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Abstract: Does merger and acquisition (M&A) activity occur in waves, that is, are there oscillations between low and high levels of M&A activity? The answer to this question is important in developing univariate as well as structural models of explaining and forecasting the stochastic behavior of M&A activity. There is evidence to suggest that aggregate U.S. time-series data on merger and acquisition (M&A) activity exhibit a "wave: behavior, which has been modeled by fitting either a two-state Markov switching-regime model or a sine-wave model to the data. This study provides an alternative characterization of the temporal patterns in M&A as a nonlinear process with strongly persistent or long-memory dynamics. The apparent level changes or partial cycles of differing magnitudes in aggregate M&A time series are consistent with an underlying data generating process exhibiting long memory. Time- and frequency-domain estimation methods are applied to a long M&A time series constructed by Town (1992), covering approximately a century of merger activity in the U.S. economy. We find significant evidence of long-term cyclical behavior, nonperiodic in nature, in the M&A time series, even after accounting for potential shifts in the mean level of the series. A shock to M&A activity exhibits significant persistence as it is damped at the very slow hyperbolic rate, but it eventually dissipates. We provide both theoretical and empirical rationales for the presence of fractional dynamics with long-memory features in M&A activity. Theoretically, long-term dependence may be due to persistent differences in firm valuation between stockholders and nonstockholders following an "economic disturbance," as suggested by Gort (1969). Empirically, long-memory dynamics in M&A activity may reflect the statistical properties of fundamental factors underlying its behavior, as several of the proposed determinants of M&A activity have been shown to exhibit strong persistence.
Abstract: This paper examines the implications of intergenerational transfers of time and money for labor supply and capital accumulation. Although intergenerational transfers of time in the form of grandparenting are as substantial as monetary transfers in the data, little is known about the role and importance of time transfers. In this paper, we calibrate an overlapping generations model extended to allow for both time and monetary transfers to the US economy. We use simulations to show that time transfers have important positive effects on capital accumulation and that these effects can be as significant as those of monetary transfers. However, while time transfers increase the labor supply of the young, monetary transfers produce an income effect that tends to decrease work effort. We also find that child care tax credits have little impact on parental time and money transfers, but that a universal child tax credit would increase the welfare of the rich while the poor would benefit from a means-tested program.
Abstract: By 1989 the Michigan Panel Study on Income Dynamics (PSID) had experienced approximately 50 percent sample loss from cumulative attrition from its initial 1968 membership. We study the effect of this attrition on the unconditional distributions of several socioeconomic variables and on the estimates of several sets of regression coefficients. We provide a statistical framework for conducting tests for attrition bias that draws a sharp distinction between selection on unobservables and on observables and that shows that weighted least squares can generate consistent parameter estimates when selection is based on observables, even when they are endogenous. Our empirical analysis shows that attrition is highly selective and is concentrated among lower socioeconomic status individuals. We also show that attrition is concentrated among those with more unstable earnings, marriage, and migration histories. Nevertheless, we find that these variables explain very little of the attrition in the sample, and that the selection that occurs is moderated by regression-to-the-mean effects from selection on transitory components that fade over time. Consequently, despite the large amount of attrition, we find no strong evidence that attrition has seriously distorted the representativeness of the PSID through 1989, and considerable evidence that its cross sectional representativeness has remained roughly intact.
Abstract: The rationale for issuing poison pill securities remains unclear, despite the findings of a large body of prior research that these defenses adversely affect shareholder wealth. This paper investigates the hypothesis that the adoption of such defenses may reflect shareholdersŐ desire to contract efficiently with their managers in an environment characterized by hostile takeovers and uncertainty about the managersŐ true performance. Unlike previous research, we focus on financial characteristics of firms as they relate to the motives for adopting such defenses. Our empirical research does not support the optimal contacting hypothesis. We interpret our results as supportive of the managerial entrenchment hypothesis.
Abstract: According to the standard model of urban traffic congestion and urban spatial structure, congestion tolling results in a more concentrated city. In recent years, a new model of rush hour urban auto congestion has been developed which incorporates trip-timing decisions: the bottleneck model. In the simplest bottleneck model, optimal congestion tolling without toll revenue redistribution has no effect on trip price since the efficiency gains exactly equal the toll revenue collected. Optimal congestion tolling then has no effect on urban spatial structure. This paper formalizes this result and extends it somewhat.
Abstract: This paper shows that the debt burden of households, as measured by the debt service to income ratio, is helpful in forecasting the future growth of consumer spending. Not only is the debt-service ratio a statistically significant predictor of future spending growth, it also explains about as much of the variation in spending growth as many other commonly used indicators. And when combined with other economic indicators, the debt-service ratio still provides incremental predictive power. The debt-service ratio predicts future spending growth in part because it helps predict future income growth for borrowing-constrained households, but also because it directly affects spending growth. I argue that this direct effect reflects a tightening of lending standards by financial institutions following a rise in the debt burden of households. This direct effect is important for spending on durable goods and services, but virtually nonexistent for spending on nondurable goods. Because almost 70 percent of spending on nondurable goods represents purchases of food and clothing (which are less discretionary than purchases of durables and services), I conclude that my results are consistent with the view that borrowing-constrained households will limit their discretionary purchases when faced with a tightening of credit.
Abstract: This paper reexamines whether the term structure of interest rates, rather than merely a single interest rate, should be included in the demand for money of the interwar era. In contrast to earlier work, we use cointegration techniques to model the equilibrium/error correction process, and find that a sufficiently rich dynamic model using a single interest rate has considerable explanatory power. Nevertheless, we conclude that the inclusion of the term structure may help to explain the turbulent monetary dynamics of the Depression era.
Abstract: Market exchange is subject to an endogenously determined level of predation which impedes specialization and gains from trade. We construct a model in which utility-maximizing agents opt between careers in production and careers in predation. Three types of equilibria may emerge: autarky (with no predation and no defense), insecure exchange equilibria (with predation and defense), and secure exchange equilibria (in which defense completely deters predation). Trading equilibria, two-thirds of them secure, are supported only in a narrow range of security parameter values. Since changes in the technologies of defense and predation have terms of trade effects, some producers may be hurt by enhanced security. We show cases of 'immiserizing security' in which producers in large poor countries are harmed by increased security.
Abstract: Previous studies of trends in inequality have ignored changes in the distribution of home production. This paper asks whether including the value of home production affects the trend in inequality of families. During the 1980s household money income grew at a slow rate but inequality increased. At the same time home production declined somewhat overall, but it declined more for high income households than for low income household. Using Panel Study of Income Dynamics data we develop three methods to adjust household money income for the value of home production. We then compare trends in the level and distribution of these measures of adjusted income to the trends in the level and distribution of money income. Income adjusted for the value of home production is more equally distributed than unadjusted income, but inequality of adjusted income grew during the 1980s. These conclusions are the same regardless of the method for adjusting income.
Abstract: This paper develops an asymptotic theory of inference for a two-regime threshold autoregressive (TAR) model with an autoregressive root which is local-to-unity. We find that the asymptotic null distribution of the Wald test for a threshold is non-standard and mildly dependent on the local-to-unity coefficient. We also study the asymptotic null distribution of the Wald test for an autoregressive unit root, and find that it is non-standard and dependent on the presence of a threshold effect. These tests and distribution theory allow for the joint consideration of non-linearity (thresholds) and non-stationarity (unit roots).
Our limit theory is based on a new set of tools which combines unit root asymptotics with empirical process methods. We work with a particular two-parameter empirical processes which converges weakly to a two-parameter Brownian motion. Our limit distributions involve stochastic integrals with respect to this two-parameter process. This theory is entirely new and may find applications in other contexts.
We illustrate the methods with an application to the U.S. monthly unemployment rate. We find strong evidence of a threshold effect. The point estimates suggest that in about 80% of the observations, the regression function is close to a driftless I(1) process, and in the other 20% of the observations, the regression function is mean-reverting with an unconditional mean of 5%. While the conventional ADF test for a unit root is quite insignificant, our TAR unit root test is arguably significant, with an asymptotic p-value of 3.5%, suggesting that the unemployment rate follows a stationary TAR process.
Abstract: This paper considers two potential rationales for the apparent absence of mean reversion in real exchange rates in the post-Bretton Woods era. We allow for (i) fractional integration and (ii) a double mean shift in the real exchange rate process. These methods, applied to CPI-based rates for 17 countries and WPI-based rates for 12 countries, demonstrate that the unit-root hypothesis is robust against both fractional alternatives and structural breaks. This evidence suggests rejection of the doctrine of absolute long-run purchasing power parity during the post-Bretton Woods era.
Abstract: This paper considers the implications of omitted mean shifts for estimation and inference in VARs. It is shown that the least squares estimates are inconsistent, and the F test for Granger causality diverges. While model selection rules have the tendency to incorrectly select a lag length that is too high, this over-parameterization can reduce size distortions in tests involving the inconsistent estimates. The practical issue of how to remove the breaks is shown to depend on whether the mean shifts are of the additive or innovational type in a multivariate setting. Under the additive outlier specification, the intercept in each equation of the VAR will be subject to multiple shifts when the break dates of the mean shifts to the univariate series do not coincide. Conversely, under the innovative outlier specification, the unconditional means of the univariate time series are subject to multiple shifts when mean shifts to the innovation processes occur at different dates: Techniques designed to detect multiple shifts are recommended when break dates do not coincide.
Abstract: We test for stochastic long-memory behavior in the returns series of currency rates for eighteen industrial countries using a semiparametric fractional estimation method. A sensitivity analysis is also carried out to analyze the temporal stability of the long-memory parameter. Contrary to the findings of some previous studies alluding to the presence of long memory in major currency rates, our evidence provides wide support to the martingale model (and therefore for foreign exchange market efficiency) for our broader sample of foreign currency rates. Any inference of long-range dependence is fragile, especially for the major currency rates. However, long-memory dynamics are found in a small number of secondary (nonmajor) currency rates.
Abstract: In many public policy problems, we need to estimate the way in which policy changes affect people's behavior. In the analysis of tax and subsidy reform, which is the topic of this paper, we need to know how tax-induced price changes affect the amounts that people buy of the taxed goods. We present various economic and statistical approaches to obtaining the estimates that are required. We consider the structural methods that are standard in economics, where the behavior and welfare of individual agents are simultaneously captured by the specification of utility functions whose parameters are to be estimated. We argue that these methods are less useful than alternatives that directly consider the derivatives of the regression function of average behavior. We consider both parametric and nonparametric estimators of these derivatives in the context of price reform for foods in Pakistan, focussing on the advantages and disadvantages of "average derivative estimation" (ADE) as proposed by Hardle and Stoker (1989) and Stoker (1991). Average derivative estimation is attractive in principle because it directly estimates the statistics that are required for policy analysis. In the practical case considered here, neither technique is a clear winner; each has strengths and weaknesses.