The relationship between interest rates and business investment is a topic of interest in macroeconomics and corporate finance alike. In frictionless capital markets, an increase in real interest rates leads to a decline in investment because firms discount new projects at a higher cost of capital. Controlling for opportunities, changes in real interest rates affect firms symmetrically.
A major shortcoming of the frictionless view is that it pays no attention to how firms actually raise capital, or have raised capital in the past. Firms with high levels of short-term debt, or with maturing long-term debt, for example, must refinance at market interest rates, while the debt service payments of firms with long-term debt are determined by interest rates at the time of issuance.
This study attempts to answer a simple question: how important are economies of scale in advertising agency operations? Advertising agencies, like most other businesses, are multiple-product firms. An agency's costs may depend on how their clients allocate their advertising budgets across media and there is considerable variation in media mix among agencies. (SectionII provides some quantitative information on this variation.) Accordingly, we use nonlinear estimation techniques to examine the influences of both scale and media mix on advertising agency costs.
We find evidence that scale economies may not be as important as many have argued and that media mix is. a significant determinant of costs. Differences in media mix between large and small agencies seem typically to lower the costs of the former relative to the latter even if all economies of scale have been exhausted.
Until the Card and Krueger (1994, 1995) publications, there was near unanimity among economists that increases in the minimum wage have a small negative effect on the employment of low wage workers covered by minimum wage law. However, Card and Krueger’s contrary evidence with US data, as well as evidence from Britain (Machin and Manning, 1994; Dickens, Machin and Manning, 1999), have challenged this view, based on the traditional competitive model. Economists are now taking more seriously other models, such as the equilibrium wage dispersion models (e.g., Burdett and Mortenson, 1989; Burdett and Wright, 1994; Dickens, Machin and Manning, 1999; Manning, 1993), which can accommodate non-negative employment effects in the covered sector.
While this debate moves forward, we note that we have even less of an understanding of the employment and wage effects of the minimum wage on the sector not covered by minimum wage law (uncovered sector). Aside from this paper’s predecessors (El-Hamidi and Terrell, 2001; Gindling and Terrell, 1995), there are only a handful of empirical studies examining the impact on the uncovered sector, e.g., Tauchen (1981) studies the uncovered agricultural sector in the US and more recently Fajnzylber (2001) studies the impact on the informal sector in Brazil.
