Academic attention has increasingly been focused on the operation of security markets. This is largely due to the impetus provided by the Institutional Investor Study (see U.S. Securities and Exchange Commission [35]), by the Securities Act Amendments of 1975 whereby Congress mandated the development of a national market system (NMS), and by the expanding computer technology of the 1970s. Not surprisingly, much of the attention has focused on the role of dealers and stock exchange specialists as market makers. The literature has generally viewed these market makers as suppliers of immediacy to ordinary traders, and has taken the bid-ask spread to be the price they impose for the provision of this service.

During the explosive growth in options markets, from 18.1 million contracts traded in 1975 to 57.2 million in 1978, institutional participation has lagged. While precise measures are not available, informed estimates suggest that only 12 to 15 percent represents true institutional activity in spite of the fact that one by one, tax, regulatory, and conceptual barriers have been reduced or eliminated. In addition to such retarding factors as lethargy, prejudice, and unfamiliarity, there are still some fundamental characteristics of options which make questionable the prudence of their use by fiduciaries or asset managers in a fiduciary position.

I'd like to begin by thanking the Western Finance Association for the lunch I just consumed …

It is only fair that I inform you at the outset that the views you are about to hear can only be described as biased. They are biased because I'll be limiting my remarks to those parts of finance that I think I know something about; secondly, my comments will contain a disproportionate reflection of my own work. The more generous among you might argue that this puts me in good company. A better explanation would recognize that I am really in a monopoly position for the next half hour or so: there are no contemporaneous sessions within commuting distance, your lunch was paid in advance and is not refundable, and for some of you at least there is a certain cost associated with getting up and leaving in full view of the organizers.

Increasing attention has been focused, as of late, on the relatively low rate of rental housing starts and the increase in apartment conversions to condominium ownership. By some estimates, additions to owner–occupied housing stock since 1970 have occurred at twice the rate of addition to the rental stock, a pattern that has caused concern to some policymakers.

”Poor people cause poor housing.” This statement is the basis for one of the major policy proposals to eradicate poor housing and neighborhoods that plague some of our urban areas. If the motto is correct, then poor housing and poor neighborhoods can be eliminated by providing direct support for the demand for housing by low-income households. The role of government, under such a policy, is to funnel its resources to households in the form of demand subsidies. Examples of such demand-side programs are housing allowances and the Section 8 existing housing program.

The findings of this study indicate, contrary to the recent claims by Aaron [1, 2], among others, that the real estate tax on residential properties is regressive. Using a data base from a sample of household observations for FHA–HUD 203–Program single–family market sales for counties contained in five major United States Standard Metropolitan Statistical Areas (SMSAs), the statistical analyses suggest that the degree of observed regressivity varies significantly across counties and is the result of two forces. First, in many counties, the poor and de facto inequitable assessment practices are the principal causes for property tax regressivity. Second, in some counties that exhibit relatively equitable and uniform assessment practices, the end product appears to be an income regressive property tax. Hence, the property tax in these counties may be intrinsically (slightly) regressive. However, in general, if there were uniform administration of the property tax, it would be (slightly) progressive.

The paper by Cohen, Maier, Schwartz, and Whitcomb (CMSW) presents the authors' comments on previous literature about bid-ask spreads in securities markets and the way in which they are formed and also gives a number of the authors' own ideas on the topic. I have a few comments on what they have to say in both of these categories, but I will emphasize the latter, since I find it more interesting to comment on their own assertions than to comment on their comments about others. In this and previous versions of their paper and previous papers on the same topic, CMSW have explained that they view price movements over time in securities markets as being partly the result of underlying economic changes and partly a reflection of the impact of idiosyncratic orders that come in from individual investors. On the latter point, I do not find their view very convincing. Individuals decide to trade a security, I believe, for essentially one of two reasons: a desire to change their cash balances or a result of a change in probability beliefs about future returns. I do not believe that either of these situations will result in an impact on security price unless they influence to action at the same time large numbers of investors, in which case they represent exactly the source of underlying economic changes which ought to affect price.

The Edelstein and Follain papers are not as different as they may appear at first. The two are linked through the income elasticity of housing. Follain is concerned with this measure explicitly, while Edelstein1s analysis hinges on the value he assumes for it. Both papers are also policy papers, and their conclusions are of immediate importance for ongoing policy decisions.

Sudipto Bhattacharya's paper, “An Exploration of Nondissipative Dividend–Signaling Structures,” is in two parts. The first develops a nondissipative “quota–based” signaling model. Optimal contingent (wage) contracts are shown to induce workers, whose productivity is not directly observable, to “self–select” by the choice of level of committed productivity. However, the most novel feature of the paper is the attempt to apply the quota–based signaling model to the problem of dividend signaling in the capital– –market that is, the modeling of the “information content” of corporate dividends as an ex–ante signal of future earnings. As Bhattacharya notes, the “information content” of hypothesis of dividend payment is somewhat ill–defined to date, so such an application of the quota–based signaling model, if successful, would be a definite contribution to dividend theory.

I have always considered it unfair for a discussant to criticize an author for writing a paper differently than he would have written it had he been addressing that topic. However, since the topic of the Brueggeman and Peiser paper is so important and the paper is so different from what I would have written, I am going to indulge myself for a moment.

What I have attempted to do in this paper and a companion paper [1] on dividend-signaling is to delineate two “polar cases” of signaling in which firms either can or cannot (at all) directly communicate the ex-post profitability of their business without moral hazard. In this paper, we assume that they can, and signaling through dividends or earnings forecasts “merely” serves to bring forward the timing of communication of insiders' expectation of profitability to the outside market. The model is “nondissipative” because the incentivestructure that leads to self-selection using the signal is based on market value revisions which are themselves based on the discrepancy between the signal and the ex-post indicator, not on any exogenous or “third party” costs, unlike the model in the companion paper [1].