Knowledge that Transforms

Michael Beenstock, Arbitrage, Speculation, and Official Forward Intervention: The Cases of Sterling and the Canadian Dollar, The Review of Economics and Statistics, Vol. 61, No. 1 (Feb., 1979), pp. 135-139

Christos C. Paraskevopoulos, Alternative Estimates of the Elasticity of Substitution: An Inter-Metropolitan CES Production Function Analysis of U.S. Manufacturing Industries, 1958-1972, The Review of Economics and Statistics, Vol. 61, No. 3 (Aug., 1979), pp. 439-442

It is generally believed that market power is an important determinant of profits. Although market power is not observable directly, theories of and industry behavior suggest that it may be correlated with easily measurable variables like size, market share and/or industry concentration, and recent growth. If true, these several associations imply a correlation between observable variables, S, which measure size, market share, and recent growth, and (observable) variables, H, which index profitability. These correlations have been demonstrated in empirical literature and have been adduced as evidence of an underlying (casual) correlation between market power (M) and profitability. In fact, it has been claimed that the predicted profitability of each firm, based on models of type under consideration, provides a single integrated estimator of market power held by firm (Shepherd, 1972, p. 35). Such interpretations of S::fl correlations, however, have been questioned seriously on a number of grounds. On one hand, it has been argued that large size, market share and industry concentration should be attributed primarily to efficiency and superior competitive performance rather than to collusion.' The second major line of attack, on other hand, suggests that S::f1 correlations could result from stochastic processes which, of course, do not imply a correlation between market power, or efficiency, and profitability (Mancke, 1974). Our principal concern in present paper is with possible stochastic determinants of profitability. We argue essentially that while ex ante investment opportunities can be randomly distributed, realized rates of return may not generally be specified as fully determined by stochastic processes (cf. Caves, Gale, and Porter, 1977, pp. 668-669). The implications of this argument are explored in a simulation study based on a rudimentary, but representative, model of and industry behavior. The evidence drawn from this experiment does not support view that empirical relationships between profitability and market structure are likely to be result of random processes. The paper is divided into two parts. The principal section develops a simulation model of behavior that incorporates reasonable market features, and examines effects of randomly distributed ex ante investment opportunities in such a setting. A final section contains concluding remarks and suggestions for further research.

THE present difficulties in social security financing will probably be further compounded in the coming decades by the low birth rate and consequent aging of the population. Workers approaching may have to look forward to minimal social security payments with little prospect of escalator clauses to protect the purchasing power of their pensions. Therefore, it will be necessary to investigate levels of private savings to determine whether prospective retirees will have adequate to cover their needs. If these holdings are inadequate it may be necessary to formulate a policy to stimulate savings amongst families who are approaching retirement. This paper will examine net worth situations of a nationwide sample of men (National Longitudinal Study, 1966-1971) on the eve of retirement (age 45 to 59 at the time of the first interview) to find out (a) the current state of net worth, (b) factors related to high levels of net worth, (c) future prospects for these factors and (d) policies that might be employed to stimulate growth in net worth.

Petroleum Institute, Petroleum Facts and Figures, Washington, D.C., 1971. , Basic Petroleum Data Book, Washington, D.C., 1976. Burright, Burke, and John Enns, Econometric Models of the Demand for Motor Fuel, Rand Report R1561-NSF, Rand Corporation, Santa Monica, Calif., 1975. Chase Econometrics Assoc., Inc., Effect of Tax and Regulatory Alternatives on Car Sales and Gasoline Council on Environmental Quality, 1974. Dahl, Carol A., American Energy Consumption, 'Extravagant or Economical': A Study of Gasoline, Resources and Energy (forthcoming). , Refinery Mix in the U.S., Canada and the E.E.C.. manuscript, Wayne State University, 1979. Houthakker, Hendrik S., Phillip K. Verleger, Jr., and Dennis P. Sheehan, Dynamic Demand Analysis for Gasoline and Residential Electricity, Journal of Agricultural Economics 56 (May 1974), 412-418. Keck, Carol A., Nathan Erlbaum, Patricia L. Milic, and Michael Trentacost, Changes in Individual Travel Behavior during the Energy Crisis, 1973-1974, New York Department of Transportation, Planning and Research Bureau, Preliminary Research Report 67, New York, N.Y., 1974. Motor Vehicle Mfg. Assoc., Auto Facts and Figures, Detroit, MI., various years. Norling, Carol Dahl, Demand for Gasoline, Ph.D. Thesis, University of Minnesota, Minneapolis, MN. Office of Energy Systems Passenger Car Use of Gasoline: Analysis of Policy Options, Federal Energy Administration, Washington, D.C., 1975. Ramsey, James, G. Rash, and B. Allen, An Analysis of the Private and Commercial Demand for Gasoline, this REVIEW 57 (Nov. 1975), 502-507. Sims, Christopher A., Money, Income, and Causality, The Economic Review 62 (Sept. 1972), 540-552. U.S. Department of Commerce, Business Statistics, Washington, D.C., various years. , Statistical Abstract of the United States, Washington, D.C., various years. , Survey of Current Business, National Income Accounts Supplement, Washington, D.C., various years. U.S. Department of Transportation, Highway Statistics Summary to 1965, Washington, D.C., 1965. , Highway Statistics, Washington, D.C., various years. U.S. Government Printing Office, Economic Report of the President, Washington, D.C., 1975. Wildhorn, Sorrel, Burke K. Burright, John H. Enns, and Thomas F. Kirkwood, How to Save Gasoline: Public Policy Alternatives for the Automobile, Rand Report R1560-NSF, Rand Corporation, Santa Monica, Calif. (1974).

THIS paper centers on an empirical analysis of the short-run incidence of the corporate income tax. The topic is made interesting by the existence of two major conflicts. First, traditional microeconomic theory suggests that firms will exhibit no short-run response to variations in the corporate tax rate; yet, businesses (whose behavior theory is supposed to describe) generally claim that some response does take place. Second, statistical estimates of the degree of short-run tax-shifting conflict. A study by Musgrave and Krzyzaniak (1963) suggests that firms are successful in avoiding the entire burden of the tax; however, Gordon (1967) concludes that firms bear the entire burden in the short run. The Musgrave and Krzyzaniak (M-K) study has been criticized on the grounds that it did not take sufficient account of cyclical variables that may have an impact on profit rates. Goode (1966), Slitor (1966), and Oakland (1972) have attempted to demonstrate that the absence of demand-pressure variables causes an upward bias in the M-K estimate of tax shifting. Nevertheless, Dusansky has used two-stage least squares to estimate a profit equation in which such influences are incorporated, and has obtained results consistent with the M-K conclusion of full shifting. One of the apparent shortcomings of the studies mentioned above is that they seem to be either unaware of or disinterested in the mechanism of tax shifting.1 The studies consist of the specification and estimation of profit equations in which a tax-shift parameter is specified. But this technique yields no information with regard to the tax-effects on the decision variables of the firms in question. Traditional tax literature considers two possible means of shortrun shifting:2 forward-shifting (accomplished through variations in product-prices) and backward-shifting (carried out through changes in factor-prices). Obviously, non-zero overall shifting requires that either forward-shifting or backward-shifting (or both) is carried out. Thus, the Musgrave and Krzyzaniak conclusion of full overall shifting implies that product-prices and/or factor-prices must be sensitive to variations in the tax rate. But, because of the use of the reduced-form estimation procedure, one cannot even begin to translate their findings into a reasonable guess concerning which of these prices are affected. And Gordon's conclusion of zero shifting could conceivably be the result of offsetting changes in product-prices and factorprices. It seems plausible to suggest that one should be concerned with several dimensions of taxresponse, rather than merely the end (net) result. In a later exchange between the authors of the first two studies cited above,3 Musgrave and Krzyzaniak take up this point by suggesting that the most reasonable approach to the controversy would involve the specification and estimation of a structural model in which price, wage, and shifting behavior are (1968, p. 1360). This paper is, in essence, a response to that suggestion. In section II, an estimated model is presented in which the potential vehicles of short-run shifting (prices and wages) are specified as endogenous variables. This treatment allows us to trace through the short-run effects of variations in the tax rate. In sections III and IV the effects of the tax on the endogenous variables are computed from the reduced form of the system, and these results are translated into measures of overall shifting and wageand price-responses. Then, in section V, conclusions are drawn. Received for publication September 18, 1975. Revision accepted for publication April 20, 1978. * San Diego State University. Thanks for financial support are due to the Center for Public Economics at San Diego State. Another objection is that both papers tend to be ambiguous with respect to the rationale behind shifting behavior. This point is taken up in my previous paper (Sebold, 1970). 2 Not all types of response to the tax need be categorized as ,'shifting. This point will be discussed later in this paper. 3 See Gordon (1968) and Musgrave and Krzyzaniak (1968).

THE impact of a negative income tax (NIT) on family labor supply is important for policy and research reasons. Income maintenance transfers are likely to be based on family size and family income. Because family earnings are a major component of total income in many families, exactly how the NIT treatment alters family earnings is a main evaluative issue. Both transfer costs and foregone production may be affected by the impact of the NIT on family earnings. A second reason for examining NIT impacts on family labor supply is that recent theoretical advances in labor supply theory (Kosters, 1966; Ashenfelter and Heckman, 1973; and Killingsworth, 1976) have stressed the role of individual decision making in the context of a family. Killingsworth concluded that while the introduction of the NIT would reduce family earnings, it is not necessarily true that each member of the family has reduced earnings. In the present analysis the adding up property of ordinary least squares estimates is used to demonstrate how NIT impacts are distributed across different family members. Our findings support Killingsworth's theoretical conclusion. Next, we examine whether the NIT impact on family earnings stems primarily from some NIT families reducing work efforts without stopping work or merely involves a few families allowing their earnings to fall to zero. Tobit estimates are used to provide separate estimates of NIT impacts on the likelihood of any family earnings and the level of conditional family earnings. Data on family earnings from the Gary Income Maintenance Experiment are used in the analysis.

variables-precisely the case examined by Gerkinghe finds that moments of the finite-sample distribution for the TSLS estimator exist only up to the number of overidentifying restrictions. In the context of equations (1) all structural equations are exactly identified. It follows that none of the moments of this distribution exist. One may obtain parameter estimates, but associated tests of significance are simply not meaningful. The empirical results established by Gerking must be questioned on these grounds. It should also be recognized that any estimator used to obtain structural coefficients in this model must ensure that both the input and the output identities are satisfied. When coefficient estimates are obtained they must be such that implied interindustry flows (Z13 = a^X1) are consistent with the equality of gross output and gross outlay. Without this constraint, comparative static results based on input-output coefficients are not meaningful.

A well-established feature of the labor market is that an inverse relation exists between the unemployment rate (u) and the vacancy rate (v). Hansen (1970) provides a clear exposition of the theoretical model that implies that the u-v relation will be negatively sloped and convex to the origin. The usefulness of the relation is that it provides a means of distinguishing between changes in deficient demand unemployment (indicated by movements along the curve) and changes in nondeficient demand unemployment (indicated by a shift of the curve). In the United States, Great Britain and Canada there has been an upward shift of the u-v relation since the mid-sixties, although the timing and the magnitude of the shifts have varied considerably.' As figure 1 illus-