Contrary to the standard economic advice, many regulations of financial intermediaries, as well as other regulations such as blue laws, fishing rules, zoning restrictions, or pollution controls, take the form of quantity controls rather than taxes. We argue that costs of enforcement are crucial to understanding these choices. When violations of quantity regulations are cheaper to discover than failures to pay taxes, the former can emerge as the optimal instrument for the government, even when it is less attractive in the absence of enforcement costs. This analysis is especially relevant to situations where private enforcement of regulations is crucial.

In June 1997, the New York Stock Exchange lowered its minimum price increment on most stocks from eighths to sixteenths. We use a sample of institutional trades to directly measure the effect of this tick size reduction on execution costs. Though quoted and effective spreads decline, realized execution costs for these institutions increase after the change to sixteenths. Costs increase most for orders that aggressively demand liquidity, including large orders, orders placed by momentum traders, and orders not worked by the trading desk. These findings emphasize that spreads are not a sufficient statistic for market quality. Smaller tick sizes may actually reduce market liquidity.

We consider an environment in which individuals receive income shocks that are unobservable to others and can privately store resources. We provide a simple characterization of the unique efficient allocation of consumption in cases in which the rate of return on storage is sufficiently high or, alternatively, in which the worst possible outcome is sufficiently dire. We show that, unlike in environments without unobservable storage, the symmetric efficient allocation of consumption is decentralizable through a competitive asset market in which individuals trade riskfree bonds among themselves.

Recently, Penman and Sougiannis (1998) and Francis, Olsson and Oswald (1999) compared the bias and accuracy of the dividend discount model (DDM), discounted cash flow model (DCF), and Edwards-Bell-Ohlson residual income model (RIM) in explaining the relation between value estimates and observed stock prices. Both studies report that, with non price-based terminal values, RIM outperforms DCF and DDM. Our primary research objective is to explore whether, over a five-year valuation horizon, DDM, DCF and RIM are empirically equivalent when Penman's (1998) theoretically terminal value expressions are employed in each model. Using Value Line terminal stock price forecasts at the horizon to proxy for such values, we find empirical support for the prediction of equivalence between these three price-based valuation models. Our secondary research objective is to demonstrate that, within each class of the DCF and RIM valuation models, the model that employs Value Line forecasted price in the terminal value expression will generate the lowest pricing errors, compared to models that employ non price-based terminal value under an arbitrary growth assumption. Results indicate that, for both DCF and RIM, price-based valuation models outperform the corresponding non price-based models by a wide margin. We also revisit the issue of the apparent superiority of RIM, and find that this result does not hold in a level playing field where an approximation of ideal terminal values is employed. In fact, the price-based RIM model is marginally outperformed by the price-based DCF and DDM models, in terms of pricing errors as well as its ability to explain current market price.

State-Owned and Privately Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity by Kathryn L. DeWenter and Paul H. Malatesta. Published in volume 91, issue 1, pages 320-334 of American Economic Review, March 2001

Market Trade in Patents and the Rise of a Class of Specialized Inventors in the 19th-Century United States by Naomi R. Lamoreaux and Kenneth L. Sokoloff. Published in volume 91, issue 2, pages 39-44 of American Economic Review, May 2001

A common claim in the nonrenewable resource literature is that improvements in technology may largely offset the effects of increasing scarcity over time. This study provides perhaps the first empirical evidence on this issue by analyzing the determinants of the average finding cost for additional petroleum reserves in the United States over the 19671990 period. Using a new index of the level of technology, our analysis suggests that technological change played a major role in allaying what would otherwise have been a sharp rise in the average cost of finding additional reserves of natural gas. The impact of technological change on finding costs for U.S. crude oil reserves has been more modest. To place our work in context, we note that in recent years there has been renewed interest in the causes and consequences of technological change. At the macroeconomic level, a huge literature modeling the impact of technological innovation on economic growth and living standards has emerged [see, e.g., Paul Romer (1990) and Gene M. Grossman and Elhanan Helpman (1991)]. At the micro level, increasingly sophisticated methods are being used to assess the links between technological change, productivity, and average or marginal costs at the sectoral level [see, e.g., Samuel Kortum and Saul Lach (1995)]. The potential effects of technological change in alleviating the increasing scarcity of nonrenewable resources are widely discussed in the resource and environmental economics literature. The simplest variant of the Harold Hotelling (1931) model predicts that nonrenewable resource prices should rise at a rate equal to the real rate of interest. It is well known, however, that

We develop a new test of a parametric model of a conditional mean function against a nonparametric alternative. The test adapts to the unknown smoothness of the alternative model and is uniformly consistent against alternatives whose distance from the parametric model converges to zero at the fastest possible rate. This rate is slower than n[superscript -1/2]. Some existing tests have nontrivial power against restricted classes of alternatives whose distance from the parametric model decreases at the rate n[superscript -1/2]. There are, however, sequences of alternatives against which these tests are inconsistent and ours is consistent. As a consequence, there are alternative models for which the finite-sample power of our test greatly exceeds that of existing tests. This conclusion is illustrated by the results of some Monte Carlo experiments.

Standard econometric analysis incorporates racial classification as an exogenous binary variable. However, econometric specification of racial identity by a simple binary variable masks differences in the meaning and use of racial/ ethnic identity across social groups. Consider an analysis of earnings differences between nonHispanic whites and Hispanics. A white/brown dichotomous variable in the earnings equation is clearly inappropriate since a large fraction of Hispanics either self-identify as white (regardless of how they are seen by others) or have physical features that are indistinguishable from non-Hispanic whites (though they may self

J. Carr Bettis, John M. Bizjak, Michael L. Lemmon, Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders, The Journal of Financial and Quantitative Analysis, Vol. 36, No. 3 (Sep., 2001), pp. 345-370