Knowledge that Transforms

SINCE the publication Friedman's A Theory Consumption Function (1957), a number papers have appeared testing the permanent income hypothesis (PIH). With only a few exceptions (see Singh & Drost, 1971; Singh, 1975), most the researchers have estimated permanent income through the application Cagan's (1956) or Koyck's (1954) distributed lag model.1 As is well known, this leads to a regression current consumption on personal disposable income (PDI) and lagged consumption a form very similar to the consumption function implied by Brown's habit persistence hypothesis (HPH). Indeed, after the Klein-Friedman debate it has become almost a practice to consider HPH to be truly a complete anticipation of PIH notwithstanding the fact that the focus the two hypotheses is quite different. In fact, the application Koyck's model to PIH by its nature violates some the basic assumptions the latter. Not only does it bring about dependence between the transitory and permanent components income, but also yields transitory components income and consumption that may be mutually correlated (see Holmes, 1971; Singh, 1969; Walters, 1968). Thus, the tests PIH that use Koyck's distributed lag model in the time series context (see Holmes, 1970, 1972; Singh and Drost, 1971; Singh, 1975) clearly become dubious value. In addition, there are some builtin problems in the estimation a distributed lag model which although quite well known are often ignored in the empirical research related to PIH. This paper intends to discuss the basic differences in the two hypotheses and thereby show that it is wrong to identify HPH and PIH with each other. In section II, we set up the PIH and HPH models, outline various assumptions and examine in what respect the two models are different. In section III we analyze and compare the properties the estimators in the two models.

IT has long been recognized that a country's relative factor endowment will strongly influence the focus of its comparative advantage in international trade. Within the context of the postwar Japanese economy, this paper will consider the impact of a rapid change in factor endowment on the structure of comparative advantage. Several questions will be addressed. In 1954 Japan was a labor-abundant economy,' midway in the factor endowment spectrum between the developed (MDCs) and the less developed (LDCs) economies. A dualism in its economy and trade structure prevailed. Has the rapid erosion of its labor abundance affected the technological character of its trade? As Japan's factor endowment has converged toward that of the MDCs, has the dualism in its trade structure been similarly eroded? In section I we shall briefly describe the structure of Japan's economy during the period and the change that occurred in its factor endowment. Section II will discuss the Leontief methodology used in evaluating the technology of a trade bundle, and some of the index number problems that arise when this methodology is applied in a dynamic context. In section III the change in the technology of exports and imports over the period is examined. In section IV we examine the allocative efficiency of Japan's export structure.

THE economic and demographic determinants of the labor force behavior of married females have been studied intensively.' Many of the important variables have now been isolated: education, age, income of husband, number of children, etc. However, as will be discussed below, the existing literature pays insufficient attention to the fact that U.S. income tax laws have placed a large burden on the earnings of married women. When a married couple chooses to enjoy the tax advantages of filing jointly, the first dollar earned by the wife is in effect taxed at the same marginal rate as the last dollar earned by the husband.2 The purpose of this paper is to present some empirical results on the impact of tax rates on the labor supply of married women. Explicit attention is focused on the extent to which individuals react to net rather than gross wages. The evidence strongly supports the view that it is the net wage that matters in the hours of work decision. Section I briefly discusses how taxes have been treated traditionally in the analysis of labor supply. Section II presents a model for examining the impact of taxes on labor supply, and section III contains the results of an empirical test of this model. A concluding section discusses work in progress which will refine and extend the results of this paper.

THE reaction of investors to the dividend policy of the firm has received considerable attention during the last two decades. During this period two principal schools of thought emerged. The first, led by Myron Gordon (1959, 1962), suggested that dividend policy is relevant to security valuation; the second, led by Modigliani and Miller (1961), suggested that it is not. Although the lines between these two positions were drawn more than ten years ago, the issue concerning dividend relevance remains unresolved today.' The reason for the long duration of the controversy is the lack of unambiguous empirical evidence which strongly supports either of the two schools.2 During the last decade the research on capital markets conducted by Sharpe (1964), Lintner (1965), and Mossin (1966) brought to the field of finance the Capital Asset Pricing Model (hereafter, CAPM). This valuation model has provided the basis for a significant number of empirical studies ranging from the value of added disclosure requirements to the benefits of corporate mergers.3 Although it is customary in these studies to state the assumptions under which the CAPM was developed, the use of the model itself assumes implicitly that the degree to which the assumptions abstract from reality does not impair the model's usefulness as a testing device. One of the inherent assumptions in the use of CAPM concerns dividend policy. In this regard, using the CAPM implicitly assumes the irrelevance hypothesis indicating a strong tendency among scholars to accept the irrelevance position. The argument for this position initially spelled out by Modigliani and Miller (1958) is demonstrated through an analysis of (1) the rationality of the behavior of stockholders, and (2) market forces. It suggests that, as long as a firm's investment decisions are known, the capital market will evaluate the firm's shares according to its potential profitability. If certain shareholders prefer more cash income than dividends paid, they can obtain such by liquidating part of their stock holdings. Doing this, these investors would realize the same return as those who maintain their original stock holdings regardless of the firm's dividend policy.4 Contrary to this, the relevance school suggests that a payment of cash dividends by the firm to its shareholders has a significant impact on the valuation of its securities.5 The arguments set forth in support of this position vary from the informational content of dividends to the clientele effect and return prospects on retained earnings.6 The purpose of this paper is to present the results of a theoretical and empirical investigation of the dividend issue and to examine the implications of the findings in light of recent developments in capital market theory. The results of this study indicate, contrary to other recent studies,7 that investors do in fact have a net preference for dividends and, consequently, the practical use of the capital asset pricing model, which implicitly assumes investor indifference between returns in the form

W HILE economists generally recognize that takeover bids limit managers' opportunity sets, empirical evidence on the efficacy of this constraint has heretofore been lacking. This paper develops a state preference model of a tender offer and the risk adjusted transactions costs of the offer are shown to be the constraining mechanism. We then show that, under certain conditions, observation of rates of return and measures of risk can lead to the estimation of the size of transactions costs. These costs are estimated using a sample of 95 tender offers that occurred in the United States between 1956 and 1970. The objective of each of the offers was a transfer of control of the target firm.

Peer Reviewed

Belton M. Fleisher, George Rhodes, Unemployment and the Labor Force Participation of Married Men and Women: A Simultaneous Model, The Review of Economics and Statistics, Vol. 58, No. 4 (Nov., 1976), pp. 398-406

T is widely acknowledged that time spent in school is an important determinant of earnings. There is less agreement about the effects of expenditures per year of schooling on earnings. Most studies of the returns to schooling consider only the extensiveness (time in school) and not the intensiveness (resources invested per year) of investments.' If schools are efficient users of resources, then intensiveness of investment can be called the quality of schooling.2 Several studies have examined the effects on earnings of school quality (see Morgan and Sirageldin, Johnson and Stafford, Wachtel, and Welch) and college quality (Solmon, Wachtel), but no one has examined the trade-off between the two. In this study I provide some strong additional evidence that expenditures at both the school and college level are important determinants of earnings and examine the relative importance of expenditures at each level. Our examination of school expenditures is based on the NBER-TH sample of World War II veterans whose socio-economic background and life cycle behavior have been followed through test data collected by the Army in 1943 and subsequent surveys by Thorndike and Hagen in 1955 and the National Bureau of Economic Research (NBER) in 1969. Among the extensive background data collected by the NBER was information on schools attended and levels attained. Earnings data were collected in both the 1955 and 1969 surveys. These data follow the respondents through a large part of their life cycles as the mean age in 1969 was 47. The respondents chosen for the initial sample were all volunteers for Army pilot or navigator training qualification tests in 1943. Thus, the sample is all male and probably all white and is also drawn from the top half of the population intelligence distribution. Thus, it is not surprising that they attained high levels of education and earnings in the postwar period. School expenditure data for the pre-college level are difficult to obtain. Most previous studies have used state-wide average data which obscure a great deal of the variation in expenditures. Data for individual school districts are available but are incomplete. These data are used even though we are forced to reduce the potential size of the sample.3 About 85 % of the respondents who attended college provided the names of the colleges, which were matched with expenditure data. The sample size for the model estimated is 1,633. The availability of school expenditure data accounts for most of the reduction from an initial sample of 5,084 NBER-TH respondents. The sample was made more homogeneous by eliminating those in poor health in 1969, those with zero or nominal earnings or real earnings in excess of $75,000 in 1955 or 1969, and airplane pilots. An earnings function similar to many estimated before (see, for example, Griliches and Mason) is used to examine the effect of school expenditures. It includes background measures, labor force experience variables, as well as measures of the extensiveness and intensiveness of Received for publication August 16, 1974. Revision accepted for publication July 21, 1975. *This research has been supported by NIE Grant No. OEG 2-71-04798. The author is grateful to Moshe Ben Horim for research assistance. This paper has not undergone the National Bureau of Economic Research review procedures. 1 The terminology is introduced by Leibowitz. Estimates of the rate of return to investments in higher education which measure both theextensive and intensive costs are found in Leibowitz (1974) and Wachtel (1975). 2Although the profit motive is absent, there are incentives for the efficient use of resources by school administrators that suggest that expenditure levels are a reasonable quality index. A related problem is that expenditure differences reflect regional or other variations in the cost of inputs and not differences in the amount of resources used. This is true for some inputs (e.g., land on which schools are built) but it is not true for most resources. 3 About 80% of the respondents to the 1969 survey provided the name and location of their high school. About half of these responses could be matched with available data on expenditures by school district. Missing data are due to incomplete information provided by the respondents and incomplete data available from the Office of Education. In addition, no data were available for those who attended private high schools, some 8% of the sample.

IN this paper an attempt is made to ascertain the determinants of the demand for international reserves by the monetary authorities of the less developed countries (LDCs).' An important aim of the paper is to improve on the specifications of the demand-for-reserve functions that exist in the literature.2 The model presented improves on existing ones in many respects, including (i) the concepts of actual and optimum reserves are differentiated and the relationship between them rigorously specified; (ii) the determinants of the optimum level of international reserves are obtained by maximizing an intertemporal, stochastic macroeconomic model;3 (iii) an expected export earnings variable is estimated and used as an explanatory variable; and (iv) distributed lag adjustment is introduced. In the next section a modified partial adjustment model is specified. The equation to be estimated has a second-order lag scheme. In section III the estimation methods and data sources are discussed. Estimation of the demand function is done in two steps: first, export earnings functions are estimated for the twentynine LDCs in the sample during 1950-1969. From these, we obtain two variables expected export earnings and an export instability index to use with others in the cross-country equation. Next, a country cross-section regression analysis is carried out for 1970. Steadystate elasticities are calculated and the results are discussed.

Statistical analysis of commodity futures prices and, indeed, of speculative prices in general has largely been carried out on the assumption that prices or first differences of prices are covariance stationary. Examples of this abound in the literature, the best known probably being parametric tests of the random walk hypothesis (see, for example, Stevenson and Bear, 1970) and studies of individual behaviour in futures markets (see, for example, Telser, 1967). This assumption of stationarity implies, of course, that the possibility of non-constant variance of the process generating prices is not admitted. On the surface this may not appear to be a severe constraint, but Samuelson (1965) has proposed a model of futures price formation in which prices become increasingly volatile as the expiry date of the contract draws nearer. On the other hand, little empirical evidence is available to enable judgment to be made on the plausibility of the assumption of constant variance. The purpose of this note is to suggest that, in Samuelson's model, a law of increasing price volatility may not generally hold. This proposition is examined in section II. In section III some of the difficulties associated with the testing of hypotheses about price variability are discussed and in section IV evidence is presented from several futures markets.