This article develops a dynamic model of retail competition and uses it to study the impact of the expansion of a new national competitor on the structure of urban markets. In order to accommodate substantial heterogeneity (both observed and unobserved) across agents and markets, the article first develops a general framework for estimating and solving dynamic discrete choice models in continuous time that is computationally light and readily applicable to dynamic games. In the proposed framework, players face a standard dynamic discrete choice problem at decision times that occur stochastically. The resulting stochastic-sequential structure naturally admits the use of conditional choice probability methods for estimation and makes it possible to compute counterfactual simulations for relatively high-dimensional games. The model and method are applied to the retail grocery industry, into which Walmart began rapidly expanding in the early 1990s, eventually attaining a dominant position. We find that Walmart's expansion into groceries came mostly at the expense of the large incumbent supermarket chains, rather than the single-store outlets that bore the brunt of its earlier conquest of the broader general merchandise sector. Instead, we find that independent grocers actually thrive when Walmart enters, leading to an overall reduction in market concentration. These competitive effects are strongest in larger markets and those into which Walmart expanded most rapidly, suggesting a diminishing role of scale and a greater emphasis on differentiation in this previously mature industry.

We show that venture capitalists' (VCs) on‐site involvement with their portfolio companies leads to an increase in both innovation and the likelihood of a successful exit. We rule out selection effects by exploiting an exogenous source of variation in VC involvement: the introduction of new airline routes that reduce VCs' travel times to their existing portfolio companies. We confirm the importance of this channel by conducting a large‐scale survey of VCs, of whom almost 90% indicate that direct flights increase their interaction with their portfolio companies and management, and help them better understand companies' activities.

Multinational firms with operations in high-tax countries can benefit the most from reallocating taxable income to tax havens, though this is sufficiently difficult and costly that only 20.4% of German multinational firms have any tax haven affiliates. Among German manufacturing firms, a 1 percentage point higher foreign tax rate is associated with a 2.3% greater likelihood of owning a tax haven affiliate. This is consistent with tax avoidance incentives and contrasts with earlier evidence for U.S. firms. The relationship is less strong for firms in service industries, possibly reflecting the difficulty of reallocating taxable service income.

Recently, Ronald Heiner (1983) has proposed a theory of predictable behavior which has its roots in what Heiner labels a competence-difficulty gap (hereafter called a C-D gap). This gap is a measure of the spread between an economic agent's competence to make an optimizing decision and the difficulty of the decision problem. Heiner argues that as the C-D gap widens, the agent is increasingly likely to follow rule-governed behavior, and it is this rule-governed behavior that produces observed regularities in economic behavior. If there is no C-D gap, Heiner argues that rule-governed behavior would disappear and, along with it, the observed regularities. Instead, unpredictable behavior, characterized by constant perturbation, would replace predictable behavior. Furthermore, the dynamic properties of Heiner's theory are characterized, in his words, by sudden behavior. This behavior is described as a sudden reversal of previous behavior and a persistent movement in another direction or behavior of a different kind. One of the casual or intuitive examples Heiner offers for support of his theory is the switching between buying and selling strategies in financial markets, resulting in sudden movement in stock prices (p. 582). This paper explores this idea and argues that there is more than intuitive support for Heiner's speculation; that, in fact, the behavior of daily price changes in financial markets conforms better to the prediction of Heiner's theory than to standard efficient market theory predictions.

Conditions of secular stagnation--low interest rates, below target inflation, and sluggish output growth--now characterize much of the global economy. We consider a simple two-country textbook model to examine how capital markets transmit secular stagnation and to study policy externalities across countries. We find capital flows transmit recessions in a world with low interest rates and that policies that attempt to boost national saving are beggar-thy-neighbor. Monetary expansion cannot eliminate a secular stagnation and may have beggar-thy-neighbor effects, while sufficiently large fiscal interventions can eliminate a secular stagnation and carry positive externalities.

Activist shareholders have an incentive to communicate and cooperate with other major shareholders. However, the impact of their activity on information flow surrounding targeted firms is largely unknown. We explore this aspect using a prolific proponent: labor unions. Following the mailing of proxies containing union-sponsored shareholder proposals, trading volume increases significantly and at-issue bond yield spreads of targeted firms are lower compared to matched firms. Subsequent difference-in-differences analyses show that stock prices of targeted firms become more informative as a result of activism, affirming the intuition that activism results in a reduction of differential information between outside investors.

In an innovative and provocative paper in this Review, Eugene Fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest, ignoring taxes, is a constant and that the market for U.S. Treasury Bills is efficient in the sense of embodying rational expectations.' Those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output, monetary policy, and so forth.2 The methodologies which lead to these contradictory conclusions are quite different. Previous studies had followed the lead of Irving Fisher by relating nominal interest rates to distributed lags on past rates of inflation.3 These distributed lags are generally interpreted as approximations to the market's expected rate of inflation and thus any remaining variation is attributed to variation in the real rate.4 Fama's methodology, on the other hand, draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation, the ex post real interest rate, consists by definition of the ex ante real interest rate plus a pure forecasting error.5 The hypothesis of market efficiency implies that these forecasting errors must be serially random. Thus, observing ex post real rates is equivalent to observing ex ante real rates with random measurement error. These errors of course confound the problem of identifying variation in the ex ante real rate. In this paper, we will argue that the relative magnitude of these measurement errors is such that the tests carried out by Fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational. More powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis. Of course, rejection

Measures of industrial capacity utilization (hereafter, CU) have been used extensively in helping to explain changes in the rate of investment, labor productivity and inflation. The CU measures have also been used to obtain indices of capital in use, as distinct from capital stock in place. A number of alternative measures of CU are periodically calculated and published; the 1980 Economic Report of the President, for example, contains three series, that by the Federal Reserve Board, the U.S. Department of Commerce (Bureau of Economic Analysis) and the Wharton School of Finance. Other publicly available series are those prepared by McGraw-Hill Publishing Company, the U.S. Department of Commerce (Bureau of the Census), and Rinfret-Boston Associates, Inc. Although a host of CU measures is publicly available, it is not at all clear how one should interpret changes over time in each measure or variations among them. A principal reason underlying these interpretation problems is that the crucial link between underlying economic theory and the constructed measure of CU is weak. One way in which this issue has manifested itself in the policy domain over the last five years has been with respect to the uncertain effects of dramatic increases in energy prices on capacity output and on CU. Each of the CU measures noted above is computed in such a way that explicitly ignores any role for energy prices. Yet several times during the last decade, though growth to apparently high rates of CU had taken place, investment and average labor productivity were much lower than expected, and the rate of price increase much greater. In brief, during the last decade the explanatory power of alternative CU measures has dropped sharply. Some have conjectured that post-OPEC energy price increases may have brought about major changes in the U. S. economy so that old quantitative relationships between measured CU and investment, labor productivity, and price inflation may have been altered substantially. In order to assess effects of changes in PE on CU, a re-examination of the notion and measurement of CU is needed, based on the framework of the economic theory of the firm. That is the focus of this paper.