the value of corporate voting rights and control a cross country analysis this paper measures the value of corporate voting rights specifically of the control block of votes in a sample of 661 dual class firms in 18 countries in 1997 a consistent measure across countries is proposed the measure is adjusted for takeover probability block holding costs and dividend and liquidity differences between the share classes the value of controlblock votes varies widely across countries it is close to half of firm market value in south korea andclose to zero in finland the value of control block votes is interpretedas a lower bound for actual private benefits of the controlling shareholder the legal environment law enforcement investor protection takeover regulations andpower concentrating corporate charter provisions explain 68 of the cross country variation in the value of control block votes

the secret of growth is financing secrets corporate law and growth economics abstractinnovative businesses unite capital and new ideas which requires overcoming the double trust dilemma investors fear losing their wealth and innovators fear losing their ideas to overcome this dilemma seventeenth century spice traders invented the joint stock company with an essential feature of modern corporations entitlements to marketable shares of future profits using the corporate form innovative business ventures can often be organized so that innovators expect to earn more from their share of profits than from stealing the investors money and investors expect to earn more by preserving the company s secrets than by disseminating them the corporation thus provides a protected space for holding creative secrets while developing them by developing the innovations that transform economies the corporation became the dominant economic form of business organization

lender penalty for environmental damage and the equilibrium cost of capital in a model of the lending relationship incorporating both adverse selection and moral hazard we show that increasing the liability of lenders for environmental damage done by their borrowers has a qualitatively ambiguous impact upon interest rates this calls into question the assertion of financial community representatives that such reform will necessarily driveup interest rates and have adverse macroeconomic consequences if it is this fear which is preventing reform then that reluctance may in the case of many classes of pollutant be misplaced the implications of such reform for credit rationing are also explored

optimal taxation of flow pollutants when firms may also inflict catastrophic environmental damage in many industries firms affect the environment in two distinct types of ways firstly they emit routine anticipated volumes of flow pollutants secondly they can potentially inflict catastrophic environmental damage liability for which may be overhanging or limited by the law operaters of chemical plants nuclear power stations and oil tankers are three examples if an emissions tax or charge is to be levied on the flow pollutants in these cases how should it be set we use simple dynamic programming techniques to characterise second best optimality we identify contexts in which the tax should be raised above its pigovian level to take account of the catastrophic potential and others where it should be set below that level the analysis has significant implications for how policymakers should go about calibrating ecological taxes in a number of high profile industries

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

environmental federalism and environmental liability abstract environmental federalism considers what level of government should optimally regulate pollution this paper addresses this question for accidental pollution which government regulates through the ex post liability regimes of either negligence or strict liability we find that decentralizing the choice between these regimes does not in general induce the socially optimal outcome when firms can pay all damages all regions may choose negligence and impose an overly strict standard of due care when firms may be bankrupted by damages all regions may choose strict liability which induces too little care in addition asymmetric equilibria are possible in which some regions choose negligence others strict liability combining negligence with a pigovian tax or strict liability with a bonding requirement can align regional authorities incentives with those of a central government

strategic judgment proofing a liquidity constrained entrepreneur raises capital to finance a business activity that may harm bystanders the entrepreneur raises senior secured debt to shield assets from the tort victims in bankruptcy for a fixed level of borrowing senior debt creates better incentives for precaution taking than either junior debt or outside equity the entrepreneur s level of borrowing is however socially excessive giving tort victims priority over senior debtholders in bankruptcy prevents overleveraging but leads to suboptimal incentives lender liability exacerbates the incentive problem even further a limited seniority rule dominates these alternatives shareholder liability mandatory liability insurance and punitive damages are also discussed

endogenous market structure and competition in the 19th century american brewing industry abstract this study examines market structure and competition in the brewing industry in american frontier states around 1880 although comprehensive firm level data are unavailable available data provide information about the presence of firms in western frontier markets and characteristics of those markets the analysis uses these data in a discrete dependent variable econometric model to estimate the size of a market needed to support a certain number of breweries and the impact of market characteristics on market structure in addition the estimated market sizes needed to sustain different numbers of firms provide information about the competitive effects of entry in the early brewing industry the results indicate that the presence of second and third brewing firms significantly increased competition in a market implying that duopoly markets were not perfectly competitive moreover these findings suggest that brewing firms were not engaged in collusive behavior

the distortive effects of antitrust fines based on revenue in most jurisdictions antitrust fines are based on affected commerce rather than on collusive profits and in some others caps on fines are introduced based on total firm sales rather than on affected commerce we uncover a number of distortions that these policies generate propose simple models to characterise their comparative static properties and quantify them with simulations based on market data we conclude by discussing the obvious need to depart from these distortive rules of thumb that appear to have the potential to substantially reduce social welfare how competition authorities cas should set fines and how they actually do so in practice is a highly debated issue among antitrust practitioners in europe where fines are often set directly by the cas appeal courts have often slashed cas decisions precisely on the grounds of how they set the fines an illuminating example is the uk competition appeal tribunal cat decision in 2011 to cut the fines set by the office of fair trading oft for members of the construction recruitment cartel substantially on the grounds that the wrong measure of affected commerce was used

environmental risk and extended liability the case of green technologies abstract we analyze the effect of extending environmental risk to banks we assume that the firm needs external funds to invest in green technology and reduce the risk of environmental damage prevention may affect the distribution of both environmental losses and operating revenues we show that under moral hazard the firm does not always invest less in prevention than the optimal social level we also show that extending liability may improve both the level of prevention and the level of compensation however extended liability always leads to an increased probability of bankruptcy for the firm we also obtain that partial extended liability improves social welfare while full extended liability does not

from cash in the market pricing to financial fragility we review some recent research that explores the relationship between asset price volatility and financial fragility when markets and contracts are incomplete jel e5 g2

estimating wage discrimination in the labor market if labor supply curves are not perfectly inelastic wage discrimination induces some minority workers to leave the labor force studies of discrimination that focus only on wage differentials overlook these disincentive effects on minority employment

bankruptcy and care choice this article considers the care choice of a potentially bankrupt injurer when care is pecuniary and the legal system is characterized by strict liability i show contrary to previous results that such an injurer may take too little or too much care and that neither injurer care nor victim welfare is necessarily increasing in injurer wealth when injurers behave optimally analysis of an expected cost function demonstrates that injurer expected costs are a concave and increasing function of injurer assets a result suggesting applications to the study of vertical relationships and markets for agents

the impact of equal opportunity policy on sex differentials in earnings and occupations women began to enter nontraditional occupations at an increasing rate at the same time federal equal opportunity policy was strengthened in 1972 equal employment opportunity eeo policy was strengthened and expanded and equal opportunity in education became federal policy for the first time these policies constitute a two pronged attack on sex discrimination because they address impediments to mobility on both the demand and supply sides of the labor market together they should increase women s access to nontraditional jobs and to the skills necessary to perform them during the 1970 s women made occupational gains that are concentrated disproportionately in the white collar occupations one explanation for this is that the impact of federal equal opportunity policy differs across schooling levels in section i i discuss federal equal opportunity policy section ii contains empirical evidence on the direct effects of eeo policy on sex differentials in earnings and occupational segregation by sex section iii presents estimates of changes in the effect of schooling on women s entry into nontraditional occupations during the 1970 s and attempts to determine what portion may be due to equal educational opportunity policy and to indirect effects of eeo policy

intertemporal market effect on gender earnings differentials lawyers in canada 1970 80 the conventional methodology for decomposition of cross sectional earnings differentials is extended to include a market effect on intertemporal changes in earnings and to analyse the changes in gender differentials over time the integrated cross sectional and intertemporal methodology is illustrated by a decomposition of the change in the earnings differential that occurred during the 1970s between male and female lawyers in canada an unprecedented rate of growth in the supply of lawyers during the 1970s in canada was associated with changes in the gender earnings differential in the legal profession this rapid supply growth had an almost negligible net impact on female earnings but a negative impact of 15 on the male earnings this explains the narrowing of the earnings differential by almost 30 over the decade although three fifths of the gender differential in 1970 and half of the differential in 1980 were attributable to the differences in the characteristics of the two groups these chang

misselling through agents this paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents prospecting for customers and advis ing on the product s suitability for the specific needs of customers when structuring salesforce compensation firms trade off the expected losses from misselling unsuitable products with the agency costs of providing market ing incentives we characterize how the equilibrium amount of misselling and thus the scope of policy intervention depends on features of the agency problem including the internal organization of a firm s sales process the transparency of its commission structure and the steepness of its agents sales incentives jel m31 m37 m52 when purchasing unfamiliar products consumers often rely on information and advice pro vided by representatives of the seller this creates the possibility of misselling the question able practice of a salesperson selling a product that may not match a customer s specific needs 1 this problem is particularly severe in markets for technically complex products such as con sumer electronics auto repairs medical care and retail financial services including securities pensions insurance policies and mortgages an important feature of these markets is that the seller often deals with the customer through an agent rather than directly for example financial brokers typically recommend purchase of a specific product after inquiring about their customers particular circumstances and needs the possibility of abuse has led to regulation in some of these markets most notably for securities transactions the financial industry regulatory authority finra the major self regulatory organization for securities firms operating in the united states mandates that broker dealers make a reasonable effort to obtain information about the individual characteristics of their noninstitutional cus tomers and to ensure that their recommendations are suitable to customers financial situations

how liable should a lender be the case of judgment proof firms and environmental risk comment recently u s environmental law has shown a tendency toward increased lender liability a model of a potentially judgment proof owner of a firm a lender and a potential victim is developed in which this policy can increase accident frequency and reduce efficiency full partial and zero lender liability rules and a minimum equity requirement are analyzed partial lender liability and an equivalent minimum equity requirement deliver the highest level of efficiency although the former can deliver a higher contribution by the lender to the victim than the latter policy and empirical implications are also discussed copyright 1995 by american economic association

productivity and the role of college in narrowing the male female wage differential in the usa in 1980 this study analyses the impact that productivity factors and the particular role of college have upon the inequality in male and female wages using the 1980 1 100 public use sample the findings herein suggest that whereas both black and white females and black males who entered the labour force in 1975 or later possess productivity characteristics that are superior to their elder counterparts the productivity characteristics of white males entering the labour force over this period are significantly inferior to those possessed by older white males also in sharp contrast to a voluminous literature that concludes that college widens the wage gap between the sexes this analysis shows that college played a paramount role among the productivity characteristics in narrowing the gender wage differential in 1980

an analysis of the effects of higher education on wage differentials between blacks and whites by gender in the united states previous analyses that have examined the effect to higher education on the wage differences between blacks and whites have largely been focussed on males and failed to provide quantitative estimates of the impact that higher education has on discrimination and the black white wage differential for both genders in 1980 in particular we find that equalizing the years of college completed by black and white males reduces the wage differential by 14 conversely equalizing the years of college completed by black and white females exacerbates wage inequality by increasing the wage advantage accruing to black females by nearly 24 hence the egalitarian policy mission of higher education in narrowing wage inequality between blacks and whites is complicated by the issue of gender

entry in monopoly market this paper develops new empirical models of market concentration from game theoretic models of entry we construct our models from inequality conditions that describe entrants equilibrium strategies in simultaneous move and sequential move games and use them to study the effects of entry in isolated monopoly markets for new automobiles from estimates of the market size necessary to support one and two dealers we conclude that monopoly dealers do not block the entry of a second dealer we also find that entry does not cause price cost margins to fall by much

does hazardous waste matter evidence from the housing market and the superfund program this paper uses the housing market to develop estimates of the local welfare impacts of superfund sponsored cleanups of hazardous waste sites we show that if consumers value the cleanups then the hedonic model predicts that they will lead to increases in local housing prices and new home construction as well as the migration of individuals that place a high value on environmental quality to the areas near the improved sites we compare housing market outcomes in the areas surrounding the first 400 hazardous waste sites chosen for superfund cleanups to the areas surrounding the 290 sites that narrowly missed qualifying for these cleanups we find that superfund cleanups are associated with economically small and statistically insignificant changes in residential property values property rental rates housing supply total population and types of individuals living near the sites these findings are robust to a series of specification checks including the application of a regression discontinuity design based on knowledge of the selection rule overall the preferred estimates suggest that the local benefits of superfund cleanups are small and appear to be substantially lower than the 43 million mean cost of superfund cleanups

environmental policy based on strict liability implications of uncertainty and bankruptcy a firm level model is developed to analyze the impacts of bankruptcy and uncertain firm wealth on incentives for safety under a strict liability rule future damages and wealth are uncertain and a firm s income earning activities that possibly create damages are incorporated into the model this analysis shows that firms do not always undertake more of a risky activity than is socially desirable for the extremely hazardous industry case larger firms always undertake less of a risky activity than smaller firms for the cyclical industry case larger firms do not always conduct less of a risky activity than smaller firms

free bank failures risky bonds versus undiversified portfolios almost 30 of the 872 banks established under the free banking system 1837 62 are considered failures unable to reimburse noteholders for the full value of their bank notes upon closure lacking sufficient data economists have focused on one of two general failure explanations poor regulation design or undiversified bank portfolios i test both explanations within hazard functions using warren weber s annual balance sheet data for almost every antebellum bank my results suggest that free banking s bond secured note issue was the underlying problem but individual banks could have avoided failure by diversifying their assets with loans and controlling their circulation

direct estimates of the demand for race and sex discrimination for empirical economists one of the most fruitful areas of research has been the examination of racial sexual differences in wages and employment opportunities the dynamic movement of relative wages during the 1960s not only aroused widespread interest among the academic community it also spurred the search for ways to quantify both the level of wage discrimination and the secular changes in wage discrimination the two principle research models used in this regard have been what i shall refer to as the relative demand curve and wage decomposition approaches both approaches are inspired by the model exposited in gary becker s seminal work the economics of discrimination the relative demand curve approach interprets the intercept and time trend variables and secular changes in these variables as discrimination shifters in regression of relative wages on the relative quantities of blacks to whites the wage decomposition approach on the other hand looks at separate race specific wage regressions and takes the difference in the regression coefficients weighted by the mean value of the respective variable as indicators of wage discrimination in the next section i argue that both of these empirical approaches to estimating wage discrimination or changes in wage discrimination are intrinsically incapable of measuring becker s tastes for discrimination variable in section iii a new empirical approach to estimating wage discrimination the production function approach is presented and applied in section iv to a time series cross section of black and white

what do we learn from the price of crude oil futures summary despite their widespread use as predictors of the spot price of oil oil futures prices tend to be less accurate in the mean squared prediction error sense than no change forecasts this result is driven by the variability of the futures price about the spot price as captured by the oil futures spread this variability can be explained by the marginal convenience yield of oil inventories using a two country multi period general equilibrium model of the spot and futures markets for crude oil we show that increased uncertainty about future oil supply shortfalls under plausible assumptions causes the spread to decline increased uncertainty also causes precautionary demand for oil to increase resulting in an immediate increase in the real spot price thus the negative of the oil futures spread may be viewed as an indicator of fluctuations in the price of crude oil driven by precautionary demand an empirical analysis of this indicator provides evidence of how shifts in the uncertainty about future oil supply shortfalls affect the real spot price of crude oil copyright 2010 john wiley sons ltd

the influence of financial status on the effectiveness of environmental enforcement abstract this paper analyzes the influence of financial status on the effectiveness of environmental enforcement it considers multiple dimensions of both enforcement and financial status regarding enforcement the paper considers both the likelihood of enforcement as captured by the likelihood of inspections conducted at regulated facilities and the severity of enforcement as captured by the size of sanctions imposed on polluting facilities found violating their effluent limits as indicators of corporate financial status the paper considers measures of liquidity solvency and profitability a proxy for corporate managerial skill all of which can influence the likelihood that a firm faces liquidity and or bankruptcy constraints the paper first develops a theoretical model of optimal abatement in the presence of liquidity and bankruptcy constraints and uses the model to investigate the impact of financial status on optimal abatement and the effectiveness of enforcement then the paper empirically examines the interactions between enforcement and financial status using data on wastewater discharges from us chemical manufacturing facilities for the years 1995 to 2001 empirical results suggest that the financial status dimensions considered here in general play an important role in determining the incentives created by enforcement as the most striking result we show theoretically and empirically that when financial dimensions are included in the analysis the conventional wisdom regarding the effect of enforcement likelihood on abatement no longer holds i e increased enforcement can actually lead to worse environmental performance

discrimination fact or fiction an examination using an alternative approach women earn less than men blacks earn less than whites these facts are blatantly observable in the economy with the proliferation of civil rights legislation in the last two decades social scientists have become increasingly concerned with the determination of the wage gap attributable to discrimination because workers have different productivities statistical methods have been used to isolate the discrimination effect from wage differences justified by differences in productivity the primary method estimates an equation with wages expressed as a function of productivity and sex or race since productivity cannot be directly observed a number of proxies for productivity have been used such as education tenure and experience statisticians 11 have shown that the necessity of using proxies results in statistical biases which may tend to overestimate discrimination they have shown that mismeasuring any independent variable can impart a bias on each regression coefficient thereby causing a severe misestimate of discrimination these errors are proportional to the degree of mismeasurement the relative degree of error variance in the independent variables as well as to the amount of intercorrelation between each variable and race or

alternative models of earnings determination and labor market structures there are three distinct research traditions in the analysis of individual earnings determination human capital or earnings function analyses aggregate wage analyses and labor demand analyses an important and incongruous aspect of each is the treatment of geographical differences in labor markets this paper first investigates the magnitude and character of geographical wage differentials the sizable differences discovered there are then related to the existing and highly simplified models of labor market differences while the two major classes of models compensating differentials and labor demand differ significantly in assumptions and implications it is impossible to distinguish adequately between them there appears to be a clear need for more structural analyses of labor market operations

the benefits of extended liability we characterize the optimal regulation of a firm that undertakes an environmentally risky activity this firm the agent is protected by limited liability and bound by contract to a stakeholder the principal the level of safety care exerted by the agent is nonobservable this level of care depends both on the degree of incompleteness of the regulatory contract and on the allocation of bargaining power between the principal and the agent increasing the wealth of the principal that can be seized upon an accident has no value when private transactions are regulated but might otherwise strictly improve welfare an incomplete regulation supplemented by an ex post extended liability regime can sometime achieve the second best

the human capital approach to black white earnings inequality some unsettled questions the persistence of earnings differences between blacks and whites in the united states has been a topic that has received a substantial amount of attention in both theoretical and empirical research in economics the differential in earnings typically is tied to racial differences in human capital accumulation this paper advances a systematic critique of the human capital approach to black white inequality inadequacies are identified in human capital theory as a general theory of inequality as well as a specific theory of racial inequality the critique suggests that a serious analysis of the black white earnings gap will require an entirely new approach to the study of racial income inequality

an analysis of occupational upgrading differentials between black and white males the racial occupational mobility gap is examined by applying a decomposition methodology to logistic functions results indicate that approximately one third of the mobility gap between black and white male workers is due to differences in average characteristics the endowment effect the residual difference accounts for the remaining two thirds formal education is found to be a major component of both the endowment effect and the resdiual difference the returns to tenure with a firm overall labour market experience and marriage reduce the mobility gap in favour of black workers

measuring direct discrimination in labor markets using a frontier approach evidence from cps female earnings data numerous studies of earnings differentials have attempted to measure discrimination against females or minorities by decomposing the total differential between males and females or whites and non whites into an explained and unexplained portion typically these studies follow the work of oaxaca 8 however a number of criticisms can be raised with these techniques 9 5 4 of which two are particularly important that the reduced form wage equations for the two groups will not be identical in every case and that there may be large and unobservable differences between the characteristics of the two groups for which the wage equations cannot account either of these problems are sufficient to make it impossible to use residual analysis to measure discrimination attempts to address these problems and obtain reliable and consistent estimates of the extent of discrimination are important for policy purposes low and villegas 7 address the first of these problems by suggesting the use of hedonic wage equations which contain only human capital characteristics or proxies and characteristics which directly affect the hedonic parameters in this framework perfect substitution between the workers is assumed their work however leaves the second problem unresolved in this paper a stochastic earnings frontier with a discrimination discount is used to estimate discrimination against women an earnings frontier for females that depends upon marginal productivity as measured by human capital and labor market characteristics of females is estimated discrimination is assumed to be the amount female earnings are removed from the frontier less any labor market inefficiency since these estimates will depend solely on female data they do not depend upon an assumption of similarity between males and females this procedure allows

impact of the worker s employment probability on wage rates the employment probability is a significant determinant of the worker s wage rate expecially in the presence of employers hiring discrimination several tests suggest that the omission of this variable in the wage regression may lead to misspecification

liability and organizational choice abstract scholars have long maintained that increases in liability encourage firms to contract out risky activities in order to take advantage of so called judgment proof strategies these strategies allow entities to limit their liability through contractual arrangements with nearly insolvent firms however the use of judgment proof firms triggers countervailing effects it provides opportunities to externalize liability through judgment proof firms but the insolvency of these firms introduces distortion in care levels that can generate more liability costs these costs may outweigh the benefits of externalizing liability making contracting out suboptimal a simple model of organizational decision making with judgment proof firms is developed and applied to the oil industry where contracting out decreased in response to heightened liability following the exxon valdez oil spill

modelling the informal sector formally abstract the theoretical characterization of formal informal sector dualism by labor market dualism is integrated with its empirical characterization by size dualism by supposing that the minimum formal sector wage is only enforced for firms greater than a certain size a firm s size varies directly with the talent of its enterpreneur manager and the choice between formal and informal sector entrepreneurship is determined endogenously it is then shown that the size gap between the smallest formal sector firm and largest informal sector firm varies directly with the formal informal sector wage differential which in turn is shown as expected to increase the further is the minimum wage above the market clearing wage the comparative statics of changes in the size of the firm above which the minimum wage is enforced are also examined

learning by drilling interfirm learning and relationship persistence in the texas oilpatch author s kellogg ryan m abstract production in many industries such as construction and heavy manufacturing relies on inputs from both lead firms and contractors these firms joint productivity often hinges on their ability to share information and coordinate activities suggesting that they have strong incentives to learn about each other s personnel procedures and expertise this learning differs from standard learning by doing in that it is relationship specific its benefits are not appropriable outside the relationship in which the learning takes place in this paper i empirically examine the importance of relationship specific learning using high frequency data from oil and gas drilling i find that the joint productivity of a lead firm and its drilling contractor is enhanced significantly as they accumulate experience working together this result is robust to other relationship specificities i also find that firms appear to recognize the benefits of joint experience controlling for other specificities lead firms are more likely to work with contractors with which they have substantial prior experience than those with which they have worked relatively little

estimation of a model of entry in the airline industry this paper considers the effect of an airline s scale of operation at an airport on the profitability of routes flown out of that airport the empirical methodology uses the entry decisions of airlines as indicators of underlying profitability the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city pair profitability these estimates imply that city pair profits increase in airport presence and decrease rapidly in the number of entering firms the literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms

from pigou to extended liability on the optimal taxation of externalities under imperfect financial markets an important contribution of economics to public policy rests on the precept that price signals should force producers of externalities to internalize the welfare of other economic agents pigou 1920 s celebrated insight on the taxation of externalities provided an intellectual foundation for a variety of policies from pollution taxes permits to experience rating pigovian taxation s policy appeal is limited if the polluter has insufficient resources to pay the damage when it occurs to defend pigovian taxation in the presence of judgment proof agents its proponents point at the many institutions extending liability to third parties yet little is known about the validity of pigou s analysis in this context the paper analyzes the costs and benefits of extended liability and investigates whether full internalization is called for in the presence of agency costs between potential polluters and providers of guarantees its contribution is two fold it first shows that the better the firms corporate governance and the stronger their balance sheet the more closely taxes should track the corresponding externality it then develops the first analysis of extended liability when guarantors themselves may be judgment proof and the extension of liability may give rise to further externalities relatedly it derives the curvature of the optimal taxation of externalities in a multiplant firm

bank runs in the free banking period free banks in the united states issued private banknotes without discretionary restriction of entry previous research suggests explanations for noteholders relatively large losses and the substantial number of banks that closed the authors examine these hypotheses and the hypothesis that contagious runs were important the evidence provides no support for the importance of wildcat banking due to par versus market valuation of bond reserves episodic but not general support for the importance of declining bond prices and support for contagion effects and contemporaries knowledge of them with little or no impact on the number of banks that closed copyright 1994 by ohio state university press

environmental accidents under moral hazard and limited firm liability we study optimal government policy when firms operations involve a risk of a large environmental accident firms do not have sufficient assets to cover such costs and the risk is affected by firms efforts which are unobservable to outsiders when firms profits and government revenues have equal weights in the social welfare function a first best can be implemented and requires that the firm be subsidized heavily when operating with no accident and all its assets confiscated in the event of an accident with a lower weight on firm profits the solution is always second best with lower subsidies to the firm and a firm effort lower than at the first best solution when firm investments affect both the required accident preventing effort for given risk and the work effort required for a given output the first best never involves specific investment subsidies while a second best solution generally always does

back to the future backtesting systemic risk measures during historical bank runs and the great depression abstract we evaluate the performance of two popular systemic risk measures covar and srisk during eight financial panics in the era before fdic insurance bank stock price and balance sheet data were not readily available for this period we rectify this shortcoming by constructing a novel dataset for the new york banking system before 1933 our evaluation exercise focuses on two challenges ranking systemically important financial institutions sifis and financial crisis prediction we find that covar and srisk meet the sifi ranking challenge that is they help identify systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months before panics in contrast aggregate covar and srisk are only somewhat effective at predicting financial crises

bank entry during the antebellum period a recent study by kenneth ng 1988 challenges the view the free banking laws lowered barriers to entry the authors study examines bank entry and capital formation in free and nonfree banking states during the free banking period a competitive model is developed and used to test if barriers were lowered in free banking states the evidence indicates that entry significantly increased after the enactment of the free banking laws and that entry policy in nonfree banking states appeared to have been liberalized when the free banking laws were enacted in other states copyright 1995 by ohio state university press

strict liability as a deterrent in toxic waste management empirical evidence from accident and spill data abstract this paper examines whether strict liability imposed on polluters has reduced uncontrolled releases of toxics into the environment we fit regressions relating spills of selected chemicals to the type of liability in force in a state and to state manufacturing activity for some chemicals spills are more numerous in states imposing strict liability this could be due to unobserved state characteristics with small firms being responsible for a disproportionate number of spills regardless of the liability structure alternatively separate regressions for the two liability regimes suggest that only under strict liability are small firms responsible for a disproportionate number of spills

market power in the eco industry polluters incentives under environmental liability law this paper analyzes the output and abatement choices of perfectly competitive downstream polluters who are subject to environmental liability law and procure abatement from an imperfectly competitive eco industry under strict liability polluting firms choose suboptimal abatement but socially optimal output given abatement under negligence with firm specific abatement standards polluting firms choose suboptimal output but socially optimal abatement given output under negligence with industry wide abatement standards the output and abatement choices of most firms are socially suboptimal second best considerations are offered for each case under strict liability negligence these apply to the level of liability the behavioral standard

liquidity constraints and imperfect information in subprime lending ditions for precisely the population that is most likely to have a difficult time obtaining credit those with low incomes and poor credit histories these consumers who typically cannot qualify for regular bank loans comprise the so called subprime market because the company we study originates subprime loans its loan applications and transaction records provide an unusual win dow into the consumption and borrowing behavior of households that are rationed in primary credit markets moreover we track loan repayments allowing us to analyze the difficulties in lending to the subprime population we begin by documenting the importance of short term liquidity constraints for individuals in our sample we present two pieces of evidence both are based on purchasing behavior and indicate a high sensitivity to cash on hand first we document a dramatic degree of demand seasonality associated with tax rebates overall demand is almost 50 percent higher during tax rebate season than during other parts of the year this seasonal effect varies with household

liability and large scale long term hazards this paper analyzes the application of liability to large scale long term hazards the key features distinguishing such hazards are the long temporal separation between exposure to a hazard and disease and the large damages when injuries finally emerge the large scale of damages creates a strong incentive to avoid liability payments and the long temporal separation creates numerous avenues through which parties can avoid paying possible damage awards the analysis focuses on the incentive to avoid paying damages by vertically divesting production tasks associated with serious occupational risks such divestiture can lower liability costs if the small firm operating the risky stage goes out of business before latent injuries emerge or has insufficient assets to pay damages and declares bankruptcy when suits are filed the paper then presents an empirical regression analysis of small firm entry into the u s economy between 1967 and 1980 the period in which liability laws were changing the point estima

an empirical analysis of homosexual heterosexual male earnings differentials unmarried and unequal using data from the 1990 u s census pums 5 the authors present the first large scale study of wage differentials between heterosexual and homosexual men the homosexual sample consisting of gay men in unmarried partnered relationships are estimated to have earned 15 6 less than similarly qualified married heterosexual men and 2 4 less than similarly qualified unmarried partnered heterosexual men the authors interpret these two figures as upper and lower bound estimates of the differential between homosexual and heterosexual men the dual comparison enables the authors to disentangle the penalty to being unmarried from other determinants of the wage differential estimated at 14 1 this variable appears to be the main source of the wage gap

the boundaries of the firm revisited why do firms exist what is their function and what determines their scope these remain the central questions in the economics of organization they are also central questions for business executives and corporate strategists the worldwide volume of corporate mergers and acquisitions exceeded 1 6 trillion in 1997 it is hard to imagine that so much time effort and investment bankers fees would be spent on adjusting firm boundaries unless there was some underlying economic gain indeed the exceptional levels of merger and acquisition activity over the past two decades are a strong indication that economically significant forces do determine organizational boundaries the study of firm boundaries originated with the famous essay by coase 1937 who raised the question of why we observe so much economic activity inside formal organizations if as economists commonly argue markets are such powerful and effective mechanisms for allocating scarce resources coase s answer was in terms of the costs of transacting in a world of imperfect information when the transaction costs of market exchange are high it may be less costly to coordinate production through a formal organization than through a market in large part thanks to the work of williamson 1975 1985 recent decades have seen a resurgence of interest in coase s fundamental insight that firm boundaries can be explained by efficiency considerations our understanding of firm boundaries has been sharpened by identifying more precisely the nature and sources of transaction costs in different circumstances in the process the focus of

accidents waiting to happen liability policy and toxic pollution releases proponents of environmental policies based on liability assert that strict liability imposed on polluters induces firms to handle hazardous wastes properly we examine unintended pollution releases relating them to the liability imposed on polluters by state mini superfund laws we find that strict liability reduces the frequency and severity of pollution releases but that its effects vary with firm size smaller firms are associated with more pollution releases in states with strict liability suggesting that in these states smaller firms may have specialized in riskier production processes their number however has not necessarily grown in response to the state s liability policy

margin based asset pricing and deviations from the law of one price in a model with heterogeneous risk aversion agents facing margin constraints we show how securities required returns increase in both their betas and their margin requirements negative shocks to fundamentals make margin constraints bind lowering risk free rates and raising sharpe ratios of risky securities especially for high margin securities such a funding liquidity crisis gives rise to bases that is price gaps between securities with identical cash flows but different margins in the time series bases depend on the shadow cost of capital which can be captured through the interest rate spread between collateralized and uncollateralized loans and in the cross section they depend on relative margins we test the model empirically using the credit default swap bond bases and other deviations from the law of one price and use it to evaluate central banks lending facilities jel g01 g12 g13 e44 e50 the paramount role of funding constraints becomes particularly salient during liquidity crises with the one that started in 2007 being an excellent case in point banks unable to fund their operations closed down and the funding problems spread to other investors such as hedge funds that relied on bank funding therefore traditional liquidity providers became forced sellers interest rate spreads increased dramatically treasury rates dropped sharply and central banks stretched their balance sheets to facilitate funding these funding problems had significant asset pricing effects the most extreme example being the failure of the law of one price loop securities with nearly

antitrust penalties and the implications of empirical evidence on cartel overcharges research for this paper was supported by a grant from the economic and social research council res 062 23 2211

an alternative approach to the analysis of wage differentials a key question in many studies of male female or black white wage differentials is how much of the differential can be explained by economic factors and how much remains unexplained the unexplained portion is then ascribed to discrimination since oaxaca 17 first formalized this decomposition the residual difference methodology has been the dominant methodology utilized in empirical studies of wage differentials 4 7 8 10 15 18 but recently the validity of the assumptions underlying the residual difference methodology have been called into question by butler 5 6 in this paper the theoretical underpinnings of the residual difference methodology are reexamined and an alternative theoretical framework for this methodology is suggested the new framework overcomes the shortcomings inherent in oaxaca s specification of the model and therefore provides a sound theoretical foundation for the residual difference decomposition

on being asset constrained in litigation contests this paper establishes that being asset constrained may be advantageous for defendants in litigation contests an active asset constraint of defendants i may increase decrease defendant plaintiff contest effort ii may lower the sum of plaintiff and defendant contest effort iii lowers expected defendant payment and iv makes a symmetric contest asymmetric

market structure and multiple equilibria in airline markets we provide a practical method to estimate the payoff functions of players in complete information static discrete games with respect to the empirical literature on entry games originated by bresnahan and reiss 1990 and berry 1992 the main novelty of our framework is to allow for general forms of heterogeneity across players without making equilibrium selection assumptions we allow the effects that the entry of each individual airline has on the profits of its competitors its competitive effects to differ across airlines the identified features of the model are sets of parameters partial identification such that the choice probabilities predicted by the econometric model are consistent with the empirical choice probabilities estimated from the data we apply this methodology to investigate the empirical importance of firm heterogeneity as a determinant of market structure in the u s airline industry we find evidence of heterogeneity across airlines in their profit functions the competitive effects of large airlines american delta united are different from those of low cost carriers and southwest also the competitive effect of an airline is increasing in its airport presence which is an important measure of observable heterogeneity in the airline industry then we develop a policy experiment to estimate the effect of repealing the wright amendment on competition in markets out of the dallas airports we find that repealing thewright amendment would increase the number of markets served out of dallas love

bidding with securities auctions and security design we study security bid auctions in which bidders compete for an asset by bidding with securities that is they offer payments that are contingent on the realized value of the asset being sold the value depends on investment by the winner thus creating the possibility of moral hazard such auctions are commonly used both formally and informally in formal auctions the seller generally restricts bids to an ordered set such as an equity share or royalty rate by restricting the bids standard auction formats such as first and second price auctions can be used in informal settings with competing buyers the seller does not commit to a mechanism upfront rather bidders offer securities and the seller chooses the most attractive bid based on his beliefs ex post we characterize equilibrium payoffs and bidding strategies in this setting and show that an informal mechanism yields the lowest possible revenues across all mechanisms we also determine the optimal formal mechanism and show that the security design is more important than the auction format we show that the revenue equivalence principle that expected revenues are independent of the auction format holds if the set of permissible securities is ordered and convex such as equity otherwise it need not hold for example when bidders offer standard debt securities a second price auction is superior on the other hand if bidders compete on the conversion ratio of convertible debt a first price auction yields higher revenues finally we examine how different forms of moral hazard impact our results

drilling like there s no tomorrow bankruptcy insurance and environmental risk this paper measures the effects of bankruptcy protection on industry structure and environmental outcomes in oil and gas extraction using administrative data from texas i exploit variation in an insurance requirement that reduced firms ability to avoid liability through bankruptcy among small firms the policy substantially improved environmental outcomes and reduced production most production was reallocated to larger firms with better environmental records but high cost production where social cost may have exceeded social benefit decreased these results suggest that incomplete internalization of environmental costs due to bankruptcy is an important determinant of industry structure and safety effort in hazardous industries

hotelling under pressure we show that oil production from existing wells in texas does not respond to oil prices while drilling activity and costs respond strongly to explain these facts we reformulate hotelling s class

bank panics government guarantees and the long run size of the financial sector evidence from free banking america governments attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility confidence in these guarantees presumably alters the size of the financial sector but observing the long run consequences of failed guarantees is difficult we look to america s free banking era and compare the consequences of a broken guarantee during the indiana centered panic of 1854 to the panic of 1857 in which guarantees were honored our estimates of a model of endogenous market structure indicate substantial negative long run consequences to financial depth when panics cast doubt upon a government s ability to honor its guarantees

the missing missing middle the notion that the distribution of firm size in poor countries is characterized by a bimodal distribution with a missing middle is a widely accepted fact in development economics for example see krueger 2013 the idea of the missing middle is that there are a large number of small firms some large firms but very few medium sized firms the purported fact about the missing middle is cited as evidence for two broad stories of why many countries are poor perhaps surprisingly these models look for the cause of the missing middle in two fundamentally different places one approach suggests that small firms are disfavored in low income countries for example by a lack of access to financial capital and thus face difficulties in growing to become middle sized firms the other approach posits a dual economy of large high productivity firms and small low productivity firms and then suggests that larger firms are disfavored in low income countries for example by having to bear large fixed costs of regulation which make it difficult for middle sized firms to become established we begin by reviewing these theories of development based on the purported fact of a missing middle we then explore the evidence on distribution of firm sizes in more detail and challenge the presumption that a missing middle occurs at all we present three main facts first there is in fact no evidence of a missing middle in detailed and comprehensive data on the size of manufacturing firms in india indonesia or mexico regardless of how we slice the data to be sure there

schooling and changes in the inequality in male and female earnings in the united states over the 1970s ref jnl au fn j s sn akin eau au fn i sn garfinkel eau chti the quality of education and cohort variation in black white earnings ditferentials comment title american economic review vol 70 year 1980 fp 186 lp 191 ejnl bk au fn g sn becker eau title the economics of discrimination pub name university of chicago press cty chicago year 1957 epub ebk jnl au fn a h sn beller eau chti the impact of equal opportunity policy on sex differentials in earnings and occupations title american economic review vol 72 year 1982a fp 171 lp 175 ejnl jnl au fn a h sn beller eau chti occupational segregation by sex determinants and changes title journal of human resource vol 17 year 1982b fp 371 lp 192 ejnl jnl au fn b r sn bergmann eau chti the effect on white income of discrimination in employment title journal of political economy vol 6 year 1971 fp 294 lp 313 ejnl jnl au fn a s sn blinder eau chti wage discri

environmental risks and bank liability abstract many governments have introduced or are considering introducing laws to recover from the liable parties the cleanup costs caused by pollution damages in particular the banks who finance the firms causing environmental damages may be considered liable in various court cases in the us and elsewhere banks have been found liable while they have been exempted in others we develop a model in which the insurance sector may insure the firm for the pollution risk and the bank may lend money for investment under complete information of the bank about the firm s activities the limited liability of the firm induces excessive investment and insufficient care but full liability of the bank creates the appropriate internalization of the environmental risk this rationalization of the laws on lender liability must be qualified because in general the banks suffer from agency problems adverse selection and moral hazard in their relationships with firms in the adverse selection case full liability of the bank leads to underinvestment partial liability is better but may fail to implement the optimal second best allocation in the case of moral hazard full responsibility is killing the project too often while still leading to low care too often partial responsibility may achieve the second best optimal allocation but in some cases the level of responsibility necessary to induce the proper level of care is too high for the project to be financed by the bank we conclude with a discussion of the implications of our results with regards to liability laws for environmental damages

debt and seniority an analysis of the role of hard claims in constraining management we argue that long term debt has a role in controlling management s ability to finance future investments a company with high widely held debt will find it hard to raise capital since new security holders will have low priority relative to existing creditors conversely for a company with low debt we show there is an optimal debt equity ratio and mix of senior and junior debt if management undertakes unprofitable as well as profitable investments we derive conditions under which equity and a single class of senior long term debt work as well as more complex contracts for controlling investment behavior

the causes of free bank failures a detailed examination abstract in this paper we propose and test a new explanation of bank behavior during the free banking era 1837 1863 arguing against the conventional view that free bank failures were due to wildcat banking we claim they were caused by falling asset prices confronting both explanations with our new and detailed data set developed from state auditor reports we find that the falling asset price explanation of free bank failures explains far more failures than does the wildcatting hypothesis