taxes redistribution and the minimum wage a theoretical analysis this paper considers a simple general equilibrium model that contains two types of workers with differing levels of ability and a social welfare maximizing government the paper shows that social welfare can sometimes be increased by supplementing an optimal linear income tax with a minimum wage but that social welfare can never be increased by supplementing an optimal nonlinear income tax with a minimum wage

detecting earnings management a new approach this paper provides a new approach to test for accrual based earnings management our approach exploits the inherent property of accrual accounting that any accrual based earnings management in one period must reverse in another period if the researcher has priors concerning the timing of the reversal incorporating these priors can significantly improve the power and specification of tests for earnings management our results indicate that tests incorporating reversals increase test power by around 40 and provide a robust solution for mitigating model misspecification arising from correlated omitted variables

inventories and the concentration of suppliers and customers evidence from the chinese manufacturing sector this study investigates the links between supplier and customer base concentrations and inventory holdings in the chinese manufacturing sector using financial data from a cohort of 516 companies we find that firms that face higher supplier density benefiting from better co ordination with suppliers hold fewer inventories whereas firms with higher customer density retain larger inventories as a result of the bargaining power exercised by customers we then extend the analysis by investigating the impact of account payables receivables and bad debt reserves finding that inventory holdings are positively associated with the two forms of financing and negatively associated with bad debts this last relationship however becomes less severe when firms have access to large volumes of payables finally we show that the above results hold with varying degrees of similarity also when we partition the dataset into six homogenous industrial segments overall this study contributes to the growing literature on inventories and the structure of the supply chain by shedding new light on the importance of both supplier and customer densities as well as the volume of payables and receivables for inventory management

external debt in post conflict countries summary in the development literature there exists no systematic study of external borrowing in post conflict countries we address this gap by analyzing statistical and case study evidence from three african countries we find that many war affected countries face rising debt arrears and deteriorating relations with creditors rebuilding trust between lenders and borrowers is hence a crucial but often slow process furthermore donors to war affected african countries have been slow to grant exceptional debt relief based on odious debt or on financial requirements debt relief for post conflict reconstruction should embrace a more forward looking and more generous conditionality

did high debts distort loan and grant allocation to ida countries summary we examine the allocation of net loans net transfers and grants to ida countries over the period 1982 2008 focusing on the role of debt and debt sustainability in the decisions of multilateral and bilateral donors we find no evidence of defensive lending but strong evidence of defensive granting a significant negative reaction of net loans to the debt ratio indeed characterizes the decisions of both multilateral and bilateral creditors the impact of lower loans on the budget of debtor countries is however accommodated through higher grants in addition to debt relief these findings are consistent with a substitution of grants for loans and with the new approach to debt sustainability but question the efficiency and selectivity of foreign aid

the economics of development a survey i the subject our definition of the subject will be the use of economic analysis to understand the economies of poor or developing countries this includes in particular how standards of living in the population are determined and how they change over time and further how policy can or should be used in the influence of these processes the definition contains in principle much or most of analytical methods in economics insofar as they can be put to use in the examination of the issues of interest this is as it should be but it poses a problem for a survey in a journal a comprehensive treatment is infeasible so we shall follow a different route the survey will focus on what i take to be the major themes and approaches which characterise the productive aspects of the subject there is therefore no pretence at being exhaustive the purpose is rather to highlight some of the advances many of these have been of real substance there are a number of possible purposes for a survey and it is important to be clear at the outset for whom it is intended what it is and what it is not this survey is addressed to economists and students of economics who know the tools of their trade but not necessarily how they have been applied to and fashioned for the analysis of the economics of developing countries it is a description of the ways in which problems can be productively formulated and approached in terms of examples chosen for their intrinsic importance and interest the vastness of the subject means that we have to be highly selective it does not seek to provide a summary evaluation of the current view of the appropriate response to immediate policy questions it is not a history of thought nor a research manifesto nor an attempt to adjudicate or settle the major debates where they arise naturally from the major purpose some judgements on these subjects will be offered but they do not themselves constitute the primary intent of this survey there are three lines of enquiry or sets of questions which have i suggest been distinctive of the most fruitful work in development economics they will

accrual reversals earnings and stock returns we show that accruals consist of at least two distinct underlying processes one with positive serial correlation and the other with negative serial correlation we also find that the accrual reversals characterizing the negatively serially correlated process are predominantly good accruals that correctly anticipate fluctuations in working capital accrual estimation error is the least persistent component of earnings while accruals relating to firm growth are less persistent than cash flows finally the mispricing of accruals appears to be driven by a combination of accrual estimation error and firm growth

policy selectivity forgone debt and donor behavior in africa authors assess the dynamics behind the high net resource transfers by donors and creditors to sub saharan african countries analyzing the determinants of overall net transfers for a panel of 37 recipient countries in 1978 98 authors find that country policies mattered little donors especially bilateral donors actually made greater transfers to countries with high debt largely owed to multilateral creditors when policies were bad authors conclude that comprehensive debt relief has the potential though not the certainty to restore selectivity in support of good policies that would make development assistance more effective going forward and increase public support in donor countries

sovereign debt relief and its aftermath this paper studies sovereign debt relief in a long term perspective we quantify the relief achieved through default and restructuring in two distinct samples 1920 1939 focusing on the defaults on official government to government debt in advanced economies after world war i and 1978 2010 focusing on emerging market debt crises with private external creditors debt relief was substantial in both eras averaging 21 of gdp in the 1930s and 16 of gdp in recent decades we then analyze the aftermath of debt relief and conduct a difference in differences analysis around the synchronous war debt defaults of 1934 and the baker and brady initiatives of the 1980s 1990s the economic landscape of debtor countries improves signicantly after debt relief operations but only if these involve debt write offs softer forms of debt relief such as maturity extensions and interest rate reductions are not generally followed by higher economic growth or improved credit ratings jel e6 f3 n0 and h6

non defaultable debt and sovereign risk abstract we quantify gains from introducing limited financing through non defaultable debt into a model of equilibrium sovereign risk for an initial sovereign spread of 4 2 introducing the possibility of issuing non defaultable debt for up to 10 of aggregate income reduces immediately the spread to 1 5 and implies a welfare gain equivalent to a permanent consumption increase of 0 8 nevertheless the spread reduction achieved by the introduction of non defaultable debt is short lived our findings shed light on different aspects of proposals to introduce common euro area sovereign bonds that could be virtually non defaultable

bankruptcy proceedings for sovereign state insolvency the paper examines the main issues involved in translating domestic bankruptcy procedures to the sovereign context it considers some of the principles by which domestic bankruptcy procedures operate and the extent to which they apply to international lending two recent proposals are considered in more detail that of krueger a new approach to sovereign debt restructuring and that of pettifor chapter 9 11 resolving international debt crises the jubilee framework for international insolvency the paper also considers the question of the ex ante effects of a procedure which makes default less costly and concludes that despite a negative impact on the ability to borrow the overall welfare effect need not be negative

on the role of the production and consumption assumptions for optimum taxation abstract the sensitivity of optimum tax rates to a variety of factors has sustained many different lines of enquiry this paper attempts to demonstrate by computational procedures the role of the production and consumption leisure assumptions in the light of recent research in particular the work of stern will be extended to provide an assessment of the allen analysis it will be shown that optimum negative marginal tax rates are no longer a curiousity and that our production and consumption leisure assumptions are of considerable importance for variable wage tax models

evidence for the ineffectiveness of debt rescheduling as a policy instrument where an economy cannot meet its external debt service obligations it is forced to appeal to creditors for rescheduling of the debt as such rescheduling is evidence of a country s incapacity to carry a debt burden this article explores factors that explain the probability of a country requiring debt rescheduling in a panel framework the current literature is extended by modelling a dynamic random effects panel probit in order to identify a presence of state dependence after controlling for country heterogeneity we find clear evidence of state dependence when a 2 year lag of the dependent variable is allowed for suggesting that overall the fact that a country has experienced a rescheduling arrangement in the past does indeed make them more likely to experience further rescheduling the article stresses that in order to draw the appropriate policy conclusions from this finding one must understand that the debt rescheduling variable is itself a policy response variable the fact that further resche

sovereign insolvency procedures a comparative look at selected proposals abstract the most practicable short term approaches for sovereign debt restructuring would include a code of conduct voluntary approach and collective action clauses contractual approach in the medium term a sovereign insolvency procedure statutory approach may have an important role to play because it would be a comprehensive instrument designed to coordinate different creditor groups prior to and during a debt crisis this paper provides a survey of six comprehensive policy proposals for a sovereign bankruptcy procedure it points to approaches that could improve existing proposals and creates a basis for new proposals which could prove conducive to reaching political consensus

institutions and government controls abstract this paper develops a model of government policy toward industrial control and regulation that sheds light on the determinants of differential country experiences in terms of organizational arrangement and enterprise performance in contrast to the model developed by shleifer and vishny shleifer a vishny r w 1994 politicians and firms quarterly journal of economics 109 995 1025 shleifer a vishny r w 1998 the grabbing hand government pathologies and their cures harvard univ press cambridge ma which suggests that government controls over firms come about when politicians can use public funds to buyoff the managers and solicit their cooperation in politically motivated redistribution of rents the present shows that it may be the ability to use the government s regulatory powers at discretion that encourages politicians to impose controls on firms and redistribute their rents the model implies that the politicians appetite for intervention tends to be greater when the cost of collecting and using public funds is higher which is the opposite of what the shleifer vishny model predicts the present model helps explain the puzzling observation that countries with poor institutions are more likely to impose extensive controls on production and maintain large and inefficient public sectors the model also sheds light on a variety of other stylized facts and puzzles and offers new hypotheses to be tested

to give or to forgive aid versus debt relief is generalized debt relief an effective development strategy or should assistance be tailored to countries characteristics to answer this question the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief since offering such a menu is costly it is preferred by donors only when the cost of assistance is low and the probability that an indebted country is creditworthy is high enough for lower probabilities and higher costs of assistance donors prefer a policy of only debt relief very limited aid is the preferred policy only for high costs of assistance and low probabilities that the government is creditworthy

recent experience with commercial bank debt reduction has the menu outdone the market abstract debt reduction at market terms has been criticized as too expensive from the point of view of the debtor the recent reduction agreements following the menu approach are partially concerted but they also possess some elements of voluntariness this raises two issues a what is the conceptual justification for such financial arrangements and b based on recent evidence to what extent have these arrangements reduced the cost of debt reduction in a review of six recent menu driven debt reduction agreements we find that the debtors achieved a far better financial result than would have been feasible with simple market buybacks

mexico s investment collapse debt or oil abstract this paper tests three explanations for mexico s investment collapse in the early 1980s the oil price decline the termination of capital inflows and debt overhang uncertainty effects using previously ignored investment data on private sector industries the data consistently point to the importance of the rise in the relative price of investment goods driven in large part by falling world oil prices but the data also allow a role for the termination of capital inflows however after controlling for these effects the paper finds little evidence for debt overhang effects heightened uncertainty or other commonly cited explanations in the literature jel f34

rewarding the profligate and punishing the prudent and poor some recent proposals for debt relief at a conference organized in june 1986 by the overseas development council on the future of the world bank former west german chancellor helmut schmidt investment banker felix rohatyn and the chairman of the federal reserve board paul volcker all suggested that the massive 60 billion trade surplus of japan be mobilized to solve what they termed as the debt problem of the third world mr barber conable the new president of the world bank is quoted by the new york times 3 july 1986 as saying clearly there is the expectation that japan in view of the light defense burden it carries will participate fully in solving collective debt problems of the world he characterized the japanese surpluses as a considerable world asset and suggested that establishing a special facility such as the one established by the imf in the 1970s to tap saudi arabia s surplus petro dollars to recycle them would be one way of dealing with it nearly a year ago in october 1985 at the annual meetings of the world bank and imf at seoul us treasury secretary james baker signaled a shift in the us approach to the debt crisis the baker plan aimed to help highly indebted middle income countries 15 were mentioned by baker 10 of them in latin america resume growth and achieve adjustment towards a sustainable debt position through the adoption of the following course of action by lenders debtors and multilateral agencies within the context of the then prevailing imf supervised case bycase approach commercial banks the world bank and other multilateral development banks were to increase lending to these countries baker suggested that the commercial banks commit a total of 20 billion in net new lending over 198688 and the multilateral development banks an additional 9 billion during the same period this increased net lending was to be in support of the adoption of market oriented policies by indebted nations growth was to be promoted inflation reduced and external balance restored by expanding the role of the private sector and of markets both domestically and internationally the first offspring of the baker plan is the recent growth oriented adjustment plan for mexico which was foisted upon a reluctant imf perhaps the world s last unreconstructed bastion of adjustment through austerity by the combined pressure of the us treasury and federal reserve board and the mexican threat of repudiation the imf s reservations concerned the budgetary features of the package not the novel real growth and oil price contingency clauses which it supported the 18 month standby arrangement with the imf provides mexico with sdr 1 4 billion about 1 7 billion in support of what is described as a comprehensive program of adjustment and structural reform the total financing package amounts to 12 billion of which 6 billion is to come from the commercial banks mexico s economic problems had of course been intensified dramatically as a result of the drop in the price of oil policies aimed at bringing mexico s real gdp growth to 3 5 by 1987 from recent negative growth rates of 4 or 5 involve a variety of growth oriented market friendly adjustment measures increased public investment current expenditure cuts tax reform measures marketbased adjustments in tariffs and prices charged by public sector enterprises liberalizing trade measures mexico is about to join the ga7t and only very mild by traditional imf standards budgetary restraint a reduction in the deficit gdp ratio by three percentage points over 1986 87 the aspect of the mexican program of most interest for this discussion is the actions taken

debt relief investment and growth from 1989 to 2004 the donor community provided approximately 400 billion in debt relief to developing countries in an attempt to promote growth and reduce poverty using a sample of 118 developing countries this paper empirically assesses the impact of debt relief on growth via 1 resources made available for investment from reduced debt service payments and 2 improved incentives to invest from a reduced debt stock although the results show no general evidence of a growth effect from debt relief the study provides certain evidence that it promotes investment and thereby growth in countries not classified as hipcs

the 1990 mexico and venezuela recapture clauses an application of average price options abstract the paper prices contingent contracts and options written on average prices and uses the methodology to value the recapture clauses in the 1990 mexican and venezuelan debt restructuring agreements it is shown that the current values of the recapture clauses are less than one quarter of the maximum contractually possible and are a concave function of the standard deviation of the oil price the paper also points out that the benefits of recapture clauses are not only an increased degree of risksharing between countries and creditors but also a decrease in the likelihood of the debtor to default and an increased incentive to invest and adjust

optimal linear income taxation with general equilibrium effects on wages abstract the paper argues that the endogeneity of wages may make a considerable difference to optimal linear tax rates in this case there is not only the usual direct redistribution via the fiscal system but also the general equilibrium redistribution due to the change in wages depending on the elasticity of substitution of the production function and the labour supply elasticities these may be reinforcing or opposing it is shown that the general equilibrium effect may plausibly outweigh the direct effect so that net redistribution to the lower paid involves a wage subsidy financed by a lump sum tax

official debt restructurings and development abstract despite the frequency of official debt restructurings little systematic evidence has been produced on their characteristics and implications using a dataset covering more than 400 paris club agreements this paper fills that gap it provides a comprehensive description of the evolving characteristics of these operations and studies their impact on debtors the progressive introduction of new terms of treatment gradually turned the paris club from an institution primarily concerned with preserving creditors claims into an instrument to foster development in the world s poorer nations among other objectives our study finds that more generous restructuring conditions involving nominal relief are associated with an acceleration of per capita gdp growth and with a reduction in poverty and inequality we also find that countries receiving nominal relief tend to receive lower aid flows subsequently the opposite being the case for countries receiving high reductions in the net present value of their obligations but no nominal haircuts

donors mechanisms for financing international and national public goods loans or grants this paper investigates whether three classes of donors multilateral organisations regional institutions and bilateral donors tailor their mix of grants and loans to reflect international benefit spillovers and recipient specific benefits derived from aid funded activities in developing and transition countries to account for recipient benefit shares donors should use a greater share of grants when supported activities yield a larger portion of international public benefits a greater reliance on loans is appropriate when a large portion of recipient specific benefits are associated with the assistance by reflecting recipient benefit shares in the grant loan mix donors assistance also promotes allocative efficiency using the credit reporting system crs database from oecd for 1980 2000 our analysis establishes that various donor classes apply different grant loan mixtures when supporting the environment health knowledge and governance sectors of recipient countries we employ analysis of variance and other statistical comparisons of the means to investigate differences among donor classes we demonstrate that bilateral donors do the best job in tailoring their grant loan mix to accord with the extent of international public good benefits embodied in the aid supported activity multilateral organisations grant loan mix is intermediate of the three types of donors with some evidence of them relying more on grants to finance activities that possess a larger share of international public good spillovers regional institutions however do not discriminate their grant loan mix by either sectors or the associated public good spillovers this finding suggests that regional development banks need to adjust their grant loan mix to better account for international benefit spillovers if these institutions are to warrant the increased funds to underwrite regional public goods that they have been seeking if however their mix is institutionally set then the stakeholders must give these institutions greater flexibility to tailor their grants and loans to who benefits from the aid supported public goods this is the first paper to empirically ascertain whether the grant loan mix is tied to the inherent publicness of the aid funded activities

imf concern for reputation and conditional lending failure theory and empirics one possible explanation for the unsatisfactory implementation of imf conditionality has been attributed to the lack of credibility of the imf threat of interrupting financial assistance in case of non compliance with the negotiated conditions in this paper we suggest that such lack of credibility might be due to the dual role played by the imf which acts at the same time as a creditor and a monitor of economic reforms we show that the imf incentive to hide its surveillance failures in order to preserve its reputation of being a good monitor may actually distort its lending decisions towards greater laxity relative to social optimum in punishing non compliance with economic reforms we have empirically tested such theoretical result by supposing that larger departures from efficiency of the imf lending rule are associated with a longer relationship between a country and the imf the longer this relationship the stronger the imf reputation will be affected in case it ultimately decides to stop lending specifically we have empirically investigated whether imf disbursements are affected by the imf own share of debt which is taken as a proxy for the duration of the relationship between the fund and a country our empirical results show that a higher imf debt share does increase imf disbursements

sovereign debt repurchases no cure for overhang troubled debtor countries do not gain by repurchasing external bank debt at market discount even if a buyback would stimulate investment by relieving debt overhang the reason is that buybacks allow creditors to reap more than 100 percent of any efficiency gains that might result from increased investment we show that open market buybacks provide a benchmark for evaluating more complex negotiated buyback deals by comparing any given deal with a hypothetical market buyback of the same size one can derive upper and lower bounds on the gain to the country we apply our model to the 1990 mexican debt deal

prospective aid and indebtedness relief a proposal primary needs of human development are not met in poor development countries although ambitious goals have been set by the international community to meet specific human development targets by 2015 official development aid is lagging and excessive external debt continues to drain much needed resources from poor countries despite the recent hipc highly indebted poor countries initiative this paper outlines a 15 year program for implementing the 2015 human development targets while resolving fully the debt overhang problem for a set of 49 poor countries the proposal requires additional contributions from 23 rich countries amounting to 0 1 of 1 of their gdp over each of the 15y ears although only a small part of the effort would take the form of debt cancellation the outstanding debt of the 49 poor countries would be totally extinct by year 2015 the program to be implemented in a multilateral framework in which all interested parties have an effective voice relies on several basic premises a long term commitment by donors a fair burden sharing among creditors a fair distribution of newly available resources among poor countries heavily indebted or not a targeting of these resources to human development programs a conditionality guaranteeing reasonable aid effectiveness

a strategy for efficient debt reduction f or the past seven years the u s government has managed the debt crisis with the preeminent goal of sustaining the flow of debt servicing payments from the debtor countries to the commercial banks the focus on the banks especially in the first years of the crisis 1982 85 is easily explained several money center banks had exposure of nearly 200 percent of bank capital in latin america alone upon the outbreak of the crisis in 1982 a widespread suspension of debt service payments could well have sunk several major banks i have discussed the u s government s policy focus on the debt servicing to the commercial banks in sachs 1986b 1989c and sachs and huizinga 1987 but today those policies are being revised after years of steady decline in the exposure ratios of the most heavily exposed banks the risk of a u s banking crash as the result of the debt crisis is now virtually nonexistent in addition the burden of debt payments is contributing to profound economic crises and growing political instability in almost all of the democracies in latin america a wide range of analysts now concurs that the debt burden should be reduced not only for the sake of the debtors but also for the sake of the creditors who have an important long run stake in allowing the developing countries to surmount the current acute crisis the brady plan unveiled by secretary of treasury nicholas brady in march 1989 is based on the need for a reduction of the debt burden

debt relief for poor countries conditionality and effectiveness this paper studies the effectiveness of debt relief to stimulate economic growth in the most heavily indebted poor countries we develop a neoclassical framework with a conflict of interest between the altruistic donor and the recipient government and model conditionality as an imperfectly enforceable dynamic contract in contrast to the recent practice of fully cancelling debt optimal incentive compatible conditionality is accompanied by a concessionality level that implies a combination of subsidized loans and outright grants the optimal concessionality level depends on the recipient s access to international financial markets and on the strength of the conflict of interest incentive compatible transfers with optimal concessionality levels generate substantial welfare gains if the donor does not implement the optimal concessionality level and provides subsidized loans only then the effectiveness of transfers decreases in the long run with severe welfare implications in contrast transfers are less effective in the short run if the donor offers outright grants only

are buybacks back menu driven debt reduction schemes with heterogeneous creditors abstract we analyze the mechanics of menu driven debt reduction deals similar to those recently initiated by debtor countries in which heterogeneous banks choose freely between selling or retaining their debt claims we show that menu deals can facilitate discrimination across heterogeneous banks because of imperfections in the secondary market for debt this implies that menu deals are likely to dominate market buybacks and pure concerted relending agreements particularly when banks differ widely in their valuation of claims on the debtor

discussion of are executive stock options associated with future earnings abstract hanlon rajgopal and shevlin conclude that grant of stock options to executives is associated with a positive impact on future operating performance this discussion comment examines the impact of endogeneity model structure and the choice of a benchmark model on this conclusion while some results indicate that there is a position relation between stock option grants and operating performance alternative econometric approaches produce distinctly different results

ida grants and hipc debt cancellation their effectiveness and impact on ida resources abstract ida is in trouble the world bank s long term plans presume that ida will need all the loan repayments currently scheduled just to keep its program from shrinking in future decades yet the ida grant and hipc debt reduction programs are cutting the flow of repayments foreshadowing major future cuts in ida aid unless the donor countries agree on a plan to offset those costs poor countries will suffer meanwhile the efficiency and effectiveness of the grant and debt cancellation programs have been seriously questioned these programs are evaluated and changes in the bank s future plans for ida are proposed

aid policies and growth the authors of this paper use a new database on foreign aid to examine the relationships among foreign aid economic policies and growth of per capita gdp in panel growth regressions for 56 developing countries and 6 four year periods 1970 93 they find that the policies that have a great effect on growth are those related to fiscal surplus inflation and trade openness they construct an index for those three policies and have that index interact with foreign aid they have instruments for both aid and aid interacting with policies they find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies in the presence of poor policies aid has no positive effect on growth this result is robust in a variety of specifications which include or exclude middle income countries include or exclude outliers and treat policies as exogenous or endogenous they examine the determinants of policy and find no evidence that aid has systematically affected policies either for good or for ill they estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors pursuit of their own strategic interests in a counterfactual they reallocate aid reduce the role of donor interests and increasing the importance of policy such a reallocation would have a large positive effect on developing countries growth rates

why do accruals predict earnings abstract higher accruals are associated with lower subsequent earnings we show this phenomenon can be explained by the way sales profits and working capital respond to changes in a firm s product markets empirically high accruals predict high subsequent sales growth but a long lasting drop in both profits and profitability accruals also predict an increase in future competition suggesting that accruals are correlated with abnormally high and in equilibrium transitory true profitability that attracts new entrants to the industry overall the predictive power of accruals is better explained by product market effects than by measurement error in accruals or diminishing returns from investment

imf conditionality as a screening device a theoretical model is developed in which adoption of an imf programme signals a country s productivity it is assumed that there are two types of country one with a high return on investment and the other with a low return the country s type is known only to itself in the presence of a debt overhang the high productivity country may choose not to undertake the investment despite it being socially efficient to do so in this case the creditor would like to offer the country some debt reduction but the low productivity type will also benefit from the debt reduction this problem can be avoided if the country has sufficient resources to engage in a debt buyback in order to gain the debt relief only the high productivity type would be prepared to sacrifice current resources for the debt reduction and thus a separation of the types is achieved this is similar to an argument found in acharya and diwan 1993 we argue however that it is unlikely that a heavily indebted country will have sufficient resources for a buyback if the country is credit constrained an alternative screening mechanism is to undertake an imf programme in return for debt reduction and possibly an imf loan this mechanism can be the equilibrium outcome even if the programme creates only disutility for the country s policy makers

official finance requirements in the 1990s abstract estimates based on a savings gap model with endogenous private bank lending suggest that projections of development aid requirements for sub saharan africa low income asia and latin america by fishlow 1987 the development committes 1988 and the un 1988 are too optimistic a substantial increase in official financial flows to developing countries is necessary it appears that an increase in private bank exposure by 25 a 35 debt reduction and a 35 interest reduction as proposed in the recent brady plan are insufficient to reach minimum growth rates in the three developing regions

the optimal public employment policy abstract this paper studies optimal public employment in a model with two types of labor unskilled and skilled and a single consumption good a linear income tax is used to redistribute income it is shown that if the income tax and public employment levels are optimal then there is less unskilled labor and more skilled labor in public production than is necessary to minimize costs at the prevailing gross wage rates the robustness of this result is investigated by examining a second model

the allocational role of takeover bids in situations of asymmetric information have special information about the target firm s resources which indicates that the target is really worth more than its current market valuation hence the acquiring firm by paying only a small premium is able to acquire these resources at a price below the true worth to shareholders indicated by the inside information thus shareholders are unable to capture the true benefits of their investments and an inefficient amount of investment will take place therefore the government should restrict takeover bids the above argument is clearly wrong if there is competition among informed bidders for the target firm s assets however proponents of the argument claim that some takeover bids occur exactly because only one agent has special inside information about the target company s resources in this paper we show that

when is fiscal adjustment an illusion fiscal adjustment is an illusion when it lowers the budget deficit or public debt but leaves government net worth unchanged conventional measures of the budget deficit largely show the change in public sector debt ideally the measured deficit would reflect the change in public sector net worth many people consider it impractical to try to measure public sector assets my paper does not discuss what the deficit should measure but instead proposes a positive and testable theory of how governments actually behave when an outside agent forces a reduction in a government s conventional deficit and debt accumulation the government responds by lowering asset accumulation or increasing hidden liabilities since government net worth is unchanged such fiscal adjustment is an illusion using data from countries with world bank and imf fiscal adjustment programmes and case studies of emu countries compliance with the maastricht criteria i confirm my theoretical predictions fiscal adjustment in these countries was at least partly an illusion

income taxation endogenous factor prices and production efficiency in an analysis of a two type income tax model with endogenous wages this paper shows that production efficiency is violated in the optimum with i non linear and ii linear income taxation if and only if a distortionary tax schedule is implemented these findings complement earlier results of the literature in passing it is also shown that optima with non linear redistributive income taxation cannot be identified with the redistributive regime if the assumption of endogenous wages is taken seriously

a cheap lunch for emerging markets removing international financial market imperfections with modern financial instruments summary this paper develops a market based procedure to significantly reduce the indebtedness of emerging markets by applying an asset backed security approach to a pool of emerging market bonds in an extensive simulation study based on historical data the cumulated interest savings over a horizon of 10 years amount to about 20 of the credit sum on average with a standard deviation of 8 and up to 44 for individual countries dependent on the internal distribution of the surplus the theoretical structure of the transaction is explicitly derived in cooperation with professionals from major commercial banks and it implies only negligible implementation cost the implementation requires neither institutional reforms nor debt forgiveness but can supplement or substitute previous measures

communication commitment and growth abstract we study the effect on the growth of an economy of alternative financing opportunities in a stochastic growth model with incentive constraints efficient accumulation mechanisms are designed and computed for economies that differ in their incentive structure we show that when borrowing is subject to information constraints there is a computable efficient transfer mechanism that does not affect capital accumulation and investment patterns even though consumption patterns and the distribution of wealth are affected in contrast enforcement constraints can severely reduce the outside financing opportunities and affect investment patters and economic growth we adapt numerical algorithms for obtaining numerical solutions of these models

optimal deficit and debt in the presence of foreign aid summary external revenue in the form of foreign aid constitutes an important component of the government s budget constraint in many developing countries we derive optimal public spending and the resulting optimal deficit and debt in an optimal control framework when the government seeks to maximize the utility of constituents in the presence of external revenue that cannot be influenced by the government directly but is contingent on public revenue and debt we find that in this context a policy of running budget deficits and accumulating debt becomes optimal in simulations we characterize the size and the path dependency of the optimal deficit and debt

structural adjustment a survey of the issues and options abstract the article raises and attempts to answer questions such as adjustment for what purpose to what shocks of what factors or forces by whom who loses and who benefits from adjustment and adjustment how it also discusses the question of adjustment when the distinction between external and internal shocks is rejected as neither helpful for the allocation of blame nor for the justification of raising finance an analysis of the impact on the poor is sketched out after a brief discussion of the role of the market and government intervention in adjustment policy and the fallacy of aggregating country policies there follows a discussion of the double paradox of conditionality why should a donor impose conditions that are in the best interest of the recipient and why instead of paying for getting good advice is the recipient rewarded with extra money ten possible reasons are given the paper ends with proposals as to how to overcome the conflict between national sovereignty and assuring that donor money is well spent

flight capital as a portfolio choice the authors examine flight capital in the context of portfolio choice they estimate the stock of flight capital held abroad and compare it with the stock of real nonfinancial capital held within each country for 51 countries they construct estimates as of 1990 of private domestic capital and flight capital which combined add up to domestic wealth there are large regional differences in the proportion of private wealth that is held abroad ranging from 3 percent in south asia to 39 percent in africa they explain differences in portfolio choice in terms of the capital to labor ratio indebtedness exchange rate distortions and risk ratings all proxies for differences in the risk adjusted rate of return on capital they then apply the results to four policy questions in which private portfolio choices are potentially important the effect of the east asian crisis on domestic capital outflows spillovers the effect of hipc debt relief on capital repatriation and why africa has so much of its private wealth outside the continent their conclusions 1 the four most severely affected east asian countries will eventually lose about 250 billion in domestic wealth as a result of the deterioration in risk between march 1997 and september 1998 2 they found some support for a spillover model 3 the effect of the hipc debt relief initiative on capital repatriation will vary massively between hipc eligible countries 4 africa has by far the lowest capital per worker which makes massive capital flight from africa all the more distinctive three variables explain capital flight in africa exchange rate overvaluation adverse investor risk ratings and high indebtedness

financing vs forgiving a debt overhang abstract this paper examines the tradeoffs facing creditors of a country whose debt is large enough that the country cannot attract voluntary new lending if the country is unable to meet its debt service requirements out of current income the creditors have two choices they can finance the country lending at an expected loss in the hope that the country will eventually be able to repay its debt after all or they can forgive reducing the debt level to one that the country can repay the post 1983 debt strategy of the imf and the us has relied on financing but many current calls for debt reform call for forgiveness instead the paper shows that the choice between financing and forgiveness represents a tradeoff financing gives the creditors an option value if the country turns out to do relatively well creditors will not have written down their claims unnecessarily however the burden of debt distorts the country s incentives since the benefits of good performance go largely to creditors rather than itself the paper also shows that the tradeoff itself can be improved if both financing and forgiveness are made contingent on states of nature that the country cannot affect such as oil prices world interest rates etc

curse or blessing has the impact of debt relief lived up to expectations a review of the effects of the multilateral debt relief initiatives for low income countries as the multilateral debt relief initiatives draw to a close this article reviews the impacts of debt relief to low income countries lics building on both the theoretical and empirical literature

the relation between earnings and cash flows abstract a model of earnings cash flows and accruals is developed assuming a random walk sales process variable and fixed costs and that the only accruals are accounts receivable and payable and inventory the model implies earnings better predict future operating cash flows than current operating cash flows and the difference varies with the operating cash cycle also the model is used to predict serial and cross correlations of each firm s series the implications and predictions are tested on a 1337 firm sample over 1963 1992 both earnings and cash flow forecast implications and correlation predictions are generally consistent with the data

oil nontax revenue and the redistributional foundations of regime stability nontax revenues make up a substantial amount of government revenue around the world though scholars usually focus on individual sources of such revenue for example foreign aid and state owned oil companies using a theory of regime change that builds on recent models of the redistributional foundations of dictatorships and democracies i generate hypotheses regarding all nontax revenue and regime stability i argue that an increase in nontax revenue should be associated with less taxation of elites in democracies more social spending in dictatorships and more stability for both regime types i find support for all three of these hypotheses in a cross sectional time series analysis covering all countries and years for which the necessary data are available significantly i show that the particular source of nontax revenue does not make a difference they all act similarly with regard to regime stability and the causal mechanisms

debt buybacks debt reduction and debt rescheduling under asymmetric information in the early nineties there was a significant recovery of many debtridden economies after the shift in debt policy implicit in the socalled brady plan yet the use of scarce resources from debtor countries to buy back part of their debts remains a controversial feature of this plan we use a multiperiod model of debt overhang to show that under asymmetric information this transfer of resources emerges naturally as part of the shift from a strategy of debt rescheduling to one of debt reduction after nearly a decade of suffering from debt ridden economies in the early nineties many countries with large external debts finally reduced their debt service ratios regained access to spontaneous private financing and achieved higher growth and lower inflation imf 1993 many analysts have since attributed at least part of this success to the shift in the international debt strategy in 1989 which took a new direction with the so called brady initiative l a rather controversial feature of this initiative was the use of scarce resources from the debtor countries to buy back part of their debt there are two reasons why this use of a country s resources seems unwise first capital has more value in the debtor country than abroad thus transferring additional current resources from the country to its creditors at fair prices would appear to be welfare reducing second contrary to the idea that by repurchasing its debt in the open market a debtor country benefits from the discount price bulow and rogoff 1988 1991 prove under assumptions that include symmetric information that these buybacks hurt the country since the purchase price2 incorporates and transfers to the seller all the benefits caused by a reduced debt 3

applying chapter 9 insolvency to international debts an economically efficient solution with a human face abstract internationalizing us insolvency procedures for municipalities chapter 9 would provide a viable and efficient solution to the debt crisis chapter 9 deals with debtors having governmental powers protects those affected by public debts and gives them a right to be heard with minor changes it can be applied internationally this paper elaborates this proposal initially made in 1987 and presents the structure of chapter 9 de facto international precedents and some basic elements of an international chapter 9 it shows that this solution would combine economic efficiency and the protection of human dignity allowing adjustment with a human face

macroeconomic stability and the distribution of growth rates it is often argued that macroeconomic instability can form a binding constraint on economic growth drawing on a new index of stability threshold estimation is used to divide developing economies into two growth regimes depending on a threshold level of stability for the more stable group of countries the output benefits of investment are greater conditional convergence is faster and measures of institutional quality have more explanatory power suggesting that instability forms a binding constraint for the less stable group macroeconomic stability is also shown to dominate several other candidates for identifying distinct growth regimes

political conditionality and foreign aid this article argues that a new generation of political conditionalities has emerged during the last decade this requires an expansion of the original definition and research agenda beyond the traditional questions of use and effectiveness however there is also a need to dig deeper into the dynamics surrounding political conditionalities particularly the bargaining processes and outcomes along the aid chain from domestic donor politics donor harmonization fora policy dialog spaces to the political economy of recipient institutional reform and donor coping strategies because they influence the set up use follow up purpose and effectiveness of pcs

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

the stock of external sovereign debt can we take the data at face value abstract the stock of sovereign debt is typically measured at face value defined as the undiscounted sum of future principal repayments face values are misleading when debts are issued with different contractual forms or maturities in this paper we construct alternative measures of the stock of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for differences in contractual form and maturity we show that our alternative measures 1 paint a very different quantitative and in some cases also qualitative picture of the stock of developing country external sovereign debt 2 often invert rankings of indebtedness across countries which historically defined eligibility for debt forgiveness 3 indicate that the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by roughly 50 once model consistent measures of debt are used 4 show how the spread of aggregation clauses in debt contracts that award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts and 5 illustrate how countries have manipulated their debt issuance to meet fiscal targets written in terms of face values

on the persistence and pricing of industry wide and firm specific earnings cash flows and accruals economic theory suggests that the industry wide component of firm performance is more persistent than the firm specific component this paper tests whether investors fail to fully appreciate the relatively higher lower persistence of industry wide firm specific earnings consistent with predictions we find that the industry wide component of earnings is a significant predictor of future stock returns we show that this form of mispricing is distinct from the accrual anomaly sloan 1996 a hedge portfolio trading strategy that exploits signals from both industry fundamentals and accounting accruals generates abnormal returns in excess of either strategy alone additional evidence suggests that the market underreacts overreacts to industry wide cash flows firm specific accruals but correctly prices both industry wide accruals and firm specific cash flows

voluntary choices in concerted deals the menu approach to debt reduction in developing countries this article examines the mechanics and attributes of concerted debt reduction agreements that offer creditors a choice between exit and relending options the menu approach sets prices for different choices that implement a decentralized equilibrium when banks can commit to choose from the menu and are not allowed to free ride a menu can be designed that assures that the price paid for debt repurchased is equal to the marginal value of the debt claims this can be achieved by taxing the gains that accrue to nonexiters witb a request for new money the equilibrium amount of debt reduction rises when the new money request is increased the importance of banks heterogeneity for menus to dominate simple concerted buybacks and the case in which debt reduction can be financed by loans from international financial institutions are discussed

the regional distribution of public employment theory and evidence abstractthe regional distribution of public employment theory and evidence regional studies this article analyzes the optimal regional pattern of public employment in an information constrained second best redistribution policy it shows that regionally differentiated public employment can serve as an expenditure side tagging device bypassing or relaxing the equity efficiency trade off the optimal pattern exhibits higher levels of public employment in low productivity regions and is more pronounced the higher is the degree of regional inequality empirically using a panel of european regions from 1995 to 2007 the analysis finds evidence that public employment is systematically higher in low productivity regions the latter effect is stronger in countries with higher levels of regional inequality

an empirical investigation of dynamic ordering policies adaptive base stock policy is a well known tool for managing inventories in nonstationary demand environments this paper presents empirical tests of this policy using aggregate firm level data first we extend a single item adaptive base stock policy in previous literature to a multi item case second we transform the policy derived for the multi item case to a regression model that relates firm level inventory purchases to firm level sales and changes in sales forecasts we focus on two research questions can the adaptive base stock policy explain cross sectional ordering behaviors under sales growth to the extent that the adaptive base stock policy fails to explain ordering behaviors under sales growth are there frictions that explain such a finding our empirical results demonstrate disparities in ordering behaviors between firms experiencing high and moderate sales growth contrary to theoretical prediction this implies that inventory purchases are a function of not only current sales and changes in sales forecast but also past sales growth as potential explanations for this departure from theoretical prediction we show that both future demand dynamics and inventory holding risks depend on past sales growth in addition we find that firms inventory holding risks may also be affected by purchasing constraints imposed by supply chain contracts our results provide managerial implications for practitioners and inform future theoretical research this paper was accepted by martin lariviere operations management

understanding the relation between accruals and volatility a real options based investment approach abstract accruals are fundamental to financial reporting and are the underlying innovation of accounting despite this accounting research has provided little understanding of how economic forces affect a firm s level of accruals and limited guidance for forming expectations of accruals based on ex ante firm characteristics we consider accruals as a form of investment and examine whether theoretical predictions from a real options based investment framework provide insight into the relation between accruals and the ex ante expected volatility faced by the firm specifically the theory predicts that higher volatility dampens investment because firms prefer to wait and see instead of investing immediately consistent with this theory we document a robust negative relation between year ahead net working capital accruals and expected volatility we also predict and find that the negative association between year ahead net working capital accruals and expected volatility is less pronounced for distressed firms and more pronounced for firms with a longer operating cycle and that current asset accruals are more sensitive to volatility than current liability accruals finally we find that the residuals from an investment based expected accrual model outperform those from the widely used performance adjusted modified jones model in identifying companies that just meet or beat analysts earnings forecasts collectively our findings suggest that the investment perspective of accruals and in particular the real options based investment framework provide useful insights for forming expectations of accruals

the political economy of the enhanced hipc initiative only three years after its endorsement bythe world bank and the imf the heavilyindebted poor country hipc initiativewas considerably altered and enhanced thispolicy shift can be explained as a resultof utility maximization behavior bynational and international politicians international bureaucrats and ngo apolitico economic model suggests that theoverall rise of hipc default risk and thesymbolic value of the year 2000 have beenthe two major determinants of changes involume eligibility and conditionalityrequirements

the role of multilateral institutions in the market for sovereign debt creditor country governments have an interest in avoiding defaults by sovereign debtors because default sanctions may be costly to their citizens as a result a standard bargaining model predicts that debtors do not repay in equilibrium even if the threat of sanctions is credible on the part of the banks by contracting with a third party such as a multilateral institution with some degree of independence creditor country governments can precommit not to intervene in equilibrium when debt renegotiation occurs the sovereign receives a subsidy from the multilateral agency the model is used to interpret recent debt reduction operations

what motivates managers choice of discretionary accruals abstract the papers by subramanyam 1996 and kasanen kinnunen and niskanen kkn 1996 both consider why managers manipulate accounting accruals subramanyam finds that discretionary accruals are associated with several performance measures and concludes that managers accrual choices increase the informativeness of accounting earnings however a strong competing alternative is that the jones model systematically mismeasures discretionary accruals so that they contain a significant non discretionary component unlike many us studies kkn find strong evidence of earnings management in finland where finnish managers set earnings to satisfy the demand for dividends by keiretsu like institutional investors

how did highly indebted poor countries become highly indebted reviewing two decades of debt relief how did highly indebted poor countries become highly indebted after two decades of debt relief efforts a set of theoretical models predict that countries with unchanged long run savings preferences will respond to debt relief with a mixture of asset decumulation and new borrowing a model also predicts that a high discount rate government will choose poor policies and impose its inter temporal preferences on the entire economy reviewing the experience of highly indebted poor countries compared with that of other developing countries the author finds direct and indirect evidence of asset decumulation and new borrowing associated with debt relief the ratio of the net present value of debt to exports rose strongly over 1979 97 despite the debt relief efforts average policies in highly indebted poor countries were generally worse than those in other developing countries nor were wars more likely in highly indebted poor countries over time there has been an important shift in financing for highly indebted poor countries away from private and bilateral nonconcessional sources to the international development association and other sources of multilateral concessional financing but this implicit form of debt relief also failed to reduce debt in net present value terms although debt relief is done in the name of the poor the poor are worse off if debt relief creates incentives to delay reforms needed for growth