a symmetric safety valve abstract how to set policy in the presence of uncertainty has been central in debates over climate policy concern about costs has motivated the proposal for a cap and trade program for carbon dioxide with a safety valve that would mitigate against spikes in the cost of emission reductions by introducing additional emission allowances into the market when marginal costs rise above the specified allowance price level we find two significant problems both stemming from the asymmetry of an instrument that mitigates only against a price increase one is that most important examples of price volatility in cap and trade programs have occurred not when prices spiked but instead when allowance prices collapsed second a single sided safety valve may have unintended consequences for investment we illustrate that a symmetric safety valve provides environmental and welfare improvements relative to the conventional one sided approach

psychological factors and stock option exercise we investigate stock option exercise decisions by over 50 000 employees at seven corporations controlling for economic factors psychological factors influence exercise consistent with psychological models of beliefs employees exercise in response to stock price trends exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons consistent with psychological models of values that include reference points employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year

payments settlement tiering in private and public systems what are the benefits provided by a payment system what are the trade offs in public versus private payment systems and in restricted versus open payments arrangements modern payment systems encompass a variety of institutional designs with varying degrees of counterparty protection we develop a framework that allows for an examination and comparison of payment systems and specification of conditions leading to their adoption we relate these conditions to the design of present large value payment systems fedwire chips target etc

complying with the kyoto protocol under uncertainty taxes or tradable permits the kyoto protocol allocates tradable emission allowances aaus to developed countries but they are free to choose a set of policy instruments to comply with these targets we compare two different policy instruments a tax and purely domestic tradable permits for the european union the us and japan information on abatement costs and international permit price is imperfect and stems from nine global economic models for a country party to the protocol the benefit of emission reduction is that it can sell more or has to buy less aaus we show that in this context permits entail a slightly lower expected cost than a tax for the us and japan whereas both instruments yield an almost equal outcome for europe applying weitzman s framework prices vs quantities res 1974 in this context we show the importance of the positive correlation between costs and benefits technology shocks that lead to low abatement costs in one country generally lead to low abatement costs in other countries too thereby leading to a low international permit price in the true up period

correlated uncertainty and policy instrument choice abstract for two decades environmental economists have generally maintained that benefit uncertainty is irrelevant for choosing between price and quantity instruments but that cost uncertainty matters with the identity of the efficient instrument depending upon the relative slopes of the marginal benefit and cost functions but in the presence of simultaneous correlated uncertainty such policy instrument recommendations may be inappropriate with plausible values of relevant parameters the conventional identification of a price instrument will be reversed to favor instead a quantity instrument the opposite reversal from the choice of a quantity instrument to a price instrument seems less likely to occur

a model of tiered settlement networks this paper develops a model of settlement system to study the endogenous structure of settlement networks and the welfare consequences of clearing agent failure the equilibrium degree of tiering is endogenously determined by the cost structure and the information structure the degree of tiering is decreasing in the fixed cost of operating the second tier network and the availability of public credit history furthermore the welfare effects of clearing agent failure can be decomposed into operational inefficiency and the loss of private information

insiders sales under rule 10b5 1 plans and meeting or beating earnings expectations we find that firms with insider sales executed under rule 10b5 1 plans exhibit a higher likelihood of meeting or beating analysts earnings expectations mbe this relation between mbe and plan sales is more pronounced for the plan sales of chief executive officers ceos and chief financial officers cfos and is nonexistent for other key insiders the market reactions to firms that successfully meet or beat expectations are relatively positive compared with their peers that fail to do so one interpretation of our results is that ceos and cfos who sell under these plans may be more likely to engage in strategic behavior to meet or beat expectations in an effort to maximize their proceeds from plan sales however readers should exercise caution in making inferences because the potential presence of limit order transactions makes it difficult to unambiguously determine the direction of causality of the relation we document this paper was accepted by mary barth accounting

inside and outside money as alternative media of exchange we study a random matching model of money in which a subset of people called bankers have known histories and the rest called nonbankers have unknown histories earlier we showed that if there are no outside assets then an optimal arrangement has bankers issuing objects banknotes that are used in trades involving nonbankers here the same model is used to compare such exclusive use of inside money to the exclusive use of outside money we show that the set of implementable outcomes using outside money is a strict subset of the set using inside money

unsystematic security price movements management earnings forecasts and revisions in consensus analyst earnings forecasts empirical evidence suggests that information about a firm s future earnings prospects is important to investors griffin 1976 givoly and lakonishok 1979 1980 and imhoff and lobo 1984 reported statistically significant abnormal stock returns before at and after announcements of analyst earnings forecast revisions in addition imhoff and lobo documented positive correlation between the magnitudes of the forecast revisions and the abnormal returns these findings are consistent with the hypothesis that investors find analyst forecast revisions informative another source of information about future earnings is projections from corporate officials several studies have found unsystematic stock price changes prior to and or immediately surrounding the public release of management earnings forecasts e g foster 1973 nichols and tsay 1979 patell 1976 jaggi 1978 penman 1980 and waymire 1984 the conclusion from this research is that management forecasts also convey information to investors

prices versus quantities versus hybrids in the presence of co pollutants we investigate the optimal regulation of a pollutant given its abatement interaction with another pollutant under asymmetric information about firms abatement costs we take a policy relevant second best approach by assuming that the co pollutant is regulated exogenously but perhaps not efficiently our focus is on optimal policy choice in this setting and we derive rules for determining whether a pollutant should be regulated with an emissions tax an emissions market or a market with price controls given the regulation of its co pollutant we find that the policy choice for a pollutant is unaffected by its interaction with a co pollutant that is controlled with a fixed number of tradable permits because changes in emissions of the primary pollutant do not affect aggregate emissions of the co pollutant however when a co pollutant is controlled with a tax the policy choice for the primary pollutant must account for its effect on expected co pollutant damage through changes in the variance of co pollutant emissions consequently standard conclusions about the environmental policy choice problem must be modified in this case our results have important implications for designing policies for greenhouse gases under uncertainty

insiders incentives for asymmetric disclosure and firm specific information flows abstract recent research suggests that insiders incentives for capturing cash flows affect price formation process in which insiders are inclined to withhold good news and to accelerate the release of bad news jin and myers 2006 we investigate whether insiders incentives for private control benefit proxied by control ownership wedge affect firm specific return characteristics we find that control ownership wedge is negatively related to the likelihood of positive return jumps and positively related to the extent of asymmetric market reaction to good news rather than to bad news overall our results support the notion that corporate insiders increase opaqueness and withhold good news in order to capture unexpected cash flow

transferability finality and debt settlement abstract payment fundamental to exchange in a decentralized economy often takes the form of transfers of inside money i e specialized forms of debt associated with each type of inside money is a set of rules that governs both the legitimacy of such transfers as means of extinguishing other debts and the allocation of the ensuing risks in this paper we develop a model of debt as inside money in a simple mechanism design framework we show that transferable debt that can be used to settle other debt obligations with finality can be a welfare improving arrangement in the presence of limited enforcement powers transferable debt has two advantages over simple chains of credit it allows for removal of less than perfectly reliable agents from the chain in a timely fashion and it allows agents to direct payments to the proper party without direct communication with other members of the credit chain

market valuation of employee stock options this study investigates whether investors incorporate the value of a firm s outstanding employee stock options into its stock price i estimate the outstanding options value for a sample of firms for which outstanding fixed options exceed 5 of outstanding common shares in 1988 i find a negative correlation between the value of outstanding options and a firm s share price the correlation is stronger i for the option s intrinsic value than for the option s time value ii for options that are later in their vesting stage than earlier in their vesting stage and iii for large firms than for small firms in addition the fasb s method for calculating compensation expense has no explanatory power in the presence of this paper s calculation of the options value

combining price and quantity controls to mitigate global climate change abstract uncertainty about compliance costs causes otherwise equivalent price and quantity controls to behave differently and leads to divergent welfare consequences although most of the debate on global climate change policy has focused on quantity controls due to their political appeal this paper argues that price controls are more efficient simulations based on a stochastic computable general equilibrium model indicate that the expected welfare gain from the optimal price policy is five times higher than the expected gain from the optimal quantity policy an alternative hybrid policy combines both the political appeal of quantity controls with the efficiency of prices using an initial distribution of tradeable permits to set a quantitative target but allowing additional permits to be purchased at a fixed trigger price even sub optimal hybrid policies offer dramatic efficiency improvements over otherwise standard quantity controls for example a 50 trigger price per ton of carbon converts the 3 trillion expected loss associated with a simple 1990 emission target to a 150 billion gain these results suggest that a hybrid policy is an attractive alternative to either a pure price or quantity system

carbon markets and technological innovation this paper examines the effects of firm level innovation in carbon abatement technologies on optimal cap and trade schemes with and without price controls we characterize optimal cap and trade regulation with a price cap and a price floor and compare it to the special cases of pure taxation and a simple emissions cap innovation shifts the tradeoff between price and quantity based instruments towards quantitybased emissions trading schemes more specifically an increase in innovation effectiveness lowers the optimal emissions cap and leads to relaxed price controls unless the slope of the marginal environmental damage curve is small because of the decrease in the emissions cap innovation in abatement technologies can lead to a higher expected carbon price so as to provide sufficient incentives for private r d investments the expected carbon price decreases once innovative technologies are widely used

soft and hard price collars in a cap and trade system a comparative analysis we use a stochastic dynamic framework to compare price collars price ceilings and floors in a cap and trade system with uncertainty in the level of baseline emissions and costs we consider soft collars which provide limited volume of additional emission allowances a reserve at the price ceiling and hard collars which provide an unlimited supply of additional allowances thereby preventing allowance prices from exceeding the price ceiling conversely allowances are removed from the market if prices fall to the floor we find that increasing the size of the reserve strictly lowers expected net present values of compliance costs however there is a diminishing effect as the allowance reserve is expanded most of the expected cost savings are achieved with a modest reserve consequently a rather limited soft price collar could provide considerable assurance about cost while preventing the possibility that emissions could spiral out of control

enforcement and price controls in emissions trading this paper examines how enforcement affects the structure and performance of emissions trading programs with price controls under uncertainty about firms abatement costs the analysis highlights how an enforcement strategy can cause abatement cost risk to be transmitted to enforcement costs via the price of permits when this occurs accommodating the effect of abatement cost risk with an optimal policy results in higher expected emissions and lower expected permit price than their second best optimal values however it is possible to design an enforcement strategy that shields enforcement costs from abatement cost risk by tying sanctions directly to permit prices this enforcement strategy stabilizes enforcement effort the optimal permit supply and price controls are independent of enforcement costs and the policy produces the second best optimal outcome

ceo stock option awards and the timing of corporate voluntary disclosures abstract we investigate whether ceos manage the timing of their voluntary disclosures around stock option awards we conjecture that ceos manage investors expectations around award dates by delaying good news and rushing forward bad news for a sample of 2 039 ceo option awards by 572 firms with fixed award schedules we document changes in share prices and analyst earnings forecasts around option awards that are consistent with our conjecture we also provide more direct evidence based on management earnings forecasts issued prior to award dates our findings suggest that ceos make opportunistic voluntary disclosure decisions that maximize their stock option compensation

carbon markets 15 years after kyoto lessons learned new challenges abstract carbon markets are substantial and they are expanding there are many lessons from market experiences over the past eight years there should be fewer free allowances better management of market sensitive information and a recognition that trading systems require adjustments that have consequences for market participants and market confidence moreover the emerging market architecture features separate emissions trading systems serving distinct jurisdictions and a variety of other types of policies exist alongside the carbon markets this situation is in sharp contrast to the top down integrated global trading architecture envisioned 15 years ago by the designers of the kyoto protocol and raises a suite of new questions in this new architecture jurisdictions with emissions trading have to decide how whether and when to link with one another stakeholders and policymakers must confront how to measure the comparability of efforts among markets as well as relative to a variety of other polic

on a fundamental advantage of permits over taxes for the control of pollution we extend the tax versus permits literature by considering permit supply functions and pollution tax functions that are generalizations of the usual constant permit supply and constant pollution tax rate in our model pollution is not uniformly mixed and the regulator is uncertain about the polluting firms abatement costs we determine the optimal permit supply functions and the optimal pollution tax functions using these functions we show that permits lead unambiguously to lower total expected costs than taxes we analyze the magnitude of this difference for a simple model of climate change by relating the optimal permit supply functions to weitzman am econ rev 68 683 691 1978 we provide a new interpretation of his results

employee stock option exercises an empirical analysis this paper describes the exercise behavior of over 50 000 employees who hold longterm options on employer stock at eight corporations employees typically exercise options years before expiration commonly sacrificing half of the black scholes value exercise is strongly associated with recent stock price movements the market to strike ratio proximity to vesting dates time to maturity volatility and the employee s level within the company these findings have implications for compensation planners the fasb as it develops a new accounting standard for options and financial statement users and preparers who apply and interpret the new fasb standard

a note on correlated uncertainty and hybrid environmental policies this note examines the effects of correlated uncertainty between abatement costs and pollution damage on hybrid emissions control policies in particular i show how correlated uncertainty affects the structure and performance of control policies that combine permit trading with price controls moreover i show how correlated uncertainty affects the choice between a simple emissions tax versus a hybrid policy under correlated uncertainty constant marginal damage is no longer necessary or sufficient for a tax to be an optimal policy

who wants a good reputation we examine a market in which long lived firms face a short term incentive to exert low effort but could earn higher profits if it were possible to commit to high effort there are two types of firms inept firms who can only exert low effort and competent firms who have a choice between high and low effort there is occasional exit and competent and inept potential entrants compete for the right to inherit the departing firm s reputation consumers receive noisy signals of effort choice and so competent firms choose high effort in an attempt to distinguish themselves from inept firms a competent firm is most likely to enter the market by purchasing an average reputation in the hopes of building it into a good reputation than either a very low reputation or a very high reputation inept firms in contrast find it more profitable to either buy high reputations and deplete them or buy low reputations

discussion of information distribution within firms evidence from stock option exercises abstract huddart and lang j accounting econom 34 2003 documents that higher level of employee option exercise during a particular month is associated with lower returns in subsequent months suggesting employees exploit private information in their exercise decisions while the paper extends the insider trading literature that has focused on top executives a number of inconsistencies with prior studies remain unresolved moreover the study does not establish a direct link to the private information employees supposedly exploit establishing such a link is warranted here in the light of the surprising finding that exercises by senior employees are no more informative than those by lower rank employees

alternative approaches to cost containment in a cap and trade system we compare several emissions reduction instruments including quantity policies with banking and borrowing price policies and hybrid policies safety valve and price collar using a dynamic model with stochastic baseline emissions the instruments are compared under the design goal of obtaining the same expected cumulative emissions across all options based on simulation analysis with the model parameterized to values relevant to proposed us climate mitigation policies we find that restrictions on banking and borrowing including the provision of interest rates on the borrowings can severely limit the value of the policy depending on the regulator chosen allowance issuance path although emissions taxes generally provide the lowest expected abatement costs a cap and trade system combined with either a safety valve or a price collar can be designed to provide expected abatement costs near those of a tax but with lower emissions variance than a tax consistently a price collar is more cost effective than a safety valve for a given expected cumulative emissions outcome because it encourages inexpensive abatement when abatement costs decline

the payments system liquidity and rediscounting in an economy where fiat money serves both as a medium of exchange and the means by which debts are cleared it is shown that nonoptimal equilibria of constrained liquidity may arise optimality may be restored by temporary expansions of the monetary base e g an active central bank discount window copyright 1996 by american economic association

second best instruments for near term climate policy intensity targets vs the safety valve abstract current proposals for greenhouse gas emissions regulations in the united states mainly take the form of emissions caps with tradable permits since weitzman s 1974 3 study of prices vs quantities economic theory predicts that a price instrument is superior under uncertainty in the case of stock pollutants given the general belief in the political infeasibility of a carbon tax in the us there has been recent interest in two other policy instrument designs hybrid policies and intensity targets we extend the weitzman model to derive an analytical expression for the expected net benefits of a hybrid instrument under uncertainty we compare this expression to one developed by newell and pizer 2006 6 for an intensity target and show the theoretical minimum correlation between gdp and emissions required for an intensity target to be preferred over a hybrid in general we show that unrealistically high correlations are required for the intensity target to be preferred to a hybrid making a hybrid a more practical instrument in practice we test the predictions by performing monte carlo simulation on a computable general equilibrium model of the us economy the results are similar and we show with the numerical model that when marginal abatement costs are non linear an even higher correlation is required for an intensity target to be preferred over a safety valve

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process