system. Using an empirical approach developed by Shaffer (Econom. Lett. 29 (1989) 321, J. Money Credit Bank. 25 (1993) 49, Federal Reserve Bank of Philadelphia, Working paper no. 93-28R), we find a structural break in the middle of the privatization period that signals the start of an episode of what Shaffer calls “supercompetitive” behavior. In such a supercompetition, banks run at levels of output where marginal cost exceeds marginal revenue. This behavior is consistent with a struggle in which banks take losses now because they think the market share they get in the bargain offers a positive present value of expected future return. The behavior can also be consistent with just the sort of banking crises that ensued in Mexico.

Historically, the average return on S&P stocks has far exceeded the average return on short-term U.S. government debt. Rajnish Mehra and Prescott (1985), for example, found that the average difference was 6.2 percent per year in the 1889–1978 period. They tried to account for this difference by assuming it is a premium for bearing nondiversi � able aggregate risk but found that risk accounted for only a tiny fraction of the difference. They concluded that there is an “equity premium puzzle.” Here, we reexamine this puzzle, taking into account some factors ignored by Mehra and Prescott (taxes, regulatory constraints, and diversi� cation costs) and focusing on long-term

We examine the link between the excess value of a diversified firm and the value of its internal capital market. Subsidies to small financially constrained segments with good relative investment opportunities significantly increase excess value, while transfers of resources from segments with good relative investment opportunities significantly decrease excess value. Of interest is that subsidies to small financially constrained segments with poor relative investment opportunities also significantly increase excess value. However, there is little evidence that this result depends on the diversity of a firm's investment opportunities. We conclude that financing constraints drive the relationship between the internal capital market and firm value.

We find that executives who jump to chief executive officer (CEO) positions at new employers come from firms that exhibit above-average stock price performance. This relationship is more pronounced for more senior executives. No such relationship exists for jumps to non-CEO positions. Stock options and restricted stock do not appear to significantly affect the likelihood of jumping ship, but the existence of an "heir apparent" on the management team increases the likelihood that executives will leave for non-CEO positions elsewhere. Hiring grants used to attract managers are correlated with the equity position forfeited at the prior employer and with the prior employer's performance.

Many clinics that offer in vitro fertilization (IVF) have begun to market the following options to couples: (1) an a la carte program where the couple pays $7,500 per attempt regardless of the outcome; or (2) a money-back-guarantee program where the couple pays a $15,000 fee that covers up to three attempts, however, if after three cycles there is no live-birth delivery, then the full $15,000 is refunded. We assess the a la carte versus the money-back-guarantee programs, and find the surprising result that the money-back-guarantee program appears (for the patients) to be “too good to be true.” That is, the money-back guarantee yields a substantial negative expected profit per couple for the clinics. More importantly from the patients' perspective, the money-back guarantee is the better option for all couples with less than 0.5 success probability per cycle. Virtually all traditional IVF patients have had per-cycle success probabilities below 0.5. A detailed analysis of the key variables—i.e., success rate per attempt, heterogeneity of couples' rates of success, individual couples' “learning” on successive attempts, and cost to the clinic per attempt—shows that these money-back guarantees are unprofitable for the clinics. Since presumably clinics are not in business to lose money, the standard analysis must be missing something major. We suggest that the marketing of money-back guarantees is inducing couples who would previously have used—successfully—other less invasive procedures with fewer side effects and less risk of multiple births to decide to proceed directly to IVF, and that this scenario makes the money-back guarantees profitable for the clinics. The implications of earlier use of IVF are then considered from an overall public policy point of view. Just as mothers everywhere tell their children, “When something looks too good to be true, then it is too good to be true!”

We examine factors leading multiunit chains to adopt a common naming strategy, that is, naming components in a manner that identifies them with each other and the overall chain, rather than a local naming strategy that identifies a chain's components with their locations but not each other. Because chains' naming strategies have been shown to be critical to their success, we examine the effects of component failures on naming strategies. We advance organizational and interorganizational learning processes to explain chains' adoption of local naming strategies, which stress local adaptation, or common naming strategies, which emphasize standardization. In contrast to past research emphasizing learning from success, we focus on learning from the failure of strategy, specifically, the failure of a chain's own and other chains' commonly and locally named components. Two fundamental results emerge from our analysis of Ontario nursing home chains' naming strategies from 1971 to 1996. One is that nursing home chains learned from their own and others' failures, and the second is that the chains learned less from failures when they had a historical investment in the failing strategy.

Economists have long emphasized the importance of expectations in determining macroeconomic outcomes. Yet there has been almost no recent effort to model actual empirical expectations data; instead, macroeconomists usually simply assume that expectations are "rational." This paper shows that while empirical household expectations are not rational in the usual sense, expectational dynamics are well captured by a model in which households' views derive from news reports of the views of professional forecasters, which in turn may be rational. The model's estimates imply that people only occasionally pay attention to news reports; this inattention generates "stickyness" in aggregate expectations, with important macroeconomic consequences.