real options agency conflicts and optimal capital structure abstract we examine the impact of a stockholder bondholder conflict over the timing of the exercise of an investment option on firm value and corporate financial policy we find that an equity maximizing firm exercises the option too early relative to a value maximizing strategy and we show how this problem can be characterized as one of overinvestment in risky investment projects equityholders incentive to overinvest significantly decreases firm value and optimal leverage and significantly increases the credit spread of risky debt numerical solutions illustrate how the agency cost of overinvestment and its effect on corporate financial policy vary with firm and project characteristics

investment policy with time to build abstract most capital projects have an implementation lag we examine the effect of implementation lag on a levered firm s investment decision the main finding is that implementation lag can potentially have a substantial effect on a levered company s investment trigger and this effect can be significantly different from that of an unlevered company the exact relationship between lag and investment trigger depends on the level of debt used by the firm for an optimally levered firm a crucial determinant of the lag investment relationship is the fraction of investment cost that has to be incurred upfront if this fraction is small investment trigger is a decreasing function of implementation lag and the effect can be economically significant if this fraction is large investment trigger can be either increasing or decreasing in lag depending on parameter values but the magnitude of the effect is not large optimally levering a firm makes the implementation lag more investment friendly relative to an unlevered firm thus it is possible that the lag has a negative effect on investment if the firm is unlevered but a positive effect if the same firm is optimally levered for an optimally levered firm implementation lag generally has a non negative effect on investment

investment under uncertainty with price ceilings in oligopolies abstract we study the impact of price cap regulation on the level and timing of investment in an oligopolistic cournot industry facing stochastic demand we find that a price ceiling affects investment decisions in two mutually competing ways it makes the option to defer investment more valuable but at the same time it reduces the incentive for firms to strategically underinvest in order to raise prices we show that while sensible price cap regulation speeds up investment a low price cap can be a disincentive for investment there exists an optimal price cap independent of market concentration the competitive investment price trigger that maximizes investment incentives and in the long term increases industry installed capacity this optimal price cap becomes less effective and less robust as the market becomes more competitive and as demand volatility increases errors in estimation of the optimal price cap have asymmetric effects underestimation has more dire consequences than overestimation

neopatrimonialism and the political economy of economic performance in africa critical reflections during the past two decades neopatrimonialism has become the convenient all purpose and ubiquitous moniker for african governance the school of thought behind this research program which the author refers to as the neopatrimonialism school has produced an impressive literature on africa its analysis informs policymakers and its language permeates media reportage on african states while neopatrimonialism has long been a focus of development studies in recent times it has assumed politically and economically exigent status the school identifies causal links between neopatrimonialism and economic performance and makes predictions drawing from what is referred to as the logic of neopatrimonialism neopatrimonialism is said to account for trade policies hyperinflation economic stagnation low investment in infrastructure urban bias andultimately the lack of economic development in africa this article examines the empirical basis of predictions and policy prescriptions it argues that while descriptive of the social practices of the states and individuals that occupy different positions within african societies the concept of neopatrimonialism has little analytical content and no predictive value with respect to economic policy and performance

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

economic statism private capital and the dilemmas of accumulation in nigeria abstract nigeria s persistent economic stagnation is attributable to a mutually reinforcing political dynamic comprising a weak developmental state and pervasive rent seeking within the private sector this syndrome was a source of nigeria s initial economic crisis in the early 1980s and it continues to impede structural adjustment initiatives economic policy reform has been compromised by state strategies designed to preserve the gains of elite rentier groups while private entrepreneurs have responded to policy change by seeking new rental havens in finance and other nontradable sectors in consequence structural adjustment has failed to elicit a supply response or to generate significant political support for a more propitious enabling environment nigeria s experience reinforces the perception that changes in nominal incentives must be accompanied by broader institutional transformation if economic reform is to be effective

shifting fortunes the political economy of financial liberalization in nigeria abstract on the recommendation of the world bank nigeria began to liberalize its financial sector in 1986 contrary to the prediction of financial repression theory savings and investment decline in the wake of banking deregulation by 1995 the nigerian financial system was in a state of collapse the paper locates the main failure of nigeria s financial deregulation in the political and institutional setting of reform the institutional mechanisms needed to supervise and regulate banking under the new system were absent while private sector banking capacities were weak moreover financial liberalization was quickly captured by a clientalist state as a means of reallocating rents to strategic constituents an additional precipitating factor was macroeconomic instability the paper points to the importance of incorporating political and institutional variables into any model of financial reform or transformation

directly unproductive profit seeking dup activities this paper propses directly unproductive profit seeking dup activities as a general concept that embraces a wide range of recently analyzed economic activities including the subset of rent seeking activities considered by krueger it then proceeds to provide a synthesis and generalization of the welfare theoretic analysis of such activities by developing a fourfold categorization of cases depending on the levels of distortions before and after the dup activity thus a unification and overview of the subject are achieved

informational efficiency and welfare in the stock market abstract in an overlapping generations model each generation invests a given budget into a portfolio consisting of risky shares and a riskless asset in each period all agents receive information about the future dividends of the shares there is a unique stationary equilibrium this equilibrium is not constrained efficient in the sense that there exists a non market clearing share price such that all agents would be better off if the shares were exchanged at this price further for certain stochastic environments the public information is socially harmful and we derive a necessary and sufficient condition for this to occur

implementation lag and the investment decision abstract the effect of implementation lag on investment trigger depends on project reversibility and growth rate conventional results that longer lag and greater uncertainty raise investment trigger are overturned if the project is sufficiently reversible and or has a high enough growth rate

the impact of delivery lags on irreversible investment under uncertainty abstract we consider the valuation and rational exercise of irreversible investment opportunities in the presence of revenue uncertainty and delivery lags in order to capture supply side market imperfections in the markets for investment goods we assume that the lag depends on the revenue process faced by the investor we show that such imperfections have a pronounced decelerating impact on rational investment demand as they may increase the value of waiting in excess of the exercise payoff even for projects which otherwise would be perceived as highly remunerative we also consider the comparative static properties of the optimal investment policy and its value and demonstrate that typically increased uncertainty decreases the investment incentives by increasing the value of waiting

money and redistribution revisionist notes on a problem of samuelson abstract this paper disputes the view that money remedies a friction of overlapping generations its arguments are based upon the numerical example of samuelson 1958 it shows that there is a one to one mapping from equilibria in a system of complete timeless markets to the sequential equilibria usually studied friction is absent in that sense further monetary injection is not unique in converting inefficiency to efficiency the same conversion is possible in markets for consumption loans the common factor of both conversions is redistribution of wealth prior to trade such redistributions correspond to redistributions of numeraire in complete timeless markets

economic openness democracy and income inequality an empirical analysis scholars have studied effects of economic openness and democracy on national income inequality in two literatures in democracy studies scholars agree democracy reduces inequality but empirical evidence is ambiguous in globalization studies effects of economic openness on inequality are debated but have not been rigorously examined this article is the first systematic statistical study of the effects of both economic openness and democracy on income inequality these effects need to be studied together the authors measure national income inequality from a comprehensive gini coefficient data set economic openness is measured from trade flows foreign direct investment inflows and financial capital inflows the period studied is 1960 to 1996 the unit of analysis is a country decade and the sample includes 69 countries the authors find that democracy and trade reduce income inequality foreign direct investments increase income inequality and financial capital does not affect income inequality policy implications are discussed

real options and preemption under incomplete information abstract this paper introduces incomplete information and preemption into an equilibrium model of firms facing real investment decisions the optimal investment strategy may lie anywhere between the zero npv trigger level and the optimal strategy of a monopolist depending on the distribution of competitors costs and the implied fear of preemption our model implies that the equity returns of firms which hold real options and are subject to preemption will contain jumps and positive skewness

optimal capital structure bargaining and the supplier market structure abstract this paper studies the relationship between firm leverage and supplier market structure we find that firm leverage decreases with the degree of competition between suppliers specifically leverage decreases with the elasticity of substitution between suppliers leverage also decreases with the number of suppliers when the elasticity of substitution is high and increases with the number of suppliers when the elasticity is low we also provide empirical evidence that is consistent with the model predictions

optimal priority structure capital structure and investment we study the interaction between financing and investment decisions in a dynamic model where the firm has multiple debt issues and equityholders choose the timing of investment jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract examining the relative efficiency of priority rules observed in practice we develop several predictions about how firms adjust their priority structure in response to changes in leverage credit conditions and firm fundamentals notably financially unconstrained firms with few growth opportunities prefer senior debt while financially constrained firms with or without growth opportunities prefer junior debt moreover lower rated firms are predicted to spread priority across debt classes finally our analysis has a number of important implications for empirical capital structure research including the relations between market leverage book leverage and credit spreads and tobin s q the influence of firm fundamentals on the agency cost of debt and the conservative debt policy puzzle the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

political instability in africa a rent seeking approach the foregoing analysis developed the paradigm of self interest motivated revolutionary activities in effect the construct presented differs from the by product theory developed by tullock only in its specific modeling of government created rents as the engine which drives the violent political behavior the empirical test of the positive relationship between rent creation by the government and the amount of destabilizing political activity yields strong support for the structuring of politically destabilizing activities as rent seeking in nature it is the authors hope that further empirical investigation and a more general and rigorous modeling of revolution as a rent seeking activity will become an important part of the literature in public choice

economic reform and political transition in africa the quest for a politics of development the 1980s were bracketed by crises in africa as protracted economic malaise was succeeded by a wave of political reform analysts have sought to understand the sources of economic decline as well as the political requisites for recovery in the region neoclassical and structuralist analyses have been challenged by state centric views of economic change the latter perspective emphasizes the need for capable developmental states as a basis for long term adjustment but a political theory of economic change is still lacking such a theory must address the institutional foundations of growth as well as the shifting basis of social coalitions in african regimes political liberalization suggests the possibility of a new setting for economic reform though the effects of political reform on institutions and coalitions remain ambiguous and democratization cannot be regarded as a panacea for the region s developmental failure future research must look more closely at the interests and structures in transitional regimes and scholars should adopt a more comparative vantage on africa s challenges of reform

sufficient and necessary conditions for information to have social value in pure exchange this paper extends corrects and unifies earlier statements concerning the social value of public information as well as the no trading conditions in pure exchange sufficient and necessary conditions are provided for both the single period and two period cases in a postsignal trading model the social value of information is shown to be closely linked to the allocational efficiency of the market the degree of homogeneity of prior beliefs and of information structures the time additivity of preferences and the efficiency of endowments we conclude that the case in favor of public information is much stronger than previously suggested

irreversible investment real options and competition evidence from real estate development abstract we examine the extent to which uncertainty delays investment and the effect of competition on this relationship using a sample of 1214 condominium developments in vancouver canada built from 1979 1998 we find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments empirically a one standard deviation increase in the return volatility reduces the probability of investment by 13 percent equivalent to a 9 percent decline in real prices increases in the number of potential competitors located near a project negate the negative relationship between idiosyncratic risk and development these results support models in which competition erodes option values and provide clear evidence for the real options framework over alternatives such as simple risk aversion

nigeria during and after the oil boom a policy comparison with indonesia nigeria and indonesia provide an interesting contrast with regard to performance and policy during and after the oil boom roughly a decade after the first oil shock nigeria is faced with several economic problems including a serious decline in its agricultural sector and a deteriorating external debt situation while some decline in the nonoil traded goods sector reflects efficient adjustment to the oil boom policy with regard to public expenditure exchange rates pricing and the trade regime could exacerbate such decline and impede readjustment as the boom subsides the links between oil prices deficits inflation and real exchange rate appreciation are analyzed and nigerian and indonesian fiscal and exchange rate and agricultural and foreign borrowing strategies are compared it is concluded that with the exception of cuts in the deficit since 1984 nigerian policy following the boom has not been conducive to adjustment to the current period of low oil prices and high real interest rates corrective measures and policy options are discussed

the value of information in production economies abstract it is known that blackwell s 1953 ann math statist 24 265 272 theorem according to which more information always has positive value does not hold in many economic circumstances in particular in exchange economies with random endowments it may fail completely we show that in certain economies with risk averse consumers and risk neutral producers the blackwell theorem holds in competitive equilibrium given that risk sharing markets are absent however in the presence of a risk sharing market it is shown that for crra utility functions all agents may become weakly worse off with better information journal of economic literature classification numbers d51 d80 g14

asset price variability in a rational expectations equilibrium this paper shows that in a rational expectations equilibrium with different types of agents who are informed and uniformed about a piece of information price variability may increase as the proportion of agents who are informed increases this is a surprising result and the paper establishes the conditions under which price variability will increase as the percentage of informed agents increases

the making of a rentier class wealth accumulation and political control in senegal political and economic dynamics set in motion by efforts to consolidate post colonial regimes have contributed to the continuing weakness of indigenous bourgeoisies throughout much of post colonial africa this article suggests that state power has been used to foster private rent seeking rather than productive local private investment in order to promote and sustain the political cohesion of ruling classes the political consolidation of dominant rentier classes forged through state patronage and clientelist mechanisms of control creates obstacles to the emergence of local class strata interested in or capable of using state power to promote the expanded accumulation of capital be it local or foreign a study of senegal illustrates this point