transfers in a polarized country bridging the gap between efficiency and stability we consider a political economy model of country whose citizens have heterogeneous preferences for a national policy and some regions may contemplate a threat of secession the country is efficient if its break up into smaller countries leads to aggregate utility loss we show that in an efficient country whose citizens preferences exhibit a high degree of polarization a threat of secession cannot be eliminated without interregional transfers we also demonstrate that if majority voting is used to determine the redistribution schemes within the country then a high degree of polarization yields the full compensation scheme as the unique political equilibrium

separation of powers and political accountability political constitutions are incomplete contracts and therefore leave room for abuse of power in democracies elections are the primary mechanism for disciplining public officials but they are not sufficient separation of powers between executive and legislative bodies also helps to prevent the abuse of power but only with appropriate checks and balances checks and balances work by creating a conflict of interest between the executive and the legislature yet requiring both bodies to agree on public policy in this way the two bodies discipline each other to the voters advantage under appropriate checks and balances separation of powers also helps the voters elicit information

a theory of political transitions we develop a theory of political transitions inspired by the experiences of western europe and latin america nondemocratic societies are controlled by a rich elite the initially disenfranchised poor can contest power by threatening revolution especially when the opportunity cost is low for example during recessions the threat of revolution may force the elite to democratize democracy may not consolidate because it is redistributive and so gives the elite an incentive to mount a coup highly unequal societies are less likely to consolidate democracy and may end up oscillating between regimes and suffer substantial fiscal volatility

the principle of convergence in wartime negotiations if war results from disagreement about relative strength then it ends when opponents learn enough about each other learning occurs when information is revealed by strategically manipulable negotiation behavior and nonmanipulable battlefield outcomes i present a model of simultaneous bargaining and fighting where both players can make offers and asymmetric information exists about the distribution of power in the markov perfect sequential equilibrium making and rejecting offers has informational value that outweighs the one provided by the battlefield however states use both sources of information to learn and settle before military victory the principle of convergence posits that warfare ceases to be useful when it loses its informational content and that belief in defeat victory is not necessary to terminate initiate hostilities thus the standard puzzle in international relations that seeks to account for prewar optimism on both sides may not be that relevant

trust across borders we make the case for fresh approaches to examine the role of trust in international collaborations based on the idea that not only do the levels of trust differ across international borders but also both the nature of trust and the institutional and cultural support for trust can vary across different national contexts collaboration partners from different countries are therefore likely to bring either symmetric or asymmetric conceptions of trust to the business relationship we develop a model and propositions linking symmetry and asymmetry in the institutional and cultural support for trust in international collaborations with the degree of partner interdependence and identify implications for governance and trust building investments we conclude with some suggestions for research that incorporates trust asymmetries between partners

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

secessionism and minority protection in an uncertain world abstract with the changing political and economic circumstances confronting their countries regionally concentrated minorities have been facing a strategic problem important aspects of which can be stylized as a situation in which a minority leader is uncertain about the costs of secession for her community this paper shows that this uncertainty is a central cause of secession using a model which incorporates both policies to appease secessionist aspirations and informational asymmetries in a situation of asymmetric information in which the policy maker is better informed about the consequences of separation than the minority leader signaling incentives make secession the unique equilibrium outcome whether mutually advantageous compromises exist or not we also show that the ruling majority may seek to maintain political unity by pre committing to minority protection rules which prevent bluffing by the informed policy maker additionally the model generates comparative statics results on the question of which states are most likely to adopt constitutional rules protecting the minorities living within their borders

organization and management in the midst of societal transformation the people s republic of china twenty five years of economic reform has propelled china to the center of the world s economic stage based on current trends in the foreseeable future china is likely to become the largest economy in the world china s dramatic growth may be envied by other developing economies but for management scholars it presents an exciting intellectual puzzle in this paper we describe the empirical context of china today review contemporary research on chinese management and organizations and describe the nine papers in this special issue oforganization science the papers provide a close examination of how massive corporate transformation in china has influenced interfirm relationships affected opportunity structures and social processes and modified individual behaviors within firms we identify the many paradoxes in this intellectual terrain and present a guide to the challenging research agenda ahead we recommend that scholars of organizations think deeply about china as a context and consider china as an empirical setting where the boundaries of existing knowledge on organizations can be extended

notes on multiperiod valuation and the pricing of options a mean variance risk return tradeoff relationship is derived for the diffusion process limiting case of a state preference model with aggregate consumption serving as a pivotal variable the model is compared to other recent models along the dimensions of generality and tractable implementation the incorporation of stochastic interest rates in general equilibrium and arbitrage based valuation models is examined and an extension to earlier methods is discussed in connection with the implementation of robust general valuation procedures this paper develops an integrative discussion of some recent developments in the theory of multiperiod valuation our aim is not to survey the rapidly burgeoning literature in this area in an exhaustive way instead it is our goal to highlight some results of our own and others that have a bearing on judgments regarding promising and robust directions of enquiry in this area of research in doing so areas that have been particularly empnasized are 1 the incorporation of aggregate consumption as a pivotal variable in general and specialized multiperiod valuation formulae and 2 the incorporation of endogenized dynamics for the riskless rate of interest in black scholes 4 type option pricing methodology throughout our emphasis is on the internal consistency generality and simplicity of different models insofar as full information valuation in a general equilibrium context is concerned rather than on issues pertaining to empirical testing and econometric methodology the starting point for much of our analysis is rubinstein s 28 important paper on multiperiod valuation and hakansson s 15 related contributions in this paper rubinstein considers a multiperiod state preference model of general exchange equilibrium with no explicit modeling of production investment in order to develop pricing relationships linking the prices of elementary arrow

the breakup of nations a political economy analysis this paper develops a model of the breakup or unification of nations in each nation the decision to separate is taken by majority voting a basic trade off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted the model emphasizes political conflicts over redistribution policies the main results of the paper are i when income distributions vary across regions and the efficiency gains from unification are small separation occurs in equilibrium and ii when all factors of production are perfectly mobile all incentives for separation disappear i introduction following the demise of communism the entire map of europe from the atlantic coast to the urals is being redrawn and issues of separation unification and the redrawing of borders are yet again at the forefront of european concerns many of the issues raised by this process are primarily of a political cultural or linguistic nature however there are also economic considerations that bear on this problem the objective of this paper is to analyze some important economic and political determinants of the process of unification and separation of democratic nations the starting point of our analysis is to suppose that from an economic efficiency point of view separation of nations is never desirable a unified nation is always more efficient since free trade among regions is guaranteed duplication costs in defense and law enforcement are avoided and local public goods provision such as transportation and communication networks or common standards can be coordinated furthermore any benefits of decentralization that might be obtained in a world with several nations may also be achieved within a unified nation by replicating the administrative structure of the world with several

japanese investors choice of joint ventures versus wholly owned subsidiaries in the us the role of market barriers and firm capabilities this study analyzes how market barriers and firm capabilities affect multinationals choice of joint ventures versus wholly owned subsidiaries abroad in the study we compile a vector of variables that distinguish between industry specific barriers and firm specific capabilities to analyze japanese investors ownership decisions in the us our results in general support the hypothesis that japanese investors facing high market barriers in the target industry are more likely to choose joint ventures while those possessing strong competitive capabilities are more likely to set up wholly owned subsidiaries specifically marketing variables are more influential than technological factors in determining the choice of partial versus full ownership these findings however vary across sub samples that represent low versus high tech industries and consumer versus industrial products

rationalist explanations for war realist and other scholars commonly hold that rationally led states can and sometimes do fight when no peaceful bargains exist that both would prefer to war against this view i show that under very broad conditions there will exist negotiated settlements that genuinely rational states would mutually prefer to a risky and costly fight popular rationalist and realist explanations for war fail either to address or to explain adequately what would prevent leaders from locating a less costly bargain essentially just two mechanisms can resolve this puzzle on strictly rationalist terms the first turns on the fact that states have both private information about capabilities and resolve and the incentive to misrepresent it the second turns on the fact that in specific strategic contexts states may be unable credibly to commit to uphold a mutually preferable bargain historical examples suggest that both mechanisms are empirically plausible

why did the west extend the franchise democracy inequality and growth in historical perspective during the nineteenth century most western societies extended voting rights a decision that led to unprecedented redistributive programs we argue that these political reforms can be viewed as strategic decisions by the political elite to prevent widespread social unrest and revolution political transition rather than redistribution under existing political institutions occurs because current transfers do not ensure future transfers while the extension of the franchise changes future political equilibria and acts as a commitment to redistribution our theory also offers a novel explanation for the kuznets curve in many western economies during this period with the fall in inequality following redistribution due to democratization i introduction the nineteenth century was a period of fundamental political reform and unprecedented changes in taxation and redistribution britain for example was transformed from an oligarchy run by an elite to a democracy the franchise was extended in 1832 and then again in 1867 and 1884 transferring voting rights to portions of the society with no previous political representation the decades after the political reforms witnessed radical social reforms increased taxation and the extension of education to the masses moreover as noted by kuznets inequality which was previously increasing started to decline during this period the gini coefficient for income inequality in england and wales had risen from 0 400 in 1823 to 0 627 in 1871 but fell to 0 443 in 1901 two key factors in the reduction in inequality were the increase in the proportion of skilled workers williamson 1985 and the redistribution of income toward the poorer segments of the society for example taxes rose from 8 12 percent of national product in 1867 to 18 8 percent by 1927 and the progressivity of the tax system increased substantially see lindert 1989

secessions and political extremism why regional referenda do not solve the problem this paper shows that an uninformed player can increase his bargaining power by committing to receive information from an expert more skeptical to cooperation this general idea is applied to a model in which a regional political leader the expert influences voting in a referendum on independence by strategically disseminating information about the consequences of separation i show that this motivates a moderate electorate to appoint a more extreme leader to receive biased information that increases their bargaining power over the gains of staying unified however a trade off between bargaining power and precision of information causes inefficient outcomes in equilibrium jel c73 d72 d82 h77

political bargaining in a federation buchanan meets coase abstract in recent decades the issues of federalism and political integration have gained prominence in public debate as well as in the academic realm a frequently made point is that allowing free secession may protect the minority s interests thus providing it with an incentive to enter the federation this paper explicitly considers the political process in the federation arguing that the option to secede may distort the political choices made by the individual regions to improve their bargaining positions as a result the allocation of resources in the federation could well end up being inefficient and unattractive for the minority region in contrast limiting the secession possibilities by requiring the consent of a majority of voters through a regional referendum rather than leaving it to the discretion of the legislature restores efficiency

a model of spoils politics accounts of state failure in the developing world frequently highlight a logic of spoils politics in which a government and an opposing faction vie for control of the state and the accompanying spoils attempts to buy the opposition off play a key role in this logic and an informational problem often complicates these efforts because of limited transparancy the government generally has a better idea about the actual size of the spoils than the opposition does we formalize this aspect of spoils politics as a signaling game in which the government has private information about the size of the spoils and tries to co opt the opposition by offering a share of the spoils the opposition can accept the offer or reject it by fighting consistent with the strong empirical finding that the probability of civil war is higher when income is low the probability of breakdown increases as the size of the spoils decreases we also study the effects of uncertainty the opposition s military strength the cost of fighting and power sharing agreements on the probability of fighting

on the number and size of nations this paper studies the equilibrium determination of the number of countries in different political regimes and in different economic environments with more or less economic integration we focus on the trade off between the benefits of large jurisdictions and the costs of heterogeneity of large and diverse populations our model implies that i democratization leads to secessions ii in equilibrium one generally observes an inefficiently large number of countries iii the equilibrium number of countries is increasing in the amount of economic integration

a multiperiod asset pricing model with unobservable market portfolio a note this paper develops a multiperiod general equilibrium theory of asset prices that is simple and yet can be empirically tested without observing the market portfolio or aggregate consumption we demonstrate that the systematic risk of an asset can be measured through the conditional covariance of its rate of return with the next period risk free rate of interest the theory is developed using the minimum set of assumptions needed to produce the intertemporal sharpelintner isl model see constantinides 5 6 thus if the present model holds then the isl model will also hold however to test or apply our results the market portfolio does not have to be observed and thus the empirical problems discussed in roll 17 can be avoided

incentives for secession in the presence of mobile ethnic groups abstract this paper presents a model on secessions and nationalism with special emphasis on the role of imperfectly mobile ethnic minorities individuals trade off political benefits of homogeneity against economic costs from increasing returns to scale in production the main findings are i mobility decreases the political motivation for independence because increased competition for labour forces the ethnic majorities in the separating countries to accommodate their policy ii the impact of mobility depends on whether separation is politically or economically motivated iii increased mobility leads to a less accommodated policy in case of no separation

the inefficient use of power costly conflict with complete information recent work across a wide range of issues in political economy as well as in american comparative and international politics tries to explain the inefficient use of power revolutions civil wars high levels of public debt international conflict and costly policy insulation in terms of commitment problems this paper shows that a common mechanism is at work in a number of these diverse studies this common mechanism provides a more general formulation of a type of commitment problem that can arise in many different substantive settings the present analysis then formalizes this mechanism as an inefficiency condition that ensures that all of the equilibria of a stochastic game are inefficient this condition has a natural substantive interpretation large rapid changes in the actors relative power measured in terms of their minmax payoffs may cause inefficiency

wary managers unfavorable environments perceived vulnerability and the development of trust in foreign enterprises in china vulnerability is salient among international managers who tend to be wary when operating in transition economies like china systematic research is lacking though on how the local environment influences foreign managers perception of vulnerability and how foreign managers can develop trust even when their perceived vulnerability is high we conducted in depth case studies of two foreign controlled enterprises in china and developed a theoretical model that links perceptions of the macro level environment to micro level management our results illustrate the antecedents and consequences of perceived vulnerability and the processes of trust building in unfavorable environments through comparative analysis of the two cases we found that the foreign managers perceived vulnerability was shaped by the institutional technological and market conditions of the local environment and we learned how this perceived vulnerability influenced their trust in the local workforce and the joint investment in formal and social control they used in building trust the effect of perceived vulnerability on trust was moderated over time when the implementation of control was combined with active investments in trust which led to behavioral changes on the part of the local employees which in turn increased their trustworthiness the implications of these findings are discussed