Endogenous Capital Utilization in a Neoclassical Growth Model

BEATRIZ RUMBOS AND LEONARDO AUERNHEIMER

This paper introduces a variable rate of capital utilization and depreciation into a modified Ramsey-type neoclassical growth model via the well-known concept of pure user cost. The optimal utilization rate is found to be determined by the opportunity cost of holding capital or the net real interest rate. As a consequence, this rate may vary in the short run, so total services of capital become a control rather than a state variable. Furthermore, the introduction of a variable utilization rate yields a slower rate of convergence toward the steady state, inducing more persistence in the transitional dynamics. To illustrate how the endogenous choice of utilization acts on the system, some simulations are carried out, including the transition period when there is a temporary fall in the exogenous real interest rate. (JEL E13; Atlantic Econ. J., 29(2): pp. 121-134, June 01. ©All Rights Reserved)

A Model of Optimal Advertising Expenditures in a Dynamic Duopoly

M. PAZ ESPINOSA AND PETR MARIEL

This paper develops a dynamic model of oligopolistic advertising competition. The model is general enough to include predatory advertising and informative advertising as particular cases. The analysis is conducted in a differential game framework and compares the open-loop and feedback equilibria to the efficient outcome. It is found that for the informative advertising competition game, advertising levels are closer to the collusive outcomes in a feedback equilibrium. In the case of predatory advertising, expenditures are inefficiently high in a feedback equilibrium and the open-loop solution is more efficient. (JEL L13, M37; Atlantic Econ. J., 29(2): pp. 135-161, June 01. ©All Rights Reserved)

Remedies for Misrepresentation in Applications in the Presence of Fraudulent Intent

CHARLES M. NORTH

Many contracts are based upon information provided in written applications, including insurance and employment contracts. However, the remedies used in these two contexts for material misrepresentation in the application differ. Insurers use the remedy of rescission and restitution, which returns the parties to status quo ante. Employers simply terminate the contract, leaving the parties where they are at the time of termination. This paper examines the role played by each remedy in the context of intentional misrepresentation. It is shown that rescission and restitution expands the situations in which mutually beneficial contracting will occur. It is also shown that insurers can offer lower premiums when the remedy of rescission and restitution is available. (JEL K12, C72, D82, G22, J23; Atlantic Econ. J., 29(2): pp. 162-176, June 01. ©All Rights Reserved)

Empirical Evidence of a Positive Inflation Premium Being Incorporated into Stock Prices

AUSTIN MURPHY AND ANANDI SAHU

This study demonstrates that in contrast to prior research findings on short-term stock returns, long-term stock returns are positively correlated with inflation. In addition, within the context of a more complete explanatory model, long-term stock returns are found to be negatively related to changes in long-term interest rates and negatively related to beginning price to earnings ratios. The significance of these variables in explaining almost all the time series variation in long-term stock returns demonstrates that changes in stock values are well explained by theory. (JEL G10; Atlantic Econ. J., 29(2): pp. 177-185, June 01. ©All Rights Reserved)

The Effects of Tax Rates and Enforcement Policies on Taxpayer Compliance: A Study of Self-Employed Taxpayers

MUKHTAR M. ALI, H. WAYNE CECIL, AND JAMES A. KNOBLETT

This paper presents an econometric analysis of taxpayer compliance, exploring its relationship with audit rates, penalties if detected, tax rate schedule, income level, and sources of self-employment income. Using data drawn from the Annual Report of the Commissioner of Internal Revenue Service [IRS, various] and the Data Book [IRS, various] for 1980 to 1995, the audit rate and penalty rate are both effective deterrents to noncompliance. The effectiveness of these two policy instruments depends upon the individual's level of income. It seems the higher the income level, the more effective these instruments are. In general, compliance increases with the level of income but at a decreasing rate. It is also found that individuals tend to comply less as the marginal tax rate rises. Again, such tendency is more pronounced for high-income taxpayers than for low-income taxpayers. (JEL H20, H24, H26; Atlantic Econ. J., 29(2): pp. 186-202, June 01. ©All Rights Reserved)