long live the doge death as a term limit on venetian chief executives can an electorate use the projected life expectancy of a lifetime appointed chief executive to enforce binding informal term limits informal term limits based on the life expectancy of a chief executive candidate at election would enable an electorate to exercise discretion in adjusting tenure lengths to minimize expected turnover and tenure length costs while also providing a strictly binding term limit death we provide a detailed historical case study of venice from 1172 to 1797 when the ruling patricians utilized informal term limits on their chief executive the doge relying on the projected life expectancy of ducal candidates

financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

term limits and electoral accountability abstract periodic elections are the main instrument through which voters can hold politicians accountable from this perspective term limits which restrict voters ability to reward politicians with re election appear counterproductive we show that despite the disciplining effect of elections term limits can be ex ante welfare improving from the perspective of voters by reducing the value of holding office term limits can induce politicians to implement policies that are closer to their private preferences such truthful behavior by incumbents in turn results in better screening of incumbents we characterize under which circumstances two term or even longer term limits are the optimal institution for voters

shirking and sorting in a political market with finite lived politicians this paper analyzes principal agent slack in the context of a political market composed of voters challengers and incumbents the introduction of a last period via finite livedness in combination with voters imperfect information about politicians preferences causes time varying shirking behavior on the part of politicians political markets eventually sort out those politicians with significantly deviant policy preferences potentially providing a solution to the last period problem and enabling politicians to make credible commitments in the extreme sorting can insure that it is not worthwhile for potential shirkers to run for office a systematic relationship between political shirking and number of terms in office may exist and depends on how quickly sorting takes place we show that evidence of little if any shirking is quite consistent with politicians having diverse and strongly held policy preferences in addition if sorting is a significant feature of political markets cross sectional studies will tend to oversample little and non shirking politicians compared to longitudinal studies reinterpretations of existing empirical work are also discussed

an economic model of representative democracy this paper develops an approach to the study of democratic policy making where politicians are selected by the people from those citizens who present themselves as candidates for public office the approach has a number of attractive features first it is a conceptualization of a pure form of representative democracy in which government is by as well as of the people second the model is analytically tractable being able to handle multidimensional issue and policy spaces very naturally third it provides a vehicle for answering normative questions about the performance of representative democracy

inventories and interest rates a critique of the buffer stock model economists generally test for the effect of interest rates on inventories by including some measure of the real interest rate in a standard flexible accelerator buffer stock model this paper presentsseveral reasons for concluding that this approach is incorrect and demonstrates how interest rate effects can be introduced into decisionrules derived under the assumption of optimizing behavior by firms decision rules for finished good inventories output and price are estimated using monthly observations on the food and kindred product industry the results generally conform to the predictions of the theory copyright 1986 by american economic association

political parties and political shirking using ada roll call voting scores for the 1947 2006 period i find that senators shirk in their last term the degree of shirking is limited by political parties which constrain the politician in his last term and varies by post senate career choices the results highlight the importance of political parties in the repeated game that is electoral politics

venture capital staged financing and optimal funding policies under uncertainty abstract our paper presents a dynamic model of entrepreneurial venture financing under uncertainty based on option exercise games between an entrepreneur and a venture capitalist vc in particular we analyze the impact of multi staged financing and both economic and technological uncertainty on optimal contracting in the context of vc financing our novel approach combines compound option pricing with sequential non cooperative contracting allowing us to determine whether renegotiation will improve the probability of coming to an agreement and proceed with the venture it is shown that both sources of uncertainty positively impact the vc investor s optimal equity share specifically higher uncertainty leads to a larger stake in the venture and renegotiation may result in a dramatic shift of control rights in the venture preventing the venture from failure moreover given ventures with low volatility situations might occur where the vc investor loses his first mover advantage based on a comparative static analysis new testable hypotheses for further empirical studies are derived from the model

dynastic political privilege and electoral accountability the case of u s governors 1950 2005 i introduction political dynasties which pass on public offices and other political privileges from family member to family member have been important in the united states throughout its history this paper investigates whether dynastic political privilege enhances incumbent accountability to voters as incumbents with family political capital work to maintain favorable reputations even in the incumbents last period this would mitigate last period problems in contrast with earlier empirical results in which incumbents in their last period in office deliver inferior economic results we test the hypothesis that dynastic political privilege increases accountability using data for 1950 2005 on u s governors including a new data set on the family relationships of politicians the constitution of the united states embodies the political ideals of the founders whose goal was to establish a republican national government that was responsible to the nation s people that specified the powers of the federal government that recognized the rights of the states and that incorporated checks and balances which would limit governmental power this new government was to be a direct contrast to and repudiation of monarchy in one of the most explicit repudiations of monarchy the constitution forbids the grant of titles of nobility by both the federal government and the states constitution of the united states article i sections 9 and 10 see the federalist papers number 39 for james madison s statements on the most decisive importance of the ban on titles of nobility library of congress 1961 242 interestingly however the constitution does not directly forbid hereditary office provided that the inheritor of the office is elected to it or appointed to it by constitutional means for example early in the nineteenth century the nation elected john quincy adams son of the second president as its sixth president dal bo dal bo and snyder 2009 carefully examine u s congressional dynasties from 1789 to 1996 and find that political power in the united states is self perpetuating this seems not only contrary to our nation s fundamental political principles but it also seems to hand over opportunities for rent seeking to relatives of successful politicians furthermore it is inefficiently anticompetitive because under such a system many highly qualified candidates are frozen out of office for reasons other than qualifications and anticipated productivity in office thus at first glance this process of family privilege in politics appears repugnant and contrary to the republican principles of our national political system there are however at least two other views of inherited political privilege which see it as socially useful first it is possible that political skills are actually inheritable so that dynastic political privilege may be socially productive that is relatives of office holders may gain special access to knowledge and skills that is only available to other potential office holders at much higher cost if at all the second and perhaps more important way in which inherited political privilege could be socially productive is that it may mitigate public sector principal agent problems the political system of the united states presents substantial principal agent problems as the voters cannot directly control the behavior of incumbent officials this gives office holders opportunities to act against the voters interests through corruption shirking on the job consumption at public expense promoting narrow ideology and others dynastic political privilege may make these behaviors more costly the possibility that opportunistic behavior in office may damage other family members political prospects disciplines current office holders making them more likely to exercise care in serving their constituents interests the main mechanism for voters to discipline incumbents is through elections

the interaction of debt financing cash grants and the optimal investment policy under uncertainty abstract significant progress has been made toward understanding a levered firm s optimal investment policy under uncertainty to date however not much work has concentrated on the time scale trade off and collectively held real options we employ a game theoretic real option model between a firm and a government to analyze the effect of uncertainty and investment stimulus in the form of cash grants on optimal investment timing financing and investment scaling we find that the jointly held real option between the firm and the government leads to underinvestment regardless of whether the firm has the possibility to issue debt subsidies however reduce the level of underinvestment notably the results indicate that even though levered firms receive less support they invest more than unlevered firms this challenges recent findings that a firm s optimal investment level is not affected by the way it finances a project similarly we find that for realistic parameter constellations the levered firm s optimal investment threshold can be higher than that of its unlevered counterpart this indicates that the availability of tax shield benefits does not necessarily serve as an incentive to invest earlier finally we show that the effect of cash flow uncertainty on the equilibrium level of grants is ambiguous and triggers the switch from a subsidy to non subsidy regime

real investment options with multiple sources of rare events abstract we value real investment options when the underlying asset follows a mixed jump diffusion process involving various types sources of rare events jumps these jumps are assumed independent of each other with each type having a log normally distributed jump size and a random poisson distributed arrival time they may represent uncertainties about the arrival and impact on the underlying investment of new information concerning technological innovation competition political risk regulatory effects and other sources an analytic solution is presented for european claims call or put options with multiple sources of jumps a discrete time markov chain methodology implemented within a finite difference scheme is proposed for the valuation of american as well as european options the approach is also applicable to financial options with multiple types of rare events the approach is illustrated through valuing complex real options with compound features involving interactions between optimal investment and subsequent operating decisions specifically we value a growth option and an extension option

why voters vote for incumbents but against incumbency a rational choice explanation in recent elections voters supported initiatives to limit the number of terms that their representatives may serve yet at the same time overwhelmingly re elected their incumbents we provide a theoretical explanation for this and other puzzles associated with voting on term limitations the pattern of voting on term limits can be explained by the desire to redistribute power from one party to another from one branch of government to another and from districts with long term incumbents to districts whose representatives have served only for a short time span we test these hypotheses by looking at voting patters on california proposition 140 and the vote on the 22nd amendment with generally positive results

investment in technological innovations an option pricing approach abstract this paper develops a model of the optimal investment strategy for a firm confronted with a sequence of technological innovations we incorporate many of the most important characteristics of real world technology markets for example we permit innovations to be stochastic in their arrival times and their profitability we also incorporate learning so that firms adopting current innovations become better able to benefit from future innovations the model yields four distinct investment strategies the model is then used to predict actual firm policy these implications are discussed and compared with observed firm behavior

does electoral accountability affect economic policy choices evidence from gubernatorial term limits this paper analyzes the behavior of u s governors from 1950 to 1986 to investigate a reputation building model of political behavior we argue that differences in the behavior of governors who face a binding term limit and those who are able to run again provides a source of variation in discount rates that can be used to test a political agency model we find evidence that taxes spending and other policy instruments respond to a binding term limit if a democrat is in office the result is a fiscal cycle in term limit states which lowers state income when the term limit binds

princes and merchants european city growth before the industrial revolution as measured by the pace of city growth in western europe from 1000 to 1800 absolutist monarchs stunted the growth of commerce and industry a region ruled by an absolutist prince saw its total urban population shrink by one hundred thousand people per century relative to a region without absolutist government this might be explained by higher rates of taxation under revenue maximizing absolutist governments than under nonabsolutist governments which care more about general economic prosperity and less about state revenue

the administrative foundations of self enforcing constitutions current theories of the rule of law argue that public officials respect rights if the citizens are coordinated on an equilibrium in which they collectively resist abuse constitutional rules are means to coordinate on this equilibrium in past and present states however constitutional rules often have no effect on the rule of law this paper suggests an alternative view of the origin and development of the rule of law instead of considering constitutional rules as coordination devices for citizens at large history suggests considering them as manifestations of equilibria with rulers constrained by administrators required to implement policy analysis of the administrative foundations of self enforcing constitutions may be the key to a theory and policy that would foster the rule of law in developing countries and those in transition in particular constitutional reforms might benefit from focusing on altering the equilibrium distribution of administrative capacity and power providing incentives to the administratively powerful to check predation by each other and the central authorities and to align administrators interests with social welfare

interactions between investment timing and management effort under asymmetric information costs and benefits of privatized firms abstract in this paper we examine the interactions between investment timing and management effort in the presence of asymmetric information between the owner and the manager where the manager has an informational advantage we find that investment timing is later under asymmetric information than under full information implying a decrease in the value of equity option however in order to minimize any distortion under underinvestment management effort is greater under asymmetric information than under full information we show that there are trade offs in the efficiencies of investment timing and management effort under asymmetric information these results fit well with the findings of past empirical studies concerning the costs and benefits of privatized firms

self imposed term limits in reconciling voters behavior with legislative term limits dick and lott argue that since more senior representatives are better at rent seeking there is an inefficient tendency to re elect incumbents in their model term limits are preferred collectively by constituencies even though no constituency would independently oust its incumbent representative however many term limits are unilaterally self imposed in particular the 22nd amendment limiting presidents terms to two and their model cannot explain these limits in this comment i suggest that term limits may be self imposed by risk averse voters who prefer cycling between left and right wing candidates to a once and for all election that imposes a candidate of a single ideology on the entre electorate the market failure that makes term limits helpful is that out of power minorities cannot bribe the median voter

the production and inventory behavior of the american automobile industry understanding inventory movements is central to an understanding of business cycles this paper presents an empirical study of the behavior of inventories in the automobile industry it finds that inventory behavior is well explained by the assumption of intertemporal optimization with rational expectations the underlying cost structure appears to have substantial costs of changing production as well as substantial costs of being away from target inventory thelatter being a function of current sales given this cost structure whether inventory behavior is stabilizing or destabilizing depends on the characteristics of the demand process in the automobile industry inventory behavior is destabilizing the variance of production is larger than the variance of sales

term limits causes and consequences this paper consults multiple literatures to specify andevaluate the economic rationales for term limitation particularly on congress i first consider theories that aroseto explain among related issues why individual states mightunilaterally self impose term limits on their own delegationsto congress next i consider two main lines of argument foruniversal limits both of which begin with the empiricalphenomenon of high and rising congressional tenure first supporters of term limits argue that higher tenure biaseslegislatures toward inefficiency big government highspending second higher tenure creates inefficient anti competitive conditions in the legislative election market term limitation would remedy these inefficiencies by virtue ofdecreasing average tenure these claims are then evaluated inlight of the evidence amassed in the literature based on theliterature reviewed this paper finds that while term limitswill reduce average tenure there is no evidence to suggestthat term limits will affect the underlying causes of theseinefficiencies further research on a more general reform which would strike deeper at these underlying causes isimplied

an arrgh chy the law and economics of pirate organization this article investigates the internal governance institutions of violent criminal enterprise by examining the law economics and organization of pirates to effectively organize their banditry pirates required mechanisms to prevent internal predation minimize crew conflict and maximize piratical profit pirates devised two institutions for this purpose first i analyze the system of piratical checks and balances crews used to constrain captain predation second i examine how pirates used democratic constitutions to minimize conflict and create piratical law and order pirate governance created sufficient order and cooperation to make pirates one of the most sophisticated and successful criminal organizations in history

stage financing and the role of convertible securities venture capital financing is characterized by extensive use of convertible securities and stage financing in a model where a venture capitalist provides staged financing for a project we illustrate an advantage of convertible debt or warrants over a mixture of debt and equity essentially when the venture capitalist retains the option to abandon the project the entrepreneur has an incentive to engage in window dressing and bias positively the short term performance of the project reducing the probability that it will be liquidated an appropriately designed convertible security prevents such behaviour because window dressing also increases the probability that the venture capitalist will exercise the conversion option becoming the owner of a substantial fraction of the project s equity

the financing of business start ups abstract this article investigates the determinants of capital structure and types of financing used around business start ups utilizing a survey that reduces the confounding effects of survivorship bias in particular the influence of start up size asset structure organization type growth orientation and owners characteristics are examined both in the choice and in the magnitude of finance use the results are consistent with the theoretical models incorporating issues such as information asymmetries agency theory and transaction costs the results also demonstrate linkages among providers of finance maturity of assets and the capital structure of start ups while the results provide insights into business finances near the time of creation some recommendations for future research are discussed

the variability of aggregate demand with s s inventory policies this paper develops a general theory of the aggregate implications of s s inventory policies it is shown that s s policies add to the variability of demand with the variance of orders exceeding the variance of sales overall the s s theory contradicts the widely held notion that retail inventories act as a buffer protecting manufacturers from fluctuating sales in 1951 arrow harris and marschak 3 introduced the s s form of inventory policy the policies are designed for retailers of finished goods who face economies of scale when placing orders with their suppliers to pursue an s s inventory policy the retailer establishes a lower stock point s and an upper stock point s no order is placed until inventories fall to s or below whereupon they are restored to the maximum of s a general proof of the optimality of these s s inventory policies was provided by scarf 13 at the microeconomic level the model has been extensively investigated formulae are available to compute optimal policies e g ehrhardt 6 and these policies are xidely used in industry e g schwartz ed 14 in addition the model has been extended to increasingly complex demand environments e g karlin and fabens 11 in contrast little is known about the macroeconomic implications of s s policies several recent papers have begun to correct this deficiency akerlof has suggested that pursuit of constant threshold money holding policies of the s s variety might be responsible for the observed low short run income elasticity of the demand for money akerlof 1 and akerlof and milbourne 2 in the operations research literature ehrhardt schultz and wagner 7 analyzed the demand environment of a wholesaler supplying several retailers they required that the distinct retailers have independent sales ruling out the analysis of common factors in sales finally simulation results of blinder 4 suggested a role for the s s model in understanding retail sector inventories however the theoretical difficulties with the model remained unresolved blinder commented if firms have a technology that makes the s s rule optimal aggregation across firms is inherently difficult indeed it is precisely this difficulty which has prevented the s s model from being used in empirical work to date blinder 4 p 459 in this paper we present a general theory of the aggregate implications of s s policies our central finding is that s s policies add to the variability of demand with the variance of orders exceeding the variance of sales this result holds even in the presence of common factors in retail sales in addition a close connection

estimating dynamic games of electoral competition to evaluate term limits in us gubernatorial elections this paper shows how to identify and estimate using standard semi parametric techniques a class of dynamic games with perfect monitoring that have been at the frontier of recent research in political economy the empirical analysis provides novel quantitative insights into the trade off that voters face between ideology and ability the differences in ability and ideology among parties and states and the differences in preferences between political candidates and voters we analyze the consequences of term limits and quantify their relative importance specifically we characterize conditions under which term limits improve voters welfare

staged financing an agency perspective this paper investigates the structure of outside investment in a profitable entrepreneurial venture though efficient financing the venture up front may be infeasible because the entrepreneur cannot commit to not renegotiate down the outside investor s claim once she s sunk her investment staging the investment over time helps to mitigate this commitment problem the early rounds of investment create collateral that support the later rounds we characterize the optimal staged investment path and show how it is affected by various features of the venture the predictions of the model are consistent with observations on staged financing in venture capital

corruption and development a review of issues in this paper we start with a discussion of some of the different denotations of the problem of corruption we then consider the ways in which the damaging consequences of corruption operate in a developing economy while not ignoring its possible redeeming features in some cases we pursue the question of why corruption is perceptibly so different in different societies and also persistent finally we examine the feasible policy issues that arise in this context

attendance rates political shirking and the effect of post elective office employment attendance rates political shirking and the effect of post elective office employment i introduction political shirking the degree to which a politican s actions deviate from the wishes of his constituents can take many different dimensions economists e g amacher and boyes 1978 davis and porter 1989 dougan and munger 1989 kalt and zupan 1984 lott 1987d nelson and siberberg 1987 and peltzman 1984 have debated whether shirking exists in how a politician votes when he does vote this divergence is measured through some particular special interest voting ratings e g american conservative union americans for democratic action etc however shirking can obviously take as many forms as there are outputs that a politician produces besides how he votes he also produces services for his constituents involving everything from being personally available to listen to the constituents grievances to ensuring effective handling of case work by his staff see for example fiorina 1977 fenno 1978 and cain et al 1987 1 one dimension that has not been sufficiently examined is the extent to which politicians shirk by failing to vote on pending legislation 2 no attention has been given to which mechanisms will make this particular type of shirking relatively more costly most economists agree that opportunitic behavior by politicians is limited by the threat of reelection e g amacher and boyes 1978 barro 1973 kalt and zupan 1984 nelson 1976 and telser 1976 3 by implication the level of shirking should be the greatest when a politician decides to leave office however this opportunistic behavior might be reduced to the extent that political parties or constituencies impose costs for shirking through affecting politicisns post elective office career or the careers of their children thus a politicians last term in elective office may not represent his last period in any meaningful sense the next section outlines the differing views on how politicians act when they no longer face the threat of reelection section iii describes some empirical evidence on what mechanisms may prevent this last period problem the final section discusses the impliactions of these results ii the last period whether economists view politicians as ideologues e g kau and rubin 1979 and kalt and zupan 1984 or as simply attempting to maximize political support e g barro 1973 ferejohn 1986 nelson 1976 and peltzman 1984 the threat of reelection is seen as preventing shirking as kalt and zupan 1984 298 phrase it it appears that the proximity of the next election inhibits ideological shirking even those who do not view the last period as affecting how a politician votes argue that it will affect how often he votes lott 1987a 1987b has argued that if voters can determine and elect politicians that have ideological preferences corresponding exactly to the wishes of constituents politicians voting patterns should continue to reflect those values even when the cost of shirking in terms of forgone future votes is low the penalty to ideologues of not votingfor their constituency in the last period when they no longer face reelection is the forgone utility from not doing what they personally value assuming that politicians also desire leisure politicians should continue to vote for what they believe in but they should vote less frequently since they no longer receive the additional return of larger future support mechanisms to overcome this last period problem have been suggested by becker and stigler 1974 9 10 they argue that opportunistic behavior can be controlled if officeholders face the loss of a pension or equivalently a posted bond in the event of opportunistic behavior in their last term however the actual pension system does not effectively eliminate the last period for politicians since retirement payments are not based on cheating in the last period

reconciling voters behavior with legislative term limits a puzzle exists over why voters continually re elect their congressional and state representatives although these same voters often support initiatives to limit the number of terms that their legislators may serve residents of california colorado and oklahoma voted in 1990 to limit the terms of their state legislators to tenures ranging from six to twelve years 1 in california these same voters however re elected 87 of 91 or 96 percent of all incumbent state representatives and senators whose terms they sought to limit 2 among re elected incumbents 67 or 77 percent had served as long as or longer than the maximum term prescribed under their state s term limit initiative voters defeated only two incumbents who would have been removed under the terms of california s tenure restrictions had they been in effect similar voter behavior characterized recent state elections in colorado and oklahoma 3 more generally these seemingly contradictory voter preferences also are apparent in public opinion polls at the federal level while 62 percent of voters immediately prior to the 1990 general elections indicated their intentions to reelect their congressman that same poll showed that only 24 percent said they approve of the way congress is handling its job gallup and newport 1990 pp 36 37 support for term limit initiatives and the low public esteem of legislators as a group both appear to be inconsistent with voters strong preferences for their own representative and the regular reelection of incumbents

incumbent performance and electoral control in the pure theory of electoral competition citizens compare the platforms of the candidates and vote for the one whose platform is preferred candidate strategies are identified with promises about future performance in office models of this sort have been developed in both static mckelvey 1975 and dynamic kramer 1977 i settings and all appear to have the property that if the set of alternatives is large enough in some sense equilibrium platforms rarely exist but these models have another feature that is quite as disturbing as their instability in the static setting discussed by mckelvey little attention is paid to the possibility that once in office the politician s preferences may diverge from those of his constituents and that he may therefore choose policies at variance from his platform instead it is simply assumed that promises will be kept whether or not such behavior is congruent with the interest of the officeholder it is sometimes argued that an enforcement mechanism may exist to discipline politicians for failing to keep promises but without a specification of the mechanism it is not obvious that it would be in the interests of the

term limits time horizons and electoral accountability term limits have been known to reduce electoral accountability by removing the possibility of reelection thus affecting economic policy choices i e the lame duck effect we show that the magnitude and statistical significance of this effect is influenced by the expected length of a future career by using incumbent age as a proxy for expected career length we find that the lame duck effect is statistically observable only among those politicians with long careers ahead using data on us governors from 1950 to 2005 we find evidence that the influence of term limits is heterogeneous primarily influencing young incumbents who hope to have long careers and thus have stronger incentives to remain accountable to voters indeed we find little evidence of a lame duck effect among older incumbents suggesting that their already shortened time horizons may offset the term limit effect

a political theory of populism when voters fear that politicians may have a right wing bias or that they may be in uenced or corrupted by the rich elite signals of true left wing conviction are valuable as a consequence even a moderate politician seeking reelection chooses populist policies i e policies to the left of the median voter as a way of signaling that he is not from the right truly right wing politicians respond by choosing more moderate or even left of center policies this populist bias of policy is greater when the value of remaining in o ce is higher for the politician when there is greater polarization between the policy preferences of the median voter and right wing politicians when politicians are indeed more likely to have a hidden right wing agenda when there is an intermediate amount of noise in the information that voters receive when politicians are more forward looking and when there is greater uncertainty about the type of the incumbent we show that similar results apply when some politicians can be corrupted or in uenced through other non electoral means by the rich elite we also show that soft term limits may exacerbate rather than reduce the populist bias of policies

persistence of power elites and institutions we construct a model to study the implications of changes in political insti tutions for economic institutions a change in political institutions alters the distribution of de jure political power but creates incentives for investments in de facto political power to partially or even fully offset change in de jure power the model can imply a pattern of captured democracy whereby a democratic regime may survive but choose economic institutions favoring an elite the model provides conditions under which economic or policy outcomes will be invariant to changes in political institutions and economic institutions them selves will persist over time jel d02 d72 the domination of an organized minority over the unor ganized majority is inevitable the power of any minority is irresistible as against each single individual in the majority who stands alone before the totality of the organized minor ity at the same time the minority is organized for the very reason that it is a minority

optimal exercise of jointly held real options a nash bargaining approach with value diversion this paper provides a two stage decision framework in which two or more parties exercise a jointly held real option we show that a single party s timing decision is always socially efficient if it precedes bargaining on the terms of sharing however if the sharing rule is agreed before the exercise timing decision is made then socially optimal timing is attained only if there is a cash payment element in the division of surplus if the party that chooses the exercise timing can divert value from the project then the first best outcome may not be possible at all and the second best outcome may be implemented using a contract that is generally not optimal in the former cases our framework contributes to the understanding of a range of empirical regularities in corporate and entrepreneurial finance

oligarchic versus democratic societies this paper develops a model to analyze economic performance under different political regimes an oligarchic society where political power is in the hands of major producers protects their property rights but also tends to erect significant entry barriers against new entrepreneurs democracy where political power is more widely diffused imposes redistributive taxes on producers but tends to avoid entry barriers when taxes in democracy are high and the distortions caused by entry barriers are low an oligarchic society achieves greater efficiency because comparative advantage in entrepreneurship shifts away from the incumbents the inefficiency created by entry barriers in oligarchy deteriorates over time the typical pattern is one of rise and decline of oligarchic societies an oligarchic society may first become richer but later fall behind a similar democratic society i also discuss how democracies may be better able to take advantage of new technologies how within elite conflict in oligarchies might cause a transition to democracy and how the unequal distribution of income may keep inefficient oligarchic institutions in place jel p16 o10

option pricing when the underlying asset earns a below equilibrium rate of return a note in their classic paper black and scholes 2 present two derivations of the european call option pricing formula the first which we will refer to as the replication derivation relies on the fact that the returns from the option can be replicated by holding a continuously revised position in the underlying asset and bonds this implies that if an option is not priced according to the blackscholes formula there is a sure profit to be made by some combination of either short or long sales of the option and underlying asset this argument is seemingly independent of considerations relating to capital market equilibrium the second derivation which we will call the equilibrium derivation evolves from the requirement that the option earn an expected rate of return commensurate with the risk involved in holding the option as an asset this note considers the pricing of a call option on an asset which earns an expected rate of return lower than that necessary to induce investors to hold it we show in this case that even if the replication strategy is feasible it is inefficient a consequence of this is that the correct option pricing formula is different than the black scholes formula unlike the black scholes formula our formula requires as an input the difference between the expected rate of return on the underlying asset and that expected rate of return which would be required to induce holding of the asset other papers have made a similar point constantinides 3 and cox et al 4 have argued that in equilibrium the prices of traded contingent claims must satisfy a partial differential equation which is identical to the black scholes partial differential equation only when the underlying asset pays no dividends and earns a rate of return sufficient to induce holding of the asset more recently ingersoll 5 has noted that commodities often pay a nonpecuniary service yield the value of which must be taken into account in deriving the option price none of these authors however explain why the black scholes formula is sometimes inappropriate the purpose of this note is to demonstrate why the black scholes formula needs modification even if replication is feasible we provide an intuitive derivation of the correct formula and discuss why divergences of the equilibrium price from the black scholes formula do not result in arbitrage opportunities

earnouts in mergers and acquisitions a game theoretic option pricing approach abstract this paper presents a valuation approach for merger and acquisition m a deals employing contingent earnouts it is argued that these transactions have option like features and the paper uses a game theoretic option approach to model the value of such claims more specifically the paper examines the impact of uncertainty on the optimal timing of m a using earnouts and it also investigates the impact of uncertainty on the terms of the earnout optimal earnout and initial payment combinations are endogenously derived from the model and testable hypotheses are developed the theoretical contribution of this paper is a dynamic decision making model of the invest to learn option generated upon investment in an acquisition the paper also offers practical implications for the design of acquisitions employing earnouts

optimal tenure of elected public officials constitutional limits on the tenure of elected chief executives are a prominent feature of many governments yet they have received little attention from economists working in the field of political behavior this paper develops an analysis of tenure limits and their incidence the analysis assumes that the limits substitute for more familiar electoral controls such as elections recalls and impeachment proceedings we assume that restrictions are imposed if they cause the constitutionally decisive voter to be better off on average this assumption although not a standard one applied to policy in general is fairly common in the literature on constitutional choice where the memberships of interest groups later to be formed are plausibly unknown at the time of the constitutional convention 1 the decision to restrict is undertaken in an environment of uncertainty and naturally it is not without its costs it is clear for instance that restriction substitutes inexperienced politicians for experienced ones moreover a tenure limit generates an incentive problem during the final term in office since no further electoral test remains 2 this lame duck

evaluating pharmaceutical r d under technical and economic uncertainty this study sets up a compound option approach for evaluating pharmaceutical r d investment projects in the presence of technical and economic uncertainties technical uncertainty is modeled as a poisson jump that allows for failure and thus abandonment of the drug development economic uncertainty is modeled as a standard diffusion process which incorporates both up and downward shocks practical application of this method is emphasized through a case analysis we show that both uncertainties have a positive impact on the r d option value moreover from the sensitivity analysis we find that the sensitivity of the option with respect to economic uncertainty and market introduction cost decreases when technical uncertainty increases

dynamic r d investment policies this paper examines dynamic r d investment policies and the valuation of r d programs in a contingent claims framework we incorporate the following characteristics of r d programs into our model learning by doing collateral learning between different projects in the program interaction between project cash flows periodic reevaluations of the program different intensities of investment capital rationing constraints and competition we show that a firm may invest in multiple projects even if only one can be implemented after development is complete furthermore the firm may significantly alter its funding policy over time for example it may simultaneously develop multiple projects for a period of time then focus on a lead project and potentially resume funding of a backup project if the lead project fails to deliver on its early promise we show how a firm can forecast expected r d spending through time for an optimally executed r d program while project volatility plays an important role in determining r d program value we find that for high volatility projects the optimal investment policy is not very sensitive to changes in or misestimation of volatility in considering whether to accelerate development of a project a firm should balance the adverse effects of increased costs and the loss of investment flexibility against the positive effects of rapid uncertainty resolution and accelerated cash flows in the presence of a budget constraint that prevents the firm from simultaneously accelerating projects and developing projects in parallel we find that if one project significantly dominates another early in the development stage the option to accelerate the lead project is likely to be more valuable than the option to exchange projects thus the backup project would be shelved in order to commit extra resources to development of the lead project finally competition from other firms leads to more parallel investment in the early development stages of projects less parallel investment in the latter stages of development and lower overall investment

favorite sons intergenerational wealth transfers among politicians in this paper we investigate the degree of occupational following in politics and its impact upon the career success and behavior while in office of both sons and fathers we find that sons follow into their politician fathers footsteps to a degree surpassed in the general population only among farmers and self employed proprietors there is substantial indirect evidence which suggests that following is motivated to a large extent by the transfer of valuable name recognition and voter loyalty

international trade and institutional change medieval venice s response to globalization international trade can have profound effects on domestic institutions we examine this proposition in the context of medieval venice circa 800 1600 early on the growth of long distance trade enriched a broad group of merchants who used their newfound economic muscle to push for constraints on the executive that is for the end of a de facto hereditary doge in 1032 and the establishment of a parliament in 1172 the merchants also pushed for remarkably modern innovations in contracting institutions that facilitated longdistance trade for example the colleganza however starting in 1297 a small group of particularly wealthy merchants blocked political and economic competition they made parliamentary participation hereditary and erected barriers to participation in the most lucrative aspects of long distance trade over the next two centuries this led to a fundamental societal shift away from political openness economic competition and social mobility and toward political closure extreme inequality and social stratification we document this oligarchization using a unique database on the names of 8 178 parliamentarians and their families use of the colleganza in the periods immediately before and after 1297 we then link these families to 6 959 marriages during 1400 1599 to document the use of marriage alliances to monopolize the galley trade monopolization led to the rise of extreme inequality with those who were powerful before 1297 emerging as the undisputed winners jel codes d02 f10 n43

a theory of strategic venture investing some venture capital investors seek purely financial gains while others such as corporations also pursue strategic objectives the paper examines a model where a strategic investor can achieve synergies but can also face a conflict of interest with the entrepreneur if the start up is a complement to the strategic partner it is optimal to obtain funding from the strategic investor if the start up is a mild substitute the entrepreneur prefers an independent venture capitalist with a strong substitute syndication becomes optimal such that the independent venture capitalist is the active lead investor and the strategic partner a passive co investor the expected returns for the entrepreneur are nonmonotonic lowest for a mild substitute and higher for a strong substitute as well as for a complement the paper also explains why a strategic investor often pays a higher valuation than an independent venture capitalist

legislator voting and shirking a critical review of the literature we set out to critically review the progress in answering two related questions what determines how legislators vote and how can shirking by legislators be measured in the first category the hypothesis that legislators shirk in order to indulge their personal ideological preferences has led researchers astray the theoretical underpinning is shaky on two counts first legislators who indulge their preferences at the expense of their constituents preferences put themselves at a competitive electoral disadvantage second the original two stage procedure used to measure ideological shirking is severely flawed among many other problems the residual measure of shirking implicitly assumes that the median voter is the relevant constituent principal for the legislator agent

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

a microsimulated model of inventories in interfirm competition abstract producers management of inventories of finished goods are studied with a computer simulation that depicts the interactions of a group of firms with their customers customers give orders that have a random component to their current customary suppliers and will attempt to switch to another firm if stockouts cause bad service the firms are shown experimenting to find rules of inventory management that avoid loss of customers yet incur low costs average inventories and costs under the rules that firms arrive at rise non linearly with the variance of customer orders the simulated firms respond to higher interest rates by substantial cuts in average inventories held the costs firms incur when changing the level of production also affects the rule that firms select unless firms are able to take advantage of each others experience wide variation in behavior among firms is likely under such a scenario

motivation of politicians and long term policies we analyze the motivation of politicians in democracies when long term policies are socially desirable politicians receive utility from holding office and from the success of their projects we refer to the two extreme types of politicians as populists and policy success seekers one result is that inefficiencies in the political process are smaller when a politician is of the populist type when politicians offer incentive contracts the problem of inefficient decision making may be solved the amount of money necessary to induce the incumbent to undertake the socially optimal project decreases with the degree of populism he displays

the option value of advanced r d existing tools for making r d investment decisions cannot properly capture the option value in r d since many new products are identified as failures during the r d stages the possibility of refraining from market introduction may add a significant value to the npv of the r d project this paper presents new theoretical insight by developing a stochastic jump amplitude model in a real setting the option value of the proposed model depends on the expected number of jumps and the expected size of the jumps in a particular business the model is verified with empirical knowledge of current research in the field of multimedia at philips corporate research this way the gap between real option theory and the practice of decision making with respect to investments in r d is diminished

investments of uncertain cost abstract this paper examines irreversible investment decisions when projects take time to complete and are subject to two types of cost uncertainty the first is technical uncertainty i e uncertainty over the physical difficulty of completing a project which is only resolved as the investment proceeds the second is input cost uncertainty i e uncertainty over the prices of construction inputs or over government regulations affecting construction costs which is external to the firm these two types of uncertainty have very different effects on the investment decision a simple investment rule is derived that maximizes firm value and is used to analyze the decision to start or continue building a nuclear power plant during the 1980s

unsuccessful success failed no confidence motions competence signals and electoral support if no confidence motions are primarily motivated by bringing down governments why do only approximately 5 of no confidence motions in advanced parliamentary democracies from 1960 result in the termination of government in this project the author addresses this puzzle by developing a formal model of the electoral benefits of no confidence motions and tests these hypotheses with the use of an original data set no confidence motions represent highly visible opportunities for opposition parties to highlight their strength or ability compared to the government in the hopes of improving their vote shares the author finds support for the signal based theory on a sample of 20 advanced parliamentary democracies from 1960 to 2008 although no confidence motions result in decreases for the government parties the opposition parties that propose the motion experience boosts in vote share this relationship is even stronger when the proposing party is an alternative governing possibility illustrated by the condit

a theory of political entrenchment can an incumbent political party increase its chances at re election by implementing inefficient policies that harm its constituency this paper studies the possibility of such a phenomenon which we label political entrenchment we use a two party dynamic model of redistribution with probabilistic voting political entrenchment by the left occurs only if incumbency rents are sufficiently high low skill citizens may vote for this party even though they rationally expect the adoption of these policies we discuss the possibility of entrenchment by the right the scope for commitment to avoid entrenchment policies and the effect of state capacity income inequality and party popularity on the likelihood of entrenchment we illustrate our theory with a number of historical examples

default and liquidation timing under asymmetric information abstract we consider a dynamic model in which shareholders delegate the running of a firm to a manager who observes private information about the firm s running and liquidation costs we analytically derive the optimal compensation scheme contingent on the firm s cost structure information asymmetries can change the high cost firm s bankruptcy choice and timing most notably even if the liquidation value is higher than the face value of debt the high cost firm can choose default rather than liquidation to reduce the manager s information rent this can lead to the counterintuitive result that the debt value increases beyond the face value as the firm approaches default and that it jumps upward at the default time information asymmetries accelerate negative liquidation and delay positive liquidation whereas they accelerate default the optimal leverage ratio of the asymmetric information case becomes higher than that of the symmetric information case because more debt mitigates the loss due to information asymmetries our results can potentially account for many empirical findings

the complementarity effect effort and sharing in the entrepreneur and venture capital contract abstract this paper focuses on the relationship between the venture capitalist and the entrepreneur in particular it analyses how both players unobservable effort levels affect the equity share that the entrepreneur is willing to cede to the venture capitalist we solve the entrepreneur s maximization problem in the presence of double sided moral hazard in this scenario we show that the venture capitalist s share is binding and therefore there is no efficiency wage we simulate the model and show that the entrepreneur s effort does not monotonically decrease in the share allocated to the venture capital while the venture capitalist s effort does not monotonically increase in his share we show that as efforts tend to be more complementary the project cash flows are distributed nearly equally at approximately 50 for each partner this theoretical finding is actually observed in real contracts between entrepreneurs and venture capitalists