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We argue that active management’s popularity is not puzzling despite the industry’s poor track record. Our explanation features decreasing returns to scale: As the industry’s size increases, every manager’s ability to outperform passive benchmarks declines. The poor track record occurred before the growth of indexing modestly reduced the share of active management to its current size. At this size, better performance is expected by investors who believe in decreasing returns to scale. Such beliefs persist because persistence in industry size causes learning about returns to scale to be slow. The industry should shrink only moderately if its underperformance continues.

I develop a continuous-time general equilibrium model with a continuum of states of the world and a continuum of agents endowed with heterogeneous beliefs. The model permits to analyze the interactions between financial markets and production. There is a single firm that faces convex adjustment costs and maximizes its terminal value. Equivalently, the firm uses decreasing returns to scale risk-return technology. The model is tractable and matches many of the empirical regularities in aggregate output and stock prices, such as a financial volatility that is higher than the macroeconomic volatility, skewness, kurtosis, short-term momentum, and volatility risk premium during recessions. All these aspects disappear when one assumes beliefs homogeneity or constant returns to scale. In particular, the impact of beliefs heterogeneity observed in endowment economies does not pertain when introducing production unless one assumes decreasing returns to scale in the risk-return technology. This paper was accepted by David Sraer, finance.

This study analyzed the nonlinear effect of job quality consisting of income, hard, and soft job quality dimensions on quality of life, and the roles of socioeconomic status between job quality dimensions and quality of life. Using panel data over six waves surveyed from 2016 to 2021, this study applied formative factor analysis to assess the reliability and validity of job quality, quality of life, and socioeconomic status. The random effects regression model that used both the within and between effects was employed to examine the longitudinal relationships between job quality dimensions, socioeconomic status, and quality of life of South Korean workers. First, the effect of the quality of income in a job on quality of life was inverted U-shaped, meaning that the quality of income in a job has a negative effect on quality of life as the quality of income in a job exceeds the average level. Second, the effect of hard job quality on quality of life had a pattern of diminishing returns, showing that the effect size or slope of hard job quality on quality of life decreases as hard job quality increases. Third, the effect of soft job quality on quality of life exponentially increased, verifying that the effect size of soft job quality increases as the level of soft job quality increases. Fourth, socioeconomic status negatively moderated the nonlinear relationship between the three job quality dimensions and quality of life, meaning that as the level of socioeconomic status improved, the relationship between hard job quality and quality of life weakened. These findings suggest that all three dimensions of job quality of workers with low socioeconomic status have larger effect sizes than those of workers with high socioeconomic status. This study contributes to the literature by providing evidence that the effects of the three dimensions of job quality on quality of life exhibit a variety of nonlinear relationships and that employees with lower socioeconomic status benefit more from improved job quality.

This paper investigates the optimal (effort-maximizing) structure of multistage sequential-elimination contests. We allow the contest organizer to design the contest structure using two instruments: contest sequence (the number of stages, and the number of contestants remaining after each stage), and prize allocation. When the contest technology is sufficiently noisy, we find that multi-stage contests elicit more effort than single-stage contests. For concave and moderately convex impact functions, the contest organizer should allocate the entire prize purse to a single final prize, regardless of the contest sequence. Additional stages always increase total effort. Therefore, the optimal contest eliminates one contestant at each stage until the finale when a single winner obtains the entire prize purse. Our results thus rationalize various forms of multi-stage contests that are conducted in the real world.

In a production-based asset pricing model without adjustment costs and with decreasing returns to scale following Brock (1982), stock returns at the firm level are determined by profitability, the book-to-market ratio, and the change in future profitability prospects. Although firms with low book-to-market ratios are normally more profitable and profitable firms are predicted to have higher returns, the stylized fact that book-to-market ratios positively forecast returns still holds theoretically, but with specific predicted exceptions. These implications are confirmed empirically.

The transformation of production structures has been at the centre of the historical dynamics of capitalist economies since the first Industrial Revolution. The article concentrates on production processes as principal loci of structural economic dynamics along increasing and decreasing returns trajectories. These trajectories are triggered by structural opportunities and constraints embedded in production systems, and their historical realisation is subject to different institutional configurations—production units at different levels of aggregation. The approach envisioned suggests the possibility of governing economic dynamics by structural policies working on the technological and organisational conditions of production as well as on the configuration of production processes within production units. Capitalist economies have to rely on a mix of co-ordination devices across different production units and aggregation levels for capturing structural opportunities and avoiding structural constraints.

Decreasing returns at the macro level are an outcome of efficiency at the micro level. When inputs are scarce, an efficient economy carries out only the most productive projects; when inputs are abundant, the economy implements less productive projects as well. This link between decreasing returns and efficiency suggests that misallocation can reduce the extent of aggregate decreasing returns. I formalize this connection and establish two main results: (i) misallocation amplifies the volatility of output with respect to fluctuations in inputs; and (ii) financial integration amplifies shocks in relatively distorted economies, but mitigates them in less distorted economies.

This paper develops a model of heterogeneous individuals to analyze the interacting horizon and free-rider problems faced by cooperative organizations. Analytical results identify the conditions under which a cooperative will form despite these property rights problems and show that (i) differences in members' time horizons need not necessarily lead to short-term cooperative investments and (ii) free riding is not always a problem for cooperatives. The analysis also shows how a cooperative can use a membership fee to address these property rights problems and provides additional insights into the relationship between a cooperative's cost structure and membership fees.

We show that the comparison of the two-part licensing mechanisms considered in the San Martín and Saracho (2015) context is exactly identical to that in Colombo and Filippini (J Econ 118:47-76, 2016) context. This means that the results obtained in Colombo and Filippini (J Econ 118:47-76, 2016) when the patentee chooses between per-unit and ad valorem royalties are incorrect. We conclude that when the convexity of the cost function is not too low, the patentee prefers to license by means of a royalty on the value of sales.

We investigate the pure-strategy Nash equilibria of asymmetric, winner-take-all, imperfectly discriminating contests, focussing on existence, uniqueness and rent dissipation. When the contest success function is determined by a production function with decreasing returns for each contestant, there is a unique pure-strategy equilibrium. If marginal product is also bounded, limiting total expenditure is equal to the value of the prize in large contests even if contestants differ. Partial dissipation occurs only when infinite marginal products are permitted. Our analysis relies heavily on the use of 'share functions' and we discuss their theory and application.