Reviews the book "Accounting for Income Taxes: A Review of Alternatives," by Dennis R. Beresford, Lawrence C. Best, Paul W. Craig and Joseph V. Weber.

In a series of eleven markets, sellers possessed products that were exogenously designated as either grade "regular" or grade "super." Supers were valued more by buyers but grade could not be observed by buyers prior to purchase. Sellers could add costly units of quality to their products that were observable and valued by buyers. The data are analyzed with perfect information models, signaling equilibrium models, and pooling models. A variety of behaviors are observed across the eleven markets. Signaling is observed in most markets with some markets approaching the most efficient signaling equilibrium. Pooling or partial pooling occurs in a few markets. The performance seems to be sensitive to the relative cost of signaling and the market institutional setting.

On montre a partir de l'evidence de Monte Carlo que les differences dans la forme fonctionnelle des restrictions non lineaires sont importantes dans les petites tailles d'echantillons

This paper conducts a theoretical and empirical investigation of the pricing (and portfolio) implications of investment barriers in the context of international capital markets. The postulated market structure—labelled “mildly segmented”—leads to the existence of “super” risk premiums for a subset of securities and to a breakdown of the standard separation result. The empirical study uses an extended data base including LDC markets and provides tentative support for the mild segmentation hypothesis.

A number of regulated industries, particularly in transportation and communications, have recently undertaken the transition from a regime of rigid price and entry controls to that of a more competitive market structure. While the different industries have experienced somewhat different fates, the responses to this transition do have certain common underlying characteristics. To start, demands for some form of temporary or continuing regulation during the transition to deregulation can be explained almost entirely as a response to the strength of the entry threat relative to the magnitude of sunk costs incurred by the affected parties in the previous regulatory regime. Where the obstacles to entry are low, the incumbent firms and labor ordinarily seek during the transition to permit them to recover some or all of their sunk costs. When the obstacles to entry are high, customers are likely to make similar demands for protective conditions designed to do the same, particularly when the customers' own sunk costs severely restrict their competitive options after deregulation. Pleas for protective conditions during the transition are widely regarded as introducing market imperfections that should be resisted in the name of regulatory reform. This view, however, naively equates the market results during the transition (when choices are constrained by the presence of sunk costs) to the results that would prevail in a long-run equilibrium where deregulated prices and quantities are established in the absence of most (or any) sunk costs. The regulatory problem during the transition is to define a set of residual (hopefully self-terminating) economic constraints that will satisfy the equity and other considerations created by the shortto medium-term continuation of some sunk costs without creating insurmountable obstacles to approaching an efficient competitive outcome in the long run. Any transition mechanism must thus come to grips with the essence of the transition problem from a political as well as an economic perspective: who is to bear the consequences of the overhang of sunk costs. Note that we are not making a generalized plea for the compensation of losers from deregulation, especially for windfall gains conferred by the regulatory process itself (see Kenneth Gordon, 1981). Rather, the transition problem is defined here to be a limited period in which participants in the regulatory game are permitted to amortize financial commitments made under the prior set of rules while other participants are constrained in their ability to exploit the presence of those sunk costs during the transition. Misunderstanding or failing to recognize this transition problem can pose substantial dangers: specifically, premature application of economic concepts that, while arguably valid in some future regime in which all sunk costs are amortized, decidedly do not account for the effect of these sunk costs on the marketplace in the short run. Misunderstandings of the transition problem may also encourage false conclusions about the eventual results of deregulation, that is, the long-run competitive equilibrium and industry structure that will emerge. As a consequence, policy recommendations designed to address the problems of the transition may tDiscussants: Robert Willig, Princeton University; Thomas Moore, Hoover Institution.

Macroeconomics is currently dominated by two competing frameworks of analysis through which the adherents of each attempt to explain the paths of aggregate economic variables and address the design of policy. One, the market-clearing or equilibrium approach to business cycles, is most prominently associated with the work of Robert Lucas (1972), Thomas Sargent (1976), Sargent and Neil Wallace (1976), and Robert Barro (1976). The other employs the nonmarket-clearing framework made fashionable by the work of Stanley Fischer (1977), Edmund Phelps and John Taylor (1977), and Taylor (1979). Despite the apparent theoretical superiority of the market-clearing approach (i.e., the realization of all perceived gains from trade), the non-market-clearing approach continues to dominate analysis of macroeconomic fluctuations. This is explained partly by the failure of equilibrium macroeconomic models to fare well empirically and partly by the successful incorporation of the notion of rational expectations into non-market-clearing models. The current spirit of the non-market-clearing approach emphasizes forward-looking (rational) contractual wage setting in which wages are set to clear labor markets. Shortrun rigidity of the wage contract, however, prevents instantaneous clearing of the labor market in the face of economic disturbances, and as such, becomes a source of short-run deviations in aggregate variables from their natural rates. One aspect of the non-market-clearing approach emphasized early in the literature by Don Patinkin (1952) is the notion of spillover-a situation in which buyers facing markets that clear only gradually are unable to purchase all they intend of a good at a given price, and therefore, redirect part of their unspent income to another market. The micro foundations for spillover in a model of nonclearing markets were provided in a seminal paper by Herschel Grossman (1969) in which Patinkin's concept of spillover was synthesized with the Takashi Negishi-Frank Hahn (1962) nontatonnement transaction process and Robert Clower's (1965) dual-decision hypothesis. And yet, despite these contributions, the concept of spillover has been largely ignored in the majority of current genre non-market-clearing models. In two companion pieces (1980, 1983), we formally incorporated Grossman's (1969, 1971) work into a generalized macro model and used dynamic simulations to derive the implications of market spillover for income and interest rate determination in a short-run environment of gradual adjustment of demand and expectations and nonclearing markets. Our results suggested that spillover provides an additional potential explanation for short-run quantity adjustments and, as such, is important for the short-run design of monetary policy. However, two considerations serve to temper our earlier results: 1) the models employed were fixed price; and 2) the models were not estimated. Therefore, the question still remained whether spillover mattered empirically. This paper answers this question by specifying and estimating a generalized macroeconomic model that not only incorporates the concept of spillover into a framework of nonclearing financial and real markets, but also includes a supply side to allow for flexi*Associate Professors, Miami University, Oxford, OH 45056. We thank James Dunlevy, William Hutchinson, and Nicholas Noble for their generous help on this paper. And special thanks are due Bill McKinstry for his continuous support and encouragement. We alone are responsible for any errors.