Abstract Since the pioneering work of Hall and Jorgenson (1967), numerous studies (e.g., Bischoff 1971; Chirinko and Eisner 1982; and Coen 1971) have examined the effect of attempts by the tax authority to influence investment decisions through accelerated depreciation or investment tax credits (ITC). This body of research has been fraught with econometric estimation problems, and consequently has failed to provide a clear picture of the effect of tax policies on capital investment. In a review of the literature, Chirinko (1986, 151) concludes that "[w]hile investment may respond significantly to variations in tax parameters, it appears to this author that the supporting empirical evidence has yet to be generated." At the core of the difficulties in the econometric research paradigm Is the operationalization of the neoclassical investment function itself. Chirinko (1986) notes that numerous inherent difficulties are introduced, including (1) estimations of the purchase cost of a unit of capital, financial cost of capital net of inflation, rate of depreciation of the capital good, rate of income taxation, rate of investment credit, discounted value of depreciation allowances, net cost of debt finance, and the like; and (2) the inability to control for firms' expectations regarding output, and hence the marginal product of capital. These difficulties highlight the general limitations of econometrics in certain settings. This sentiment was echoed by Chirinko and Eisner (1983, 139) when they concluded that, in the neoclassical tax policy arena, "one can get almost any answer one wants by making sure that the chosen model has specifications appropriate to one's purpose." In response to the inconclusive econometric evidence regarding the effect of tax incentives on capital investment, we adopt an alternative approach in this study, using laboratory markets to overcome the limitations noted above, thereby providing a controlled empirical test of neoclassical predictions. Although the results of our experiments provide no evidence regarding the real-world dollar responses of investment to income tax accounting subsidies, some insight into the ability of theory to predict more general aspects of taxpayer investment behavior is provided. Specifically, the research question addressed is whether capital investment increases when depreciation or investment credits allowed by the tax system result in more rapid deductions than true economic depreciation. Although this question follows directly from neoclassical predictions, we relax the assumption of price taking to permit the more realistic consideration of market price adjustments. The results of our experiments do not support the neoclassical prediction that depreciable asset investment will increase In response to accelerated tax depreciation or to investment tax credits. Demand was unresponsive to tax incentives because the prices of depreciable assets were bid up. That is, tax benefits were captured to some extent by factor suppliers. From a theoretical perspective, the study's results provide a "piece of the puzzle" in light of conflicting or nonexistent econometric evidence. In section I, a description of the experimental setting and administration is provided. Theoretical predictions of investment price and quantity are then derived from our experimental operationalization of a production economy in section II. Finally, results and conclusions are presented in sections III and IV, respectively.

Abstract Positive theory hypothesizes that accounting-based debt covenants are important factors in accounting choices. According to Watts and Zimmerman's (1990) survey, this hypothesis has generally been supported by earlier studies. That is, the closer the firm is to violating accounting covenants, the more likely managers would choose income-increasing methods. Recently, research attention has shifted to the event of covenant violation itself. For example, Beneish and Press (1993) estimate debtors' costs of violations. Further, DeFond and Jiambalvo (1991) and Sweeney (1992) examine debtors' manipulative behavior before covenant violations. These latter studies find that violations of accounting covenants are costly to debtors, who generally try to manipulate accounting numbers to avoid or defer technical defaults. The present study also focuses on the event of violation, but from the perspective of creditors. It explains two aspects of creditors' decision process following covenant violations. First, we find that creditors react to actual violations in two distinct ways: they could either waive the violations or could demand certain conditions such as early payment, increase of interest rate, reduction of borrowing base, and so forth. Second, we also model creditors' decisions either to waive or to call the debt using the option-pricing framework. We hypothesize that the determinants of waiver decisions include `the firm's bankruptcy probability and leverage ratio. Moreover, maturity, size, and security of the debt issue involved should also be important factors in the waiver decisions. Empirically, we find that creditors are more likely to grant a waiver to the firm with a lower estimated probability of bankruptcy and a lower leverage ratio. Further, debt issues that are secured or smaller in size are more likely to have violations waived than unsecured or larger issues. The maturity variable, however, is not found a significant determinant of the waiver decisions. Using the factors identified in this study, managers can assess the probability of receiving a waiver and prepare necessary strategies to ensure the firm's survival. Auditors also can use those factors to assess the possibility of the client's receiving a waiver of covenant violation as part of their evaluation of the firm's ability to continue as a going concern. Moreover, since debtors prefer waivers to nonwaivers, the prospect of receiving a waiver is likely to influence managerial behavior, including the choice of accounting alternatives. Managers expecting a nonwaiver from creditors would have more incentive to select accounting methods to avoid covenant violations.

Forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure (the intertemporal marginal rate of substitution). Representative agent theory with time-additive preferences cannot account for either of these properties. We show that the theory does considerably better along these dimensions when the representative agent's preferences exhibit habit persistence, but that the theory fails to reproduce some of the other properties of the data—in particular, the strong autocorrelation of forward premiums.

ABSTRACT Forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure (the intertemporal marginal rate of substitution). Representative agent theory with time‐additive preferences cannot account for either of these properties. We show that the theory does considerably better along these dimensions when the representative agent's preferences exhibit habit persistence, but that the theory fails to reproduce some of the other properties of the data—in particular, the strong autocorrelation of forward premiums.

The MIT Dictionary of Modern Economics is an up-to-date, authoritative reference designed primarily for students of business and other social sciences and ideal for anyone who wants a brief explanation of an economic concept or institution.In this fourth edition one entry in ten has been revised and one entry in twenty is new. Whereas the third edition increased the coverage of American institutions, this edition breaks new ground by including entries considered important from an Eastern European perspective. It also supplies comparative statistics on major economic variables for selected countries, describes the origins of widely used acronyms, and includes bibliographic references at the end of featured entries.The dictionary answers in a clear and concise way the enduring questions, which economists have considered for two centuries or more, as well as the issues of the moment, such as economic change in Europe, the problems of pollution, or the prospects for greater freedom of trade. With close to 2,800 entries it is comprehensive in its coverage of theory, national and international institutions, schools of thought, and important economists, including recent Nobel Prize winners.The dictionary was compiled initially by an experienced team of economists at Aberdeen University in the United Kingdom, and new authors have been recruited to provide international expertise, reflecting changes in the structure of the international economy. David W. Pearce, general editor, is Professor of Political Economy at University College, London.This fourth edition was prepared by John Cairns, Robert Elliott, Ian McAvinchey, and Robert Shaw, all of the Economics Department, University of Aberdeen.

Product liability ideally should promote efficient levels of product safety, but misdirected liability efforts may depress beneficial innovations. This paper examines these competing effects of liability costs on product R & D intensity and new product introductions by manufacturing firms. At low to moderate levels of expected liability costs, there is a positive effect of liability costs on product innovation. At very high levels of liability costs, the effect is negative. At the sample mean, liability costs increase R & D intensity by 15 percent. The greater linkage of these effects to product R & D rather than process R & D is consistent with the increased prominence of the design defect doctrine.

ABSTRACT We explain why an issuer may wish to raise external capital by selling multiple financial claims that partition its total asset cash flows, rather than a single claim. We show that, in an asymmetric information environment, the issuer's expected revenue is enhanced by such cash flow partitioning because it makes informed trade more profitable. This approach seems capable of shedding light on corporate incentives to issue debt and equity, as well as on financial intermediaries' incentives to issue multiple classes of claims against portfolios of securitized assets.