imperfect information and cross autocorrelation among stock prices i develop a model to explain why stock returns are positively cross autocorrelated when market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks which contain marketwide information the pricing error of one stock is correlated with the other signals as market makers adjust prices after observing true values or previous price changes of other stocks stock returns become positively crossautocorrelated if the signal quality differs among stocks the cross autocorrelation pattern is asymmetric i show that both own and cross autocorrelations are higher when market movements are larger

business ethics east vs west myths and realities the west has a stereotypical image of businesses officials and politicians etc in the east third world countries being pervasively corrupt while it views itself as being almost completely uncorrupt one closer look however realities turn out to be quite different business corruption is much more universal that westerners are generally willing to accept the major differences are that corruption in the east is practiced so blatantly that it makes major news western businesses on the other hand have over time developed sophisticated techniques whereby corruption becomes almost invisible this paper discusses the myths and realities of eastern versus western corruption and discusses several means which have allowed western companies to exploit others through subtle and almost invisible means the overall advantage however still goes to the west where petty corruption has been pretty much eliminated

smart fund managers stupid money we develop a model of mutual fund manager investment decisions near the end of quarters we show that when investors reward better performing funds with higher cash flows near quarter ends a mutual fund manager has an incentive to distort new invest ment toward stocks in which his fund holds a large existing position the short term price impact of these trades increase the fund s reported returns higher returns are rewarded by greater subsequent fund inflows which in turn allow for more investment distortion the next quarter because the price impact of trades is short term each subsequent quar ter begins with a larger return deficit eventually the deficit cannot be overcome thus our model leads to the empirically observed short run persistence and long run rever sal in fund performance in doing so our model provides a consistent explanation of many other seemingly contradictory empirical features of mutual fund performance jel classification d82 g2 g14

output effects of government purchases the theoretical analysis focuses on the distinction between temporary and permanent movements in government purchases under plausible conditions the temporary case involves an output response that is positive less than one to one with the change in government purchases and larger than that generated by an equal sized but permanent shift in purchase the equilibrium real rate of return rise in the temporary case but changes little in the permanent one defense purchases are divided empirically into permanent and temporary components by considering the role of temporary wars no temporary shifts in nondefense purchases were isolated empirical results verify an expansionary output effect for temporary purchases that exceeds that of permanent purchases the results for some other expectational hypotheses are found to be generally supportive of the theory

imperfect competition in a multi security market with risk neutrality the central purpose of this paper is to develop a model of insider trading i e trading based on private information in the context of an imperfectly competitive multi security market with risk neutral agents imperfect competition allows us to consider strategic behavior and a multi security market lets us study the effect of a correlated environment on equilibrium we employ the informational assumption that market makers can observe all order flows and so portfolio diversification arises in this model for strategic reasons given correlated fundamentals market makers can potentially learn about every security from each order flow this causes even a risk neutral trader who does not face short selling restrictions to refrain from determining the demand for each security independently this contrasts with traditional multi asset models which focus on the incentive to reduce portfolio variance or the effect of short selling restrictions or budget constraints under imperfect competition correlation has two effects one ceteris paribus it allows the uninformed to learn from additional variables since each order flow could potentially have information about all payoffs on the other hand it creates an incentive for informed traders to restrict what others can learn from public information thus our analysis can be viewed as an application to the multi security heterogeneous information model in admati 1985 of the imperfectly competitive equilibrium concept which kyle 1985 first applied to the single security homogeneous information model of grossman and stiglitz 1980 our principal results include an explicit characterization of a linear equilibrium as a function of three general covariance matrices associated with payoffs noise trading and errors in private signals under general covariance structures we show that there always exists an equilibrium in which the relationship between the vector of prices and the vector of order flows is governed by a symmetric positive definite matrix the plan of the paper is as follows in section 2 we introduce our model we derive the equilibrium in section 3 and section 4 comments on the properties of the equilibrium the proofs of the results are in the appendix

illiquidity contagion and liquidity crashes liquidity providers often learn information about an asset from prices of other assets we show that this generates a self reinforcing positive relationship between price informativeness and liquidity this relationship causes liquidity spillovers and is a source of fragility a small drop in the liquidity of one asset can through a feedback loop result in a very large drop in market liquidity and price informativeness a liquidity crash this feedback loop provides a new explanation for comovements in liquidity and liquidity dry ups it also generates multiple equilibria

cross asset speculation in stock markets in practice heterogeneously informed speculators combine private information about multiple stocks with information in prices taking into account how their trades influence the inferences of other speculators via prices we show how this speculation causes prices to be more correlated than asset fundamentals raising price volatility the covariance structure of asset fundamentals drives that of prices while the covariance structure of liquidity trade drives that of order flows we characterize how speculator profits vary with the distributions of information and liquidity trade across assets and speculators and relate the cross asset factor structure of order flows to that of returns

information diversity and complementarities in trading and information acquisition we analyze a model in which different traders are informed of different fundamentals that affect the security value we identify a source for strategic complementarities in trading and information acquisition aggressive trading on information about one fundamental reduces uncertainty in trading on information about the other fundamental encouraging more trading and information acquisition on that fundamental this tends to amplify the effect of exogenous changes in the underlying information environment due to complementarities greater diversity of information in the economy improves price informativeness we discuss the relation between our model and recent financial phenomena and derive testable empirical implications

the economic consequences of reduced uk military expenditure the last few years have seen a variety of proposals for uk disarmament for a re orientation of defence policy towards a less expensive non nuclear stance more commen surate with britain s present economic position in the world unfortunately these proposals become suddenly coy and tentative as they approach the economic implications of their programme in complete contrast to the detailed quantitative calculations they pro vide for other aspects the alternative defence commission 1983 and prins 1983 are typical examples of this the difficulties this lacuna creates are illustrated by the ordeal the labour party faced in the 1983 election campaign they advocated it appears a reduc tion of british defence expenditure which now accounts for just over 5 of gdp to about the european average of around 3 5 but they proved unable to counter the claim of the conservative defence secretary mr heseltine that this policy would cost 400 000 jobs 1 the hesitancy with which proponents of reductions in military expenditure approach the economic consequences is surprising given the near unanimity in the technical litera ture two major studies in the uk eiu 1963 and brown 1964 studies in the us leontief 1965 and a recent survey kennedy 1983 all indicate that disarmament represents an economic opportunity rather than an economic problem nonetheless the tenor of the recent policy literature suggests that it would be useful to provide a detailed assessment of the economic consequences of a reduction in uk military expenditure from 5 to 3 5 of gdp since the results obtained below are broadly in line with those of the studies cited above the contribution of this paper does not lie in the novelty of its conclusion rather it provides a detailed quantitative review of the economic issues cur rently involved in a transition to lower levels of military expenditure since there is a wide literature already available which provides arguments to suggest that such a transition could provide real security benefits the strategic aspects will only be mentioned in passing d smith 1980 and alternative defence commission 1983 provide detail on this

values versus regulations how culture plays its role this study examines the impact of culture on regulation and corruption our empirical results suggest that cultural values have significant effects on countries regulatory policies levels of corruption and economic development contrary to the conclusions drawn by others this study shows no significant relationship between the regulatory policies of countries and their perceived levels of corruption thus evidence of the public choice view toward entry regulation derived in related studies seems to be at least attenuated

corruption competition and democracy abstract this paper presents a model of the interaction between corrupt government officials and industrial firms to show that corruption is antithetical to competition it is hypothesized that a government agent that controls access to a formal market has a self interest in demanding a bribe payment that serves to limit the number of firms this corrupt official will also be subject to a detection technology that is a function of the amount of the bribe payment and the number of firms that pay it under quite normal assumptions about the shape of the graph of the detection function multiple equilibria can arise where one equilibrium is characterized by high corruption and low competition and another is characterized by low corruption and high competition some suggestive empirical evidence is presented that supports the main hypothesis that competition and corruption are negatively related

firm networking and bribery in china assessing some potential negative consequences of firm openness economic openness both in terms of increased international trade exposure and enhanced inter firm networking has been a key element of china s economic emergence since the implementation of market reforms and the opening up policy over 30 years ago unfortunately these changes have also coincided with the increased incidence of bribery and corruption both in general and in the specific context of china research on the relationship between a firm s tendency toward openness and its propensity to engage in bribery is scarce this study seeks to fill this gap based on empirical evidence provided by a large sample of chinese firms the findings of the study reveal that firms increased networking and openness tend to occur contemporaneously with greater bribery and corruption we suggest that this may be due to the misuse of guanxi based networks that coincide with the presence of firms open network strategies heightened by the potential loss of resource and capability heterogeneity and hence reduced competitive advantages in the context of openness we further find that firms paying bribes do so as an attempt to overcome unnecessary bureaucratic processes and ineffective institutional support that might tend to hinder their development

the political economy of military expenditure an introduction this paper shows that although the military burden has declined since the korean war in the oecd it still represents an important component of government spending the magnitude of military spending does not provide a measure of its importance to the economy the relation between military spending and accumulation has to be seen as a complex historical dialectical process in which military spending plays a contradictory role the other contributions to the symposium are then discussed within this framework they deal with the empirical analysis of the economic costs of military spending the impact of changing military spending and the problems of conversion copyright 1990 by oxford university press

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

understanding social welfare capitalism private property and the government s duty to create a sustainable environment no one would deny that sustainability is necessary for individual business and national survival how this goal is to be accomplished is a matter of great debate in this article i will show that the united states and other developed countries have a duty to create sustainable cities even if that is against a notion of private property rights considered as an absolute through eminent domain and regulation developed countries can fulfill their obligations to current and future generations to do so the governments must reject perfectly competitive free market capitalism and the absolute right to private property and more fully adopt social welfare capitalism as their economic system the result will be a sustainable society that balances democracy individual rights and individual flourishing with the community s flourishing

indicators for national science and technology policy how robust are composite indicators abstract this article addresses a set of issues that were central to keith pavitt s research that is the construction and use of tools to measure national innovative performance and to design national policies relating to innovation it presents an overview of the development of science and technology s t indicators and their use in national policy making and provides evidence of the vulnerability of composite s t indicators to manipulation a brief history of the development of s t indicators begins with the role of the united states followed by their worldwide diffusion with particular emphasis on europe newer developments towards composite indicators benchmarking and scoreboarding are discussed to investigate the robustness of innovation scoreboards empirically a sensitivity analysis of one selected case is presented it is shown that composite scores and country rank positions can vary considerably depending on the selection process thus the use of scoreboards leaves room for manipulation in the policymaking system further research is needed on alternative methods of calculation to prevent their misuse and abuse

emerging technologies and ethics a race to the bottom or the top does national success with an emerging technology require ethical sacrifices this question is considered through the simultaneous consideration of ethics investment and outcomes in the nine jurisdictions that are making the largest investments in nanotechnologies an important emerging technology it is found that while ethical environment has no notable effect on pure and applied research a more positive ethical environment is associated with measures associated with invention and commercialization in summary a race to the top supports invention and commercialization of emerging technologies a critical finding as it suggests that issues such as corruption and regulation could be critical in limiting the extraction of social and economic benefit from emerging technologies like nanotechnologies

philanthropy integration or innovation exploring the financial and societal outcomes of different types of corporate responsibility this article argues that previous research on the outcomes of corporate responsibility should be refined in two ways first although there is abundant research that addresses the link between corporate responsibility cr and financial performance hardly any studies scrutinize whether the type of corporate responsibility makes a difference to this link second while the majority of cr research conducted within business studies concentrates on the financial outcomes for the firm the societal outcomes of cr are left largely unexplored to tackle these two deficiencies this article extends the different conceptualizations of corporate responsibility and elaborates both the financial and the societal outcomes of different types of cr

solving generalized multivariate linear rational expectations models abstract we generalize the linear rational expectations solution method of whiteman 1983 to the multivariate case this facilitates the use of a generic exogenous driving process that must only satisfy covariance stationarity multivariate cross equation restrictions linking the wold representation of the exogenous process to the endogenous variables of the rational expectations model are obtained we argue that this approach offers important insights into rational expectations models we give two examples in the paper an asset pricing model with incomplete information and a monetary model with observationally equivalent monetary fiscal policy interactions we relate our solution methodology to other popular approaches to solving multivariate linear rational expectations models and provide user friendly code that executes our approach

are corruption indices a self fulfilling prophecy a social labeling perspective of corruption rankings of countries by perceived corruption have emerged over the past decade as leading indicators of governance and development designed to highlight countries that are known to be corrupt their objective is to encourage transparency and good governance high rankings on corruption it is argued will serve as a strong incentive for reform the practice of ranking and labeling countries corrupt however may have a perverse effect consistent with social labeling theory we argue that perceptual indices can encourage the loss of needed investment and thus contribute to higher rates of corruption within unfavorably ranked countries in effect corruption indices may inhibit foreign direct investment the effect of which is to encourage the status quo in terms of corruption ranking using an experimental study design we test the effects of country corruption rankings on the assessment of country investment desirability and find ranking exposure causes shifts in country investment desirability for 10 of 12 countries studied these findings suggest that corruption rankings which are based on perceptions of corruption may cause country isolation and a reduction in legitimate means of investment

financial education and behavioral finance new insights into the role of information in financial decisions recent empirical evidence based on surveys and experimental activities within the fields of behavioral finance and financial education has offered economists new empirically based insights into how individuals use information in making financial decisions specifically the importance of information in financial decisions may be reduced or eliminated by psychological aspects of the individual such as a state of overconfidence that is individual or shared with a group or by the individual s limited ability to process complex and abundant information this paper aims to complement this emerging body of literature by studying how individuals perceive and process information when making financial decisions we review these contributions and suggest a number of broad guidelines that can provide a framework for future discussion of this topic within financial decision theory

the changing geography of the military industry in britain lovering j 1991 the changing geography of the military industry in britain reg studies 25 279 293 a number of studies have suggested that defence spending has had a significant impact on the location of industry and the geography of labour markets this paper drawing on a recent study of the employment of research and development professionals in the uk defence industry confirms that defence spending and related employment has been concentrated in the south and west of england it also shows that a number of changes are underway the unusually large british defence industry is restructuring as a result of changes in supply and in demand following the end of the cold war major job losses are in process which may amount to a third of a million jobs in the 1990s this is associated with a spatial reorganization the effect of which is generally to consolidate high level activities in the industry in the south of england and deepen the spatial division of labour a key locational influence in this

international validation of the corruption perceptions index implications for business ethics and entrepreneurship education international government and corporate corruption is increasingly under siege although various groups of researchers have quantified and documented world wide corruption apparently no one has validated the measures this study finds a very strong significant correlation of three measures of corruption with each other thereby indicating validity one measure was of black market activity another was of overabundance of regulation or unnecessary restriction of business activity the third measure was an index based on interview perceptions of corruption corruption perceptions index or cpi in that nation validity of the three measures was further established by finding a highly significant correlation with real gross domestic product per capita rgdp cap the cpi had by far the strongest correlation with rgdp cap explaining over three fourths of the variance corruption is increasingly argued to be a barrier to development and economic growth business students often do not see ethics courses as being as relevant as other value free disciplines or core courses the data in this study suggests otherwise sustainable economic development appears very dependent on a constant virtuous cycle that includes corruption fighting and the maintenance of trust and innovation all reinforcing each other

multimarket trading and market liquidity when a security trades at multiple locations simultaneously an informed trader has several avenues in which to exploit his private information the greater the proportion of liquidity trading by large traders who can split their trades across markets the larger is the correlation between volume in different markets and the smaller is the informativeness of prices we show that one of the markets emerges as the dominant location for trading in that security when informed traders can use their information for more than one trading period the timely release of price information by market makers at one location adversely affects the profits informed traders expect to make subsequently at other locations market makers competing to offer the lowest cost of trading at their location consequently deter informed trading be voluntarily making the price information public and by cracking down on insider trading article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

estimating the innovation function from patent numbers gmm on count panel data the purpose of this paper is to estimate the patent equation an empirical counterpart to the knowledge production function innovation output is measured through the number of european patent applications and the input by research capital in a panel of french manufacturing firms estimating the innovation function raises specific issues related to count data using the framework of models with multiplicative errors we explore and test for various specifications correlated fixed effects serial correlations and weak exogeneity we also present a first extension to lagged dependent variables 1997 john wiley sons ltd

how to make the clean development mechanism sustainable the potential of rent extraction the clean development mechanism cdm should foster sustainable development and greenhouse gas emission reductions the design of the cdm and first experience suggest that it may not achieve these goals developing countries hosting cdm projects may lose cheap emission reduction possibilities for their own future use and sustainable development and technology transfer may not take place on the other hand the cdm has the potential to generate considerable rents if permit prices are high or costs low to account for equity and distributional issues a deliberate decision on how to distribute these rents could be taken and the potential failure of the cdm in meeting its goals calls for some further regulation i suggest to combine these two issues and to extract the rents by a profit tax ideally the tax revenues could contribute to national sustainable development strategies to offset external costs imposed by cdm projects and to extract part of the resource rent they may generate the international character of the cdm could offer a frame for internationally coordinated tax design this would hedge against a potential race to the bottom

the normalization of deviant organizational practices wage arrears in russia 1991 98 we apply a normalization of deviance model to understand the prevalence of the illegal practice of wage arrears the delayed payment of wages in russia during the 1990s viewing organizational dev

asymmetric information and stock return cross autocorrelations abstract using an asset pricing model under asymmetric information we show that asymmetric lead lag patterns in stock returns cannot be solely explained by information asymmetry additional frictions are necessary to produce asymmetry in return cross autocorrelations

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral

corruption across countries and regions some consequences of local osmosis abstract large and persistent differences in corruption across comparable countries is a challenging research issue even more intriguing are such differences across regions within the same country because the typically considered socioeconomic and governance characteristics are generally more similar across such regions than across different countries this paper s principal theme is that individuals perceptions of their environments are influenced by the realities that they have faced in the past these perceptions affect their current and future actions which in turn influence the current and future realities an articulation and analysis of these dynamics yields significant observations concerning individuals behavior and societal outcomes

government intervention perceived benefit and bribery of firms in transitional china this article examines whether 1 government intervention causes bribery or corruption as rent seeking theory suggested 2 a firm s perceived benefit partially mediates the relationship between government intervention and its bribing behavior as rational choice behavior theory suggested and 3 other firms bribing behavior moderates the relationship between government intervention and a firm s perceived benefit our study shows that government intervention causes bribery corruption indeed but it exerts its effect on bribery corruption through the firm s perceived benefit in other words a firm s perceived benefit fully mediates the relationship between government intervention and its bribing behavior we also find that other firms bribery positively moderates the relationship between government intervention and a given firm s bribery this study partly proves that firms are rational actors potential benefit encourages them to practice bribery besides this research also supports the rent seeking view of bribery corruption which argues that government intervention is a source of bribery corruption however we have also identified that only those government interventions that will create rent can cause bribery corruption

welfare reform and the race to the bottom theory and evidence economists have argued that welfare migration leads to a race to the bottom in the choice of welfare benefits although a system of federal matching grants can remedy this problem the recent welfare reform law replaced the existing matching grant structure with block grants a policy change that appears undesirable to judge whether this critique of welfare reform is justified this paper evaluates the evidence in favor of a race to the bottom after explaining the theoretical effects of welfare migration the paper surveys the empirical evidence on the occurrence of such migration concluding that the evidence is mixed the discussion also considers recent empirical tests for strategic interaction which show that benefit levels in nearby states affect a given state s benefit choice the most plausible source of such interaction is a concern about welfare migration which leads policymakers to look at benefits in neighboring states when making their own choices judging that the evidence appears consistent with the existence of a race to the bottom the paper concludes that the demise of matching grants may be undesirable from a policy perspective

high frequency lead lag effects and cross asset linkages a multi asset lagged adjustment model motivated by the empirical evidence of high frequency lead lag effects and cross asset linkages we introduce a multi asset price formation model which generalizes standard univariate microstructur