a model of delegated project choice we present a model in which a principal delegates the choice of project to an agent with different preferences the principal determines the set of projects from which the agent may choose the principal can verify the characteristics of the project chosen by the agent but does not know which other projects are available to the agent two frameworks are considered i a static setting in which the collection of available projects is exogenous to the agent but uncertain and ii a dynamic setting in which the agent searches for projects

designing subnational institutions regional and municipal reforms in postauthoritarian chile this article conceptualizes decentralization as a change in the institutional rules that divide political authority and governing capacity between levels of government by emphasizing the institutional dimension the author argues that different approaches to the study of institutions namely rational and historical institutionalism can generate analytical leverage on the contemporary trend of decentralization in the chilean case rationalist perspectives illuminate the country s continued status as one of latin america s most centralized polities comparatively weak subnational institutions directly reflect the strategic design considerations of national politicians however concepts central to historical institutionalism including critical junctures and unanticipated consequences explain how and why decentralization gained steam in the postauthoritarian period specifically chile s shift to more decentralized institutions is the legacy of pinochet era reforms of subnational government sequencing

observability and the payback criterion among the enigmas of corporate finance theory that have received little attention is the puzzling use of the payback method as a capital budgeting tool although the payback method has many drawbacks it is widely used in industry see klammer 1972 fremgren 1973 schall sundem and geijsback 1978 1 gordon 1955 attempted to explain this anomaly by observing that the inverse of the payback period is an approximation for the internal rate of return but as sarnat and levy 1969 point out the accuracy of the approximation depends on the life of the project and its irr for low values of irr the inverse of payback is a very poor approximation moreover it is difficult to believe that corporations that use complex and sophisticated technologies need a rule of thumb to approximate something as simple to compute as the irr in fact empirical evidence shows that most firms compute both the irr and the payback period see schall the payback criterion continues to be widely used in industry although there is little support for it among the academicians this paper attempts to find an economic rationale for it by using an incentive model with asymmetric information it argues that when the managers possess private information regarding projects selected for implementation it is in their interest to choose ceteris paribus projects that pay back faster since manager s wages depend on output because their productivity is unknown by choosing projects that pay back fast they hope to improve their reputations i wish to thank milton harris and an anonymous referee for their helpful suggestions while i retain the responsibility for any remaining errors 1 it has been found that payback is rarely used as a primary capital budgeting method it is used as a secondary criterion to a discounted cash flow method such as npv net present value or irr internal rate of return

capital budgeting and delegation abstract as part of our ongoing research into capital budgeting processes as responses to decentralized information and incentive problems we focus in this paper on when a level of a managerial hierarchy will delegate the allocation of capital across projects and time to the level below it in our model delegation is a way to save on costly investigation of proposed projects therefore it is more extensive the larger are the costs of such investigations this delegation takes advantage of the fact that the lower level manager s preferences are assumed to be similar though not identical to those of the higher level

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

capital budgeting in multidivision firms information agency and incentives author s bernardo antonio e cai hongbin luo jiang abstract we consider a firm with two investment projects divisions each run by a manager who can provide i unverifiable information about the quality of either or both projects and ii unverifiable access to valuable resources that can enhance the cash flows of either or both projects we then examine the extent to which capital allocation and managerial compensation schemes can be designed jointly to mitigate the information and incentive problems within the firm we find that the firm underinvests in capital in both projects relative to the first best level optimal managerial profit sharing increases in the quality of both projects and managers underinvest resources in both projects interestingly the underinvestment problem in one project is less severe when the other project is higher quality this effect will be stronger when the moral hazard problem is more acute and project returns are more highly correlated we also predict that multi division firms will invest more less than single division firms when other divisions in the firm perform well poorly

real exchange rates and divisia moments of world trade abstract this paper introduces new indexes of prices and quantities of world trade and demonstrates their link with real exchange rates these indexes are applied to data from the group of seven countries one of our results is that the elasticity of exports with respect to the real exchange rate is 0 4

a historical institutionalist approach to the uruguay round agricultural negotiations the reduction of agricultural trade barriers accomplished at the close of the uruguay round ur of the general agreement on tariffs and trade is a puzzle because previous research has suggested that producer groups would always succeed in blocking liberalization efforts the author explains this apparent puzzle through the use of a comparative historical method developed by collier and collier for analyzing the ur as a critical juncture the analysis suggests that transformations in productive technology enabled producer groups to reap extraordinary economic and political rents during most of the post world war ii era however the fiscal crises of the 1980s provided governments an incentive to exert relative autonomy from producer groups and initiate bargaining over trade barriers as trade barriers and the political influence of producer groups were reduced the ur emerged as the product of a critical juncture in the transition from the fordist to the post fordist mode of agricultural accumulation

consumption patterns in sri lanka a decomposition analysis knowing consumer reaction to changes in prices and income is important in formulating microeconomic policies such as public utility prices and commodity taxation this paper analyses the consumpti

economic and demographic factors in australian alcohol demand in the last two decades total pure alcohol consumption in australia has declined by about 31 and currently it is at the same level as it was in the 1950s australians consumed about 10 litres of pure alcohol per person in 1982 and now the level has declined to about 7 litres of pure alcohol per person during the last four decades per capita beer consumption has reached a peak of 140 litres in 1975 and has fallen to a low 93 litres in 1999 wine consumption has increased four fold while spirits consumption has stayed around the same level this paper using the australian consumption data for beer wine and spirits for the period 1956 1999 aims to explain the change in consumption patterns of beer wine and spirits by considering the effects due to changes in economic and demographic factors the results show that while income and prices significantly influence the consumption patterns of alcohol the increasing australian elderly population also plays an important role

why the npv criterion does not maximize npv this article presents a theory of capital allocation that shows how the use of net present value npv as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria like the internal rate of return and the profitability index the essence of our theory is rooted in the mainstream paradigm of corporate finance while firms use npv to measure the addition to firm value from prospective projects classical informational and agency considerations prevent it from implementing the optimal capital budgeting outcome our theory also identifies conditions when alternative criteria should be used finally we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem copyright 2004 oxford university press

a cross country analysis of consumption patterns this paper uses the system wide approach to analyse the consumption patterns in 18 oecd countries the results show that on average the oecd per capita consumption increased by 3 per annum and prices increased by about 7 per annum oecd consumers spend about half of their income on food housing and transport it is also shown that in most oecd countries food housing and medical care are necessities and clothing durables transport and recreation are luxuries and that the demand for all goods considered are price inelastic the controversial hypothesis of stigler and becker 1977 that tastes are the same across countries is also tested and it is found that the oecd consumption data do not support their claim

empirical regularities in south african consumption patterns this article investigates a number of empirical regularities in the south african consumption patterns the data support the following empirical regularities 1 variability in consumption systematically exceeds the variability in prices 2 law of demand 3 income flexibility is about 0 5 4 engel s law and 5 the demand hypotheses demand homogeneity and slutsky symmetry are acceptable in contrast to the findings for a number of other countries another important empirical regularity that consumer s utility function is additive is rejected for the south african consumers based on the implied demand elasticity estimates from the preferred model it is found that food housing and medical care are necessities and clothing furniture transport and recreation are luxuries and demand for all the commodities are price inelastic

intertemporal capital budgeting abstract this paper analyzes the optimal capital budgeting mechanism when divisional managers are privately informed about the arrival of future investment projects consistent with field study evidence an optimal allocation mechanism can include a stipulation that a capital request for discretionary investment will be declined with positive probability in the period after a significant investment was made even though this is ex post suboptimal the model derives a number of empirical predictions regarding capital budgeting and the investment of financially constrained firms

budget selection when agents compete abstract a principal selects a budget k of how many projects to fund within an organization and then consults n agents each of whom has private information about his own project s value after receiving cheap talk reports from the agents the principal decides which projects to implement subject to the budget and agents report on new i i d projects every period until the budget is exhausted when the budget is small relative to the number of agents each of whom are biased towards their own projects competition between agents degrades the quality of information conveyed in equilibrium and lowers the principal s payoff a larger budget induces less competition and therefore may be selected in order to extract more information from the agents even though this leads to some unprofitable projects being adopted in an extension i find that a policy of never allowing a funded agent to seek funding again increases payoffs compared to when the agent can always re seek funding

a real option analysis of investments in hydropower the case of norway abstract this paper presents a valuation study of hydropower investment opportunities in the norwegian context according to nve norwegian water resources and energy directorate the regulator there is a potential of 39 twh not yet developed generation in a normal year is approximately 120 twh by using the conceptual real option framework of dixit and pindyck 1994 investment under uncertainty princeton university press princeton nj one can estimate the value of investment opportunities to nok 11 million gwh eur 1 4 million gwh furthermore the optimal trigger price for initiating an investment based on electricity forward prices is calculated to nok 0 32 kwh eur 0 04 kwh the analysis shows consistency between real option theory and aggregate investment behaviour in norwegian hydropower

divisia moments of greek consumption abstract greek consumption data 1951 1984 are used to compute divisia moments quantity variances tend to exceed price variances and the price quantity covariance is mostly negative in periods of high inflation the price variance increases while both the price quantity correlation and the income flexibility decrease

average rates of return working capital and npv consistency in project appraisal a sensitivity analysis approach abstract in project appraisal under uncertainty the economic reliability of a measure of financial efficiency such as a rate of return depends on its strong npv consistency meaning that the performance metric i supplies the same recommendation in accept reject decisions as the npv ii ranks competing projects in the same way as the npv iii has the same sensitivity to perturbations in the input data as the npv in real life projects financial efficiency is greatly affected by the management of the working capital using a sensitivity analysis approach and taking into explicit account the role of working capital we show that the average return on investment roi is not strongly npv consistent in accept reject decisions if the working capital is uncertain and changes under changes in revenues and costs also it is not strongly npv consistent in project ranking we also show that the internal rate of return irr is not strongly npv consistent and economic analysis may even turn out to be impossible owing to possible nonexistence and multiplicity caused by perturbations in the input data as well as to possible shifts in the financial meaning of irr under changes in the project s value drivers we introduce the straight line rate of return slrr based on the notion of average rate of change which overcomes all the problems encountered by average roi and irr it always exists is unique strongly npv consistent for both accept reject decisions and project ranking and has an unambiguous financial nature

agricultural policy reform in the european community a three level game analysis since the beginning of the general agreement on tariffs and trade gatt uruguay round the european community ec has twice attempted to reform the common agricultural policy cap resulting in the february 1988 stabilizers reform package and the may 1992 macsharry reform package curiously these two attempts at reform resulted in vastly different outcomes the 1988 reform was incremental in nature and functioned mainly as a stopgap measure the 1992 reform however called for a shift from nontransparent consumer subsidies to transparent taxpayer subsidies this shift represented a fundamental change in the philosophy underlying the cap and laid the groundwork for an agreement in the uruguay round this article examines the conditions under which this important policy shift occurred it employs an interpretative case study method that demonstrates the empirical value of robert putnam s two level game model when it is expanded to consider the simultaneous interaction of negotiations at three levels the domestic level the ec level and the international level the study concludes that the power and heterogeneity of interest groups at various levels of the game matter that the real and perceived costs of no agreement affect the degree of substantive reform and finally that a three level interactive strategy is important in achieving an acceptable agreement at each level of the game

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

divisia moments of australian consumption abstract quarterly australian consumption data 1959 1978 are used to compute divisia price and quantity indexes together with divisia variances and covariances the quantity variances tend to exceed the price variances and the price quantity covariances are mostly negative estimates of the income flexibility are also presented

inflation and relative prices a system wide approach abstract the paper introduces a system wide model for the analysis of the effects of inflation on relative prices this enables the identification of those commodities whose relative prices are distorted by inflation the model provides measures of the natural rate of relative price variability which is associated with zero inflation and the inflation rate which minimizes relative price variability an illustrative application with australian data is provided

divisia moments of u s consumption 1929 1982 abstract using u s consumption data for 1929 to 1982 divisia price and volume indexes are computed as well as divisia variances and covariances the quantity variances tend to be larger than the price variances and the majority of the price quantity covariances is negative

divisia moments of indian consumption abstract divisia moments of the first and second order are presented for indian annual price and quantity data separately for 23 and 8 commodity groups of consumption covering the period 1960 1979 contrary to the results reported for other countries in a majority of cases the price variances tend to exceed the quantity variancesin both data sets

a theory of socialistic internal capital markets abstract we develop a model of a two division firm in which the strong division has on average higher quality investment opportunities than the weak division we show that in the presence of agency and information problems optimal effort incentives are less powerful and thus managerial effort is lower in the strong division this leads the firm to bias its project selection policy against the strong division the selection bias is more severe when there is a larger spread in the average quality of investment opportunities between the two divisions

the capital budgeting process incentives and information we study the capital allocation process within firms observed budgeting processes are explained as a response to decentralized information and incentive problems it is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low we also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer there is general agreement that investment decisions are the most important decisions made by corporations the choice of projects and the level of investment is critical not just for stakeholders of the firm but also for the economic well being of society as a whole it has been alleged that u s firms invest too little and tend to overemphasize short term results for example porter 1992 citing poterba and summers 1992 asserts that u s firms use hurdle rates to evaluate investment projects that are higher than their estimated costs of capital to understand the investment behavior of firms one must consider both the process by which external capital is made available to firms and the process by which internally and externally raised capital is allocated to investment projects within the firm considerable attention has been paid to how firms raise external capital the fundamental insight in this area is the celebrated result of modigliani and miller mm that capital structure is irrelevant in the absence of capital market frictions accordingly in the three decades since their contribution research on how external capital is raised has focused on market frictions including information and incentive problems relatively little research has focused on the internal allocation process and its relationship to the organization of the firm modern finance theory prescribes allocating capital according to the net present value npv rule just as the mm result itself provides no theory of the arrangements under which

ideal divisia moments price dispersion and inflation abstract ideal divisia price and quantity index numbers are computed for 18 countries using per capita consumption data for the 1970 s correlation matrices of general price change and price dispersion are computed and determinants of price dispersion are analyzed

growth of agricultural protection in east asia abstract japan is well known for its restrictions on food imports less well known is the fact that south korea and taiwan are also protective of their agricultural sectors this protectionism began early this century when all three countries were part of the japanese empire and it has increased rapidly during the 1960s and 1970s today food prices in east asia average two or three times higher than in international markets reflecting levels of protection that rival those in western europe

capital rationing and organizational slack in capital budgeting this paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm each with his or her own objectives and decisions the facts of interest are 1 the existence of organizational slack 2 the rationing of resources within organizations 3 the stated cut off rate for accepting capital projects in firms is often greater than the market rate of interest organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned resource rationing is defined as the under allocation of resources i e an increase in the amount allocated would generate revenues in excess of its costs rationing and slack are both manifestations of ex post inefficiencies an lp model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present the optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital thus inducing rationing in some states of the world typically resources are optimally allocated such that slack exists in other states the optimal allocation policy trades off these two inefficiencies