A reconsideration of the Pigovian theory of regulating externalities via taxation is undertaken for environments with private information. The presence of private information may have no effect on the social optimum; but when it has an impact, it is to cause a group of different agents to share the same production or consumption levels. The model developed provides an appealing characterization of when such situations transpire: they occur when the individuals who desire most to engage in some activity are the ones who society least wants to participate. Since such instances could potentially be regulated by the imposition of quantity controls, this may explain authorities' apparent predilection for quantity limits rather than tax-cum-subsidy schemes to manage many externalities

A model of financial intermediation to determine the market value of bank equity, deposits and deposit insurance is developed. The implicit equilibrium interest rate on deposits is derived and analyzed. Three types of risks are considered in the model: interest-rate risk, financial risk and default risk. The effect of different regulatory measures, such as capital adequacy, reserve and liquidity requirements, deposit insurance and interest rate ceilings is analyzed and their impact on the bank behavior is also assessed. Moreover, we investigate the interactions among these measures to determine which are dominant under alternative circumstances, and which are redundant.

[This study addresses the issue of self-selection bias in the analysis of economic consequences of mandatory accounting changes. Self-selection bias arises from the use of truncated, nonrandom samples to assess the behavior of firms using different accounting methods at the time of the mandated change. Using ordinary least squares (OLS) to estimate regression models containing data generated by self-selected firms can yield inconsistent and inefficient estimates of regression parameters. The present study uses the case of SFAS No. 2, promulgated in 1974, to illustrate the effects of selection bias on studying the economic consequences of accounting regulation. The estimation method used to correct for self-selectivity is a two-stage switching regression procedure developed by Heckman (1976, 1979) and Lee (1976, 1978). Employing this research method requires developing a complete model that explains the accounting choice decision and R&D investment decision. The switching regression model is estimated with data from 1973 to correct for self-selection bias and to predict the likely economic consequences of SFAS No. 2 prior to its adoption. The unbiased estimates of the R&D equations are then used with the Wald test to examine structural changes in the R&D model after the implementation of SFAS No. 2. To examine the sensitivity of the results to self-selection bias, the analysis is replicated with OLS estimates. The results of the switching regression analysis indicate that selection bias exists in both the capitalizing and expensing groups. This bias is further shown in systematic differences between the results of OLS and switching regression estimates. The OLS estimates consistently understate the predicted values of R&D expenditures for both groups and appear to understate the negative impact of SFAS No. 2 on the capitalizers' R&D expenditures. The results of the Wald test show that observed changes in the capitalizers' R&D spending behavior after 1974 are attributable, at least in part, to general macroeconomic phenomena. However, after controlling for the effects of economywide changes, the analysis shows an incremental effect of SFAS No. 2 on the R&D expenditures of former capitalizers

We test whether airline consolidations generate monopoly profits by examining returns to listed carriers around horizontal airline-acquisition bids and evaluating effects of industry concentration on share-price reactions. Under Civil Aeronautics Board (CAB) regulation, returns to targets, bidders, and rival carriers are positive functions of changes in concentration implied by bids. Changes in concentration after deregulation have no positive effect on carrier returns. These results support Jordan's (1970, 1972) hypothesis that CAB activities fostered carrier collusion. There is no evidence of monopoly gains from carrier consolidations after deregulation

From the Santa Monica Freeway to the New Jersey Turnpike, drivers are unhappy about the cost of automobile insurance and are asking government to do something about it. California voters approved Proposition 103 in 1988; it requires that all rates be approved by the state insurance commissioner, attempts to reduce rates by 20 percent, and dramatically limits the criteria that can be used to rate drivers for premium purposes. New Jersey enacted an insurance reform law that seeks to charge insurers for a deficit-burdened state underwriting pool and prohibits the use of age, sex, and marital status in rating drivers for premiums. Other states enacting or considering significant rate rollbacks or reform since 1988 include Arizona, Florida, Michigan, Nevada, and Pennsylvania. This article describes the current consequences of similar policies adopted in Massachusetts more than a decade ago. The experience suggests that recent moves by other states in the same direction will ultimately prove quite expensive as the proportion of high-cost drivers increases and as insurers lose the incentive to write policies and control costs. The trend away from insurance premiums based on expected cost also reduces incentive effects for drivers, since insurance premiums provide a link between tort judgments and consumer decisions.

[A simple classical Walrasian framework is proposed for the study of manipulation among asymmetrically informed risk-averse traders in financial markets, and it is used to analyze the occurrence of a market breakdown in the trading system. Such a phenomenon occurs when the outsiders refuse to trade with the insiders because the informational motive for trade of the insider outweighs her hedging motive. We demonstrate the robustness of our results by proving that the market collapse condition extends not only to the linear strategy function, but to the whole class of feasible nonlinear strategy functions. Implications for insider-trading regulation are sketched

A simple classical Walrasian framework is proposed for the study of manipulation among asymmetrically informed risk-averse traders in financial markets, and it is used to analyze the occurrence of a market breakdown in the trading system. Such a phenomenon occurs when the outsiders refuse to trade with the insiders because the informational motive for trade of the insider outweighs her hedging motive. We demonstrate the robustness of our results by proving that the market collapse condition extends not only to the linear strategy function, but to the whole class of feasible nonlinear strategy functions. Implications for insider-trading regulation are sketched