We propose a parsimonious, comprehensive proxy for innovations in limited arbitrage: innovations in ETFs’ premium. Consistent with a common component, we confirm limited arbitrage factors, LAFs, constructed from ETFs’ premium innovations spanning four asset classes are correlated. Further, we find that equity LAFs are negatively priced in the cross-section of stock returns. Our pricing tests also confirm that LAFs provide pricing information beyond well-known limits of arbitrage: illiquidity and idiosyncratic volatility. Overall, our findings suggest that limited arbitrage risk is priced and LAF is a relevant risk-factor.

elsewhere (1982), economists' beliefs that modern capitalism is a fine innovation-generating machine have no intellectual grounding in contemporary neoclassical theory. The twin theorems take technologies as given. The apparent effectiveness of capitalism in this arena must reside in characteristics and mechanisms other than those featured in the microeconomic theory textbooks. In our book, we attempt to analyze these. It also is true that the capitalist engine is a much more complicated one than many economists seem to think. I presently am

In a recent article in this Review, Morton Paglin proposes a measure of concentration which he claims will correct the Gini ratio for overstatement in populations where each individual may be expected to vary his income or wealth over his life cycle. The Paglin measure suggests that the Gini ratio overstates income concentration in the United States by a third and does not reveal a 23 percent decline in concentration which has occurred between 1947 and 1972. These results are based on an improper decomposition of the Gini ratio. In this note I decompose the Gini ratio to derive the Paglin measure. It is shown to correct for neither demographic nor life cycle income effects and to understate intracohort income or wealth inequality.' If properly normalized, the Paglin measure shows that the Gini overstates U.S. income concentration by 7 percent or less, and indicates a decline in U.S. interfamily income concentration of less than 12 percent. Four percentage points of this decline are the result of demographic change, while less than 7 points (comparable to the 5 percent decline of the Gini) are the result of decreased income concentration within cohorts of family heads. Decomposition further reveals major changes in the division of income among cohorts and in concentration of income within cohorts. These changes compensate each other in the Paglin measure, the use of which as a measure of income or wealth concentration is not recommended. The Gini concentration ratio

In the June 1976 issue of this Review, Larry Orr provided a theoretical framework for ascertaining the optimum level of transfer payments. Building on the foundations of the theory of public goods, he demonstrates that the optimum level of such transfers is a unique function of the (diminishing) marginal utility to taxpayers of improved income support for the poor and the (increasing) marginal cost to taxpayers of larger transfer payments. A unique feature of Orr's approach is his recognition of differences among individuals (taxpayers and recipients alike) in their perceived marginal utilities and costs and his resolution of such differences by simple majority rule. Thus, the optimum level of transfer payments emerges from his model as a unique manifestation of both democratic and economic principles. Orr utilizes this theoretical framework to rationalize the disparity in welfare benefits available in the different states. The focus of his empirical application is on the Aid to Families with Dependent Children (AFDC) program, for the years 1963-67 and 1968-72. In seeking to apply his theoretical framework, Orr must of course identify empirical approximations for his basic arguments. In so doing, I believe he has obscured a critical distinction between racism and classism, and exaggerated the significance of racial prejudices for transfer policy.' Although this in no way detracts from the completeness of his model, it is an issue of sufficient concern to merit some further consideration.