The association between parents' health practices and children's health requirements is explored in this paper. A variance components model, incorporating unobserved family effects in the estimation procedure, is used. Mother's education is positively related to both children's days of recuperation and visits to medical facilities. Although each of the health practices examined here is significantly related to the mother's education, each health practice is also related to children's health needs independently of mother's education: Good maternal health practices are associated with 1.7 additional days of recuperation and 2.3 additional visits to medical facilities for a child per annum.

The papers in this volume and briefly summarized in this introduction document that: (1) executive compensation is positively related to share price performance: (2) poor firm performance is associated with increased executive turnover; (3) managers choose accounting accruals in ways that increase the value of their bonus awards; (4) the adoption of new short- and long-term executive compensation plans and golden parachutes are associated with positive share price reactions; (5) the death of a firm's founder is associated with positive share price reactions; and (6) managers are less likely to make merger bids that lower their stock prices when they hold more stock in their firm. These findings are interpreted as generally supporting the view that executive compensation packages help align managers' and shareholders' interests.

The unique characteristics of options enable investors to create nonnormal portfolio return distributions that cannot be replicated with other assets. This analysis explores the power of various investment selection criteria to identify efficient portfolios from investment strategies involving call options and treasury bills, stocks, and covered option writing. The preference structure for strategies incorporating options is compared to traditional stock-fixed income investments, and the importance of options to investor utility maximization is illustrated. This study reveals that rules of stochastic dominance that place few restrictions on investor preference functions and asset return distribution are appropriate criteria by which to rank portfolios containing options and other assets.

When Keynes came to sum up the central message of the General Theory for the economics profession, in a remarkable but by now long-forgotten QJE article of 1937, he began with a philosophical disquisition on the behavior of mankindunder uncertainty. Here as elsewhere, Keynes made it abundantly clear that he shared Frank Knight's distinction. Uncertainty did not mean risk-that which is, at least in principle, reducible to well-defined actuarial probabilities. By uncertainty Keynes intended, I believe, to convey the idea of ignorance-that which is essentially due to insufficient or precarious knowledge of the mechanism by which the future is generated out of the past. The Keynesian scenario looks out over an economic world that is rife with uncertainty. In that world, expectations play an important dual role as both a manifestation of uncertainty and a cause of it. Such expectations are arbitrary to some degree because they can be based on almost anything, including self-fulfilling expectations of the behavior and expectations of others. And, as Keynes pointed out, based on so flimsy a foundation, these expectations of expectations are subject to sudden and violent changes. It follows that while there may ultimately be some long-run forces drawing it toward full employment, capitalism may also have some deep-seated tendencies toward shortrun instability. Unadulterated laissez-faire is likely to be out of equilibrium much of the time, and even when it is in equilibrium there is no guarantee of being in a equilibrium. Whether in a state of bad equilibrium or merely in disequilibrium, such coordination failures generate undesirable macroeconomic consequences like unemployment which can cause very significant welfare losses. By the ultimate logic of this Keynesian worldview, then, the stage is set for some form of government intervention to recoordinate the economy into a better configuration. Any such government policy will inevitably introduce some microeconomic distortions, but as an empirical matter such losses tend to be small, relative to the enormous welfare gains from having an economy operate at its full-employment level. Such general considerations do not indicate the best form of government intervention to stabilize the macroeconomy. Indeed, we do not currently have a general, realistic framework within which a meta-issue like that might be properly addressed. Nevertheless it is possible, I believe, to give some common sense criteria for desirable forms of government intervention. It is my contention that economists have not been sufficiently imaginative in devising operational mechanisms or systems possessing advantageous macroeconomic properties. The usual fiscal and monetary policies are, to my mind, sledgehammer-like tactics for controlling unemployment and inflation. They do the job, but clumsily, by brute force-and they can leave a big mess afterwards. I think it is possible to find subtler alternatives that operate more cleanly and with a softer touch by taking a page from the book of Adam Smith. A good mechanism for fighting unemployment and inflation should have several noteworthy characteristics. It should be decentralized, based on the natural microeconomic incentives of a market-like environment. It should work more or less automatically, keeping to a minimum the need for using discretionary government policy. And, in a highly uncertain world, it should be robust in retaining its desirable macroeconomic characteristics over a wide range of possible situations or circumstances-including some that are currently unforseen. I want to argue that a superior form of government policy for combating unemploy*Department of Economics, Massachusetts Institute of Technology, Cambridge, MA 02139.

Many economic studies provide empirical evidence regarding cross-sectional differences in firm profitability. In most of these studies, firm profitability is measured by an accounting rate of return (net income dividend by the book value of assets, hereafter, ARR) rather than an economic rate of profit.' Franklin Fisher and John McGowan define the firm's economic rate of profit (IRR) as that interest rate which equates the present value of its net revenue stream to its initial outlay (1983, p. 82). Fisher and McGowan examine the analytic relation between a firm's ARR and its IRR in a series of and conclude that the ARR is such a bad surrogate for the IRR that the results of ARR-based empirical studies are likely to be (p. 91). William Long and David Ravenscraft (1984) have criticized the theoretical work of Fisher and McGowan because the nature of the analytic relationship between the ARR and the IRR in the context of highly simplified hypothetical examples may not be indicative of the nature of the relationship in empirical settings. Their criticism adopts the utilitarian view that the ARR has to be treated as a suitable surrogate for the IRR as long as no preferable alternative measure of profitability is available for empirical work. This view has merit as long as the measurement error which is contained in the ARR is random rather than systematic. Unfortunately, the nature and extent of the measurement error which is contained in the ARR in a particular empirical setting can only be determined unequivocally if the IRR is unequivocally known. In such a case, of course, there would be no need to rely on the ARR at all. Due to this unhappy circle, empirical research on firm profitability has continued to rely on the ARR despite the fact that many persons reasonably believe that the results of such research may be totally misleading (Fisher and McGowan; G. C. Harcourt, 1965), while others reasonably believe that the results are reliable enough to form a basis for policy decisions (Long and Ravenscraft). Recent work by Y. Ijiri (1978; 1979; 1980) and by myself (1982) has shown that conditional IRR estimates can be obtained from data in firms' financial statements. While these IRR estimates are conditional, they do abstract from certain extraneous factors that influence ARRs and that differ across firms. Consequently the conditional IRR estimates are free from some of the sources of measurement error which are known to contaminate the ARR. Thus, the conditional IRR estimates can be used to provide evidence on whether these sources of measurement error have or have not affected the outcome of prior studies in which profitability was measured by the ARR. Such evidence can help to objectively resolve the conflict between the opposing views on the reliability of ARR-based profitability research. This paper uses conditional IRR estimates to examine the properties of the measurement error in the ARR in a study of the relationship between firm profitability and firm size. The remainder of the paper is organized as follows. In Section I, the theoretical work of Fisher and McGowan is used *Professor of Accounting, University of Iowa, Iowa City, IA 52242. I gratefully acknowledge the comments of William Albrecht, Dan Dhaliwal, Gary Fethke, Franklin Fisher, Scott Linn, William R. Kinney, Jr., and the participants of a workshop at the University of Florida on earlier versions of this paper. 1 Some authors (for example, William Long and David Ravenscraft, 1984) have used the sales margin ratio (earnings/sales) as a measure of profitability. However, if one views profitability as return per unit of sacrifice, the sales margin ratio is not a profitability measure since it ignores the sacrifice (or investment) required to generate a dollar of sales. Consequently, this paper does not attempt to shed any insight into prior studies that have relied on the sales margin ratio as a measure of profitability.