We model a market populated by two groups of boundedly rational agents: “newswatchers” and “momentum traders.” Each newswatcher observes some private information, but fails to extract other newswatchers' information from prices. If information diffuses gradually across the population, prices underreact in the short run. The underreaction means that the momentum traders can profit by trend‐chasing. However, if they can only implement simple (i.e., univariate) strategies, their attempts at arbitrage must inevitably lead to overreaction at long horizons. In addition to providing a unified account of under‐ and overreactions, the model generates several other distinctive implications.

This study examines the potential profit of ten Variable Length Moving Average (VMA) technical trading rules in ten emerging equity markets in Latin America and Asia from January 1982 through April 1995. The average difference in buy−sell returns after trading costs for each rule and country are compared to a buy and hold strategy. Taiwan, Thailand and Mexico emerge as markets where technical trading strategies may be profitable. We find no strong evidence of profitability for the other markets. However, we find that 82 out of the 100 country–trading rule combinations tested in ten emerging markets, disregarding their statistical significance, correctly predict the direction of changes in the return series. These findings may provide investors with important asset allocation information.

We propose a procedure for measuring the effect of systematic discrimination in the income tax. Different socioeconomic groups are assumed to face different tax schedules. We show that a welfare loss is caused by the group specificity of schedules, the dollar value of which is our measure of discrimination. Defining vertical equity as the dollar value of the tax system's welfare superiority over an equal yield flat tax, discrimination equates to a loss in vertical equity. The Australian income tax is found to discriminate against wage and salary earners, causing a roughly 1% loss of social welfare in 1984.

This paper estimates economic models of the determinants of state benefit levels in the Aid to Families with Dependent Children (AFDC) program using 1969–1992 data. These models have been extensively researched; however, the existing literature has produced an unacceptably wide range of estimates. Using alternative econometric procedures, this paper systematically examines both the specification assumptions underlying previous analyses as well as several additional specification issues. It is, therefore, able to replicate and reconcile estimates from previous studies and to provide updated, consensus estimates of the demand for welfare generosity. It finds that changes in the average level of income within states have small but statistically significant positive effects on benefits with the confidence bounds on the elasticity extending from 0.11 to 0.82. Changes in the effective price of redistribution are found to have, at most, weak negative effects with elasticities in the range of -0.14 to 0.02. These results are used to evaluate the effects of block grant provisions in the recently enacted welfare reform legislation.

A rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts. Several studies document analysts' tendency to systematically underreact to information. Underreaction is inconsistent with rationality. Other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic. This study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts. The evidence indicates that analysts underreact to negative information, but overreact to positive information. These results are consistent with systematic optimism in response to information.

A rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts. Several studies document analysts' tendency to systematically underreact to information. Underreaction is inconsistent with rationality. Other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic. This study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts. The evidence indicates that analysts underreact to negative information, but overreact to positive information. These results are consistent with systematic optimism in response to information.

The pathogenesis of Theiler's murine encephalomyelitis virus (TMEV)-induced demyelinating disease is still controversial. Our hypothesis is that primary infection of oligodendrocytes (OLGs) is not a crucial event in the pathogenesis of demyelination in this model. In fact, it has been proposed that myelin may be destroyed, as an innocent bystander, following an antiviral delayed-type hypersensitivity (DTH) response. This hypothesis would not need widespread oligodendroglial infection, because virus present in other cells would be sufficient to trigger a DTH response. The present study demonstrates that cultured OLGs and astrocytes from susceptible strains of mice (SJL and DBA) and immortalized OLGs can be infected with TMEV in vitro. Infection of OLGs, however, is at very low levels and does not result in overt cytolytic effect. In contrast, infection of immortalized OLGs is very efficient and results in clear cytolysis. Because an important characteristic of DTH responses is the liberation of potentially injurious cytokines into adjacent tissues, we also examined the effects of mouse recombinant tumor necrosis factor-alpha (TNF-alpha), interleukin-1 alpha (IL-1 alpha), and interferon-gamma (IFN-gamma) on cultured OLGs and immortalized OLGs. We found that TNF-alpha caused immortalized OLG cytotoxicity in a time- and dose-dependent manner. In contrast, no cytotoxicity was observed on primary OLGs with any of the above cytokines. To determine whether functional effects could be demonstrated on primary OLGs by either virus or cytokines, we measured mRNA expression of different myelin proteins in primary and immortalized OLGs exposed to virus or TNF-alpha. Neither the BeAn strain or the GDVII strain of TMEV interfered with myelin protein mRNA expression in primary OLGs, whereas GDVII virus dramatically reduced myelin OLG glycoprotein (MOG) mRNA in immortalized OLGs. Interestingly, although even high concentrations of TNF-alpha (10,000 U/ml) did not produce primary OLG cytotoxicity, they resulted in a significant reduction in mRNA for both myelin basic protein (MBP) and MOG in these cells. TNF-alpha (at 500 U/ml) also specifically reduced MOG mRNA in immortalized OLGs. Because immortalized OLGs are considered to be arrested at an early stage of maturation, our results suggest that immature OLGs are susceptible to both virus- and cytokine-dependent cytotoxicity, whereas mature OLGs are resistant to cytolysis by either TMEV or cytokines. TNF-alpha, however, is capable of reducing mRNA expression of myelin proteins in primary OLGs; therefore, it may participate in the induction of demyelination, as suggested by the DTH-mediated hypothesis.

The “NAIRU ” view of the relationship between inflation and the unemployment rate is that there is a value of the unemployment rate (the NAIRU) below which the price level forever accelerates and above which the price level forever decelerates. 1 This view imposes two important restrictions on the dynamics of the price process. This can be seen by examining a simple version of the NAIRU equation: πt − πt−1 = β(ut − u ∗ ) + γst +ɛt, β < 0, γ> 0, (1) where t is the time period, πt is the rate of inflation, ut is the unemployment rate, st is a cost shock variable, ɛt is an error term, and u ∗ is the NAIRU. If ut equals u ∗ for all t, the rate of inflation will not change over time aside from the short-run effects of st and ɛt (assuming st and ɛt have zero means). Otherwise, the rate of inflation will increase over time (the price level will accelerate) if ut is less than u ∗ for all t and will decrease over time (the price level will decelerate) if ut is greater than u ∗ for all t.

Bergstrom has shown that becker's “Rotten Kid theorem” holds in a world of two commodities if their utilities are transferable. The present paper identifies a further circumstance in which the theorem is valid. We show that it also holds in the absence of transferable utility if the externalities are assumed to take the form of a single pure public good.

We investigate stock option exercise decisions by over 50,000 employees at seven corporations. Controlling for economic factors, psychological factors influence exercise. Consistent with psychological models of beliefs, employees exercise in response to stock price trends—exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons. Consistent with psychological models of values that include reference points, employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year.