asymmetric benchmarking in compensation executives are rewarded for good luck but not penalized for bad abstract principal agent theory suggests that a manager should be paid relative to a benchmark that removes the effect of market or sector performance on the firm s own performance recently it has been argued that such indexation is not observed in the data because executives can set pay in their own interests that is they can enjoy pay for luck as well as pay for performance we first show that this argument is incomplete the positive expected return on stock markets reflects compensation for bearing systematic risk if executives pay is tied to market movements they can only expect to receive the market determined return for risk bearing this argument however assumes that executive pay is tied to bad luck as well as to good luck if executives can truly influence the setting of their pay they will seek to have their performance benchmarked only when it is in their interest namely when the benchmark has fallen using industry benchmarks we find significantly less pay for luck when luck is down in which case pay for luck would reduce compensation than when it is up these empirical results are robust to a variety of alternative hypotheses and robustness checks and they suggest that the average executive loses 25 45 less pay from bad luck than is gained from good luck

corporate conservatism and relative compensation this paper demonstrates that in a simple setting with managerial concern for reputation and asymmetric information on ability most managers may refrain from undertaking innovations that stochastically dominate an industry standard common components of uncertainty lead to market inferences of managerial ability based on relative performance managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating discontinuities in compensation when performance is low because of firings lead managers to have differing valuations of an accurate benchmark depending on type in particular very high and very low ability managers are more likely to undertake superior innovations than those of average ability

fixed costs and long lived investments abstract fixed costs models are difficult to analyze because they feature non degenerate time varying distributions of capital across firms if investments are sufficiently long lived however then the cross sectional distribution of capital holdings has virtually no bearing on the equilibrium and the aggregate behavior of fixed cost models is essentially identical to neoclassical models the findings are due to a near infinite elasticity of investment timing for long lived investments a feature shared by fixed cost models and neoclassical models irrelevance results found in numerical studies of fixed cost models are not parametric special cases but instead are fundamental properties of models with long lived investment goods

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

fostering change to sustainable consumption and production an evidence based view this note from the field is an edited version of a policy brief summarizing the key findings from the first half of the sustainable consumption research exchange network score for the policy programs in the field of sustainable consumption and production scp we recommend a framework for action to change to scp that mentions the key domains to include food mobility and energy use housing the last two clearly related to urban development it should use a systemic perspective on the scp challenge and differentiate between developed fast developing and base of the pyramid economies score focuses mainly on developed economies and here we propose to differentiate between 1 measures that fit with mainstream beliefs and paradigms here governments could make operational agreements on implementation of instruments like green public procurement stimulating ecodesign etc 2 problems where a rough agreement on goals exists but where change is radical or means are uncertain and hence planning difficult here governments could foster visioning experimentation and support e g international collaboration in leapfrogging programs 3 problems that outright clash with the mainstream beliefs and paradigms here governments could foster informed deliberation on the more fundamental issues related to markets governance and growth 2007 elsevier ltd all rights reserved

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

collective moral hazard maturity mismatch and systemic bailouts the paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy when everyone engages in maturity transformation authorities haver little choice but facilitating refinancing in turn refusing to adopt a risky balance sheet lowers the return on equity the key ingredient is that monetary policy is non targeted the ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage while the distortion costs are to a large extent fixed this insight has important consequences first banks choose to correlate their risk exposures second private borrowers may deliberately choose to increase their interest rate sensitivity following bad news about future needs for liquidity third optimal monetary policy is time inconsistent fourth macro prudential supervision is called for we characterize the optimal regulation which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets we establish the robustness of our insights when the set of

managerial incentives on the near linearity of optimal compensation contracts are examined when outcomes depend on managers choices as well as efforts as the cost of effort shrinks relative to payoffs the optimal contract converges to a linear payoff if the control space of the agent has full dimensionality but not otherwise thus when the agent can trade expected return for greater correlation with other returns it is better to ignore relative performance when the cost of effort is small when the choices include all fair gambles and hedges the linear schedule is no more expensive than any other schedule that induces effort unfair gambles are examined as well

sustainable consumption and production governance in countries in transition abstract unsustainable consumption and production patterns have brought human civilization to the brink of a global disaster alteration of these patterns to minimize adverse environmental impacts has become the key question of survival a question relevant for every country and citizen in this paper we are looking at trends of consumption and production in the post soviet republics these countries have a common history but they took different routes to development they are at different stages of economic growth and political processes with differences also in consumption and production related environmental pressures and policies this study is based on statistical data analysis and snap shot surveys of national experts from non governmental organizations reflecting their views and observations which often differ from official positions of national governments and international organizations in order to draw conclusions about the possibilities for further development we analyze various sustainable consumption and production indicators policy developments progress achieved and the main challenges behind sustainable consumption and production governance in these countries sustainable consumption and production policy in the countries of the region is fragmented and none of the countries uses a holistic integrated approach the influence of the eu seems to be critical for advancing sustainable development principles however the eu accession does not address the growth effect which is the main driver behind increasing environmental pressures related to consumption there is still a long way to go from this mosaic of policy elements to a coherent policy with adequate institutional support and funding mechanisms

nonconvex factor adjustments in equilibrium business cycle models do nonlinearities matter recent empirical analysis has found nonlinearities to be important in understanding aggregated investment using an equilibrium business cycle model we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs we find that while such costs lead to nontrivial nonlinearities in aggregate investment demand equilibrium investment is effectively unchanged our finding based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity is robust to the introduction of shocks to the relative price of investment goods

modelling price movements in housing micro markets identifying long term components in local housing market dynamics this study identifies housing sub markets micro markets that may be price leaders within local housing market areas and relates their performance to potentially relevant economic factors this ca

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

getgreen vietnam towards more sustainable behaviour among the urban middle class abstract in vietnam the middle class is expected to grow from 12 million to 33 million people between 2012 and 2020 the growth causes an increase as well as a shift in consumption products that were not accessible or affordable before will become increasingly so such as cars dishwashers meat products and air conditioning in urban areas the changes are most prominent and so are the side effects increased amounts of waste smog pollution and use of fossil energy or pesticides the main objective of this study was to identify sustainable behaviour that followed or did not follow from the intervention project getgreen vietnam 604 urban middle class consumers participated in a series of sustainable consumption trainings before during and after the trainings quantitative and qualitative data was collected on 90 sustainable actions 64 of the participants self reported to be engaged in a sustainable action before the intervention and this percentage increased to 80 after the group environment and activity based meetings of getgreen vietnam project ggvn were critical for the success of the intervention participants reported that before ggvn certain actions were already habitual as a money saving strategy e g sparse electricity use or food leftovers re use or due to past scarcity e g sparse water use many participants reported the intention to buy sustainable products but fewer participants took action to do so a powerful strategy toward more sustainable consumption in vietnam can be to create more group based activities around the themes of energy and shopping for food a twofold approach is needed that both installs new sustainable consumption patterns and keeps old habits rooted in daily rituals role models should set an example for the young population and consumers and vietnamese producers should be better connected to increase mutual trust and transparency

structural breaks and diversification the impact of the 1997 asian financial crisis on the integration of asia pacific real estate markets abstract currently there exists relatively little research on the influence that the 1997 asian financial crisis has had upon capital flows within the property market and the associated long run implications of it this paper examines the impact that the crisis has had upon the integration and dynamic links between a number of asia pacific real estate markets the results show that asia pacific property markets are integrated despite a structural shift occurring at the time of the crisis these results are a particularly important finding for fund managers concerned with the impact of globalization on the performance of their real estate portfolios showing that in the asia pacific region diversification benefits are actually less than that suggested by an analysis incorrectly ignoring the crisis

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

appraisal smoothing and price discovery in real estate markets this paper reviews the literature on price determination in the private and public real estate markets in particular it discusses the processes of appraisal smoothing in the private market and of price discovery between the public and the private markets in real estate markets the absence of good quality information on price whether because of lack of trades or confidentiality has led to the widespread use of appraisals for market tracking and as the basis for performance measurement appraisers have to make an optimum assessment of value based on fundamental variables and market information including transactions and a market wide appraisal index however transaction prices are a noisy signal and it is the appraiser s role to extract the signal from the noise in an efficient manner this involves a process of optimal combination of past and current information and leads to appraisal smoothing price discovery is the process by which the opinions of market participants about the value of an asset

the strategic choice of managerial incentives do firms with separate owners and managers maximize profits we address this question for an oligopoly where managers compete in quantities or prices as in the cournot or bertrand models and owners choose their managers incentives we find that there is a strategic aspect in the problem of selecting incentives and that profit maximizing behavior does not result in particular in the oligopoly we study the behavior of firms competing in quantity price more closely resembles perfectly competitive collusive behavior than cournot bertrand behavior

monetary policy as financial stability regulation this paper develops a model that speaks to the goals and methods of financialstability policies there are three main points first from a normative perspective the model defines the fundamental market failure to be addressed namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short term debt and leave the system excessively vulnerable to costly financial crises second it shows how in a simple economy where commercial banks are the only lenders conventional monetary policy tools such as open market operations can be used to regulate this externality while in more advanced economies it may be helpful to supplement monetary policy with other measures third from a positive perspective the model provides an account of how monetary policy can influence bank lending and real activity even in a world where prices adjust frictionlessly and there are other transactions media besides bank created money that are outside the control of the central bank

contractual externalities and systemic risk we study effort and risk taking behaviour in an economy with a continuum of principal agent pairs where each agent exerts costly hidden effort principals write contracts based on both absolute and relative performance evaluations ape and rpe respectively to make individually optimal risk return trade offs but do not take into account their impact on endogenously determined aggregate variables this results in contractual externalities when these aggregate variables are used as benchmarks in contracts contractual externalities have welfare changing effects when principals put too much weight on ape or rpe due to information frictions relative to the second best if the expected productivity is high risk averse principals over incentivize their own agents triggering a rat race in effort exertion resulting in over investment in effort and excessive exposure to industry risks the opposite occurs when the expected productivity is low inducing pro cyclical investment and risk taking behaviours

portfolio choice in research and development we analyze the effects of a winner take all patent mechanism on the riskiness of the research strategies chosen by competingfirms as well as on thefirms incentives to duplicate research projects nash equilibrium choices are compared with the social optimum in a oneshot simultaneous move game in which competitors choose the riskiness or correlation of their research performances we show that neither society nor firms have any preference for correlation per se while the divergence between social and privately optimal levels of risk depends on skewness characteristics of the probability distribution over discovery dates and on levels of risk aversion

rewarding trading skills without inducing gambling this paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds we show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient their trading skills are scalable and generate higher prot per unit of risk we study investment management contracts that deter this behavior if investors are short lived then the manager must leave rents to investors in order to credibly commit not to gamble if investors are long lived contracts that increase but defer expected bonuses after an outstanding performance implement the rstbest our model can explain a number of observed dierences

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

optimal leverage and aggregate investment we analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures optimal financial contracts can be implemented by a combination of debt and equity when the risk shifting problem is the most severe while stock options are also needed when the effort problem is the most severe worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level moreover aggregate leverage decreases with the risk shifting problem and increases with the effort problem

the inefficiency of the stock market equilibrium this paper establishes that when there is not a complete set of markets but more than one commodity the stock market equilibrium will not in general be a constrained pareto optimum the economy will lack both the property of exchange and production efficiency necessary conditions which must be satisfied if the economy is to be a constrained pareto optimum for all technologies are derived if all individuals have identical homothetic indifference maps then either there must be unitary price elasticities so there is no effective risk or all individuals must have the same degree of risk aversion so there is no trade on the stock market

sustainability meta labelling an effective measure to facilitate more sustainable consumption and production abstract arguably one of the most prominent measures to facilitate more sustainable consumption and production has been the instrument of product labelling but with a plethora of labelling schemes having been implemented by various actors over the last decade many now accuse them of being confusing rather than facilitating as a result governments in france uk and germany as well as businesses such as walmart and non governmental organisations like wwf have begun to consider seriously the implementation of some form of meta scheme that condenses existing product labels and other communication measures into an overarching sustainability message yet so far in depth studies on the potential institutionalisation of a sustainability meta labelling scheme are missing drawing upon a novel theoretically integrative framework that combines theoretical arguments of constructivist institutionalism and institutional entrepreneurship with the concept of legitimacy this paper addresses this gap by exploring how the notion of sustainability meta labelling has so far been discussed and investigating the prospects for such an overarching scheme to become institutionalised empirically the paper bases on documentary analysis and elite interviews focussed on case studies of four existing product labelling schemes eu ecolabel eu energy label marine stewardship council and fairtrade label as well as the notion of sustainability meta labelling legitimacy constructions are demonstrated rather than shown to be highly dynamic and oftentimes inherently conflicting many of these conflicts thereby appear to be likely to increase rather than decrease with the implementation of an overarching sustainability meta labelling scheme in a sense this study shows that the very issue that is claimed to drive the establishment of a sustainability meta labelling scheme the different interpretations of the sustainable development concept through different product labels might in fact pose one of the main challenges for its institutionalisation and effectiveness in facilitating more sustainable consumption and production

credit externalities macroeconomic effects and policy implications financial crises are often preceded by peri ods of credit expansion during which firms and households become increasingly vulnerable to a reversal in economic conditions when eco nomic conditions actually worsen financing constraints become tighter causing a deeper contraction of economic activity these events have led to policy proposals for preventing excessive borrowing during normal times if rational agents evaluate financing decisions from a privately optimal standpoint why would the debt level not be socially efficient the theoretical literature has offered an answer to this question based on a pecuniary externality that arises due to the presence of financial frictions private agents tend to under value net worth during a period of financial distress because they fail to internalize the fact that additional net worth would have positive spillovers on other agents balance sheets 1 as a result private agents borrow excessively the quantitative implications of these credit exter nalities however remain largely unknown in particular these key questions have not been addressed

collateral constraints and the amplification mechanism abstract kiyotaki and moore j polit economy 105 1997 211 have offered a theory for how common shocks to credit constrained firms are amplified through changes in collateral values and transmitted as fluctuations in output i clarify and extend their model by showing that their collateral amplification mechanism is not robust to the introduction of markets that allow these firms to hedge against common shocks a theory of incomplete hedging is proposed in which the supply of hedging available in the economy is constrained by the aggregate value of collateral i illustrate how the constraint reinstates amplification effects and discuss empirical implications of this new mechanism

why bank credit policies fluctuate a theory and some evidence in a rational profit maximizing world banks should msdntain a credit policy of lending if and only if borrowers have positive net present value projects why then are changes in credit policy seemingly correlated with changes in the condition of those demanding credit this paper argues that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions this leads to a theory of low frequency business cycles driven by bank credit policies evidence from the banking crisis in new england in the early 1990s is consistent with the assumptions and predictions of the theory

seasonality and cointegration of regional house prices in the uk the data generation process underlying regional house prices in the uk is investigated using new statistical tests it is found that causal flows tend to be northwards the south east rather than greater london acts as an exogenous price determinator of the other regions in the south the midland regions have a great influence on prices in the north and flows through the east midlands are characterised by bi directional causality these results are largely independent of assumptions made about the data generation process and tests of these assumptions have low power in any case there are also similarities between this causality and migration patterns particularly in the south of england

idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics we examine a model of lumpy investment wherein establishments face persistent shocks to common and plant specific productivity and nonconvex adjustment costs lead them to pursue generalized s s investment rules we allow persistent heterogeneity in both capital and total factor productivity alongside low level investments exempt from adjustment costs to develop the first model consistent with available evidence on establishment level investment rates reassessing the implications of lumpy investment for aggregate dynamics in this setting we find that they remain substantial when factor supply considerations are ignored but are quantitatively irrelevant in general equilibrium the substantial implications of general equilibrium extend beyond the dynamics of aggregate series while the presence of idiosyncratic shocks makes the time averaged distribution of plant level investment rates largely invariant to market clearing movements in real wages and interest rates we show that the dynamics of plants investments differ sharply in their presence thus model based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant when establishments face large and weakly persistent idiosyncratic productivity shocks consistent with existing estimates we find that nonconvex costs do not cause lumpy investments but act to eliminate them

excessive dollar debt financial development and underinsurance we propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar denominated external debt present in these markets we show that when financial constraints affect borrowing and lending between domestic agents agents undervalue insuring against an exchange rate depreciation since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars this result implies that domestic agents choose excessive dollar debt we also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets the retarded entry reinforces the underinsurance problem