This paper examines the problem faced by the Federal Reserve in announcing its private information about its future policies. Because it would like to manipulate expectations and pursue a time-inconsistent policy, the Fed cannot reveal its policy objectives precisely and credibly. It can, however, communicate some information about its goals through the cheap talk mechanism of Vincent Crawford and Joel Sobel: making announcements that are imprecise, and only giving ranges within which these goals may lie. Copyright 1989 by American Economic Association.

Are financial ratios an observed quantity that is influenced by firms or capital and product markets? The current body of empirical research concentrates on the time series behavior of such ratios when corporate distress is revealed. In this study the time series properties of joint-concern firms is examined. It is shown that for six financial ratios under examination, the data are consistent with partial adjustment process with finite adjustment durations. These durations are estimated through a methodology that does not require an a priori knowledge of the level toward which ratios are adjusted. Furthermore, the order of the six discerned durations is consistent with common wisdom. Copyright 1989 by MIT Press.

ABSTRACT This paper values a contingent claim to discrete stochastic cash flows generated by a Poisson arrival process with a randomly varying intensity parameter. In the most general case, both the size and the arrival intensity of cash flows may correlate wih state variables in a continuous time economy. Assuming the conditions of an intertemporal capital aset pricing model, solutions for the value of the contingent claim can be found using various techniques. The paper suggests immediate applications to the valuation of insurance contracts, the decision to build a firm with unknown future investment opportunities, and the pricing of mortgage‐backed securities.

We derive and test a dynamic discrete-time model of asset returns. Both the risks of individual securities and equilibrium risk premia change predictably in the model, but these changes can be attributed to movements in the returns and prices of only two well-diversified portfolios. Any other components of returns should be unpredictable. Using the generalized method of moments, the model is estimated and tested on portfolios of equities. We find the data supportive of the model’s restrictions, even when instruments designed to capture the January effect are employed.

Gary Becker's "Rotten Kid theorem" asserts that if all family members receive gifts of money income from a benevolent household member, then even if the household head does not precommit to an incentive plan for family members, it will be in the interest of selfish family members to maximize total family income. I show by examples that the Rotten Kid theorem is not true without assuming transferable utility. I find a simple condition on utility functions that is necessary and sufficient for there to be the kind of transferable utility needed for a Rotten Kid theorem. While restrictive, these conditions still allow one to apply the strong conclusions of the Rotten Kid theorem in an interesting class of examples.

Gary Becker's "rotten kid theorem" asserts that if all family members receive gifts of money income from a benevolent household member, then even if the household head does not precommit to an incentive plan for family members, it will be in the interest of selfish family members to maximize total family income. The author shows by examples that the rotten kid theorem is not true without assuming transferable utility. He finds a simple condition on utility functions that is necessary and sufficient for there to be the kind of transferable utility needed for a rotten kid theorem. While restrictive, these conditions still allow one to apply the strong conclusions of the rotten kid theorem in an interesting class of examples. Copyright 1989 by University of Chicago Press.

The preference reversal phenomenon was believed to be inconsistent with the ransitivity axiom of decision theory. However, recent papers have demonstrated that previously observed preference reversals could be explained by subject violations of the independence axiom or the compound lottery axiom. The present paper reports the results of experiments in which a substantial proportion of subject responses violate the asymmetry axiom. These results are inconsistent with expected utility theory and its generalizations.

The error Components regression model is now widely applied in econometics and statistics. Given the potentially high costs of incorrectly excluding the component from the model, an error components test should have high power. In addition, if a test is to gain acceptance from practitioners, the test should be computed easily. To obtain improved critical-value approximations, we introduce a standardized Lagrange multiplier (SLM) test statistic, which is centered and scaled to have a zero mean and unit variance under the null hypothesis. We also examine the F test, which is easily computed and has a well-known exact distribution under the null hypothesis if the regression errors are normally distributed