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

the comparative advantage of cities abstract what determines the distributions of skills occupations and industries across cities we develop a theory to jointly address these fundamental questions about the spatial organization of economies our model incorporates a system of cities their internal urban structures and a high dimensional theory of factor driven comparative advantage it predicts that larger cities will be skill abundant and specialize in skill intensive activities according to the monotone likelihood ratio property we test the model using data on 270 us metropolitan areas 3 to 9 educational categories 22 occupations and 19 industries the results provide support for our theory s predictions

an equilibrium model of the business cycle with household production and fiscal policy the authors estimate a dynamic general equilibrium model of the u s economy that includes an explicit household production sector and stochastic fiscal variables they use their estimates to investigate two issues first the authors analyze how well the model accounts for aggregate fluctuations they find that household production has a significant impact and reject a nested specification in which changes in the home production technology do not matter for market variables second the authors study the effects of some simple fiscal policy experiments and show that the model generates different predictions for the effects of tax changes than similar models without home production copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

ethics in finance and accounting editorial introduction in light of the recent crisis and its aftershocks it becomes crucial to reflect on the relationship between finance and accounting and on how to integrate ethics and efficiency as well as on how to motivate and empower practitioners in the world of finance to commit to justice fairness and enhanced understanding and to improving their personal integrity this article written as an editorial introduction to a special issue includes works related to control measurement and ethical behavior misbehaviors in finances and accounting professionalism in accounting ethical investing and corporate reporting we conclude by suggesting further research for a better integration of technical aspects of accounting and finances into business activity human activity actually and an for understanding of ethics not limited to rules but as a mutual and interdependent system of values human goods virtues and principles

risky business the decline of defined benefit pensions and firms shifting of risk since the early 1980s employment in the united states has undergone significant transformation as the large corporations that once safeguarded employees with stable jobs and rewards for loyalty have replaced these employment relationships with ones based on cost containment and flexibility one important consequence of these developments is that firms have abdicated their role as a critical risk bearer in society although evidence suggests that firms have increasingly shifted market risks onto their workforce to date there have been few detailed analyses exploring what factors have driven this phenomenon this study adds to our understanding of why firms have transferred risk to their employees by examining the decline of a highly institutionalized practice wherein large u s firms used to bear retirement risk the defined benefit db pension plan through a detailed analysis i show that variance in the presence power and interests of shareholders and employees at the firm level differentially affect a firm s willingness to shift the risk of retirement onto its workers specifically i demonstrate empirically that different types of shareholders have differential effects on a firm s retirement practices suggesting that the changing equity ownership structure of large u s firms has played a key role in how risk is allocated between workers and firms declines in employee power have also played a role because firm levels of unionization positively affect rates of db participation for both unionized and nonunionized workers

truthfulness in accounting how to discriminate accounting manipulators from non manipulators accountants preparing information are in a position to manipulate the view of economic reality presented in such information to interested parties these manipulations can be regarded as morally reprehensible because they are not fair to users they involve in an unjust exercise of power and they tend to weaken the authority of accounting regulators this paper develops a model for detecting earnings manipulators using financial statements ratios in a sample of spanish listed companies our results provide evidence that accounting data can be extremely useful in detecting manipulators this approach can be used by a large category of users of accounting information among which we can cite stock exchange supervisors or investing professionals

allocation of individuals to job levels under rationing summary we augment an ordered response model for the job level at which individuals desire to work with allowance for individual reporting of a discrepancy between actual and desired job level and we also investigate possible biases from restricting the observations to the employed and omitting the unemployed we find that the latter bias can be ignored and interpret this as evidence that the unemployed are not choosier than the employed people claiming inadequate capability utilization are not markedly differently allocated than those claiming a proper match women s lower job levels cannot be explained from rationing by capability utilization

search sorting and urban agglomeration studies have suggested that urban agglomeration enhances productivity by facilitating the firm worker matching process this article develops a model that formalizes this notion and demonstrates that when firm capital and worker skill are complementary in production urban agglomeration will tend to generate more efficient yet segregated matches as a result not only will local market size be positively associated with average productivity it will also generate greater between skill group wage inequality and a higher expected return to skill acquisition recent data from the counties and metropolitan areas of the united states is consistent with each of these implications

self selection bias in longitudinal estimation of wage gaps cross sectional regression analyses of wage gaps may be biased by omission of unobserved worker characteristics recent studies therefore have used longitudinal data to difference out the effects of such variables this paper however shows that self selection of job changers may cause longitudinal estimation of wage gaps to be inconsistent

specialization and human capital in search equilibrium this paper constructs a general equilibrium search matching model with heterogeneous workers workers choose whether to invest in general human capital or specific human capital when they enter the labor market we analyze how unemployment benefits affect the choice of the type of human capital investment jel e24 j41 j64 j65

ability and power over production in the distribution of earnings t he aggregate distribution of earnings in all western countries is approximately lognormal over most of its range but the earnings of the top 10 or 20 of individuals follow the pareto form which generates a great excess of very high earnings compared with the tail of a lognormal distribution individuals at the top appear to be paid according to the job they perform rather than their ability this paper explains these features in terms of profit maximising behaviour from time to time a single new manager or management team improves a company s profit by millions of dollars per year this shows that a senior manager can influence the company s total output far more than a junior employee his greater influence over output derives from having much more control over the company s resources profit maximising companies offer high salaries for senior management jobs because even a small improvement in their performance leads to a worthwhile increase in output and competitive bidding for the best managers then drives their salaries up to high levels this in outline is the explanation for high earnings developed formally in the rest of this paper

how the market solves an assignment problem the matching of lawyers with legal claims in the market for lawyers observable data on promotion and turnover can be explained by reference to the idea that there is positive assortative mating of lawyers and legal claims there is a scale of resources effect under which it is optimal to assign larger claims to lawyers of higher quality in a law firm the institution of tenure performs a sorting function lawyers found to be of high quality are given tenured positions and the rest leave the value of legal claims handled by a firm determines its sorting problem which in turn determines its promotion ladder and turnover

estimating gender differences in access to jobs this paper proposes a new measure of gender differences in access to jobs based on a job assignment model this measure is the probability ratio of getting a job for a female and a male at each rank of the wage ladder we derive a nonparametric estimator of this access measure and estimate it for french full time executives aged 40 45 in the private sector our results show that the gender difference in the probability of getting a job increases along the wage ladder from 9 to 50 females thus have a significantly lower access to high paid jobs than to low paid jobs

the housing market s of san diego this paper uses an assignment model to understand the cross section of house prices within a metro area movers demand for housing is derived from a lifecycle problem with credit market frictions equilibrium house prices adjust to assign houses that dier by quality to movers who dier by age income and wealth to quantify the model we measure distributions of house prices house qualities and mover characteristics from micro data on san diego county during the 2000s boom the main result is that cheaper credit for poor households was a major driver of prices especially at the low end of the market

learning about the nature of production from equilibrium assignment patterns this paper exploits empirically a key insight from lucas 1978 and rosen 1982 that the organization of production and the distribution of earnings across individuals are jointly determined by the equilibrium assignment of individuals to firms and hierarchical positions we study how different classes of production functions generate alternative equilibrium assignments we then use confidential census data on u s law offices to investigate the form that the production function should take to rationalize earnings patterns in legal services we argue that earnings patterns in this industry are consistent with a production function that is characterized by asymmetric sensitivity to the skill of agents in different organizational positions complementarity between managers and workers skill and scale effects in individual skill

behavioral rationality in finance the case of dividends as the title suggests this paper attempts to get to the specifics of the behavioral rationality theme of this conference by focusing on an area in the main core of finance namely the demand and supply of dividends where by common consent the essentially rationalist paradigm of the field seems to be limping most noticeably important and pervasive behavior patterns on both the paying and the receiving ends have despairingly been written off as puzzles even by theorists as redoubtable as fischer black see esp his much cited 1976 article behaviorists have homed in on precisely these same dividendrelated soft spots in the current body of theory see esp shefrin and statman 1984 we seem to have in sum an ideal place to look for signs of an imminent paradigm shift in the behavioral direction of precisely the kind envisioned by some of the other contributors to this conference the dividend related difficulties and supposed anomalies at issue here are more than just the parochial concern of finance specialists the dividends seem a natural area in finance where the introduction of behavioral cognitive elements might help resolve long standing anomalies particularly the seeming failure of supply to adjust to taxinduced price penalties a closer look at the empirical record however particularly at evidence of responsiveness to major structural changes shows behavior of the aggregates to be less anomalous than conventional handwringing might suggest behavioral cognitive elements whatever they might contribute to the description of particular microdecisions do not appear to be essential adjuncts to the basic finance model in the major comparative static applications for which it was intended helpful comments on an earlier version of this paper have been received from nai fu chen jean marie gagnon gur huberman kose john james poterba and especially melvin reder

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

jack of all trades or a master of one specialization trade and money we consider a model of decentralized exchange where individuals choose the set of goods they produce specialization involves producing a smaller set of goods and doing it more proficiently in doing so agents reduce production costs but also reduce the ease of trading their output we derive the equilibrium degree of specialization and examine how it is affected by underlying fundamentals due to the existence of a hold up problem individuals specialize too little relative to the social optimum introducing money leads to more specialization relative to barter and increases welfare

risky debt investment incentives and reputation in a sequential equilibrium the agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information the incentive effect of risky debt on the investment policy of a levered firm is studied in this context in a sequential equilibrium of the model a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment the incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market this anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium some empirical implications of the model for bond rating debt covenants and bond price response to investment announcements are explored

gibrat s law for all cities two empirical regularities concerning the size distribution of cities have repeatedly been established zipf s law holds the upper tail is pareto and city growth is proportionate census 2000 data are used covering the entire size distribution not just the upper tail the nontruncated distribution is shown to be lognormal rather than pareto this provides a simple justification for the coexistence of proportionate growth and the resulting lognormal distribution an equilibrium theory of local externalities that can explain the empirical size distribution of cities is proposed the driving force is a random productivity process of local economies and the perfect mobility of workers

dynamic incentives and dual purpose accounting abstract ongoing employment relationships often give rise to implicit dynamic incentives we describe the implications of implicit incentives when firms use information about both an employee s past performance and his future productivity in a two period agency model we show that when an accounting system serves these dual objectives an employee s implicit incentives may be beneficial or detrimental to the firm as a consequence firms may prefer an accounting system that reports a single metric that combines information about past performance and future productivity over one that reports two distinct metrics one for each purpose

where should the line be drawn on insider trading ethics finance ethics have drawn increasing attention from both government regulators and academic researchers this paper addresses the issue of insider trading ethics previous studies on insider trading ethics have failed to provide convincing arguments and consistent results in particular the arguments against insider trading are based primarily on moral and philosophical grounds and lack empirical rigor this study intends to establish and examine the relationship between the ethical issue and economic issue of insider trading we argue that the ethics of insider trading is in essence an economic rather than a moral issue it is so far not clear to what extent insider trading may increase or decrease shareholders wealth until then we must take care to avoid over regulating insider trading

fundamental information analysis fundamental analysis is aimed at determining the value of corporate securities by a careful examination of key value drivers such as earnings risk growth and competitive position in the context of such analysis we identify below a set of financial variables fundamentals claimed by analysts to be useful in security valuation and examine these claims by estimating the incremental value relevance of these variables over earnings our findings support the incremental value relevance of most of the identified fundamentals in fact for the 1980s the fundamentals add approximately 70 on average to the explanatory power of earnings with respect to excess returns we also show that the returns fundamentals relation is considerably strengthened when it is conditioned on macroeconomic variables thereby demonstrating the importance of a contextual capital market analysis for example several fundamentals that appear only weakly value relevant or even irrelevant in the unconditional analysis exhibit strong association with returns under specific economic conditions e g the accounts receivable and the provision for doubtful receivables signals during high inflation from a general examination of the role of fundamentals in security valuation we turn to the related issues of earnings persistence growth and the earnings response coefficient we hypothesize that the funda

competition of firms discriminatory pricing and location1 two costlessly mobile firms are to be located in a market region a subset of the plane the firms compete by setting locations and delivered price schedules to study this competitive stiuation an appropriate extensive form game is defined along with an appropri ate noncooperative solution concept existence and general properties of the equilibrium are demonstrated among the results are each firm increases its profit by locating so as to decrease total cost to both firms of serving the market firms will never locate coinciden tally if they have identical production costs and transport cost rates or if these are different and the firms are located in a circular market region having a uniform demand distribution this paper studies competition between two profit maximizing firms in space who are costlessly mobile and may discriminate in price we will allow the firms to set locations and delivered price schedules and we will be concerned with the existence and properties of equilibria in location and price starting with hotelling 9 the spatial competition literature has focused on location on bounded linear markets by two or more firms hotelling assumed identical firms that produced a single good with constant cost of production and considered consumers to be uniformly distributed and to have inelastic demand he also assumed that the consumers pay transport cost and purchase the good from the cheapest source hotelling claimed that a nash equilibrium in locations for the two firm market existed and yielded back to back locations at the center of the market many authors most recently d aspremont gabszewicz and thisse 2 have noted that an equilbrium in prices and location does not exist for hotelling s model however if the firms employ identical exogeneously specified prices hotelling s conclusions hold subsequent work by smithies 14 hartwick and hartwick 7 and eaton 3 claimed to show that a nash equi librium in f o b prices and locations can exist in markets with a uniform distribu tion of consumers each of whom have identical elastic demand functions for the two and three firm problems the work of d aspremont et al casts doubt on these conclusions without the adoption of restrictive conditions our work contrasts with these works and related research which has dealt with linear markets with uniform distributions of customers and with identical firms our work will involve markets that are subsets of the plane having nonuniform distributions of customers our firms will be allowed to be different that is have differences in production and transport costs however the fundamental difference in our approach is that our firms will set discriminatory prices and not price f o b in many ways our work will represent the discriminatory pricing

central place theory and city size distribution this paper proposes a theory of city size distribution via a hierarchy approach rather than the popular random growth process it does so by formalizing central place theory using an equilibrium entry model and specifying the conditions under which city size distribution follows a power law central place theory describes the way in which a hierarchical city system with difierent layers of cities serving difierently sized market areas is formed from a uniformly populated space the force driving the city size difierences in this model is the heterogeneity in economies of scale across goods the city size distribution under a central place hierarchy exhibits a power law if the distribution of scale economies is regularly varying which is a general class that encompasses many well known commonly used distributions this model is also consistent with a power law for flrms and a number average size rule which is the log linear relationship between the number and average size of the cities in which an industry is located

on the optimal realignment of a contest the case of college football this article examines the relationship between demand and scheduling in college football we first derive two different metrics for team quality and then use those metrics to see how they impact attendance we find that there is a positive interaction between the quality of the teams then various simulations are run to see how attendance would change under different scheduling scenarios if teams are put into conferences based on the team quality measures the average per game attendance only rises 1 2 this is true if 1 year or 10 year quality measures are used however our simulation suggests that this effect would be more than offset mainly because schools with larger capacity would play fewer home games and so aggregate attendance would fall we discuss whether this effect would be mitigated by capacity adjustments in the longer term jel l83 z20 c78

the role of ethics in finance the role of ethics in the financial community today seems to be limited to its role in financial economic theory contemporary financial economists view ethics in the context of objective wealth maximization in this context ethics functions primarily as a constraint on behavior this view is both illogical and ambiguous it is illogical because it may actually sanction unethical behavior if such behavior can be shown to lead to material gain it is ambiguous because throughout he 2000 year history of moral philosophy ethics has generally been viewed as a behavioral motivation not as a constraint if a conception of ethics as the fundamental objective in all human endeavor is disseminated in the financial community there is real hope that ethics will be accepted as both logically consistent and desirable

earnings quality research advances challenges and future research abstract this discussion makes several observations regarding the earnings quality research reviewed in dechow ge and schrand 2010 dgs i discuss some of the factors that led to the large growth in the earnings quality literature over the past two decades and note a few of the important contributions from this literature i also present what i view as several major challenges the literature faces as well as some avenues for future research in addition i discuss the difficulties in evaluating such a diverse body of literature and comment on dgs s major conclusions

an economic theory of central places is not really a theory of spatial economic behaviour instead it is a series of brilliant conjectures about the locational configurations that will result from such behaviour the brilliance of these conjectures is illustrated by the successful applications of the theory to such diverse phenomena as the locational patterns of retailing activity in cities and of service centres in rural areas the size distribution of cities and the diffusion of information and diseases in this paper we outline an economic model of central places 2 our theorising has two distinct purposes first we wish to begin the development of a theory of central places that is based on maximising behaviour of economic agents any theory of economic behaviour from which central places can be derived is necessarily both difficult and cumbersome non convexities in the activities of buying and selling drive the model and thus non differentiabilities and discontinuities abound as one seeks more generality in such circumstances difficulties multiply rapidly in order to begin the job we have used assumptions that are specific and sometimes even crude the second purpose of our theorising is to illustrate the limitations of current central place theory by providing counter examples to some propositions commonly accepted to follow from it for this purpose we need not worry about lack of generality in any of our counter examples of course we are not solely concerned to refute accepted generalisations by doing so we hope to make alternative possibilities apparent what we hope to attain therefore is a theoretical development inspired by the extremely fruitful conjectures of existing central place theory

market and political regulatory perspectives on the recent accounting scandals not surprisingly the recent accounting scandals look different when viewed from the perspectives of the political regulatory process and of the market for corporate governance and financial reporting we do not have the opportunity to observe a world in which either market or political regulatory processes operate independently and the events are recent and not well researched so untangling their separate effects is somewhat conjectural this paper offers conjectures on issues such as what caused the scandalous behavior why was there such a rash of accounting scandals at one time who killed arthur andersen the securities and exchange commission or the market did fraudulent accounting kill enron or just keep it alive for too long what is the social cost of financial reporting fraud does the united states in fact operate a principles based or a rules based accounting system was there market failure or was there regulatory failure or both was the sarbanes oxley act a political and regulatory overreaction does the united states follow an ineffective regulatory model

debt covenant violation and manipulation of accruals abstract this paper examines the abnormal accruals of a sample of 94 firms that reported debt covenant violations in annual reports we expect debt covenant restrictions to influence accounting choices in the year preceding and the year of violation time series and cross sectional models are used to estimate normal accruals in the year prior to violation both models indicate that abnormal total and working capital accruals are significantly positive in the year of violation there is evidence of positive abnormal working capital accruals after controlling for management changes and auditor going concern qualifications

worker allocation hierarchies and the wage distribution economists have traditionally viewed the allocation of workers among jobs through the concept of comparative advantage this paper investigates hierarchical production models which display an absence of comparative advantage in order to demonstrate that for hierarchical production there is a second allocating factor which plays an important role two results are found first the allocation of workers among jobs tends to match high ability workers with positions which value ability highly second despite the fact that the models display an absence of comparative advantage i e the standard theoretical explanation for why wage distributions might be skewed the models wage distributions are skewed to the right relative to the underlying ability distributions

unemployment vs mismatch of talents reconsidering unemployment benefits we develop an equilibrium search matching model with risk neutral agents and two sided ex ante heterogeneity unemployment insurance has the standard effect of reducing employment but also helps workers to get a suitable job we show through calibrations how the mere difference on unemployment insurance when countries experience a common skilled biased technological shock may result in differences in unemployment productivity growth and wage inequality these results are consistent with the contrasting performance of the labour market in europe and the united states in the last twenty five years the model is used to address some political economy issues

the importance of bundling in a gorman lancaster model of earnings the idea that the labor market of individuals can be decomposed into payments to separate productive attributes has an enduring appeal in economics assuming that demographic groups differ only in their endowments of productive characteristics it is possible to rationalize observed demographic earnings differentials without invoking the arguments that characteristics specific to a particular demographic group are direct objects of employer demand by aggregating skills over all demographic groups it is possible to produce a theory of the market determination of the prices of skills held in different amounts by different demographic groups this paper considers conditions under which characteristics are uniformly priced across sectors of a multisector economy the paper presents empirical evidence that rejects uniform pricing of characteristics as a description of the us labor market bundling may account for this evudence but other hypotheses do as well authors

a spillover based theory of credentialism i propose a model in which credentials such as diplomas are instrumentally valuable to workers the model avoids an important criticism of standard job market signalling models by tying a worker s wage to their output a worker s productivity is influenced by the skills of their co workers where such skills arise from an ability augmenting investment that is made prior to matching with co workers credentials allow workers to demonstrate their investment to the labour market thereby allowing them to match with high skill co workers in equilibrium despite the positive externality associated with a worker s investment i show how overinvestment is pervasive in equilibrium

gaap versus the street an empirical assessment of two alternative definitions of earnings managers security analysts investors and the press rely increasingly on modified definitions of gaap net income known by such names as operating and pro forma earnings we document this phenomenon and discuss competing explanations for the recent rise in the use of such modified earnings numbers and implications for the interpretation of related accounting research our results show that over the past 20 years there has been a dramatic increase in the frequency and magnitude of cases where gaap and street earnings differ further there is a very strong bias toward the reporting of a street earnings number that exceeds the gaap earnings number we also show that the market response to the street earnings number has displaced gaap earnings as a primary determinant of stock prices finally through an analysis of earnings releases we show that management has taken a proactive role in defining and emphasizing the street number when communicating to analysts and investors

housing assignment with restrictions theory and evidence from stanford university s campus this paper studies housing markets where a subset of houses in a restricted area is available exclusively to a subset of eligible buyers an empirical part shows that houses on stanford campus available only to faculty trade at substantial discounts to comparable houses off campus the theoretical part describes an assignment model with heterogeneous houses and buyers which predicts such discounts if the matchup of quality and buyer pools is sufficiently different inside versus outside the restricted area the restriction can distort allocations by making eligible buyers choose either higher or lower qualities than ineligible buyers with the same characteristics

sorting through search and matching models in economics toward understanding assortative matching this is a self contained introduction to research on search and matching we first explore the nontransferable and perfectly transferable utility matching paradigms and then a unifying imperfectly transferable utility matching model motivated by some unrealistic predictions of frictionless matching we flesh out the foundational economics of search theory we then revisit the original matching paradigms with search frictions we finally allow informational frictions that often arise such as in college student sorting

frictional assignment i efficiency abstract this paper examines the two sided matching problem where the agents on each side of the market are heterogeneous and the matching process is time consuming this is cast in a labor market setting where workers of different skills match with different machine qualities i characterize the efficient allocation and then show that it can be decentralized by a market mechanism the efficient assignment is not always positively assortative despite the fact that machine qualities and skills are complementary in production to decentralize the efficient allocation the market mechanism requires the firms to post wages and commit each machine quality to a particular skill implications on wage inequality are briefly examined journal of economic literature classification numbers j31 e24 j64

marriage and class here we consider a matching model where agents are heterogeneous and utilities nontransferable we utilize this framework to study how equilibrium sorting takes place in marriage markets we impose conditions that guarantee the existence of a steady state equilibrium and then characterize it several examples are developed to illustrate the richness of equilibria the model reveals an interesting sorting externality that can support multiple steady state equilibria even with constant returns to matching excerpt

pay technology and the cost of worker absence i introduction the complexity of patterns of worker absence is well known but is yielding reluctantly to studies that use highly detailed information about individual workers and their work environments to date these studies have focussed on how specific contractual details affect worker absenteeism rates 1 in this paper we instead take an equilibrium perspective where we assume heterogeneous firms and heterogeneous workers participate in a competitive labor market by understanding why firms with different technologies may have different policies toward absenteeism we can begin to explain observed differences in absenteeism rates across workers and firms the empirical framework is based on coles and treble 1996 which considers an equilibrium assignment model with heterogeneous firms and workers the standard assignment framework 2 assumes that each filled job is characterized by one machine of quality q and one employee with skill level s a competitive equilibrium yields a wage schedule w and an assignment rule q where a worker of skill s is hired at wage w w s by a firm holding machine q q s coles and treble 1996 do not assume that workers are differently skilled instead workers have different propensities to go absent also instead of a one worker one machine production process firms utilize different production technologies some use an assembly line technology where output requires that a sufficient number of workers show up for work and others use a linear production technology in which there are constant marginal returns to labor for reasons that will become clear a competitive equilibrium yields a wage schedule and an assignment rule that depend on worker propensities to go absent specifically workers with a lower propensity to go absent earn a higher wage and are employed in firms using assembly line technologies the key insight is that firms who operate assembly line technologies have a different shadow cost of absenteeism from those which operate a linear technology as in weiss 1985 and coles and treble 1993 in the latter technology an absence by one particular worker does not affect the marginal productivity of other workers at the firm this is not true in an assembly line firm or in production functions where labor inputs are strict complements as in kremer 1993 coles and treble 1996 consider a market equilibrium in which workers are also heterogeneous say workers have different family responsibilities in this case a competitive labor market implies equilibrium sorting by firms and workers assembly line firms require a low level of absenteeism and pay a relatively high wage to compensate workers for attending work reliably we refer to this as the shadow cost of absenteeism workers who have a comparative advantage in attending work reliably say those who do not have to look after children when the children are sick take employment in assembly line firms and enjoy the wage premium attached to employment there we refer to this as the shadow price of absenteeism conversely those who appreciate greater flexibility in work attendance take employment in the linear technology firms and in equilibrium earn a lower average wage rate although absenteeism may be costly to firms observed absenteeism rates are not necessarily inefficient the worker who misses a day at work to look after sick children or enjoy a sports event is expressing a trade off between workplace production and home production where home productivity is perhaps subject to idiosyncratic shocks efficient contracting implies that firms and workers agree to an acceptable absenteeism rate and a compensating wage differential efficient sorting implies that those workers who can commit to attending work reliably accept employment in assembly line occupations and so earn a wage premium reflecting the shadow price of absenteeism our goal is to identify and measure this shadow price using a unique data set from france

inter industry mobility and the cyclical upgrading of labor we investigate whether a market clearing model is consistent with industry employment and wage patterns related to the cyclical upgrading of labor we demonstrate that roy s 1951 market clearing

zipf s law for cities an explanation zipf s law is a very tight constraint on the class of admissible models of local growth it says that for most countries the size distribution of cities strikingly fits a power law the number of cities with populations greater than s is proportional to 1 s suppose that at least in the upper tail all cities follow some proportional growth process this appears to be verified empirically this automatically leads their distribution to converge to zipf s law

the area and population of cities new insights from a different perspective on cities the distribution of city populations has attracted much attention in part because it constrains models of local growth however there is no consensus on the distribution below the very upper tail because available data need to rely on legal rather than economic definitions for medium and small cities to remedy this difficulty we construct cities from the bottom up by clustering populated areas obtained from high resolution data we find that zipf s law for population holds for cities as small as 5 000 inhabitants in great britain and 12 000 inhabitants in the us we also find a zipf s law for areas jel r11 r12 r23

annual bonus schemes and the manipulation of earnings abstract using confidential data of executive specific short term bonus plans we investigate the extent to which executives manipulate earnings to maximize the present value of bonus plan payments as such this paper extends the work of healy 1985 like healy we find evidence consistent with the hypothesis that managers manipulate earnings downwards when their bonuses are at their maximum unlike healy we find no evidence that managers manipulate earnings downwards when earnings are below the minimum necessary to receive any bonus we demonstrate that healy s results at the lower bound are likely to be induced by his methodology

ethics in finance ii the best way to approach professional ethics whether in the finance profession or elsewhere is from the perspective of virtue ethics theory this theory places particular emphasis on the character and motivations of an individual professional and on the organizational community in which the individual acts this article extends and clarifies the central argument of an earlier article on financial ethics several real world examples illustrate the role of virtue ethics in professionalism

labor supply as a choice among latent jobs unobserved heterogeneity and identification this paper discusses aspects of a framework for modeling labor supply where the notion of job choice is fundamental in this framework workers are assumed to have preferences over latent job opportunities belonging to worker specific choice sets from which they choose their preferred job the observed hours of work and wage is interpreted as the job specific hours and wage of the chosen job the main contribution of this paper is an analysis of the identification problem of this framework under various conditions when conventional cross section micro data are applied

does unmeasured ability explain inter industry wage differentials this paper provides empirical assessments of the two leading explanations of measured inter industry wage differentials 1 true wage differentials exist across industries and 2 the measured differentials simply reflect unmeasured differences in workers productive abilities first we summarize the existing evidence on the unmeasured ability explanation second we construct a simple model which shows that if matching is important then endogenous job change decisions can create important self selection biases even in first differenced estimates of industry wage differentials third we analyze a sample that approximates the experiment of exogenous job loss we find that i the wage change experienced by a typical industry switcher closely resembles the difference in the relevant industry differentials estimated in a cross section and ii pre displacement industry affiliation plays an important role in post displacement wage determination

moral hazard and adverse selection the question of financial structure this paper looks at the moral hazard and adverse selection problems confronting an entrepreneur offering securities to an uninformed but competitive financial market the adverse selection aspect of the problem is generated by the unobservable entrepreneur s ability to transform effort into value moral hazard arises because the investment decision is made subsequent to financing we consider the joint use of both debt and equity and characterize the equilibrium relation between capital structure and unobservable attributes it is shown that 1 investment and financing are not separable 2 there is an underinvestment problem for better firms and 3 simultaneous use of both debt and equity can resolve this difficulty we also establish a connection between expected terminal firm value and debt promised payment level and between share retention and standard deviation agency problems in corporate finance originated with the influential papers of jensen and meckling 11 myers 17 ross 21 and leland pyle 14 they show that the market imperfections induced by unobservable actions lack of contracting ability and information asymmetry generally lead to second best outcomes in which the distribution of corporate ownership is achieved only at significant cost these costs take the form of excessive perquisite consumption overinvestment underinvestment and incomplete diversification of personal investment portfolios moral hazard and adverse selection comprise two forms in which agency problems may take shape arrow 1 equates these two terms with hidden action and hidden information respectively moral hazard arises when the action undertaken by the agent is unobservable and has a differential value to the agent as compared to the principal adverse selection problems arise when the agent has more information than the principal the resolution of such difficulties has been explored in a number of contexts with both signals and contingent contracting mechanisms these definitions exclude certain agency problems in the delegation literature for which the preference incongruity results from a lack of precommitment rather than some exogenous feature of the model in corporate finance one would thus identify the jensen meckling paper with moral hazard because perquisites enter the insider s objective differently from outsiders while darrough is from columbia university and stoughton is from the university of california irvine the second author s research was partially supported by grant number 410 83 0786 r 1 from the social sciences and humanities research council of canada this paper was presented at the 1984 meetings of the western finance association in vancouver and at the 1985 european finance association meetings in bern we thank kose john and frans tempelaar for their comments at the meetings

hedonic prices and implicit markets estimating demand and supply functions for differentiated products in choosing the level of quality to purchase the buyer of a differentiated product also chooses a point on the marginal price schedule for that product hence in general the demand functions for product characteristics cannot be consistently estimated by ordinary least squares market equilibrium results in a matching of characteristics of demanders and suppliers this matching restricts the use of buyer and seller characteristics as instruments when estimating demand and supply functions for product characteristics the paper develops these issues a stochastic structure for hedonic equilibrium models is then proposed identification results are presented and estimation procedures are outlined

why has house price dispersion gone up we calibrate a dynamic general equilibrium island model to investigate the 30 year increase in the level of house prices and their dispersion across u s metropolitan areas the model is based on two main assumptions households o w in and out metropolitan areas in response to local productivity shocks and the housing supply cannot adjust instantly because of technological and regulatory constraints the calibration reveals that the observed tightening of housing supply regulation cannot quantitatively account for the rise in the level and dispersion of house prices in equilibrium workers o w out of tightly regulated towards less regulated metropolitan areas undoing most of the price impact of local supply restrictions in contrast the observed increase in wage dispersion across metropolitan areas does create the observed increase in the level and dispersion of house prices workers o w towards exceptionally productive metropolitan areas and drive house prices up the calibration also suggests that the welfare eects of housing supply regulation are large when wages become more dispersed

the dynamics of inequality the past forty years have seen a rapid rise in top income inequality in the united states while there is a large number of existing theories of the pareto tail of the long run income distributions almost none of these address the fast rise in top inequality observed in the data we show that standard theories which build on a random growth mechanism generate transition dynamics that are too slow relative to those observed in the data we then suggest two parsimonious deviations from the canonical model that can explain such changes scale dependence that may arise from changes in skill prices and type dependence that is the presence of some high growth types these deviations are consistent with theories in which the increase in top income inequality is driven by the rise of superstar entrepreneurs or managers

market forces and ceo pay shocks to ceo demand induced by ipo waves i develop a simple competitive equilibrium model and derive the prediction that ceo pay size elasticity increases when more firms compete for an inelastic supply of managers using industry level ipo waves as a proxy for increased competition for ceos i find that pay size elasticity increases by 6 with a one standard deviation increase in ipo activity this effect is stronger in specialized industries in addition increased ipo activity leads to a greater likelihood of executive transitions between firms these findings indicate that market forces play a key role in the determination of ceo pay received august 6 2015 editorial decision september 24 2016 by editor francesca cornelli

self selection and the distribution of hourly wages this article formulates and estimates alternative equilibrium models of industrial wage determination and self selection in explaining industrial wage differentials we find that it is important to account for heterogeneous sector specific skills and self selection decisions by agents concerning their sector of employment the classical roy model is rejected so is an efficiency units model of the labor market a revised roy model that accounts for comparative advantage in the choice of industrial sectors and choice between market and nonmarket work is much more successful in explaining cross section wage distributions and their evolution over time

education matching and the allocative value of romance societies are characterized by customs governing the allocation of non market goods such as marital partnerships we explore how such customs affect the educational investment decisions of young singles and the subsequent joint labour supply decisions of partnered couples we consider two separate matching paradigms for agents with heterogeneous abilities one where partners marry for money and the other where partners marry for romantic reasons orthogonal to productivity or debt these generate different investment incentives and therefore have a real impact on the market economy while marrying for money generates greater investment efficiency romantic matching generates greater allocative efficiency since more high ability individuals participate in the labour market the analysis offers the possibility of explaining cross country differences in educational investments and labour force participation based on matching regimes

marriage markets and assortative mating with household public goods theoretical results and empirical implications this paper analyzes marriage market equilibria when the gains from marriage result from joint consumption of household public goods assuming transferable utility within marriage the paper proves that marriage markets will be characterized by positive assortative mating on wealth when spouses differ only in endowments and the gains to marriage result only from public goods when spouses differ in wages and household public goods are produced at home the results imply offsetting effects with public good economies creating an incentive for positive assortative mating on wages and gains from specialization creating an incentive for negative assortative mating on wages the results help explain the persistent lack of empirical support for becker s prediction of negative assortative mating on wages and have implications for empirical analysis of all joint living arrangement decisions

the effect of ethical orientation and professional commitment on earnings management behavior the purpose of this study is twofold the first objective is to examine the impact of an individual s ethical ideology and level of professional commitment on the earnings management decision the second objective is to observe whether the presence of a personal benefit affects an individual s ethical orientation or professional commitment within the context of an opportunity to manage earnings using a sample of 375 undergraduate business majors our results suggest a significant relationship between an individual s ethical orientation and decision making further participants with higher levels of professional commitment seem to be less likely to engage in earnings management behavior and less likely to behave opportunistically these results have the potential to add to our understanding of certain behaviors in entry level personnel and should be of interest to managers practitioners academicians and researchers

conflicts of interest in financial intermediation the last years have seen a surge of scandals in financial intermediation this article argues that the agency structure inherent to most forms of financial intermediation gives rise to conflicts of interest though this does not excuse scandalous behavior it points out market imperfections there are four types of conflicts of interest personal individual personal organizational impersonal individual and finally impersonal organizational conflicts analyzing recent scandals we find that all four types of conflicts of interest prevail in financial intermediation

aggregation bias in elasticities of substitution and the minimum wage paradox while the employment effects of minimum wages are usually reported to be small suggesting low substitutability between skill types direct estimates suggest a much larger degree of substitutability this article argues that this paradox is largely due to a bias induced by the aggregation of skill types into broad categories an assignment model is applied where skilled workers have a comparative advantage in complex jobs the implied pattern of substitutability reveals the sources of the bias estimation results for the united states show elasticities of complementarity to be underestimated by up to a factor 2 5 the methods laid out likewise can be applied to other markets where different quality types are close substitutes such as the housing market

introduction to the distribution of earnings and of individual output by a d roy this article summarises the lasting contribution of roy s 1950 fundamental paper roy a d 1950 the distribution of earnings and of individual output economic journal vol 60 239 pp 489 505

overeducation undereducation and the british labour market this paper addresses the issue of overeducation and undereducation using for the first time a british dataset which contains explicit information on the level of required education to enter a job across the generality of occupations three key issues within the overeducation literature are addressed first what determines the existence of over and undereducation and to what extent are over and undereducation substitutes for experience tenure and training second to what extent are over and undereducation temporary or permanent phenomena third what are the returns to over and undereducation and do certain stylized facts discovered for the us and a number of european countries hold for britain

education and skills mismatch in the italian graduate labour market this paper focuses on education and skills mismatch among italian graduates indicators for over and under utilization of education and under utilization of skills are included as explanatory factors in a wage equation testing theories that could explain the effect of over schooling on wages we find little evidence to support assignment theory and also identify a relatively weak wage effect arising from educational mismatch associated with employers as opposed to employees perceptions of the job requirements our interpretation is that some employers have re categorized jobs as requiring a degree when they were previously filled by non graduates and many have not altered pay scales accordingly

is shareholder wealth maximization immoral for those educated in modern business schools the justification for decisions made by financial professionals in business organizations has been supplied by financial economic theory broadly thi

empirical analysis of occupational hierarchies using data on u s engineers and the position of engineering jobs within firms this paper estimates a model of hierarchies within firms the model extends rosen s 1982 model of recursive production to two skills and multiple hierarchy levels the model generates an empirical model that is nested within a general roy 1951 model of self selection maximum likelihood estimates of the parameters of the production technology and the skill experience profiles are estimated the results suggest that approximately two thirds of changes in employment shares across hierarchy levels across time are explained by demographic shifts in the stock of engineering skills most of the returns to experience and to assignment to higher hierarchy levels within firms are caused by skill accumulation and self selection rather than technological dierences across hierarchy levels

returns to talent and the finance wage premium to study the role of talent in finance workers pay we exploit a special feature of the french higher education system wage returns to talent have been significantly higher and have risen faster since the 1980s in finance than in other sectors both wage returns to project size and the elasticity of project size to talent are also higher in this industry last the share of performance pay varies more for talent in finance these findings are supportive of finance wages reflecting the competitive assignment of talent in an industry that exhibits a high complementarity between talent and scale received october 11 2017 editorial decision september 4 2018 by editor stijn van nieuwerburgh authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

a breed apart security analysts and herding behavior herding behavior occurs when security analysts ignore their private opinions and issue public forecasts that mimic the earnings forecasts of others joining the consensus provides cover for analysts reputations we question the ethics of this practice when the motive to protect one s reputation takes precedence over the forecast accuracy motive while seemingly predictable behavior from a self interested perspective herding behavior has subtle but long term ramifications for the efficient pricing of securities and the preservation of the public trust in the financial services profession we call upon each individual analyst as well as the profession to exercise the moral courage necessary to cultivate a climate of personal and public integrity personal resistance and pro active policies are prescribed as actions to assist analysts to become more cognizant of their motivations as well as to promote a more ethical professional context

the detection of earnings manipulation presented are a profile of a sample of earnings manipulators their distinguishing characteristics and a suggested model for detecting manipulation the model s variables are designed to capture either the financial statement distortions that can result from manipulation or preconditions that might prompt companies to engage in such activity the results suggest a systematic relationship between the probability of manipulation and some financial statement variables this evidence is consistent with the usefulness of accounting data in detecting manipulation and assessing the reliability of reported earnings the model identifies approximately half of the companies involved in earnings manipulation prior to public discovery because companies that are discovered manipulating earnings see their stocks plummet in value the model can be a useful screening device for investment professionals the screening results however require determination of whether the distortions in the financial statement numbers r

efficient unemployment insurance this paper constructs a tractable general equilibrium model of search with risk aversion an increase in risk aversion reduces wages unemployment and investment unemployment insurance has the opposite effect insured workers seek high wage jobs with high unemployment risk an economy with risk neutral workers achieves maximal output without any unemployment insurance but an economy with risk averse workers requires a positive level of unemployment insurance to maximize output therefore moderate unemployment insurance not only improves risk sharing but also increases output

heterogeneous firms and the organization of production firms in the same industry exhibit systematic differences in the organization of production and the structure of employment entrepreneurial ability is the specific scarce input that limits the size of a firm this input must be allocated to two activities coordinating production and monitoring workers able entrepreneurs can convert calendar time into larger supplies of coordinating effort that enable them to assemble large firms greater ability implies a higher shadow price of time which increases the implicit costs of monitoring a dispersion of entrepreneurial abilities generates an equilibrium size distribution of firms differences in monitoring costs affect the choice of worker productivities the design of products and the organization of production the monitoring cost hypothesis advanced in this paper goes a long way in explaining the equilibrium of an industry containing heterogeneous firms that differ in size and behavior

a note on aggregation of skills and labor quality we use a unique new data set that combines data on individual workers and their employers to estimate marginal productivity differentials among different types of workers we then compare these to estimated relative wages leading to new evidence on

specialization and efficiency with labor market matching abstract this paper constructs a labor market matching model with heterogeneous workers due to matching frictions there may be a mismatch of talents within a production team forcing a worker to specialize in a task at which she is not talented we consider a partnership model where production takes place in teams consisting of two workers we characterize the steady state of the matching equilibrium the constrained efficiency of the matching equilibrium depends on the distribution of talents the constrained efficient allocation can always be implemented by a type specific tax we also examine an alternative model with diamond mortensen pissarides type matching between firms and workers

the effect of risk on the ceo market this article presents a market equilibrium model of ceo assignment pay and incentives under risk aversion and moral hazard each of the three outcomes can be summarized by a single closed form equation in the presence of moral hazard assignment is distorted from positive assortative matching on firm size as firms with higher risk or disutility choose less talented ceos such firms also pay higher salaries in the cross section but economywide increases in risk or the disutility of being a ceo do not affect pay the strength of incentives depends only on the disutility of effort and is independent of risk and risk aversion if the ceo can affect firm risk incentives rise and are increasing in risk and risk aversion we calibrate the losses from various forms of poor corporate governance such as failures in monitoring and inefficiencies in ceo assignment jel g34 j33 this article presents a market equilibrium model of ceo assignment pay and incentives risk averse managers of different talents are hired in a competitive market by heterogeneous firms which vary in their size risk and level of effort required the level of pay drives the assignment of talent to firms the strength of incentives induces the efficient effort level and is determined by an optimal contracting approach our main contribution is to incorporate risk into a ceo market equilibrium in a tractable manner a large empirical literature has shown that risk is a firstorder determinant of compensation contracts demsetz and lehn 1985 garen 1994 core and guay 1999 oyer and schaefer 2004 peters 2009 peters and wagner 2009 but most theories assume risk neutrality this assumption is

field of study earnings and self selection why do individuals choose different types of post secondary education and what are the labor market consequences of those choices we show that answering these questions is difficult because individuals choose between several unordered alternatives even with a valid instrument for every type of education instrumental variables estimation of the payoffs require information about individuals ranking of education types or strong additional assumptions like constant effects or restrictive preferences these identification results motivate and guide our empirical analysis of the choice of and payoff to field of study our context is norway s post secondary education system where a centralized admission process covers almost all universities and colleges this process creates credible instruments from discontinuities which effectively randomize applicants near unpredictable admission cutoffs into different fields of study at the same time it provides us with strategy proof measures of individuals ranking of fields taken together this allows us to estimate the payoffs to different fields while correcting for selection bias and keeping the next best alternatives as measured at the time of application fixed we find that different fields have widely different payoffs even after accounting for institutional differences and quality of peer groups for many fields the payoffs rival the college wage premiums suggesting the choice of field is potentially as important as the decision to enroll in college the estimated payoffs are consistent with individuals choosing fields in which they have comparative advantage we also test and reject assumptions of constant effects or restrictive preferences suggesting that information on next best alternatives is essential to identify payoffs to field of study