Product liability ideally should promote efficient levels of product safety, but misdirected liability efforts may depress beneficial innovations. This paper examines these competing effects of liability costs on product R & D intensity and new product introductions by manufacturing firms. At low to moderate levels of expected liability costs, there is a positive effect of liability costs on product innovation. At very high levels of liability costs, the effect is negative. At the sample mean, liability costs increase R & D intensity by 15 percent. The greater linkage of these effects to product R & D rather than process R & D is consistent with the increased prominence of the design defect doctrine.

The literature on contracts predicts that some principals will pay agents rents, that is, amounts larger than those necessary to keep the agent in the contract. We calculated the earnings of the average franchisee in seventy franchise systems in various industries to determine whether rents are paid as a solution to the agency problem in franchise contracts. We found that many but not all systems paid rents, both ex post and ex ante, to the average franchisee. The results confirm those of Kaufmann and Lafontaine (1994), who found rents associated with McDonald's, but the magnitude of rents within the systems we study was generally much lower than those of McDonald's.

This paper presents a model that provides an explanation, based on regime switching in the real interest rate and learning, of why tests based on stock-adjustment models, Euler equations, or decision rules—which emphasize short-run fluctuations in inventories and the interest rate—are unlikely to uncover a negative relationship between inventories and the real interest rate. The model, however, predicts that inventories will respond to long-run movements, that is, to regime shifts in the real interest rate. Tests emphasizing cointegration techniques confirm this prediction and show a significant long-run relationship between inventories and the real interest rate.

Blaine Huntsman, Basil J. Moore, Robert M. Soldofsky, Session Topic: Asset Management and Monetary Policy: Discussion, The Journal of Finance, Vol. 24, No. 2, Papers and Proceedings of the Twenty-Seventh Annual Meeting of the American Finance Association Chicago, Illinois December 28-30, 1968 (May, 1969), pp. 239-247

THEORISTS of the American labor movement long have argued over the causes of fluctuations in union membership and the prospects for future union growth. For a number of years, the hypothesis of Commons (1932) and Perlman (1966), which related union expansion to the business cycle, was the most widely accepted explanation of the fluctuations in union membership. the years, a number of critics such as Dunlop (1948), Shister (1953), and Bernstein (1954) challenged the business cycle hypothesis on the grounds that American unionism is too complex and diffuse a social phenomenon to be understood in such simple terms. They contended that a multicausal system (including the cycle) is necessary to account for the rise of trade unionism. Although union theorists have frequently provided statistical data that are consistent with their inferences concerning the major factors influencing union growth, prior to the study by Ashenfelter and Pencavel (1969) their hypotheses had not been tested on an empirical plane which could disprove the suggested causal relationship between such factors and union growth. Ashenfelter and Pencavel (A-P) used multiple regression analysis to estimate a single behavioral relationship, including social and political as well as economic variables, capable of explaining the growth of American trade unions membership in the period 1900-1960. Although the model of A-P apparently has identified the determinants of union growth, there is some question as to whether the model has equally identified the determinants of future union growth. In econometric time-series analysis, it is assumed that differential periods of time are homogeneous, except for differences in the explicit variables of the system that are measured, and for differences in random effects. Over long sweeps of time, this assumption may become very tenuous.' This issue lies at the heart of the recent debate among the so-called saturationists and the school concerning the future prospects of the rate of growth of the American labor movement.2 The saturationists argue that significant changes have occurred within the structure and composition of the American labor force which have caused the past determinants of union growth to be inoperable in the future.3 Proponents of the historical approach challenge the general validity of the influence of structural factors on the comparative propensity of workers to join unions. Taft (1963) contends that the saturationists argument assumes propensities and psychological attitudes which have not been proven. In fact, actual experience has shown these assumptions to be baseless, and not a scintilla of evidence has been presented to justify these conclusions. They maintain the labor movement increases its size in two ways at a modest pace over long spans of time and in sharp spurts at infrequent intervals, ... . and that the slow growth of unionism in the post World War II period easily can be fit into the theory.4 The debate between the saturationists and the school has not yet been resolved. The level of actual union membership has increased by 4,300,000 or 25.4% for the period 1953-1970, but the level of real union membership, as measured by the per cent of nonagricultural employment organized, has declined from 34.1 to 30.1. The recent success of the labor movement in organizing some difficult structural groups such as government employ-

We analyze the role of debt in persuading an entrepreneur to pay out cash flows, rather than to divert them. In the first part of the paper we study the optimal debt contract—specifically, the trade-off between the size of the loan and the repayment—under the assumption that some debt contract is optimal. In the second part we consider a more general class of (nondebt) contracts, and derive sufficient conditions for debt to be optimal among these.

Consider an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total future indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of long-term debt contracts.

Charles Bean, Mathias Dewatripont, John Moore; Special Issue: The Econometrics of Financial Markets, The Review of Economic Studies, Volume 58, Issue 3, 1