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In this paper, we investigate the economic returns to industrial espionage. We show that the flow of information provided by East German informants in the West over the period 1970–1989 led to a significant narrowing of sectoral TFP gaps between West and East Germany. These economic returns were primarily driven by relatively few high-quality pieces of information and particularly large in sectors closer to the West German technological frontier. Our findings suggest that the East-to-West German TFP ratio would have been 13.3 percent lower at the end of the Cold War had East Germany not engaged in industrial espionage in the West. (JEL L16, N44, O33, O38, O47, P24) [ABSTRACT FROM AUTHOR]

This lecture focuses on the costs of public debt when safe interest rates are low. I develop four main arguments. First, I show that the current US situation, in which safe interest rates are expected to remain below growth rates for a long time, is more the historical norm than the exception. If the future is like the past, this implies that debt rollovers, that is the issuance of debt without a later increase in taxes, may well be feasible. Put bluntly, public debt may have no fiscal cost. Second, even in the absence of fiscal costs, public debt reduces capital accumulation, and may therefore have welfare costs. I show that welfare costs may be smaller than typically assumed. The reason is that the safe rate is the risk-adjusted rate of return to capital. If it is lower than the growth rate, it indicates that the risk-adjusted rate of return to capital is in fact low. The average risky rate however also plays a role. I show how both the average risky rate and the average safe rate determine welfare outcomes. Third, I look at the evidence on the average risky rate, i.e., the average marginal product of capital. While the measured rate of earnings has been and is still quite high, the evidence from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for debt: the lower the marginal product, the lower the welfare cost of debt. Fourth, I discuss a number of arguments against high public debt, and in particular the existence of multiple equilibria where investors believe debt to be risky and, by requiring a risk premium, increase the fiscal burden and make debt effectively more risky. This is a very relevant argument, but it does not have straightforward implications for the appropriate level of debt. My purpose in the lecture is not to argue for more public debt, especially in the current political environment. It is to have a richer discussion of the costs of debt and of fiscal policy than is currently the case. (JEL E22, E23, E43, E62, H63) [ABSTRACT FROM AUTHOR]

Investors implement projects based on idiosyncratic signal observations, without knowing how signals and returns are jointly distributed. The following heuristic is studied: investors collect information on previously implemented projects with the same signal realization, and invest if the associated mean return exceeds the cost. The corresponding steady states result in suboptimal investments, due to selection bias and the heterogeneity of signals across investors. When higher signals are associated with higher returns, investors are overoptimistic, resulting in overinvestment. Rational investors increase the overoptimism of sampling investors, thereby illustrating a negative externality imposed by rational investors. (JEL D82, G11, G31, L26, M13) [ABSTRACT FROM AUTHOR]

The secular decline in safe interest rates since the early 1980s has been the subject of considerable attention. In this short paper, we argue that it is important to consider the evolution of safe real rates in conjunction with three other first-order macroeconomic stylized facts: the relative constancy of the real return to productive capital, the decline in the labor share, and the decline and subsequent stabilization of the earnings yield. Through the lens of a simple accounting framework, these four facts offer suggestive insights into the economic forces that might be at work. [ABSTRACT FROM AUTHOR]

We study the relation between the distribution of labor earnings and the distribution of wealth. We show, theoretically as well as empirically, that while labor earnings and precautionary savings are important determinants of wealth inequality factors, they cannot by themselves account for the thick tail of (the large top shares in) the observed distribution of wealth. Other determinants, like stochastic returns to wealth, as well as savings rates and rates of returns increasing in wealth, need to be accounted for. [ABSTRACT FROM AUTHOR]

We present a decision-theoretic analysis of an agent's understanding of the interdependencies in her choices. We provide the foundations for a simple and flexible model that allows the misperception of correlated risks. We introduce a framework in which the decision maker chooses a portfolio of assets among which she may misperceive the joint returns, and present simple axioms equivalent to a representation in which she attaches a probability to each possible joint distribution over returns and then maximizes subjective expected utility using her ( possibly misspecified) beliefs. (JEL D11, D81, D83, G11) [ABSTRACT FROM AUTHOR]

Piketty argues that r > g is the 'the central contradiction of capitalism' and that it will lead to an 'endless inegalitarian spiral.' As a result, he argues for a new global tax on capital. In this brief essay, I explain why I am not persuaded by either his prediction or his prescription. [ABSTRACT FROM AUTHOR]

According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained. (JEL E43, E52, E62) [ABSTRACT FROM AUTHOR]

We reevaluate the role of human capital in determining the wealth of nations. We use standard human capital theory to estimate stocks of human capital and allow the quality of human capital to vary across countries. Our model can explain differences in schooling and earnings profiles and, consequently, estimates of Mincerian rates of return across countries. We find that effective human capital per worker varies substantially across countries. Cross-country differences in Total Factor Productivity (TFP) are significantly smaller than found in previous studies. Our model implies that output per worker is highly responsive to changes in TFP and demographic variables. (JEL E23, I25, J24, J31, O47) [ABSTRACT FROM AUTHOR]

In a growing economy, the discount rate to evaluate a long-term investment is the minimum rate of expected return that compensates for the increased intergenerational inequalities. Because the growth rate is uncertain, there is a precautionary argument in favor of lowering the discount rate. If shocks to growth are persistent, this is a robust argument for using a smaller discount rate for more distant time horizons. If climate damages are positively correlated with future consumption, a risk premium should be added to the climate discount rate, which could have an increasing term structure. [ABSTRACT FROM AUTHOR]

We define national security (NS) as public policies that protect the safety or welfare of a nation's citizens from substantial threats. NS capital provides societal insurance against widespread harm or catastrophe, so optimal NS investments may have very low expected rates of return. Investment targeted at extreme events (war) has spillovers, reducing potential harm in less threatening situations as well. Potential threats are highly uncertain, which raises the value of ex-post scalability of NS technologies. Higher probabilities of extreme events raise the demand for flexibility, so ex-post responses to threats are more elastic, but may reduce current precaution. [ABSTRACT FROM AUTHOR]

This paper points to the important role that the elasticity of aggregate capital supply with respect to the net rate of return to capital plays for the efficiency of policymaking in a decentralized economy with mobile capital and spillovers among jurisdictions. In accordance with previous studies, we show that under the assumption of a fixed capital supply (zero capital supply elasticity) the decentralized policy choice is optimal. If the capital supply elasticity is strictly positive, however, capital tax rates are inefficiently low in the decentralized equilibrium. ( JEL E22, E61, H25, H77) [ABSTRACT FROM AUTHOR]

Counter to extant stylized facts, using newly available data on country allocations in US investors' foreign equity portfolios we find that (i) US investors do not exhibit returns-chasing behavior, but, consistent with partial portfolio rebalancing, tend to sell past winners; and (ii) US investors increase portfolio weights on a country's equity market just prior to its strong performance, behavior inconsistent with an informational disadvantage. Over the past two decades, US investors' foreign equity portfolios outperformed a value-weighted foreign benchmark by 160 basis points per year. JEL: C58, G11, G15 [ABSTRACT FROM AUTHOR]

Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency 'compensate US investors for taking on more US consumption growth risk,' yet the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle. JEL: C58, E21, F31, G11, G12 [ABSTRACT FROM AUTHOR]

The consumption growth beta of an investment strategy that goes long in high interest rate currencies and short in low interest rate currencies is large and significant. Consumption risk price differs significantly from zero, even after accounting for the sampling uncertainty introduced by the estimation of the consumption betas. The constant in the regression of average returns on consumption betas is not significant. Additionally, this investment strategy's consumption and market betas increase during recessions and times of crisis, when risk prices are high, implying that the unconditional betas understate its riskiness. JEL: C58, E21, F31, G11, G12 [ABSTRACT FROM AUTHOR]

This paper estimates marginal returns to college for individuals induced to enroll in college by different marginal policy changes. The recent instrumental variables literature seeks to estimate this parameter, but in general it does so only under strong assumptions that are tested and found wanting. We show how to utilize economic theory and local instrumental variables estimators to estimate the effect of marginal policy changes. Our empirical analysis shows that returns are higher for individuals with values of unobservables that make them more likely to attend college. We contrast our estimates with IV estimates of the return to schooling. JEL: I23, J24, J31 [ABSTRACT FROM AUTHOR]

Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina's examples falsify not only the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, αα-maxmin, and the smooth model of ambiguity aversion. Thus, Machina's examples pose a challenge to most of the present field of ambiguity. Finally, the paper discusses how an alternative representation of ambiguity-averse preferences works to accommodate the Machina paradoxes and what drives the results. ( JEL D81) [ABSTRACT FROM AUTHOR]

In an article published in the American Economic Review, Dorothe Bonjour et al. (2003) used a dataset on female monozygotic twins and showed that the within-twin estimated return to one year of education was 7.7 percent and statistically significant at the 5 percent level. This comment illustrates that the point estimate conclusion is driven by one twin pair, which is an outlier in the dataset. If one eliminates this twin pair, then the estimated return to education is 5.1 percent and statistically significant at the 10 percent level only. ( JEL I21, J16, J24, J31) [ABSTRACT FROM AUTHOR]

We present and discuss preliminary evidence suggesting that credit ratings significantly influenced prices for subprime mortgage-backed securities issued in the period leading up to the recent financial crisis. Ratings are closely correlated with prices even controlling for a rich set of security- and loan-level controls. This incremental variation in ratings has much less predictive power for security defaults, however, based on findings to date from our ongoing research, suggesting prices were excessively sensitive to ratings relative to their informational content. [ABSTRACT FROM AUTHOR]

Rather than estimating the returns to obtaining a college degree, this paper treats the college education decision as an uncertain investment involving varying likelihoods of successful graduation. We predict earnings conditional on both graduating and not graduating from both selective and non-selective institutions, and incorporate estimated individual-specific graduation rates in calculating the ex ante expected returns from college attendance for individuals across the ability distribution. Our results suggest that, especially for lower ability students, ex ante returns may differ substantially from typical estimates of the returns to a college degree, and typical estimates of the selectivity premium may be underestimated. [ABSTRACT FROM AUTHOR]

We study an open economy where a pro-labor and a pro-business candidate compete in an election. The winner chooses taxes, which affect investment returns. Electoral outcomes depend on the size of the foreign debt, but the debt itself reflects expectations about the election. The resulting interaction is novel and has several implications. Elections are associated with increased volatility. Politico-economic crises can occur. Inefficiencies vanish if the candidates commit to an appropriate tax policy, but such commitments have predictable effects on the election. Empirical evidence supporting the theory is discussed. ( JEL D72, F34, O17, O19) [ABSTRACT FROM AUTHOR]

Peter DeMarzo, Ilan Kremer, and Andrzej Skrzypacz (2005) analyzed auctions in which bidders compete in securities. They show that a steeper security leads to a higher expected revenue for the seller, and also use this to establish the revenue ranking between standard auctions. In this comment, we obtain the opposite results to DKS's by assuming that a higher return requires a higher investment cost. Given this latter assumption, steeper securities are more vulnerable to adverse selection, and may yield lower expected revenue, than flatter ones. ( JEL D44) [ABSTRACT FROM AUTHOR]

The US Bureau of Economic Analysis (BEA) estimates that the return on investments of foreign subsidiaries of US multinational companies over the period 1982-2006 averaged 9.4 percent annually after taxes; US subsidiaries of foreign multinationals averaged only 3.2 percent. BEA returns on foreign direct investment (FDI) are distorted because most intangible investments made by multinationals are expensed. We develop a multicountry general equilibrium model with an essential role for FDI and apply the BEA's methodology to construct economic statistics for the model economy. We estimate that mismeasurement of intangible investments accounts for over 60 percent of the difference in BEA returns. (JEL F23, F32) [ABSTRACT FROM AUTHOR]

The article focuses on the international flow of capital between 1880 to 1913, the "golden era" of finance, as well as during the interwar period of 1918 to 1938. Using an open-economy growth model, the authors use neoclassical growth theories to analyze variables including consumption, nonmarket time, domestic capital, and productivity. The relationship between bond returns and countries whose economies rely on either imports or exports is explored. Economic data for countries including the U.S., Finland, Great Britain, and Austria is considered.

The article presents information on research which was conducted in an effort to investigate U.S. housing markets from an asset-pricing perspective. Researchers used finance theory in an effort to explore the relationship between the risk premium of a housing asset and its exposure to risk. They determined that houses of every type in the U.S. face a common set of risk prices and that that fact, taken together with measures of exposure to risk, accounts for variations in risk-premiums seen across all housing types in the U.S. They determined that parameters which measure exposure to systemic risk factors could be estimated using transaction data for repeated sales of houses.

The article reports on research conducted to investigate the impact long run risks in cash flow and consumption growth in business enterprises had on optimal corporate default and capital structure decisions, the term structure of credit spreads and default probabilities and the levered equity risk premium. To conduct their research researchers created a unified framework which embedded a dynamic capital structure model into a consumption based asset pricing model. They found that their model produced a reasonable equity risk premium and term structure of credit spreads and kept default rates low.

We present a model in which investment in schooling generates two kinds of returns: the labor-market return, resulting from higher wages, and a marriage-market return, defined as the impact of schooling on the marital surplus share one can extract. Men and women may have different incentives to invest in schooling because of different market wages or household roles. This asymmetry can yield a mixed equilibrium with some educated individuals marrying uneducated spouses. When the labor-market return to schooling rises, home production demands less time, and the traditional spousal labor division norms weaken, more women may invest in schooling than men. (JEL I21, J12, J24, J31) [ABSTRACT FROM AUTHOR]

This paper provides a simple and empirically plausible model of artworks as investment vehicles. It reconciles the observation that average financial returns for collectibles are low and volatile with the theory of consumption-based asset pricing. Art assets are appealing both for their ability to transfer consumption over time and for their use as signals of wealth, as in the literature on the demand for luxuries. Adding art value to utility, returns also reflect this “conspicuous consumption” dividend; as a result, average financial returns are low. Risk premia for artworks are predicted to be modest or even negative. ( JEL G11, Z11) [ABSTRACT FROM AUTHOR]

The article examines the efficacy and profitability of fertilizer use in Kenya. During a three-year period beginning in July, 2000, a randomly-selected group of farmers each applied separate treatments to three plots of land used to grow maize. One plot was farmed via traditional means without fertilizer, a second received fertilizer, and the third received both fertilizer and hybrid seeds. Results indicated that, although the combination of fertilizer and hybrid seeds produced the greatest increase in yield, the rate of return was highest for plot that received just fertilizer.

A core question in the contemporary debate on distributive justice is how to understand fairness in situations involving production. Important theories of distributive justice, such as strict egalitarianism, liberal egalitarianism, and libertarianism, provide different answers to this question. This paper presents the results from a dictator game where the distribution phase is preceded by a production phase. Each player's contribution is a result of a freely chosen investment level and an exogenously given rate of return. We estimate simultaneously the prevalence of three principles of distributive justice among the players and the distribution of the weight they attach to fairness. (JEL D63) [ABSTRACT FROM AUTHOR]

The article presents a report from the treasurer of the American Economic Association (AEA). There was an operating surplus of over a million dollars for 2006, a slight decline from the amount for 2005. Sources of revenue for the 2007 budget include institutional subscriber fees, advertising and mailing list sales, and license fees from EconLit, the AEA's electronic bibliography. The AEA had overcome an operating deficit in the 1990s, but investment returns were not sufficient to cover losses in 2001 and 2002. The cost of library subscriptions to AEA journals increased while member dues remained constant. The company portfolio is invested in Vanguard mutual funds.

Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies appreciate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk. [ABSTRACT FROM AUTHOR]

The existing literature typically does not differentiate between security returns and the returns of investors in these securities. This study clarifies that investor and security returns differ because of the timing and magnitude of investor capital flows into and out of these securities. The empirical results indicate that actual investor returns are systematically lower than buy-and-hold returns for nearly all major international stock markets. These results imply that the historical equity premium and the cost of equity capital are likely lower than previously thought. [ABSTRACT FROM AUTHOR]

This article discusses water utilities that are characterized by overhead costs. About 1/4 of U.S. water utilities are private and subject to regulations, which are unlikely to be implemented by costlessness. Relying on a new dataset of 32 districts in California, the article analyzes the regulation of private water utilities. For every district, the California Public Utilities Commission chooses a price for water, an access fee per meter, and a rate of return on capital to satisfy the revenue requirements of firms. A data chart concludes that Class A utilities serve more than 10,000 residential connections and are required to submit annual reports on their capital stock including water sources, operating costs, population, rainfall, footage of pipeline, and rate of return.

This paper shows that long-term forward rates move significantly in response to the unexpected components of many macroeconomic data releases and monetary policy announcements. In the pure New Keynesian model, depicted by the solid lines, the effect of the macroeconomic and monetary policy shocks on the short-term interest rate dies out very quickly, generally within a year. The interest rate displays much more persistence in the partially backward-looking model. But even in that model, the short-term interest rate essentially returns to its steady-state level well within ten years of each shock. Eleven out of the 13 variables enter the regressions with significant coefficients for the five-year-ahead forward interest rate, and ten variables enter significantly for the ten-year-ahead forward interest rate. This sensitivity of long rates is present both for indicators of inflation and for indicators of output. The federal funds futures contract for a given month settles at the end of the month based on the average federal funds rate that was realized over the course of that month. Thus, daily changes in the current-month futures rate reflect revisions to the market's expectations for the federal funds rate over the remainder of the month. Positive macroeconomic surprises lead to expectations of higher steady-state nominal interest rates, inducing a positive response in long-term forward rates.

Relative purchasing power parity (PPP) holds for pure price inflations, which affect prices of all goods and services by the same proportion, while leaving relative prices unchanged. Pure price inflations also affect nominal returns of all traded financial assets by exactly the same amount. Recognizing that relative PPP may not hold for the official inflation data constructed from commodity price indices because of relative price changes and other frictions that cause prices to be "sticky," we provide a novel method for extracting a proxy for realized pure price inflation from stock returns. We find strong support for relative PPP in the short run using the extracted inflation measures. [ABSTRACT FROM AUTHOR]

We study time variation in expected excess bond returns. We run regressions of one-year excess returns on initial forward rates. We find that a single factor, a single tent-shaped linear combination of forward rates, predicts excess returns on one- to five-year maturity bonds with R² up to 0.44. The return-forecasting factor is countercyclical and forecasts stock returns. An important component of the return-forecasting factor is unrelated to the level, slope, and curvature movements described by most term structure models. We document that measurement errors do not affect our central results. [ABSTRACT FROM AUTHOR]

This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare's Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to "ride the bubble." Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems. Instead, this study demonstrates that predictable investor sentiment can prevent attacks on a bubble; rational investors may attack only when some coordinating event promotes joint action. [ABSTRACT FROM AUTHOR]

We investigate the effect of scale on performance in the active money management industry. We first document that fund returns, both before and after fees and expenses, decline with lagged fund size, even after accounting for various performance benchmarks. We then explore a number of potential explanations for this relationship. This association is most pronounced among funds that have to invest in small and illiquid stocks, suggesting that these adverse scale effects are related to liquidity. Controlling for its size, a fund's return does not deteriorate with the size of the family that it belongs to, indicating that scale need not be bad for performance depending on how the fund is organized. Finally, using data on whether funds are solo-managed or team-managed and the composition of fund investments, we explore the idea that scale erodes fund performance because of the interaction of liquidity and organizational diseconomies. [ABSTRACT FROM AUTHOR]

This paper explains the size and value "anomalies" in stock returns using an economically motivated two-beta model. We break the beta of a stock with the market portfolio into two components, one reflecting news about the market's future cash flows and one reflecting news about the market's discount rates. Intertemporal asset pricing theory suggests that the former should have a higher price of risk; thus beta, like cholesterol, comes in "had" and "good" varieties. Empirically, we find that value stocks and small stocks have considerably higher cash-flow betas than growth stocks and large stocks, and this can explain their higher average returns. The poor performance of the capital asset pricing model (CAPM) since 1963 is explained by the fact that growth stocks and high-past-beta stocks have predominantly good betas with low risk prices. [ABSTRACT FROM AUTHOR]

This article reexamines the linkage between taxes and wedges in three dynamic economies. In the first example, agent's preferences are additively separable between consumption and labor, and agents can perfectly forecast their future skills. The second example maintains the separability assumptions but allows agents to be uncertain about their future skills. In the third example, it is optimal for the shadow rate of return or unskilled individuals to be lower than the social rate of return on savings. There is a simple reason why the connection between wedges and taxes breakdown in the last two examples. However, in a market economy with taxes, an agent may find it optimal to adopt a joint deviation of producing different amounts and saving differently. In this world, allocations of resources can only be achieved if they are simultaneously physically feasible and incentive-compatible. Intuitively, the agents' willingness to substitute consumption goods is public information, and so there is no good reason for the planner to distort agents along the margin. This argument only demonstrates that it is necessary for an optimal tax system to feature negative marginal tax rates in savings.

The article presents the results of the study on the estimated returns to education in South Africa. The study uses the familiar within-family method, as well as variants of the family-effects models, to minimize omitted variables bias in a South African data set from 1993. Thirteen percent of respondents were resurveyed to achieve estimates of the reliability of measured schooling. The results suggest that the within-family fixed-effects estimates should be biased downwards to a considerable extent. The author also shows that errors in the schooling variable are strongly correlated within the family, and that this decreases the degree of attenuation bias in the fixed-effects model. The schooling coefficients for Africans that are less than half as large as the ordinary least-squares results were achieved after correcting for the correlated, nonclassical measurement errors.

Examines the equity premium puzzle, which deals with average debt and equity returns. Key condition for asset returns; Comparison of returns on U.S. reproducible capital to the returns on a diversified equity portfolio; Areas for further research.

The authors reply to the comment by J. Michael Pinegar (2002) regarding their paper on the issue of daylight-saving-time changes impacting financial markets (Kamstra et al. 2000). The authors maintain that they finish the exercise that Pinegar started by presenting similar plots of returns for the remaining indices and counties in their sample. Kamstra et al. also suggest that their findings considerably strengthen the case for a daylight-saving effect.

This paper refers to an article published in the 'American Economic Review' in which Mark J. Kamstra et al. (2000) test and reject the hypothesis that the mean weekend return following changes in daylight saving time equals the mean weekend return throughout the rest of the year. In this paper, the author provides further robustness tests of the results reported by Kamstra et al. The author shows that the difference between mean weekend returns for daylight-saving and non-daylight-saving weekends is significant only for fall changes in daylight saving time and that the fall difference is driven by two outliers associated with international stock market crises.

We document the return to investing in U.S. nonpublicly traded equity. Entrepreneurial investment is extremely concentrated, yet despite its poor diversification, we find that the returns to private equity are no higher than the returns to public equity. Given the large public equity premium, it is puzzling why households willingly invest substantial amounts in a single privately held firm with a seemingly far worse risk-return trade-off. We briefly discuss how large nonpecuniary benefits, a preference for skewness, or overestimates of the probability of survival could potentially explain investment in private equity despite these findings. (JEL Gil, G12, Ml3) [ABSTRACT FROM AUTHOR]

The article discusses whether the trading profits of discount brokerage customers are sufficient to cover their trading costs. This paper takes a first step towards demonstrating that overall trading volume in equity markets is excessive by showing that it is excessive for a particular group of investors: those with discount brokerage accounts. These investors trade excessively in the sense that their returns are, on average, reduced through trading. Even after eliminating most trades that might be motivated by liquidity demands, tax-loss selling, portfolio rebalancing, or a move to lower-risk securities, trading still lowers returns. Overconfident investors may trade even when their expected gains through trading are not enough to offset trading costs. In fact, even when trading costs are ignored, these investors actually lower their returns through trading. This result is more extreme than is predicted by overconfidence alone.

This essay begins by examining optimal taxation in a dynamic model with human capital. The author then tries to apply the insights from these models to tax policy, quickly finding that even a superficial treatment forces consideration of issues in political theory, contract theory, and financial theory. The author takes issue with some of the usual assumptions of the literature and shows how alternative views affect the interpretation of optimal-tax rules. In particular, the author argues that many so-called consumption-tax proposals are not true consumption taxes and are biased against human capital. [ABSTRACT FROM AUTHOR]

The article examines the persistence of intra-industry returns among companies that have consistently earned significantly higher returns than their immediate competitors. There is a wide variation in the persistence rates for within-industry profit differences. For the estimates of this study, the range of industry-level convergence rates goes from nearly zero to total convergence of abnormal profits within one year. The study also shows which industry factors determine the persistence rates, and how relatively important each factor is. Together, these attributes explain a significant amount of the variation in persistence across manufacturing industries. There is qualified support for effects of all industry attributes tested except advertising intensity. The variables that have the largest effect on persistence are skill, the degree of unionization, consumer purchases as a percentage of output, the number of firms, economies of scale and research and development intensity. The reported findings support theories of informational impediments to imitation, expropriation of labor, switching costs, rivalry, and economies of scale for explaining persistence. Theories of sunk costs and cyclical capacity use are supported also.