on the validity of environmental performance metrics different proprietary databases have been used extensively in research to assess the environmental performance and environmental risk of companies this study explores the convergent validity of the environmental ratings of msci esg stats formerly known as kinder lydenberg and domini research analytics kld thomson reuters asset4 asset4 and global engagement services ges the study shows that the ratings have common dimensions but on aggregate they do not converge on the environmental opportunity side kld environmental strengths and asset4 and ges environmental performance metrics correlate highly and provide convergent scores for us companies from 2003 2011 on the environmental risk side kld environmental concerns converge with the ges environmental industry risk and company emissions from the asset4 database further analysis confirms that industry related risks are drivers of company specific environmental performance

aggregation and pairwise aggregation of demand when the distribution of income is fixed abstract this paper derives necessary and sufficient conditions for pairwise aggregation of the demand functions of a group of consumers conditions under which the mean demand for each pair of consumers satisfies the slutsky restrictions when the distribution of income is fixed the sufficient conditions imply existence of a representative competitive consumer whose demand is the mean demand of the group the necessary conditions imply that such a representative consumer exists for every fixed income distribution only if the consumers have homothetic preferences or alternatively if for each price vector all the consumers income expansion paths lie in the same plane

a generalization of working s model abstract working s 1943 model states that budget shares are linear functions of the logarithm of income it implies constant differences between corresponding marginal and budget shares a one parameter generalization is proposed which allows each marginal share to be a linear function of the corresponding budget share this model can be further extended with one extra parameter so that all goods are either specific substitutes or specific complements

why don t people trust experts abstractcredence goods such as health care legal and financial services and auto repair create a conflict of interest by requiring experts to diagnose and provide services to uninformed consumers mistreatment of consumers appears widespread empirically but a simple explanation for mistreatment under realistic assumptions has proved elusive i generalize uwe dulleck and rudolf kerschbamer s credence good model to incorporate the highly realistic assumption that consumers do not observe experts cost functions the model guarantees equilibrium mistreatment in a wide range of price setting and market environments the model also yields testable implications regarding the nature of mistreating firms and the direction of mistreatment

changes in the value relevance of earnings and book values over the past forty years this paper investigates systematic changes in the value relevance of earnings and book values over time we report three primary findings first contrary to claims in the professional literature the combined value relevance of earnings and book values has not declined over the past forty years and in fact appears to have increased slightly second while the incremental value relevance of bottom line earnings has declined it has been replaced by increasing value relevance of book values finally much of the shift in value relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one time items the increasing frequency of negative earnings and changes in average firm size and intangible intensity across time

credence goods markets with conscientious and selfish experts i study credence goods markets when there are both selfish and conscientious experts the selfish expert is a profit maximizer the conscientious expert wants to maximize profit and repair the consumer s problem there are two classes of equilibria uniform price equilibria and nonuniform price equilibria a consumer cannot infer the expert s type from his price list in a uniform price equilibrium but can do that in a nonuniform price equilibrium when the fraction of the conscientious expert is small the selfish expert will be honest about the severity of the consumer s problem when the fraction of the conscientious expert is large the selfish expert will cheat the consumer overcharging the consumer whenever he offers to repair the problem finally more conscientious experts may result in a larger social loss when the fraction of the conscientious expert is close to one of the two extremes 0 and 1 more conscientious experts will result in smaller social loss when the fraction of the conscientious expert is in a middle range more conscientious experts may result in a larger social loss

the effect of green investment on corporate behavior this paper explores the effect of exclusionary ethical investing on corporate behavior in a risk averse equilibrium setting while arguments exist that ethical investing can influence a firm s cost of capital and so affect investment no equilibrium model has been presented to do so we show that exclusionary ethical investing leads to polluting firms being held by fewer investors since green investors eschew polluting firms stock this lack of risk sharing among non green investors leads to lower stock prices for polluting firms thus raising their cost of capital if the higher cost of capital more than overcomes a cost of reforming i e a polluting firm cleaning up its activities then polluting firms will become socially responsible because of exclusionary ethical investing a key determinant of the incentive for polluting firms to reform is the fraction of funds controlled by green investors in our model empirically reasonable parameter estimates indicate that more than 20 green investors are required to induce any polluting firmss to reform existing empirical evidence indicates that at most 10 of funds are invested by green investors

second opinions and price competition inefficiency in the market for expert advice we consider a market in which an expert must exert costly but unobservable effort to identify the service that meets the consumer s need in our model experts offer competing contracts and the consumer may gather multiple opinions we explore the incentives that a competitive sampling of prices and opinions provides for experts to exert effort and find that there is a tension between price competition and the equilibrium effort in particular the equilibrium fails to realize the second best welfare optimum an intervention that limits price competition via price control increases welfare

advertising as information further evidence in the past 30 years the economics of information has become an important feature of the revolution in modern microeconomic theory the seminal literature includes theoretical advances by stigler 10 nelson 7 8 spence 9 and darby and karni 1 in an original approach laband 3 tests the proposition that the supply of product quality signals increases with a rise in the expected marginal return to consumers utilizing yellow pages advertisements in various urban settings in later expositions laband 4 5 provides further evidence of the durability of the informational content and the differences in information provision of television and commercial advertisements for different types of goods the present paper extends and provides alternatives to laband s tests of the impact of time costs faced by consumers on the informational content of advertising this study employs a supplementary category to laband s of credence goods developed in the literature 2 6 and analyzes the impact of income as a proxy for time and information costs with a unique intra city data set from new york city and los angeles

on doctors mechanics and computer specialists the economics of credence goods most of us need the services of an expert when our apartment s heating or our washing machine breaks down or when our car starts to make strange noises and for most of us commissioning an expert to solve the problem causes concern this concern does not disappear even after repair and payment of the bill on the contrary one worries about paying for a service that was not provided or receiving some unnecessary treatment this article studies the economics underlying these worries under which conditions do experts have an incentive to exploit the informational problems associated with markets for diagnosis and treatment what types of fraud exist what are the methods and institutions for dealing with these informational problems under which conditions does the market provide incentives to deter fraudulent behavior and what happens if all or some of those conditions are violated

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

the economics of breakdowns checkups and cures a market in which the owner of a durable good x contracts with an expert for diagnostic and treatment services is studied good x may be in one of three states health disease or failure only experts can determine whether x is healthy or diseased and perform treatment the owner cannot tell whether recommended treatment is really needed this creates an information based demand for health insurance by risk neutral consumers imperfections in the market for spot insurance may give rise to free diagnostic checks strategic procrastination and long term health maintenance agreements

saving dolphins boycotts trade sanctions and unobservable technology consumers boycott some goods because they do not approve the ways they are manufactured i examine the efficacy of boycotts and the role of trade policy in influencing the foreign exporter s technology choice even when its technology choice is unobservable boycott threats can prompt the foreign firm to adopt the technology consumers prefer import policy can augment this effect but when boycotts can have a substantial impact on demand a use of ad valorem tariffs yields the unintended result specific tariffs and quotas are free of this defect but specific tariffs are more effective than quotas in addressing consumers concern

honesty in a model of strategic information transmission we consider the following simple model of consumer fraud consumers need one of two possible repairs an expensive repair denoted e or an inexpensive repair denoted i the exogenous probability that a consumer needs the more costly remedy is r each consumer is assumed to know r an expert can observe with certainty which of the two repairs is needed and can offer to sell either to the consumer in a simple extension we allow for uncertainty with respect to the expert s observation we assume that selling the expensive remedy to a consumer who needs only the inexpensive one is more profitable than selling the inexpensive one thus h eii h1 iji where h denotes profit and i denotes conditional on needing the profit functions are increasing in the price of the respective repairs for convenience we suppress the dependence of h on prices in our notation we also assume that a consumer prefers to obtain the appropriate repair to the inappropriate one thus u eie u ije and u iii u eii where u is the consumer s payoff lastly we assume that the functions u eje and u e i are decreasing in the price of the expensive repair and that u iie and u iii are decreasing in the price of the inexpensive repair we also assume that u iie is decreasing in the price of the expensive repair since the consumer ultimately buys the expensive repair in this case see below for further assumptions regarding the repairs we are interested in the equilibrium levels of honesty in this model how honest is the expert at the equilibrium do consumers always follow the expert s advice does the level of honesty increase as the interests of the agents become more similar in a sense to be defined below our assumptions are similar to those in the abstract strategic information transmission models of vincent crawford and joel sobel 1982 and jerry green and nancy stokey 1980 we follow the former paper which asks whether the signals sent become less noisy as the agents preferences become more similar despite the similarity of our model to crawford sobel s we arrive at some different conclusions with respect to the expert s honesty vis a vis the agents closeness of interests we explain this in detail in section iii in addition we allow that the expert may be uncertain about the true state of the world we also explicitly model the level of expert honesty which extends crawford sobel the outline of the paper is as follows in section i we provide the details of the model and show that a unique equilibrium exists comparative static results and a simple extension incorporating the assumption of the incompetent expert are given in section ii we draw comparisons with crawfordsobel in section iii in section iv we conclude with a brief summary

consumer information in a market for expert services abstract we present a model of credence goods in which the consumers are heterogenous in terms of the valuation they place for getting a serious problem fixed we introduce consumer information into this framework by assuming that prior to visiting an expert some consumers receive an information signal about whether they have a serious or a minor problem we show that when the fraction of consumers with low willingness to pay is sufficiently high the expert does not cheat any low valuation consumer regardless of their information status but cheats the high valuation consumers those high valuation consumers with bad signals are the most frequent victims of cheating whereas those with good signals are the least likely victims when the fraction of consumers with low willingness to pay is below a certain threshold however the unique equilibrium involves no cheating

on the role of verifiability and commitment in credence goods markets a client has a problem but does not know whether it is serious or minor she consults an expert who can correctly diagnose and fix her problem this paper characterizes the equilibrium pricing and recommendation strategies of an expert under the assumptions that i the type of treatment is verifiable by the client ii the client has the option of rejecting any treatment recommendation and iii the expert is not liable for the outcome of the treatment it is found for any parameter configuration that there exist equilibria in which the expert makes fraudulent recommendations resulting in inefficient treatment the market outcome is compared with that under an alternative market environment in which the expert is liable for treatment outcome but the type of treatment performed is non verifiable it is shown that for some parameter configurations the equilibrium is more efficient when liability is in place than when the treatment is verifiable these findings stand in sharp contrast to the received wisdom that the market outcome under verifiability of treatment is efficient while the market outcome under liability for outcome is not finally this paper shows that the existence of some honest experts may induce more fraudulent behavior by opportunistic experts

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

demand aggregation and integrability of the hoglex demand function abstract we find indirect utility and expenditure functions and the implications of slutsky symmetry for the hoglex demand function x p y y p b p yc p these implications restrict the usefulness of the hoglex function in the theory of preference aggregation unless is constant

when do experts cheat and whom do they target a credence good is a product or service whose usefulness or necessity is better known to the seller than to the buyer this information asymmetry often persists even after the credence good is consumed i propose two new theories of expert cheating suggesting that identifiable heterogeneities among customers can cause expert sellers to defraud their customers according to these theories cheating arises as a substitute for price discrimination and experts cheat selectively for instance experts target high valuation and high cost customers finally selective cheating may damage the communication of useful information from customers to experts and result in inferior services

on the use of instrumental variables in accounting research abstract instrumental variable iv methods are commonly used in accounting research e g earnings management corporate governance executive compensation and disclosure research when the regressor variables are endogenous while iv estimation is the standard textbook solution to mitigating endogeneity problems the appropriateness of iv methods in typical accounting research settings is not obvious drawing on recent advances in statistics and econometrics we identify conditions under which iv methods are preferred to ols estimates and propose a series of tests for research studies employing iv methods we illustrate these ideas by examining the relation between corporate disclosure and the cost of capital

the relevance of the value relevance literature for financial accounting standard setting another view this paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors and provides insights into questions of interest to standard setters a primary focus of financial statements is equity investment other uses of financial statement information such as contracting do not diminish the importance of value relevance research value relevance questions can be addressed using extant valuation models value relevance studies address econometric issues that otherwise could limit inferences and can accommodate and be used to study the implications of accounting conservatism r 2001 elsevier science b v all rights reserved jel classification m41 m44 g12

information transmission in regulated markets the seminal papers of vincent p crawford and joel sobel 1982 and jerry green and nancy stokey 1980 study models in which a signal about the state of the world is transmitted from a perfectly informed sender to an uninformed receiver the authors study a model in which multiple signalers compete for consumers the authors ask how much information is revealed how consumers shopping around affects this information and how each is affected by incentives an implication of the model is that in a price regulated market for health care patients should not be prohibited from gathering more than one opinion

quality signaling through certification in developing countries this paper studies how signaling the credence attributes of consumer goods distorts their market equilibrium in developing countries costs of certification sunk in order to achieve credibility play a key role in producing an oligopolistic market leading to high prices that form a barrier for consumers in the south to lower the cost certification is better achieved by a single independent body which can be financed either by end consumers through a fee or by public subsidies the paper identifies the conditions under which each funding mechanism is most efficient taking into account the government s budget constraint the theoretical analysis is motivated with reference to agricultural seed certification

the impact of environmental management on firm performance environmental management has the potential to play a pivotal role in the financial performance of the firm many individuals suggest that profitability is hurt by the higher production costs of environmental management initiatives while others cite anecdotal evidence of increased profitability a theoretical model is proposed that links strong environmental management to improved perceived future financial performance as measured by stock market performance the linkage to firm performance is tested empirically using financial event methodology and archival data of firm level environmental and financial performance significant positive returns were measured for strong environmental management as indicated by environmental performance awards and significant negative returns were measured for weak environmental management as indicated by environmental crises the implicit financial market valuation of these events also was estimated cross sectional analysis of the environmental award events revealed differences for first time awards and between industries first time award announcements were associated with greater increases in market valuation although smaller increases were observed for firms in environmentally dirty industries possibly indicative of market skepticism this linkage between environmental management and financial performance can be used by both researchers and practitioners as one measure of the benefits experienced by industry leaders and as one criterion against which to measure investment alternatives

experts vs discounters consumer free riding and experts withholding advice in markets for credence goods this paper studies the incentives for credence goods experts to invest effort in diagnosis if effort is both costly and unobservable and if they face competition by discounters who are not able to perform a diagnosis the unobservability of diagnosis effort and the credence characteristic of the good induce experts to choose incentive compatible tariff structures this makes them vulnerable to competition by discounters we explore the conditions under which honestly diagnosing experts survive competition by discounters we identify situations in which experts misdiagnose consumers in order to prevent them from free riding on experts advice and we discuss policy options to solve the free riding consumers cheating experts problem

on the limitation of warranty duration this paper analyzes the frequently observed phenomenon that firms offer product warranties that are of much shorter duration than the life expectancy of these products it is shown that competitive equilibria may entail limitation of warranty duration if firms face adverse selection problems with respect to different consumers copyright 1989 by blackwell publishing ltd

credence goods experts and risk aversion abstract the existing literature on credence goods and expert services has overlooked the importance of risk aversion in this paper we extend a standard expert model of credence goods with verifiable service quality by considering risk averse consumers our results show that the presence of risk aversion reduces the expert s incentive to invest in diagnosis and may thus lead to consumers mistreatment

conflicts of interest information provision and competition in the financial services industry abstract in some markets sellers have better information than buyers over which products best serve a buyer s needs depending on the market structure this may lead to conflicts of interest in the provision of information by sellers this paper studies this issue in the market for financial services the analysis presents a new model of competition between banks where price competition influences the ensuing incentives for truthful information revelation we also compare conflicts of interest in two different firm structures specialized banking and one stop banking

credence goods monopolists abstract with a credence good consumers never discover how much of the good they actually need therefore the seller acts as the expert determining the customers requirements this information asymmetry creates strong incentives for the seller to cheat on services we analyze whether the market mechanism may induce non fraudulent seller behavior we consider four scenarios differing in the amount of information consumers have at hand to infer the seller s incentives to be honest in three constellations the profit maximizing credence goods monopolist provides honest services only in one scenario there is no trade

how social preferences shape incentives in experimental markets for credence goods credence goods markets suffer from inefficiencies caused by superior information of sellers about the surplus maximising quality while standard theory predicts that equal mark up prices solve the credence goods problem if customers can verify the quality received experimental evidence indicates the opposite we identify a lack of robustness with respect to heterogeneity in social preferences as a possible cause of this and conduct new experiments that allow for parsimonious identification of sellers social preference types our results confirm the assumed heterogeneity in social preferences and provide strong support for our explanation of the failure of verifiability to increase efficiency

relying on the information of interested parties we investigate the conventional wisdom that competition among interested parties attempting to influence a decisionmaker by providing verifiable information elicits all relevant information we find that if the decisionmaker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties competition may be unnecessary to achieve this result if the decisionmaker is unsophisticated or not well informed competition is not generally sufficient if the interested parties interests are sufficiently opposed however or if the decisionmaker is seeking to advance the parties welfare then competition can reduce or even eliminate the decisionmaker s need for prior knowledge about the relevant variables and for strategic sophistication in other settings only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow effective decisionmaking

the world capital markets perception of sustainability and the impact of the financial crisis using a unique dataset provided by the international rating agency ges we investigate the effects of corporate sustainability and industry related exposure to environmental and social risks on the market value of msci world firms the results show a negative relationship in the earlier years of our sample period however the analysis reveals that the capital market perception of sustainability has changed owing to the financial crisis looking at the height of the crisis in september 2008 the month in which lehman brothers shocked the world s capital markets by filing for chapter 11 bankruptcy protection we find that the previously negative perception of corporate sustainability across its various dimensions was positively affected and offset in addition as a moderated regression analysis shows the crisis led to a positive perception of corporate sustainability in industries that are exposed to higher environmental and social risks our study has the practical implication that executives in particular in industries with high environmental and social risks should increase their commitment to corporate sustainability due to the changes in the institutional setting triggered by the financial crisis

the corporate social performance financial performance link strategic managers are consistently faced with the decision of how to allocate scarce corporate resources in an environment that is placing more and more pressures on them recent scholarship in strategic management suggests that many of these pressures come directly from sources associated with social issues in management rather than traditional arenas of strategic management using a greatly improved source of data on corporate social performance this paper reports the results of a rigorous study of the empirical linkages between financial and social performance corporate social performance csp is found to be positively associated with prior financial performance supporting the theory that slack resource availability and csp are positively related csp is also found to be positively associated with future financial performance supporting the theory that good management and csp are positively related 1997 by john wiley sons ltd