Excess Profits Research Articles

Long‐Term Attachments and Long‐Run Firm Rates of Return

Long‐term attachments between workers and firms are common. Numerous studies have examined worker returns to tenure, but little is known of firm returns to firm‐worker matches. Yet these attachments represent a human capital asset quasi‐held by the firm, which is not captured by traditional accounting measures of firm assets. Firms with large quasi‐holdings of human capital will have higher measured return on assets, other things equal. Analysis of data on 250 large manufacturing firms supports the view that firms profit from long‐term attachments with their workers. Consequently, unmeasured human capital assets contribute to the explanation of persistence in measured long‐run excess profits across firms.

Long-Term Attachments and Long-Run Firm Rates of Return

Long-term attachments between workers and firms are common. Numerous studies have examined worker returns to tenure, but little is known of firm returns to firm–worker matches. Yet these attachments represent a human capital asset quasi-held by the firm, which is not captured by traditional accounting measures of firm assets. Firms with large quasi-holdings of human capital will have higher measured return on assets, other things equal. Analysis of data on 250 large manufacturing firms supports the view that firms profit from long-term attachments with their workers. Consequently, unmeasured human capital assets contribute to the explanation of persistence in measured long-run excess profits across firms.

Toward a Formal Model of Steiner’s Dual Stage Theory of Manufacturing and Retailing

This paper provides the formal mathematical model of Robert Steiner’s Dual Stage Theory described and simulated in my paper “Why economists are wrong to neglect retailing and how Steiner’s theory provides an explanation of important regularities” published in The Antitrust Bulletin, Vol. XLIX, No. 4, Winter, 2004 now available on SSRN at http://ssrn.com/abstract=1972383, with the permission of Bill Curran, editor of the Antitrust Bulletin. Even in this simple case we need to consider at least two manufacturers, many retailers and many consumers. Manufacturers and retailers choose prices to maximize profits. Both have fixed costs and both manufacturers and retailers take rivals prices as given, i.e., they behave as Cournot-Nash oligopolists using Bertrand pricing. Each retailer is assumed to carry two products, a leading national brand [LB] and a competing store brand [SB]. Free entry into retailing is assumed to eliminate any excess profits and determines the number of retail outlets. So retailing is assumed to be monopolistically competitive. Consumers are assumed to know LB prices across stores, but not SB prices. An important, and somewhat unusual, assumption is that a consumer’s choice between any two stores to shop at is based only the ratio of the LB prices at those stores. This assumption produces a particularly simple market share equation, wherein an individual retailer’s share of consumers is proportional to the ratio of its LB price raised to a power µ divided by the sum of all such terms for all the retailers in the market. The assumption implies that the exponent µ is the same for all retailers. This exponent can be interpreted as a measure of “visibility” of an LB and the higher it is the more elastic the demand curve facing an individual retailer. Consumers buy either one unit of the LB or the SB, but not both. Through brand advertising, manufacturers can increase the visibility of their brand, and so increase the elasticity of demand as seen by individual retailers. The model produces both “inverse associations” described by Steiner, and thus demonstrates that his Dual Stage theory is consistent with profit-maximizing behavior by retailers and manufacturers.

Active bond strategies: What link between forecasting ability, excess return and performance?

The active management of a portfolio should not be appreciated only in term of excess profitability vis-a-vis a reference benchmark. It is a matter for a complete process where upstream is supposed to exist the manager's superior expertise. This skill is analyzed as a forecasting ability and appears by choices of asset allocation corresponding to the manager's anticipations. The article has for object to analyze the tie between forecasting ability and excess performance in an active management. It limits itself to the bond portfolio management, but takes in account the international dimension. Two types of asset allocation decisions are considered: The choice of the maturity and the choice of the markets in an environment with four currencies: The dollar, the euro, the pound sterling and the yen. A simulation on the period 1998-2001 shows the tie between forecasting ability and the hope of excess return. The opening to the international dimension shows a superior gain potential compared to a domestic active management. The comparison with a set of a priori useful information doesn't permit to transform this potential in a real excess gain in performance however. The bond portfolio management in an international context introduces a strong complexity in relation to a domestic active management. The risks of errors in anticipations accumulate themselves in a dynamic allocation between markets. The operational conclusion is to underline the interest of a management bondholders international active but restricted to constant market weights.

A Study of Neo-Austrian Economics Using an Artificial Stock Market

An agent-based artificial financial market (AFM) is used to study market efficiency and learning in the context of the Neo-Austrian economic paradigm. Efficiency is defined in terms of the excess profits associated with different trading strategies, where excess is defined relative to a dynamic buy and hold benchmark in order to make a clean separation between trading gains and market gains. We define an Inefficiency matrix that takes into account the difference in excess profits of one trading strategy versus another (signal) relative to the standard error of those profits.

The efficiency of financial futures markets: Tests of prediction accuracy

The prices of financial futures contracts can be interpreted as forecasts of the spot rates, which will apply at the final delivery date of that contract. Financial futures contracts have been traded daily since the early 1980s and provide a substantial bank of data to test the forecasting efficiency of such contracts. Tests are carried out to examine whether the interest rates implied by the futures price for eurodollar and short sterling contracts are cointegrated with the final settlement price over forecasting horizons of 1, 2 and 3 months. Similar analysis is carried out for the yen/dollar exchange rate futures contract. The paper then examines the forecasting performance of the three contracts over the forecasting horizons of 1, 2 and 3 months and in particular whether the forecasts implied by the futures contract provide better predictions than the naı̈ve no-change (i.e. random walk), a vector error correction model (VECM) or an ARIMA model. An examination of the relative efficiency of the markets for the three markets over the three time horizons is carried out and finally trading strategies are simulated to see whether excess profits can be achieved. In fact the results suggest that both profits and losses would be attracted.

Cost of carry, causality and arbitrage between oil futures and tanker freight markets

Abstract This paper investigates the dynamic relationship between oil futures and spot markets and tanker freight rates across two major tanker routes. In particular, we examine the validity of the cost of carry relationship in the WTI futures market, which suggests that the difference between physical and futures crude oil prices should reflect the transportation costs. We also examine whether the futures-physical oil differential contains information regarding tanker freight rate formation. Using physical crude oil prices for the Brent and Bonny markets, WTI futures prices and freight rates we find no evidence to support the existence of a relationship between tanker freight rates and physical-futures differentials in the crude oil market. This is mainly attributed to regional supply and demand imbalances and suggests that arbitrage opportunities between oil derivatives and tanker freight markets exist. Simulated trading strategies reveal the existence of excess profits, which are robust to variations in transaction costs, pipeline charges and timing of initiation of arbitrage.

International Trade and Gender Wage Discrimination: Evidence from East Asia

AbstractThe paper explores how competition from international trade affects gender wage discrimination in two open economies. According to neoclassical theory, if discrimination is costly, then increased industry competitiveness from international trade lessens the incentive for employers to discriminate against women. This effect should be stronger in concentrated sectors, where employers can use excess profits to cover the costs of discrimination. Alternatively, increased international trade may reduce women's bargaining power to achieve wage gains. Results for Taiwan and Korea indicate that, in contrast to neoclassical theory, competition from foreign trade in concentrated industries is positively associated with wage discrimination against women.

Duopoly locations and optimal zoning in a small open city

This paper analyzes a duopoly location model with an asymmetric zoning that prohibits firms from locating to a specific interval in a small open linear city. It is shown that the maximum differentiation principle presented in d'Aspremont et al. [Econometrica 47 (1979) 1145] is still valid under area zoning regulation. Moreover, a zoning regulation can be seen as a policy instrument to limit firms' excess profits, and a proper regulation may even reduce the distortion in total transportation costs, therefore enhancing social welfare. Specifically, the optimal zoning is about 29.5 percent of the city with no amenity effect. Finally, all the land rents raised by zoning are eventually confiscated by the absentee landowner.

Market Efficiency in the Second-hand Market for Bulk Ships

According to the Efficient Market Hypothesis (EMH), the use of technical trading rules, where buy and sell decisions are based on past price patterns, should not consistently yield an economically significant excess profit. This paper evaluates the validity of the EMH in the second-hand market for bulk ships based on the out-of-sample performance of technical trading rules. We evaluate a large number of different parameterisations of three of the simplest and most popular trading rules in the financial markets: filter rules, moving averages, and support and resistance levels. The empirical results suggest that trading rules are generally not capable of producing excess wealth over the buy-and-hold benchmark when accounting for transaction costs and the potential price slippage in an illiquid market. The results in this paper therefore support the validity of the EMH in the second-hand markets for bulk vessels.

Abnormal returns of UK privatizations: from underpricing to outperformance

This paper offers a review and discussion of the evidence concerning the underpricing and long-run performance of British PIPOs (Privatization Initial Public Offerings) between 1977 and 1996, i.e. from the first privatization under a Labour Government (British Petroleum), until the last ones by a Conservative Government (Railtrack). More recent years are excluded because the change of government, the introduction of a windfall tax on excess profits of regulated utilities, and changes in the regulatory regime, mark a totally different landscape compared with the previous twenty years. Evidence is found that underpricing was not followed by underperformance, as is usually observed with IPOs, but rather strong outperformance. This trend is decomposed by subgroups within a 55 observations sample, and it is concluded that lax regulation was probably the main driving force of abnormal returns of British PIPOs.

Modelling excess profit

This paper deals with the problem of modelling in a formal way the concept of excess profit. A common idea is that excess profit is an unequivocal concept, being the difference between profit and costs, where all types of costs are taken into account, included the opportunity cost, i.e. the profit the entrepreneur would obtain if she invested in another business. This paper aims at showing that this difference is not univocal and that different approaches may be followed to give voice to such a notion. It turns out that two different interpretations are possible. The one existing in the literature is well described by Preinrich (1938. Annual survey of economic theory: the theory of depreciation. Econometrica 6 (1), 219–241); Edwards and Bell (1961. The Theory and Measurement of Business Income Berkeley, University of California Press) and, more recently, in the financial literature, by Stewart (1991. The Quest for Value: the EVA™ Management Guide, HarperCollins, Publishers Inc.). The interpretation here provided gives rise to a different way of modelling the notion of excess profit. While the existing models are tied to the financial literature, the model here presented is more akin to a microeconomic perspective. The paper focuses on the formal relations among the various models and necessary and sufficient conditions are provided for the integration of all models in the systemic framework here adopted.

Modelling excess profit

This paper deals with the problem of modelling in a formal way the concept of excess profit. A common idea is that excess profit is an unequivocal concept, being the difference between profit and costs, where all types of costs are taken into account, included the opportunity cost, i.e. the profit the entrepreneur would obtain if she invested in another business. This paper aims at showing that this difference is not univocal and that different approaches may be followed to give voice to such a notion. It turns out that two different interpretations are possible. The one existing in the literature is well described by Preinrich (1938. Annual survey of economic theory: the theory of depreciation. Econometrica 6 (1), 219–241); Edwards and Bell (1961. The Theory and Measurement of Business Income Berkeley, University of California Press) and, more recently, in the financial literature, by Stewart (1991. The Quest for Value: the EVA™ Management Guide, HarperCollins, Publishers Inc.). The interpretation here provided gives rise to a different way of modelling the notion of excess profit. While the existing models are tied to the financial literature, the model here presented is more akin to a microeconomic perspective. The paper focuses on the formal relations among the various models and necessary and sufficient conditions are provided for the integration of all models in the systemic framework here adopted.

Possible use of Fe/CO2 fuel cells for CO2 mitigation plus H2 and electricity production

The continuous oxidation of scrap iron in the presence of a constant CO2-rich waste gas stream and water is evaluated as a means of sequestering anthropogenic CO2 as well as generating hydrogen gas and electricity. The stoichiometry of the net reaction, Fe0 + CO2 + H2O → FeCO3 + H2, and assumptions about reaction rates, reactant and product prices/values and overhead costs suggest that CO2 might be mitigated at a net profit in excess of $30/tonne CO2. The principle profit center of the process would be hydrogen production, alone providing a gross income of >$160/tonne CO2 reacted. However, the realization of such fuel cell economics depends on a number of parameters including: (1) the rate at which the reaction can be sustained, (2) the areal and volumetric density with which H2 and electricity can be produced, (3) the purity of the H2 produced, (4) the transportation costs of the reactants (Fe, CO2 and H2O) and products (FeCO3 or Fe(HCO3)2) to/from the cells and (5) the cost/benefit trade-offs of optimizing the preceding variables in a given market and regulatory environment. Because of the carbon intensity of conventional iron metal production, a net carbon sequestration benefit for the process can be realized only when waste (rather than new) iron and steel are used as electrodes and/or when Fe(HCO3)2 is the end product. The used electrolyte could also provide a free source of Fe2+ ions for enhancing iron-limited marine photosynthesis and, thus, greatly increasing the CO2 sequestration potential of the process. Alternatively, the reaction of naturally occurring iron oxides (iron ore) with CO2 can be considered for FeCO3 formation and sequestration, but this foregoes the benefits of hydrogen and electricity production. Use of Fe/CO2 fuel cells would appear to be particularly relevant for fossil fuel gasification/steam reforming systems given the highly concentrated CO2 they generate and given the existing infrastructure they provide for producing and handling H2 and/or electricity.

Non-Linear Tests Of Weakly Efficient Markets: Evidence From Portugal

This paper investigates the existence of non-linear dependence in Portuguese financial time series namely stock exchange indexes returns. Non-linear dependence may exist in a series even if we have already concluded for the lack of linear dependence. If present, non-linear dependence would contradict the random walk model and the financial markets weak form efficiency hypothesis. Using daily observations for the period 1990-1997 some so-called non-linearity tests are performed in order to decide whether we can accept the weak form efficiency hypothesis. The results seem to confirm the existence of exploitable excess profit opportunities in the Portuguese stock market.

Development and economic significance of forest certification: the case of FSC in Bolivia

Certification receives major attention in the debate about sustainable forest management, and in Bolivia a relatively wide experience exists regarding Forest Stewardship Council (FSC) certification of natural tropical forests. The present paper studies the conditions imposed on forest operators for getting certified, and the export prices of certified vs. non-certified timber products. This provides a basis for assessing aspects of the effectiveness, efficiency and equity of certification. Effectiveness in terms of certified area has been modest: almost 1 million ha of natural forests, or 14% of the area with management plans, dominated by only five large companies that probably are among the best performing. The conditions for certification are a proxy of its impact, and they mainly regarded documentation, monitoring and environmental issues that might immediately be complied with. Forest management in Bolivia has developed on the basis of an external supported law reform imposing restrictive and controlled regulations and norms, and when fulfilling the new law requirements the FSC principles and criteria are largely met. Only little improvement was obtained through certification in itself. Furthermore, deforestation persists unabated. Therefore, it appears that major roles of the FSC certification have been (i) regulation-oriented verification of compliance with already established norms and (ii) creation of a forum for consensus formation between dominating policy formulating actors. Higher prices, in the range of 5–51%, were paid for the majority of exported certified timber products. There are indications that the price premiums exceed the direct operational costs of certification, but this excess profit will presumably disappear when the market develops. However, the substantial support not based on private initiative that has been given to the certification development restricts the interpretation of the concept as a successful market-based forest policy instrument. The dominance of large enterprises in certification confirms the fear that this tool distorts the conditions of forest production at the national level—small-scale and community based enterprises had difficulties in getting certified.

Discussion of “The competitive effects of US decimalization: Evidence from the US-listed Canadian stocks” by Oppenheimer and Sabherwal

Models of market microstructure tell us that a spread is necessary to compensate market makers for order processing costs, inventory risk, and adverse selection. Since entry into market making is relatively easy on the Nasdaq dealer market, and the New York Stock Exchange (NYSE) specialist faces competition from public liquidity suppliers as well as from regional exchanges, competition should at least theoretically lead to spreads that are just large enough to cover these costs. This is, of course, provided that spreads are free to adjust to reflect the economic costs of providing liquidity. However, to economize on negotiation costs between buyers and sellers, equity markets have traditionally stipulated a minimum tick size. A minimum tick size reduces the ability of the spread to adjust downwards, potentially resulting in excess trading costs and excess profits to market makers. 2 While the tick size in US equity markets had remained one-eighth since the founding of the NYSE in 1792, 3 the costs for providing liquidity had come down considerably by the end of the 1990s, both due to technological innovation, improved access to information, and improved liquidity. It was clear that a tick size of one-eighth of a dollar was too large. In 1996, the US Congress issued a mandate

The Current State and the Outlook of Taxing Economic Rent in Russia

The article is devoted to different questions of taxing excess profits generated by mineral resources extraction. The author begins with a brief review of the concept of rent evolution in the economic science. Then the modern point of view on this topic is presented. The new Russian tax on the mineral resources extraction is analyzed. The author comes to a conclusion of its non-usefulness if applied as an instrument of capturing economic rent. Different ways of improving natural resources taxation are considered, especially of using tax on additional profits from hydrocarbon raw materials recovery.

Sour Notes in Canadian Media Merger Assessment: Toward Antitrust and Cultural Harmony

When the Competition Bureau assesses a proposed broadcasting acquisition, its concern is whether the transaction will result in a substantial lessening of competition, typically in media advertising markets. What objectives the Canadian Radio-television and Telecommunications Commission (CRTC) seeks and how it pursues them are not as well defined. The basic premise of this paper is that if the legislated objectives of the CRTC and the Competition Bureau conflict, then circumstances will arise when the agencies' decisions with respect to the acquisition of broadcasting properties will not be compatible. However, if it is the manner in which a particular objective is pursued that is the source of conflict, rather than the objective per se, resolution is possible. Based on fifteen recent decisions by the CRTC, we conclude that it is how the CRTC pursues its objectives, rather than the objective themselves, that is the source of conflict. Specifically, the CRTC, in pursuit of its objective of supporting Canadian performers, producers and the like, applies 'tangible benefits' tests when assessing applications for the transfer of ownership or control of broadcast licences. In order to afford these additional costs, broadcasters must earn above-normal profits; i.e., profits greater than what would obtain in competitive advertising markets. In exchange, the CRTC bestows on these licence holders market power in media advertising markets. Moreover, it protects these above-normal profits by restricting entry, thus detracting from the CRTC's 'diversity' objectives. These above-normal profits exceed payments made in the form of 'tangible benefits'. As a result of the exploitation of this market power, advertisers pay rates above those which would obtain in competitive markets and, ultimately, this results in higher prices for consumers. A large part (all in the case of radio broadcast acquisitions) of these 'tangible benefits' is in the form of grants to CRTC-approved cultural associations. Yet, in the cases examined, the total amount is small in comparison to what these associations receive from other government sources, notably the Department of Canadian Heritage. A less distortionary policy alternative would be to fund all of what these beneficiaries receive out of general tax revenues (via Heritage Canada) and for the CRTC to cease applying its 'tangible benefits' tests. Such an alternative would have a number of advantages relative to the current one, including reduced transactions costs for the CRTC and applicants. Moreover, it is likely that the incidence of the CRTC's levy is more burdensome on consumers than the extra tax revenues required by the alternative policy. If adopted, protection of excess profits would no longer be a rationale for restricting entry, and entry would further the CRTC's diversity objectives without threatening its other objectives (e.g., Canadian content). Moreover, as the CRTC would have no longer have any reason to favour anti-competitive broadcasting acquisitions, the Competition Bureau could pursue its objective of blocking anti-competitive acquisitions unencumbered. The public's and both agencies' interests would be served by this policy alternative.

Newsvendors Tackle the Newsvendor Problem

In 1998, the retail sales and marketing division of Time Inc., the largest publisher of consumer magazines in the US, reviewed its newsstand distribution principles and procedures for its magazines. This review affected the three major distribution decisions: the evaluation of each magazine's national print order, the wholesaler allotment procedure, and the store distribution process. For this three-echelon distribution problem, we had to adapt well-known formal solutions so that they could be implemented within the constraints of the magazine distribution channel. The revised process, referred to as Time Inc.'s Draw Management Program, has generated incremental profits in excess of $3.5 million annually.