John H. Wicks, Affluence and High Household Liquidity: Problems and Opportunities: Discussion, The Journal of Financial and Quantitative Analysis, Vol. 1, No. 1, Proceedings of the First Annual Meeting of the Western Finance Association (Mar., 1966), pp. 53-55

Investment analysis, both for purposes of capital expenditures and for financial investments, is based on an evaluation of cash flows. This evaluation involves the application of interest rates in order to determine whether a given option–a series of cash flows–is profitable or not. For numerous reasons, primarily that of simplicity, it has been traditional to assume that the rates of interest used to measure the worth of an investment are constant. With this assumption it is possible to equate the two familiar investment criteria when investments are independent and outlays are not subject to expenditure constraints, i.e., when capital markets are taken to be perfect in the usual sense. An investment is profitable if its net present value is positive when discounting of cash flows uses the (assumed constant) cost of capital, or if its (assumed unique) internal rate of return is greater than the cost of capital. Equivalence of these two criteria is historically most frequently identified with Irving Fisher [3, 4], and his two-period analysis, portrayed graphically, is generally utilized to establish the correctness of the equivalence of the criteria.

This paper is an attempt to improve on the ability of financial management to arrive at a desirable or close to “optimal” cash balance for a firm at a point in time. There have been several comments on this subject in literature over the years including the contributions of Keynes, Hicks and Samuelson. In recent years Baumol and Beranek have presented us with more specific models. This paper tends to be more operational than the Baumol or Beranek presentations and hence tends perhaps to lose some of the sophistication of the more theoretical models; it attempts to present a reasonably operational method for providing for cash balances for transactions and precautionary purposes. But let us first examine these two models briefly.

We design a compound real options model, which determines the timing of takeovers and characterizes the distribution of the associated surplus. We delineate a relation between the bargaining power of the acquiring firm and the takeover incentives. The takeover threshold is decreasing as a function of the expected primary takeover gain and the embedded divestment gain. Decreased implementation uncertainty stimulates takeover activity. This uncertainty concerns the delay until either primary takeover synergies or subsequent divestment gains are realized. We demonstrate how the relation between volatility and takeover timing depends on the functional form of the profit flow with implementation uncertainty.

A conventional contract is a contract that each side of a bargain expects the other side to insist on, because it is standard and customary under the circumstances. The author considers a process of convention formation in which agents expectations evolve through repeated interactions in a large-population setting. Agents choose best replies given their knowledge of the precedents, subject to some inertia and random error in their choice behavior. Over the long run, this adaptive learning process tends to select contracts that are efficient, and egalitarian in the sense that the payoffs are centrally located on the efficiency frontier of the payoff possibility set. When the payoffs form a convex, comprehensive bargaining set, the process selects the Kalai-Smorodinsky solution.

J. S. Duesenberry's (1949) ratcheting consumption demand is derived as a feature of the optimal dynamic consumption and investment policy given extreme habit formation that prevents consumption from falling over time. Preferences are in effect non-time-separable, extended-real-valued von Neumann-Morgenstern preferences. Consumption increases each time wealth reaches a new maximum. Risky investment is proportional to the excess of wealth over the perpetuity value of current consumption. Extensions constrain the net rate of decrease in consumption with a constant other than zero, add more consumption goods, and constrain on the maximal holding of the risky asset as a proportion of wealth.

The paper considers a bilateral monopoly with uncertainty and asymmetric information, and characterizes necessary and sufficient conditions for the existence of contracts that are efficient and incentive compatible. These contracts can be implemented by a truthful sequential revelation mechanism. Alternatively, they can be interpreted as specifying a class of payment schedules, designating the seller to choose a schedule from this class, and the buyer to pick a point on the chosen schedule. Requirements contracting is similar.

Journal Article Estimating Input Demand Equations by Direct and Indirect Methods Get access H. R. Wills H. R. Wills London School of Economics Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 48, Issue 2, April 1981, Pages 255–270, https://doi.org/10.2307/2296883 Published: 01 April 1981 Article history Received: 01 January 1979 Accepted: 01 November 1980 Published: 01 April 1981