irreversible investment with regime shifts under the real options approach to investment under uncertainty agents formulate optimal policies under the assumption that firms growth prospects do not vary over time this paper proposes and solves a model of investment decisions in which the growth rate and volatility of the decision variable shift between different states at random times a value maximizing investment policy is derived such that in each regime the firm s investment policy is optimal and recognizes the possibility of a regime shift under this policy investment is intermittent and increases with marginal q moreover investment typically is very small but in some states the capital stock jumps implications for marginal q and the user cost of capital are also examined

investment uncertainty and liquidity we analyze the dynamic investment decision of a firm subject to an endogenous financing constraint the threat of future funding shortfalls lowers the value of the firm s timing options and encourages acceleration of investment beyond the first best optimal level as well as highlighting another way by which capital market frictions can distort investment behavior this result implies that 1 the sensitivity of investment to cash flow can be greatest for high liquidity firms and 2 greater uncertainty has an ambiguous effect on investment

union wages and union decline evidence from the construction industry two well documented empirical findings are that unionized employees typically receive substantially higher compensation than their non union counterparts and that union representation in the united states has declined over time some observers have hypothesized a causal link between these two phenomena the achievement of a union wage premium they argue hastened union decline both by reducing union firms economic competitiveness and by inducing employers to adopt various union avoidance strategies using data from the current population survey and the census bureau s census of construction the authors test this hypothesis for the construction industry even in estimations that allow for a lagged response and incorporate a variety of controls they find no evidence that high union nonunion wage ratios in construction in the 1970s or 1980s resulted in lower union membership in 2000

hedging and liquidity this article develops a model for evaluating alternative hedging strategies for financially constrained firms a key advantage of the model is the ability to capture the intertemporal effects of hedging on the firm s financial situation we characterize the optimal hedge a wide range of alternative hedging strategies can be specified and the model allows us to determine in each case if the hedging strategy raises or lowers firm value and by how much we show that hedging firm value hedging cash flow from operations and hedging sales revenue are not optimal the article highlights the fact that every hedging strategy comes packaged with a borrowing strategy which requires careful consideration futures markets often provide the most liquid and convenient instruments for managing risk however because futures contracts are marked to market it is often impossible to simultaneously hedge cash flows and values for example a futures contract that locked in the value of gold that a corporation planned to extract in one year would generate an uncertain cash flow pattern over the year this article examines how liquidity and cash flow timing problems associated with different hedging strategies can affect a firm s value in our model the objective for hedging is to increase the firm s financial flexibility an optimal hedge maximizes the firm s liquidityslack in the form of excess cash or unused debt capacitywhen liquidity is most valuable this lowers the danger of costly financial distress reduces the effective cost of external financial constraints and makes value maximizing investments affordable a firm with no financial constraints does not gain from hedging and the higher the firm s financial constraints the greater the potential value of hedging the value of hedging depends critically on the design of the hedging strategy we show that the optimal hedge minimizes the variability in the marginal value of the firm s cash balances such a hedge efficiently redistributes cash balances across different states and periods taking cash from those states for which the marginal cost of the financial constraint is low and giving cash to those states for which the marginal

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

differences in social capital between 54 western european regions beugelsdijk s and van schaik t 2005 differences in social capital between 54 western european regions regional studies 39 1053 1064 based on the extant literature a newly developed index measuring social capital at the regional level in europe is presented it is shown that there are large regional differences on this social capital index it was tested if higher scores on this social capital index correlate with higher levels of economic development and regional economic growth in 54 western european regions though further research is required these preliminary results suggest a positive relationship exists between social capital and regional economic development the paper concludes with suggestions for future empirical research

corporate control and real investment in incomplete markets abstract in the standard real options approach to investment under uncertainty agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets however in most situations corporate executives face incomplete markets either because they receive compensation packages that restrict their portfolios or because cash flows from the firm s investment opportunities are not spanned by those of existing assets the present paper examines the impact of managerial risk aversion on investment decisions when the manager is exposed to idiosyncratic risk and faces the risk of a control challenge in the paper the investment policy selected by the manager reflects a trade off between his incentives to reduce risk and the need to ensure sufficient efficiency to prevent control challenges the analysis demonstrates that risk aversion induces the manager to speed up investment leading to a significant erosion of the value of the option to wait

endogenous growth decline in social capital and expansion of market activities abstract we model in an endogenous growth set up the hypotheses that the expansion of market activities weakens social capital formation and that firms can invest in formal mechanisms of control and enforcement to substitute for social capital trust work ethics honesty the model shows that the economy tends to grow faster when it is relatively poorer in social capital and that perpetual growth can be consistent with the progressive erosion of social capital these results may help to reconcile putnam s claim that social capital has declined in the u s with the satisfactory growth performance of the u s over the same period

excessive risk taking and the maturity structure of debt abstract this paper analyses the effect of short term debt on equityholders risk taking decisions we show that if short term debt limits the expropriation of debtholders it also implies a lower leverage which prevents the firm from increasing tax shields we then examine the incentive of equityholders to increase the firm risk when debtholders hold the option to swap a perpetual coupon bond with short term debt we find that this option mitigates equityholders risk shifting incentives compared to standard short term debt this restructuring option deters debtholders expropriation it increases leverage and it reduces the loss in tax shields due to asset substitution

social capital access and entrepreneurship we investigate the effect of social capital access on entrepreneurship social capital helps entrepreneurs to overcome resource constraints this is especially important in small communities where we often see a lack of market oriented institutions such as venture capital firms entrepreneurs gain access to social capital via club memberships combining differences in the number of individual club memberships with differences in the importance of social capital across communities we identify a causal small community mark up effect of individual club memberships on entrepreneurship assuming that unobserved heterogeneity that might influence both the individual s selection into clubs and the occupational choice to be an entrepreneur is independent of community size we find that the effect of club membership on the propensity to be an entrepreneur is 2 6 percentage points larger in small communities than in large communities robustness tests support the validity of our identifying assumption and results

residential mobility and social capital abstract this paper empirically investigates the role of social capital in households residential mobility behavior by considering its spatial dimension this study focuses on a household s social ties with people living nearby which we refer to as its local social capital local social capital may deter residential mobility because the resources stemming from them are location specific and will be less valuable if a household moves we conjecture that a household s possession of local social capital has a negative effect on its residential mobility and this negative effect of local social capital may be stronger on long distance mobility than on short distance mobility our empirical investigation is based on data from the panel study of income dynamics we obtain evidence which is supportive of these conjectures

optimal exercise of jointly held real options a nash bargaining approach with value diversion this paper provides a two stage decision framework in which two or more parties exercise a jointly held real option we show that a single party s timing decision is always socially efficient if it precedes bargaining on the terms of sharing however if the sharing rule is agreed before the exercise timing decision is made then socially optimal timing is attained only if there is a cash payment element in the division of surplus if the party that chooses the exercise timing can divert value from the project then the first best outcome may not be possible at all and the second best outcome may be implemented using a contract that is generally not optimal in the former cases our framework contributes to the understanding of a range of empirical regularities in corporate and entrepreneurial finance

time preference and real investment abstract this paper studies the investment timing problem of an entrepreneur with a non tradable real option with undiversifiable risk we find that the time preference can have a significant impact on the risk attitude toward the idiosyncratic risk which results from the wealth effect on the implied option value if the agent is impatient patient an increase in idiosyncratic volatility increases decreases the agent s value and delays hastens investment this finding suggests several important implications and empirical predictions for investment decisions in private firms and public firms with concentrated ownership

option exercise games an application to the equilibrium investment strategies of firms under the standard real options approach to investment under uncertainty agents formulate optimal exercise strategies in isolation and ignore competitive interactions however in many real world asset markets exercise strategies cannot be determined separately but must be formed as part of a strategic equilibrium this article provides a tractable approach for deriving equilibrium investment strategies in a continuous time cournot nash framework the impact of competition on exercise strategies is dramatic for example while standard real options models emphasize that a valuable option to wait leads firms to invest only at large positive net present values the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold copyright 2002 oxford university press

economics and identity this paper considers how identity a person s sense of self affects economic outcomes we incorporate the psychology and sociology of identity into an economic model of behavior in the utility function we propose identity is associated with different social categories and how people in these categories should behave we then construct a simple game theoretic model showing how identity can affect individual interactions the paper adapts these models to gender discrimination in the workplace the economics of poverty and social exclusion and the household division of labor in each case the inclusion of identity substantively changes conclusions of previous economic analysis

bowling alone a review essay abstract this paper is a critical review of robert putnam s influential analysis of social capital in america bowling alone the review argues that bowling alone reflects many of the strengths and weaknesses of the social capital literature like this literature bowling alone describes a remarkable number of facts concerning community life in america at the same time the book suffers from many of the conceptual problems and empirical weaknesses that have plagued the social capital literature i conclude that bowling alone does not succeed in establishing the importance of social capital in understanding various socioeconomic phenomena it purports to explain

causal parameters and policy analysis in economics a twentieth century retrospective the major contributions of twentieth century econometrics to knowledge were the definition of causal parameters within well defined economic models in which agents are constrained by resources and markets and causes are interrelated the analysis of what is required to recover causal parameters from data the identification problem and clarification of the role of causal parameters in policy evaluation and in forecasting the effects of policies never previously experienced this paper summarizes the development of these ideas by the cowles commission the response to their work by structural econometricians and var econometricians and the response to structural and var econometrics by calibrators advocates of natural and social experiments and by nonparametric econometricians and statisticians this paper considers the definition and identification of causal parameters in economics and their role in econometric policy analysis it assesses different research programs designed to recover causal parameters from data at the beginning of this century economic theory was mainly intuitive and empirical support for it was largely anecdotal at the end of the century economics has a rich array of formal models and a high quality database empirical regularities motivate theory in many areas of economics and data are routinely used to test theory many economic theories have been developed as measurement frameworks to suggest what data should be collected and how they should be interpreted econometric theory was developed to analyze and interpret economic data most econometric theory adapts methods originally developed in statistics the major exception to this rule is the econometric analysis of the identification problem and the companion analyses of structural equations causality and economic policy evaluation although an economist did not invent the phrase correlation does not imply causation 1 economists clari

a note on the theory and measurement of trust in explaining differences in economic growth this paper takes issue with the trend to attribute differences in economic growth rates to differences in interpersonal trust i discuss the world values survey wvs measure that is used to operationalise trust at the macro level i hypothesise that there is a mismatch between the theoretical argument and the empirical operationalisation of trust instead of measuring trust the wvs measure may instead proxy the well functioning of institutions i provide circumstantial evidence for this thesis by a principal components analysis of trust and institutions and a robustness test of zak and knack s 2001 trust and growth economic journal vol 111 295 321 seminal study on trust and economic growth

repeated games played by overlapping generations of players the present paper tries to explain cooperative behaviour in an organization run by a sequence of long but finitely lived agents we show that the folk theorem holds for infinitely repeated games with overlapping generations of finitely lived players any mutually beneficial outcome can approximately be sustained if the player s life span and the overlapping periods are long enough the result is stronger than the usual folk theorems in that it employs no assumption on the stage game such as the full dimensionality of payoff set or multiplicity of equilibria

identification of endogenous social effects the reflection problem this paper examines the reflection problem that arises when a researcher observing the distribution of behaviour in a population tries to infer whether the average behaviour in some group influences the behaviour of the individuals that comprise the group it is found that inference is not possible unless the researcher has prior information specifying the compisition of reference groups if this information is available the prospects for inference depend critically on the population relationship between the variables defining reference groups and those directly affecting outcomes inference is difficult to implossible if these variables are functionally dependent or are statistically independent the prospects are better if the variables defining reference groups and those directly affecting outcomes are moderately related in the population