capital market development in china abstract this paper examines why and how capital markets have developed in a low income socialist country it shows that the development is the response of economic agents operating under a more market oriented economic environment with a highly regulated and inefficient banking system this development has presented new policy challenges and opportunities the paper argues that the developmental effects of the emergence of capital markets in china can be as important as its impact on improving allocative efficiency and resource mobilization

a multiplicative model of optimal ceo incentives in market equilibrium this paper presents a unified theory of both the level and sensitivity of pay in competitive market equilibrium by embedding a moral hazard problem into a talent assignment model by considering multiplicative specifications for the ceo s utility and production functions we generate a number of different results from traditional additive models first both the ceo s low fractional ownership the jensen murphy incentives measure and its negative relationship with firm size can be quantitatively reconciled with optimal contracting and thus need not reflect rent extraction second the dollar change in wealth for a percentage change in firm value divided by annual pay is independent of firm size and therefore a desirable empirical measure of incentives third incentive pay is effective at solving agency problems with multiplicative impacts on firm value such as strategy choice however additive issues such as perk consumption are best addressed through direct monitoring jel d2 d3 g34 j3

executive compensation strategic competition and relative performance evaluation theory and evidence we examine compensation contracts for managers in imperfectly competitive product markets we show that strategic interactions among firms can explain the lack of relative performance based incentives in which compensation decreases with rival firm performance the need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance firms in more competitive industries place greater weight on rival firm performance relative to own firm performance we find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry

interaction between the formal and informal financial sectors the asian experience abstract the nature of the interaction between the formal and informal financial sectors in developing countries is a subject with important policy implications it has implications for the future of informal finance as the formal sector expands in the long term will the informal sector wither away as the traditional view of financial dualism assumes or will it continue to play an important complementary role perhaps even growing in absolute size second the pattern of two major policy approaches often advocated toward the informal sector offering it stronger competition so as to induce it to improve its terms and promoting linkages with it so as to take advantage of its lower transactions costs in reaching smaller and poorer borrowers third the existence of a large informal sector has implications for the efficacy of monetary and credit policy in achieving stabilization objectives fourth the interaction between the formal and informal financial sectors also has implications for the effects of financial liberalization through removing restrictions on the deposit rate of interest this paper draws on the experience of asian countries to address these issues

parallel fragmented or black defining market structure in developing economies abstract in describing market structure development economists employ such terms as fragmented informal parallel and segmented to account for the observed distributions of prices of both goods and factors although these terms are used interchangeably do they mean the same thing focusing on the parallel markets approach the paper identifies government policies which create excess demand or supply in particular markets as the core determinant of the emergence of an official unofficial market structure the legality of unofficial transactions proves critical in assessing the consequences of the parallel market situation contrasting alternative characterizations of market structure the paper concludes that the parallel market is a distinct analytical concept

a critical appraisal of mckinnon s complementarity hypothesis does the real rate of return on money matter for investment in developing countries this is the post print version of the final paper published in world development the published article is available from the link below changes resulting from the publishing process such as peer review editing corrections structural formatting and other quality control mechanisms may not be reflected in this document changes may have been made to this work since it was submitted for publication copyright 2009 elsevier b v

uncertainty risk and incentives theory and evidence uncertainty has qualitatively different implications than risk in studying executive incentives we study the interplay between profitability uncertainty and moral hazard where profitability is multiplicative with managerial effort investors who face greater uncertainty desire faster learning and consequently offer higher managerial incentives to induce higher effort from the manager in contrast to the standard negative risk incentive trade off this learning by doing effect generates a positive relation between profitability uncertainty and incentives we document empirical support for this prediction this paper was accepted by wei jiang finance

north south trade and capital flows in a ricardian model of accumulation abstract a class based asymmetric general equilibrium model of the world economy is developed to trace the trajectory of the north south terms of trade the world profit rate the northern real wage and the level of southern employment in the presence of capital accumulation and technical progress it is shown that i accumulation must be accompanied by a continuing deterioration in the terms of trade of the south and may entail a cumulative contraction in its level of employment and ii technical progress in the south will of necessity produce a long run worsening of its terms of trade and assuming world demand for southern goods is priceinelastic of its level of unemployment

money the rate of devaluation and interest rates in a semi open economy colombia 1968 1982 most empirical studies on interest rate behavior have made extreme assumptions regarding the degree of openness of the economy under consideration generally it has been assumed that the economy in question is either completely closed to the rest of the world or that it is fully open and that there are no controls to capital movements in reality however most cases and especially those of developing countries correspond to an intermediate situation where the capital account of the balance of payments is partially open and there exist some controls to capital movements under these circumstances it would be expected that in the short run the domestic rate of interest will respond both to external factors i e world interest rates and to internal monetary conditions i e excess supply or demand for money the purpose of this paper is to develop an empirical model to analyze the behavior of nominal interest rates in a small semiopen economy the model specifically considers the role of open economy factors world rate of interet and expected rate of devaluation for example and the role of more traditional domestic monetary conditions in explaining interest rate behavior

note on the shape of the optimum income tax schedule abstract we consider the class of two bracket piecewise linear tax schedules sheshinski 1971 1972 and provide sufficient conditions for the optimum income tax schedule to have positive marginal rates and to be strictly convex calculations yield optimum tax rates between 20 and 35 percent and moderate rate progression the max min optimum has higher tax rates but not necessarily more rate progression than the utilitarian optimum the conditions are quite general postulating nondecreasing income effects as the level of income increases

on the design of piece rate contracts we characterize the optimal piece rate contract in the canonical moral hazard setting with a wealth constrained risk averse agent the contract is shown to have a simple intuitive characterization in a structured but broad class of settings

financial development and poverty reduction can there be a benefit without a cost abstract this article investigates how financial development helps to reduce poverty directly through a distributional effect beyond its indirect effect through economic growth the results obtained with data for a sample of developing countries from 1966 through 2000 suggest that the poor benefit from the ability of the banking system to facilitate transactions and provide savings opportunities through the mckinnon conduit effect but to some extent fail to reap the benefit from greater availability of credit moreover financial development is accompanied by financial instability which is particularly detrimental to the poor nevertheless the benefits of financial development for the poor outweigh the cost

financial liberalization in india and a new test of the complementarity hypothesis abstract this article reappraises the financial repression hypothesis for india in light of the partial liberalization of the financial sector in the early 1990s using for the first time state of the art multivariate cointegration and vector error correction models vecm from this more robust testing procedure we find that for the indian economy over the sample period 1951 99 money and capital are complementary suggesting that higher real interest rates will further raise the demand for money and lead to higher levels of investment furthermore testing for a structural break in the early 1990s to coincide with the liberalization of the financial sector in india suggests that these reforms have not significantly changed the complementary relationship between money and capital the policy implication is that further financial liberalization maybe required in india to enhance investment and economic growth

heads i win tails you lose a career analysis of executive pay and corporate performance the paper utilises a novel career perspective to examine managerial theories of organisational control in the context of executive reward principal agent theory managerial power and neo institutionalism are evaluated detailed career histories of boardroom executives in all ftse350 companies between 1996 and 2008 are utilised using both a fixed effects panel and a career based approach rival hypotheses are tested in addition to the payperformance relationship the probability of job loss as a function of performance is also estimated the evidence presented points to the importance of institutional considerations in the standard agency theory and managerial power perspectives and lends support to a social theory of agency the analysis is empirical in nature and an effort is made to draw on qualitative studies to further flesh out the discussion the practical implications of the findings point to the inadequacy of existing arrangements to deliver efficient pay outcomes where performance is poor whilst highlighting dangers of relying on naive policy remedies that ignore the role played by institutional forces in their implementation also highlighted is the distinct advantage of boards adopting a cumulative or career oriented approach when evaluating executive performance from a policy perspective the case is made for truly long term incentives in the form of career shares

monetarism in chile 1973 1983 some economic puzzles the most recent of these experiments began in 1973 after the military overthrew president salvador allende in the 10 years following the coup the military implemented deep reforms directed toward transforming chile from an economy semi isolated from the rest of the world with strong governmental intervention into a liberalized worldintegrated economy where market forces were freely left to guide most of the economy s decisions these liberalization reforms were carried out at the same time that a major stabilization program aimed at reducing a 600 rate of inflation was being implemented many of the policies undertaken roughly correspond to what a vast number of economists have been advocating for developing countries trade was liberalized the capital account was partially opened interest rates were freed and an active domestic capital market was developed the fiscal system was reformed with a value added tax replacing a cascading sales tax the social security system was reformed and the private sector began to play a more active role in the growth and development

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

interest rates and investment in east asia an empirical evaluation of various financial liberalisation hypotheses the article attempts to shed light on the appropriate interest rate policy in the process of economic development to this end we examine whether higher interest rates lead to higher investment and growth in four east asian countries we find that the investment rate went up with real interest rates up to 9 per cent in all four countries but started declining at still higher interest rates in two of the countries further a banking crisis occurred in each of the three countries for which the real interest rates exceeded 9 per cent this evidence rejects the neo structuralist argument nor does it support unbridled financial liberalisation yet it provides only limited support to stiglitz s case for mild financial repression real interest rates near zero since reducing real interest rates from say 6 to 3 or 0 per cent would have reduced investment the optimum policy seems to be closest to mckinnon s restrained financial liberalisation policy that is liberalisation with a moderate upper lim

financial restraints in the south korean miracle abstract we provide novel empirical evidence on the effects of financial restraints on south korean financial development the evidence is linked to a simple model of the korean banking system that encapsulates its cartelised nature which predicts a positive association between financial development and i the degree of state control over the banking system ii mild repression of lending rates the model also predicts that in the presence of lending rate controls increases in the level of the administered deposit rate are unlikely to influence financial deepening we test the model empirically by constructing individual and summary measures of financial restraints our empirical findings are consistent with our theoretical predictions but contrast sharply with the predictions of earlier literature that postulates that interest rate ceilings and other financial restraints constitute sources of financial repression

total board remuneration and company performance using a hitherto neglected source of data this paper combines executive emoluments with executive options to construct a broader measure of executive pay than has been possible in earlier british studies the result of including the long term share option component of pay along with the more commonly utilized short term component of emoluments is to reveal executive pay as being significantly more sensitive to company performance than has previously been thought to be the case the paper questions the current policy stance of british institutional investors and of the greenbury committee with respect to executive share options copyright 1996 by royal economic society

financial deregulation and segmented capital markets the case of korea abstract this paper deals with the relation between the official and the unregulated or curb segments of the capital market in korea the paper focuses on the behavior of officially controlled interest rates paid on time deposits and on freely determined curb market interest rates the effects of financial deregulation on interest rates investment and growth are investigated it is argued that under some plausible circumstances financial deregulation can generate significant crowding out in the curb market reducing the total degree of financial intermediation the empirical results provide some support to the crowding out hypothesis and indicate that changes in the officially controlled time deposit rate have been positively related to changes in the freely determined curb market interest rate an aggregate investment function is also estimated for korea it is found that an increase decrease in the curb rate discourages encourages investment on the other hand increases in the real volume of credit intermediate in the official segment have a positive effect on real aggregate investment

consumption puzzles and precautionary savings abstract when marginal utility is convex agents accumulate savings as a precautionary measure against labor income eventualities this paper shows that precautionary savings can go a long way in making the excess growth excess smoothness and excess sensitivity features of consumption consistent with the stochastic processes of labor income observed in the u s at the microeconomic level

a re examination of the demand for money in small developing economies this paper re examines the money demand function in three small open economies of asia korea pakistan and singapore in addition to using the relatively new procedure of error correction modelling the roles of variables such as a the expected change in the exchange rate b foregin interest rates and c foreign exchange risks on money demand are examined in testing the importance of these variables in the money demand function special attention is paid to testing the assumptions of the classical linear regression model the sample period for each country spans from 1973 1 through 1990 1 the empirical results suggest that the error correction specification performs very well in addition to the traditional variables the results suggest that at least some measure of foreign monetary developments appear to have some significant effect on money demand behaviour in these small developing economies

risk aversion performance pay and the principal agent problem this paper calculates numerical solutions to the principal agent problem and compares the results to the stylized facts of ceo compensation the numerical predictions come from parameterizing the models of grossman and hart and of holmstrom and milgrom while the correct incentives for a ceo can greatly enhance a firm s performance providing such incentives need not be expensive for many parameter values ceo compensation need increase only by about 10 for every 1 000 of additional shareholder value for some values the amount is 0 003 cents

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

fiscal year ends and nonlinear incentive contracts the effect on business seasonality salesperson and executive compensation contracts typically specify a nonlinear relationship between firm revenues and pay these agents therefore have incentive to manipulate prices influence the timing of customer purchases and vary effort over their firms fiscal years this paper empirically establishes results consistent with agents focusing on performance over the fiscal year most notably in addition to varying with the calendar business cycle manufacturing firms sales are higher at the end of the fiscal year and lower at the beginning than they are in the middle further evidence is found in fiscal year price movements and patterns in the industry variation of fiscal year effects

the dependence of pay performance sensitivity on the size of the firm i analyze the relationship between firm size and the extent to which executive compensation depends on the wealth of the firm s shareholders i use a simple agency model to motivate an econometric model of this relationship estimating this model on chief executive officer ceo compensation data using nonlinear least squares i determine that pay performance sensitivity as defined by jensen and murphy 1990b appears to be approximately inversely proportional to the square root of firm size however measured i also analyze the properties of pay performance sensitivity for teams of executives working for the same firm and show it to have similar properties as ceo pay performance sensitivity

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

stagflationary effects of monetary stabilization policies a quantitative analysis of south korea this paper presents a macro model of the korean economy that focuses on short run macro economic adjustment and more in particular on the transmission channels of monetary policy between the financial and the real sector of the economy in addition to the usual link between monetary policy and aggregate demand via investment the link between monetary policy and the supply side of the economy via the financing of working capital with borrowed funds is incorporated this link can potentially reverse the short run impact of tight money on inflation and aggregate the impact on output both export prices and domestic prices show a significant sensitivity to cost of financing working capital this credit supply side link gives a stagflationary bias to restrictive credit policies the empirical relevance of this phenomenon is strongly supported by the simulation results derived with the model structurally section 2 of the paper focuses on the real sector part of the model section 3 discusses the financial sector in section 4 different monetary stabilization packages are simulated using the model presented in sections 2 and 3 and alternative policy measures are discussed the simulation runs show strong short run stagflationary effects of tight money policies

credit policy inflation and growth in a financially repressed economy this report analyzes credit policy in an open economy macro model incorporating stylized facts about the financial sector of ldc s absence of security markets existence of a curbmarket these facts are incorporated in the financial sector part of a keynes wicksell growth model it focuses on a transmission channel of monetary policy into the supply side of the economy via the cost of working capital it shows that ignoring this effect when analysing restrictive credit policy leads to underestimates of inflation and overestimation of output and current account improvements it is shown that a credit crunch can be stagflationary in the short run a cut in the real stock of credit is shown to lead to a lower steady state capital stock