Roger N. Craine, James L. Pierce, Interest Rate Risk, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 4, Proceedings of Thirteenth Annual Conference of the Western Finance Association, June 20-26, 1978 (Nov., 1978), pp. 719-732

This article provides the beginnings of a positive theory of accounting by exploring those factors influencing management's attitudes on accounting standards which are likely to affect corporate lobbying on accounting standards. Certain factors are expected to affect a firm's cashflows and in turn are affected by accounting standards. These factors are taxes, regulation, management compensation plans, bookkeeping costs, and political costs, and they are combined into a model which predicts that large firms which experience reduced earnings due to changed accounting standards favor the change. All other firms oppose the change if the additional bookkeeping costs justify the cost of lobbying. This prediction was tested using the corporate submissions to the FASB's Discussion Memorandum on General Price Level Adjustments. The empirical results are consistent with the theory.

The author determines which revenue schedule, when applied by economic regulation to production units, will result in an optimum response. He points out that regulations must be stable for a long-enough period to be taken seriously by a firm, although they should not be considered to be immutable, and that good regulatory strategy encourages cheap firms to produce more and expensive firms to produce less. A model framework is described for determining optimal revenue function and the various dependency factors are characterized. Two components, the traditional price signal and a penalty for departure from the quantity target, comprise the optimal reward function, which means that it is not redundant for economic planners to set both prices and production quotas. This analysis can be applied to environmental economics in terms of effluent standards.

Cartels are inherently unstable. At the joint profit-maximizing price and output every member has an individual incentive to expand output, secretly if possible, and cheat on the cartel even though it is better off with the cartel intact than if the cartel dissolved and the members competed. Dale Osborne has recently proposed a rule for cartel members which, if followed, will pose a credible threat of lost profits to potential cheating members and thereby reduce the inherent instability of the cartel. The rule is simple: once cheating in the form of increased output is detected, each member should increase output in the same proportion as the cheater so as to maintain the same share of the output as under joint profit maximization. This market share maintenance rule forces the cheater to share in the decline of profits and hence induces it to help the loyal members revitalize the cartel or, perhaps, not cheat in the first place. Following this rule the cartel should be far more stable than traditional theory would predict, consistent with the recent history of the Organization of Petroleum Exporting Countries (OPEC) which has remained remarkably stable despite prices incredibly far above some members' costs. The purpose of this comment is to point out some improvements in Osborne's analysis. In Section I it is shown that his proof that the market share maintenance line has a common tangency with all of the cartel members' iso-profit surfaces at the point of joint profit maximization is too restrictive. A more general proof is provided. In Section II it is pointed out that his proof that the market share maintenance rule provides the noncheater a profit-increasing retaliation against the cheater is not valid, but that the rule retains many advantages which Osborne does not mention. Section III points out some advantages of central purchasing agencies which Osborne has overlooked in his section on purchasing strategies.