earnings and pension compensation the effect of eligibility pension compensation is shown to rise with age and tenure until the worker becomes eligible to receive benefits at this point pension compensation drops sharply if workers are paid their marginal product in each period earnings grow at a lower rate prior to eligibility but must increase when the worker reaches the age of eligibility this hypothesis is tested using data from the retirement history study and earnings are found to rise significantly after eligibility this finding supports the concept of spot market compensation and is in direct conflict with the predictions of lazear type lifetime contracts

pension portability and labor mobility evidence from the survey of income and program participation abstract the evidence presented in this paper casts doubt on the proposition that pension backloading is responsible for the low job mobility rates observed for pension covered workers it corroborates earlier findings by the authors based on different data that pension covered jobs offer higher levels of compensation than workers can obtain elsewhere and it is this compensation premium rather than non portability that accounts for lower turnover among pension covered workers this evidence is further bolstered by the finding that defined contribution plans which are not backloaded and defined benefit plans bear similar negative relations to mobility

stayers as workers and savers the classic selection effect posits that deferred wages attract stayers the results in this paper suggest an alternative explanation deferred wage contracts attract savers all else constant savers are better workers than nonsavers a firm naturally works harder to retain better workers and thus is led to pay them higher wages thereby encouraging savers to remain in the firm s employ this process creates a confluence of deferred wages high levels of compensation and low quit propensities in this explanation staying is merely the result of a selection process and not the underlying factor that drives selection

the political economy of corporate control and labor rents in a democracy a political majority can influence both the corporate governance structure and the return to human and financial capital we argue that when financial wealth is sufficiently concentrated there is political support for high labor rents and a strong governance role for banks or large investors the model is consistent with the great reversal phenomenon in the first half of the twentieth century we offer evidence that in several financially developed countries a financially weakened middle class became concerned about labor income risk associated with free markets and supported a more corporatist financial system

a path dependent contingent claims approach to capacity investments this note presents a contingent claims approach to strategic capacity planning we develop models for capacity choice and expansion decisions in a single firm environment where investment is irreversible and demand is uncertain these models illustrate specifically the relevance of path dependent options analysis to planning capacity investments when the firm adopts demand tracking or average capacity strategies it is argued that asian average type real options can explain hysteresis phenomena in addition to providing superior control of assets in place

the usefulness of the wind up measure of pension liabilities a labor market perspective financial economists have long favored the use of a wind up measure of the firm s pension liabilities yet the pension liabilities of the firm also represent the pension wealth of its workers it is reasonable to presume that workers and shareholders have a common view of the pension contract if the wind up measure depicts the true pension liabilities of the firm then the wage concession granted by its workers must reflect the fact that the firm may choose to terminate the plan at any time data on the wageservice characteristics of the membership of a sample of final earnings plans in canada suggest contrary to the implications of the wind up measure that workers wages do not internalize accruing pension benefits on a year to year basis instead the data suggest that pension plans may be a vehicle through which a significant portion of the total compensation of individual employees is deferred until their later work years and that the wind up measure may well understate the pension liabilities of an on going firm the financial accounting standards board 4 or fasb recently proposed that net pension assets or liabilities appear on the corporate balance sheet in order to make operational the concept of the augmented balance sheet one must construct measures of both pension assets and pension liabilities the noncontroversial view at least among economists is that pension assets be valued at market the fasb endorses this view the measurement of pension liabilities on the other hand remains controversial financial economists such as sharpe 10 have traditionally advocated a market or wind up measure of the firm s pension liabilities the pensions due under the terms of the plan if it were to be immediately terminated are calculated and these pensions are then costed at current annuity rates the accrued benefit method without salary projection is the actuarial valuation method used in the calculation the wind up measure is the market value of the firm s pension liabilities since it identifies the precise amount that the firm would require to discharge its legal obligation if the plan were terminated 1 yet the fasb now rejects the use of this method of calculating the firm s

why federal workers don t quit quit rates in the federal government are abnormally low some economists and the federal government itself have taken this to mean that federal wages are too high this paper provides an alternative explanation it shows that the timing of compensation across a career as well as its level affect quit rates pensions in particular impose large penalties on workers who quit early and the portion of federal pay in the form of pensions is very high this feature of the federal pay structure may explain its abnormally low quit rate as a general proposition quit rates are poor indices for judging pay adequacy

reversion taxes contingent benefits and the decline in pension funding abstract the evidence since the mid 1980s contradicts the axiom that firms maximize the arbitrage value of their tax exempt pension funds instead it suggests the emergence of a new minimum funding paradigm a prominent candidate to explain the change is a sequence of escalating reversion taxes enacted between 1986 and 1990 a valuable option to a pension plan sponsor is its ability to cancel the contingent portion of its pension obligations pension promises beyond those legally required as a result of reversion taxes this option value is preserved only if the firm maintains zero excess assets and falls in proportion to the amount of excess assets retained in the pension fund the potential for this tax policy to profoundly affect the economics of pension funding seems apparent by 1995 the cumulative effect of the new contribution behavior resulted in a 60 percent reduction in excess pension assets

ambiguity aversion in buyer seller relationships a contingent claims and social network explanation negotiations between buyers and sellers or suppliers of goods and services have become increasingly important due to the growing trend towards international purchasing outsourcing and global supply networks together with the high uncertainty associated with them this paper examines the effect of ambiguity aversion on price negotiations using multiple priors based real options with non extreme outcomes we study price negotiation between a buyer and seller in a dual contingent claims setting call option holding buyer vs put option holding seller to derive optimal agreement conditions under ambiguity with and without social network effects we find that while higher ambiguity aversion raises the threshold for commitment for the seller it has equivocal effects on the buyer s negotiation prospects in the absence of network control conversely when network position and relative bargaining power are accounted for we find the buyer s implicit price or negotiation threshold decreases or increases unequivocally with increasing aversion to ambiguity extending extant real options research on price negotiation to the case of ambiguity this set of results provides new insights into the role of ambiguity aversion and network structures in buyer seller relationships including how they influence the range of negotiation agreement between buyers and sellers the results also help assist managers in formulating robust buying selling strategies for bargaining under uncertainty by knowing their network positions and gathering background information or inferring the other party s ambiguity tolerance beforehand buyers and sellers can anticipate where the negotiation is heading in terms of price negotiation range and mutual agreement possibilities

pension regulation and the market value of pension liabilities a contingent claims analysis using parisian options abstract we analyze the market consistent valuation of pension liabilities in a contingent claim framework whereby a knock out barrier feature is applied to capture early regulatory closure of a pension plan we investigate two cases which we call immediate closure procedure and delayed closure procedure in an immediate closure procedure when the assets value hits the regulatory boundary the pension plan is terminated immediately whereas in a delayed closure procedure a grace period is given to the pension fund for reorganization and recovery before premature closure is executed the framework is then used to construct fair pension deals furthermore we provide rules for deriving the optimal recovery period in pension regulation using utility analysis and interconnect the recovery period to the regulatory liquidation probability

benefit generosity and the income effect on labour supply quasi experimental evidence this study uses an unanticipated exogenous doubling of the legal minimum pension in ukraine as a unique quasi experiment to evaluate the income effect on various aspects of labour supply among the elderly in contrast to previous studies the unusually simple pension eligibility rule allows estimating a pure causal income effect applying reduced form difference in differences and regression discontinuity as well as instrumental variable methods on two nationally representative data sets yields a retirement semi elasticity of 0 1 0 2 men and women respond at different margins of labour supply but with similar overall effect

a quick algorithm for pricing european average options an algorithm is described that prices european average options the algorithm is tested against monte carlo estimates and is shown to be accurate the speed of the algorithm is comparable to the black scholes algorithm a closed form solution is derived for european geometric average options

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

on the effect of demand randomness on inventories and costs we explore analytically cardinal effects of the extent of demand randomness on optimal inventory levels and the associated expected costs to model changes in demand randomness we make extensive use of a mean preserving transformation commonly used in probabilistic microeconomics as well as the notion of risk pooling aggregating independent demands for the single period news vendor model the order quantity and associated costs are shown to depend on the randomness parameter in a simple and highly interpretable manner we show by a simple example that in some situations risk pooling might neither reduce inventories nor move them closer to the mean or median demand the managerial relevance of such analyses is discussed

investment and capacity choice under uncertain demand this paper extends the real options literature by discussing an investment problem where a firm has to determine optimal investment timing and optimal capacity choice at the same time under conditions of irreversible investment expenditures and uncertainty in future demand after the project is installed with a certain maximum capacity this capacity is fixed as an upper boundary to the output and cannot be adjusted later on it turns out that in the framework of this once and for all decision uncertainty in future demand leads to an increase in optimal installed capacity but on the other hand it causes investment to be delayed to an extent that even small uncertainty makes waiting and accumulation of further information the optimal decision for large ranges of demand limiting the capacity which may be installed weakens this extreme effect of uncertainty

pricing european average rate currency options abstract this paper develops a simple methodology that yields closed form analytical approximations for valuing european option claims involving the arithmetic average of future foreign exchange rates the main advantage of the approach is that it avoids the need to adopt time consuming numerical procedures the precision of the resulting formula and the distributional assumption that underlies it is examined by way of monte carlo simulations jel f31

the economic functions of private pensions an empirical analysis this paper presents an empirical analysis of the economic functions of defined benefit db pensions firms providing pensions choose between db and defined contribution formats the latter is essentially a tax preferred savings account the former may fill other roles determinants of firms choice of plan are estimated using plan sponsors reports to the internal revenue service firms that are larger are unionized employ mainly one sex invest in specific training and pay lower wages are more likely to provide db coverage these results suggest that the economic role of pensions is broader than mere provision of tax preferred savings accounts

collaboration in tool development and capacity investments in high technology manufacturing networks the procurement of capital intensive tools for hi tech industries is one of the most complex tasks astronomical amounts of capital are invested in the processing equipment further there is a large effort from the original equipment manufacturer oem in customizing the high capital intensive equipment to suit their production process this problem has received little attention from the quantitative decision making literature for the first time we analyze the problem of oem deciding on collaborating with the tool supplier via a special type of contract which we refer as collaboration options we show that there are benefits to both the oem and the tool suppliers from the collaboration we develop a two stage strategic model for collaborative tool development and optimal capacity investment in the first stage we solve an optimal collaboration problem faced by the oem we formulate this problem as a discrete time stochastic stopping problem for a finite horizon we use a policy iteration algorithm for deciding on optimal collaboration policy in the second stage we model the optimal investment decision of the oem in tool development and capacity acquisition using real options theory unlike the traditional options literature we consider the option value determined from the first stage model and decide on the optimal amount for investment

dependency revisited international markets business cycles and social spending in the developing world while increased exposure to the global economy is associated with increased welfare effort in the organization for economic cooperation and development oecd the opposite holds in the developing world these differences are typically explained with reference to domestic politics tradables unions and the like in the developing world are assumed to have less power or interests divergent to those in the oecd interests that militate against social spending i claim that such arguments can be complemented with a recognition that developed and developing nations have distinct patterns of integration into global markets while income shocks associated with international markets are quite modest in the oecd they are profound in developing nations in the oecd governments can respond to those shocks by borrowing on capital markets and spending countercyclically on social programs no such opportunity exists for most governments in the developing world most of which have limited access to capital markets in tough times more significant incentives to balance budgets and as a result cut social spending at the times it is most needed thus while internationally inspired volatility and income shocks seem not to threaten the underpinnings of the welfare state in rich nations it undercuts the capacity of governments in the developing world to smooth consumption and particularly consumption by the poor across the business cycle the author would like to thank steph haggard kristin bakke wongi choe tim jones and seminar participants at duke university penn state university washington university mit and the university of new mexico for their helpful comments nancy brune mark hallerberg and rolf strauch and nita rudra were very generous in providing their capital account oecd fiscal and potential labor power data respectively

the implicit pension contract developments and new directions pension economics has emerged as a separate literature over the past decade some of the early pension work was devoted to financial issues including implications of pensions for savings rates and portfolio allocation most new developments however have stemmed from research surrounding labor markets this research has led to an implicit contract theory of pensions a theory that has pensions playing a more complicated role in worker firm relation than heretofore realized the theory explains much of economic behavior in labor markets and bridges a gap between labor and financial literatures this essay describes the genesis for these ideas and traces some of the most important research results in the area an equal amount of spece is devoted to a consideration of likely directions for future research

outsourcing and capacity planning in an uncertain global environment firms employing offshore outsourcing strategies may face both exchange rate and demand uncertainties in this paper we show that the firms may benefit from operational option to switch production by keeping capacities with both domestic and foreign suppliers the value of the operational option increases as the exchange rate uncertainty or demand uncertainty increases in addition when the firms become risk averse they may use domestic capacity to hedge against offshore capacity as a result the firms may choose to hold local capacity even if it exhibits negative marginal contribution to the profit furthermore risk averse firms may keep more total capacity than risk neutral firms

real investment options with multiple sources of rare events abstract we value real investment options when the underlying asset follows a mixed jump diffusion process involving various types sources of rare events jumps these jumps are assumed independent of each other with each type having a log normally distributed jump size and a random poisson distributed arrival time they may represent uncertainties about the arrival and impact on the underlying investment of new information concerning technological innovation competition political risk regulatory effects and other sources an analytic solution is presented for european claims call or put options with multiple sources of jumps a discrete time markov chain methodology implemented within a finite difference scheme is proposed for the valuation of american as well as european options the approach is also applicable to financial options with multiple types of rare events the approach is illustrated through valuing complex real options with compound features involving interactions between optimal investment and subsequent operating decisions specifically we value a growth option and an extension option

the new political economy of taxation in advanced capitalist democracies earlier versions of this paper were presented at the 1999 annual meeting of the american political science association september 1 5 atlanta ga and the 2000 annual meeting of the midwest political science association april 27 30 chicago il the authors thank steffen ganghof philip genschel mark hallerberg alex hicks william keech dennis quinn and the anonymous reviewers and editor of this journal for many helpful comments and dennis quinn for generously sharing data duane swank thanks the german marshal fund of the united states and marquette university for support of work incorporated in this paper data utilized in this paper are available from duane swank marquette edu

unions pension wealth and age compensation profiles this paper examines the effect of unions on both the magnitude and distribution of pension benefits an analysis of experience during 1973 79 under a sample of defined benefit plans shows that beneficiaries retire at an earlier age under collectively bargained plans than under other plans receive larger benefits when they retire and receive larger increases in their benefits after they retire also benefit differentials within and across cohorts of retirees are smaller among union than nonunion beneficiaries the average union nonunion differential is therefore greater in total compensation wages plus pension benefits than in wages alone because pension benefits grow more rapidly with years of service in the nonunion sector however the total compensation differential narrows with age more quickly than the wage differential

investment timing and optimal capacity choice for small hydropower projects this paper presents a method for assessing small hydropower projects that are subject to uncertain electricity prices we present a real options based method with continuous scaling and we find that there is a unique price limit for initiating the project if the current electricity price is below this limit it is never optimal to invest but above this limit investment is made according to the function for optimal size the connection between the real option and the physical properties of a small hydropower plant is dealt with using a spreadsheet model that performs a technical simulation of the production in a plant based on all the important choices for such a plant the main results of the spreadsheet are simulated production size and the investment costs which are in turn used for finding the value of the real option and the price limit the method is illustrated on three different norwegian small hydropower projects

government employment and the provision of fringe benefits this study uses individual level data from the united states to examine the influence of government employment on the provision of five major fringe benefits four of the five benefits are more likely to be provided to government workers than to their private sector counterparts unlike wage comparisons which typically find substantial overpayment only for federal workers the findings suggest that past wage differentials underestimate the true compensation advantage enjoyed by government workers

pension benefits and male female wage differentials female members of defined benefit pension plans will receive greater pension benefits than males with identical work and earnings histories since females have greater longevity yet females have higher turnover rates and lower earnings both of which serve to reduce pension benefits relative to those received by males we illustrate the net effect on pension benefits in defined benefit plans of gender differences in longevity turnover and wages we conclude that females tend to receive lower pension benefits and therefore that pension benefits are more likely to exacerbate than to reduce the male female wage gap

the economic burden of corporate pension liabilities the pension liabilities reported by firms fall far short of the true economic pension liabilities incurred by firms economic liabilities arise not because firms have mnade a legally binding promise to provide a pension but because workers have deposited savings with their firnms in anticipation of receiving a pension upon retirement emnpirical evidence from labor market and stock market data strongly suggests that these savings flows are made by workers as if they expect a real pension at retirement and beyond the results suggest that corporations have in reality incurred liabilities far in excess of their legal liabilities true economic funding ratios for example have been approximately 70 per cent during the postwar period and have varied widely across pension plans if stock market participants calculate these true pension burdens inaccurately or rely only on reported liabilities then stock valuations are likely to contain large errors

do parties matter for economic outcomes a regression discontinuity approach a long standing issue in political economics is to what extent party control makes a difference in determining fiscal and economics policies this question is very difficult to answer empirically because parties are not randomly selected to govern political entities this article uses a regression discontinuity design namely party control changes discontinuously at 50 of the vote share which can produce near experimental causal estimates of the effect of party control on economic outcomes the method is applied to a large panel data set from swedish local governments with a number of attractive features the results show that there is an economically significant party effect left wing governments spend and tax 2 3 more than right wing governments left wing governments also have 7 lower unemployment rates which is partly due to that left wing governments employ 4 more workers than right wing governments jel c21 d72 d78 h71 h72

remodeling the competition for capital how domestic politics erases the race to the bottom this paper proposes and tests a new formal model of the competition for capital using the analogy of a tournament as a substitute for the race to the bottom model our key insight is that political costs that accompany legislating have both direct and indirect effects on the likelihood and scale of reforms while countries with higher political costs are less likely themselves to enact reforms the presence of these costs also reduces competing countries incentives to reform regardless of their own political costs domestic politics therefore mitigates the pressures for downward convergence of tax policy despite increased capital mobility we examine the capital tax policies in oecd countries during the period from 1980 to 1997 and find that states are sensitive to tax reforms in competitor countries although their responses to reforms are mediated by their own domestic costs to reform we define two potential sources of political costs of reform transaction costs due to the presence of multiple veto players in the legislative process and constituency costs due to ideological opposition to policy changes that benefit capital our evidence reveals that a reduction in these costs either domestically or abroad increases the likelihood that a country enacts tax reforms hat are the policy consequences of the elimination of various barriers to international capital and labor mobility robert frost in mending wall instructed that good fences make good neighbors scholars have increasingly expressed this sentiment s converse i e the pessimistic viewpoint that as the mobility of factors of production increases international competition assumes a beggar thy neighbor character when fences separate countries and make it difficult for factors of production to move from country to country governments can operate essentially as monopolistic suppliers of services governments can extract a price from the owners of productive resources in the form of taxes or can place regulatory restrictions on production without fear that factors of production will emigrate when the fences fall and governments must compete with each other for the same resources a state s or country s ability to tax or regulate diminishes in the extreme countries lose sovereignty over domestic policymaking e g andrews 1994 and lee and mckenzie 1989 the model that most scholars employ implicitly or explicitly to understand international or interstate competition is known commonly by its central prediction the race to the bottom e g oates 1972

the impact of investment lags on investment decision abstract this paper suggests a valuation framework for an investment project through the concept of real options generally in real asset world decision time and its payment time are not identical this so called investment lag problem should be considered when valuing real assets when investment lags exist firms accommodation capacities play important roles in this paper the real effect of investment lag on investment value is tested upon various conditions we show the valuation process of real assets under the risk neutral world the closed form formula is also provided for valuing real assets including r d project

the costs of worker displacement this study identifies part of the social loss attendant upon displacement as the remaining value of the assets specific to the severed employment relationship a bargaining model is used to link wage tenure profiles to the amount of information firms and workers possess about the duration of that relationship if information is good the profile will flatten as displacement approaches using psid data for workers separated between 1977 and 1981 wage tenure profiles are found not to change this suggests that either workers or both firms and workers are surprised by the displacement the present value of that part of the social loss attributable to the worker s share of firm specific capital is around 7 000 1980 dollars

is firm sponsored education viable abstract this paper challenges the commonly held human capital assumption that profit maximizing firms cannot invest in their employees general training we argue that general training is provided to equilibrate a hostage type relationship that exists when firms and workers share investments in specific training and that the firm s investment in general training is not necessarily subject to poaching hazards we then test the viability hypothesis empirically using data from a longitudinal survey of natural and social scientists and engineers our results suggest that 1 firm investments in general training programs are not necessarily paid for by foregone earnings and 2 turnover rates do not rise as a function of firm sponsored general training these results are discussed in terms of the current policy debate over corporate education expenditures

what are corporate pension liabilities analyses of corporate pension plans often make unstated assumptions about an implicit labor contract an example of the effect of such an assumption is that many mistakenly believe that if a worker s benefits are tied to final salary he is protected against inflation until retirement also the value of a worker s claims is often considered to be independent of the status of the firm s pension fund these implicit contract assumptions are examined and questioned the implications of analyzed pension liabilities in a manner consistent with the analysis of other corporate liabilities are explored

fixed versus flexible production systems a real options analysis in this work we address investment decisions in production systems by using real options as is standard in literature the stochastic variable is assumed to be normally distributed and then approximated by a binomial distribution resulting in a binomial lattice the methodology establishes a discrete valued lattice of possible future values of the underlying stochastic variable demand in our case and then computes the project value we have developed and implemented stochastic dynamic programming models both for fixed and flexible capacity systems in the former case we consider three standard options the option to postpone investment the option to abandon investment and the option to temporarily shut down production for the latter case we introduce the option of corrective action in terms of production capacity that the management can take during the project by considering the existence of one of the following i a capacity expansion option ii a capacity contraction option or iii an option considering both expansion and contraction the full flexible capacity model where both the contraction and expansion options exist leads as expected to a better project predicted value and thus investment policy however we have also found that the capacity strategy obtained from the flexible capacity model when applied to specific demand data series often does not lead to a better investment decision this might seem surprising at first but it can be explained by the inaccuracy of the binomial model the binomial model tends to undervalue future decreases in the stochastic variable demand while at the same time tending to overvalue an increase in future demand values

the determinant of production entry and exit model on financing behavior this study seeks for equity debt values and the relevant potential firm value with financing or not when the real options approach is assessed the paper deals with the following relative problems 1 the assessment rule of decision whether to stop production or not 2 whether the dis investment cost or salvage could reflect the production scale 3 whether the rate of capital cost or the rate of return in different stages could reflect the suitable risk premium 4 when the investment cost exit cost and salvage are the linear functions of production volume and follow the geometric brownian motion to analyze the optimum external financing behavior and to decide the production thresholds of production entry and exit

a model and empirical estimates of worker pension coverage in the u s an important issue in labor market policy today is private pension coverage it is well known that pension benefits have grown rapidly in the post world war ii years for example pension and other benefit payments as a percentage of total employee compensation rose from 7 4 in 1953 to 13 0 by 1973 11 27 yet pension participation is far from universal the most recent estimate is that 48 of all wage and salary workers currently are covered partly in response to this the president s commission on pension policy has recommended in its final report federal legislation to establish a national minimum funded pension system which would be required of all employers 8 7 this paper attempts to explain the variation in pension coverage two opposing views of pensions having very different implications for pension policy can be identified the first is implicitly adopted by the president s commission in this view pensions are exogenous to the competitive forces of the labor market distributed on a random basis as a bonus pensions do not substitute for other forms of compensation and therefore everyone would prefer to be covered a very different theory is that pensions result from competitive forces implicit in the labor market is a market for pensions in which the supply is the outcome of firms attempting to minimize costs while demand results from workers maximizing utility by choosing the optimal package of wage and nonwage compensation an outcome of this implicit market is a trade off between pension benefits and other forms of compensation if pensions are purchased in this manner systematic differences in pension coverage should emerge some workers will prefer wages and

opportunistic behavior by firms in implicit pension contracts several studies have established that under the most common form of pension coverage benefits accrue disproportionately near the end of a worker s career such backloading establishes a penalty for early quitting but may also create an incentive for opportunistic firm behavior because benefits generally are a function of highest earnings when nominal earnings are expected to rise an employer can reduce pension liabilities by discharging workers prior to retirement this paper uses the national longitudinal survey of mature men to test whether such actions by employers are systematic we estimate that pension covered workers with mean losses are less likely to be discharged unexpected increases in pension losses due to increases in inflation however raise the risk of discharge we find no evidence that the minimum vesting standards of the employees retirement income security act reduces the likelihood of discharge for older workers who previously were not vested these results are consistent with an implicit pension contract under which employer compliance is enforced by reputation

gender differences in pensions the causes of gender differences in pensions are examined for retirees and employees using the 1982 newly entitled beneficiary survey and the 1979 and 1988 may current population surveys for both retirees and the employed population much of the gender gap in coverage is accounted for by gender differences in labor market characteristics while children and marriage have a negative effect on female coverage among retirees even after controlling for labor market characteristics the negative effect is not observed among more recent groups of female employees finally recent convergence of male and female labor market characteristics contributed to a decline in the coverage gap during the 1980s

the role of pensions in the labor market a survey of the literature because employer sponsored group pension plans entail agreements between workers and their employers explicitly linking future payment and employment they offer an unusual window into long term employment relationships this review of recent research on pensions explores how pensions influence employee compensation retirement turnover and other matters central to the determination of labor s price and quantity over time the authors also outline some unanswered questions and difficult to reconcile findings because the pension promise involves an explicit and relatively well documented set of statements regarding future contingent payment and employment an examination of the design and operation of employersponsored group pension plans can yield important insights into the long term employment relationship specifically pension research illuminates some important labor market questions in two ways it offers insight into an important element of compensation in its own right and it furthers our understanding of labor markets in which long term

revisiting corporate growth options in the presence of state dependent cashflow risk abstract given a non trivial market price of risk we study the impact of state dependent cashflow risk on the optimal investment policy and on the ensuing value of an unlevered firm that holds the option of scaling up cashflows from its assets in place upon incurring an irreversible cost the firm s investment decision and value are studied as a function of the market price of risk and of the degree of state dependence in cashflow risk

the gender gap in pensions and wages this study provides rationale for the underrepresentation of women in the pension sector and examines the consequences for the gender wage gap for a given set of observed characteristics a woman is 11 19 percent less likely than a man to have a pension of the unexplained portion of the gender wage gap 10 38 percent is due to unexplained differences in pension coverage finally consistent with a screening effect of pensions women are paid more equally in the pension sector copyright 1990 by mit press

the political economy of financial internationalization in the developing world in the last decade a growing number of developing countries have opened their financial systems by liberalizing capital flows and the rules governing the international operations of financial intermediaries one explanation of this rush toward greater financial internationalization is that increasing interdependence generates domestic and foreign political pressures for capital account liberalization while we find evidence for that hypothesis we find that the proximate cause in developing countries more frequently is found in balance of payments crises politicians perceive that financial openness in the face of crisis can increase capital inflows by indicating to foreign investors that they will be able to liquidate their investments and by signaling government intentions to maintain fiscal and monetary discipline the argument is explored through case studies of chile indonesia mexico and south korea

fringe benefits and labor mobility interindustry factor mobility is a crucial determinant of the income distribution effects of exogenous changes in relative commodity prices this examination of interindustry variation in wages and profits using data from manufacturing industries from

reversions of excess pension assets after takeovers this article evaluates pension asset reversions as a source of takeover gains in our sample of 413 takeovers pension funds were reverted by 15 1 of acquirers in the two years following hostile takeovers compared to 8 4 in the two years following friendly takeovers reversions following takeovers tend to occur in unit benefit plans where the potential for wealth transfer is the greatest these results are consistent with the view that hostile takeovers breach implicit contracts between firms and employees we estimate that the reversions can on average explain approximately 11 of the takeover premium in cases where they actually occur reversions are too small to be the sole or even dominant source of takeover gains

determinants of corporate pension funding strategy abstract several hypotheses concerning pension funding strategy are tested in a cross sectional regression model on a sample of 255 firms results are consistent with the following explanations 1 finance incentives tax benefits and financial slack for high level funding 2 labor incentives for low level funding and 3 financial statement incentives relating to political costs for high level funding and debt contracting costs for low level funding pension funding strategy appears to be complex involving tradeoffs between funding incentives the nature of these interactions and tradeoffs remains to be clarified through future research

investor protection and corporate governance recent research has documented large differences among countries in ownership concentration in publicly traded firms in the breadth and depth of capital markets in dividend policies and in the access of firms to external finance a common element to the explanations of these differences is how well investors both shareholders and creditors are protected by law from expropriation by the managers and controlling shareholders of firms we describe the differences in laws and the effectiveness of their enforcement across countries discuss the possible origins of these differences summarize their consequences and assess potential strategies of corporate governance reform we argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank centered and market centered financial systems

globalization democracy and effective welfare spending in the developing world the literature on the effects of globalization on social policy and welfare and the parallel literature on the effects of democracy operate in mutual isolation to a surprising degree this article extends the debate on the welfare state in the developing world by examining the social policy reactions of democratic and authoritarian governments to globalization using unbalanced panel data on 57 developing nations and considering social security and health and education spending the authors examine whether democratic and authoritarian regimes exhibit similar or different social spending priorities in the context of increasing economic openness the results show that social spending in hard authoritarian regimes is more sensitive to the pressures of globalization than in democratic or intermediate regimes

output decision under demand uncertainty with stochastic production function a contingent claims approach this paper presents a contingent claims analysis of output decisions for the firm facing technological and demand uncertainty the paper reveals that i the optimal output level increases with the higher interest rate when the firm is subject to demand and technological uncertainty ii the effect of demand volatility and production lead time on the optimal output level could be either positive or negative iii the optimal project value decreases with the higher demand volatility iv the optimal project value decreases with the longer production lead time when the firm is subject to demand uncertainty and v the optimal project value decreases with the higher interest rate when the firm is subject to demand uncertainty it increases with the higher interest rate however when the firm is subject to both demand and technological uncertainty some important managerial implications are discussed

discontinuities in pension benefit formulas and the spot model of the labor market implications for financial economists in their analysis of corporate pension plans financial economists typically invoke the simplest and the most tractable model of the labor market this is the spot model where the worker s cash wage plus accruing pension benefit equals the value of his marginal product in each and every period this paper provides evidence against the empirical validity of the spot model and uses provisions common to most pension plans to do so these findings are relevant to the appropriate measurement of pension liabilities and thus to the present controversy surrounding the termination of overfunded plans and the recapture of surplus assets by the employer the existence of incentive effects ruled out by the spot model may help to unravel certain well known puzzles such as the failure of employers to fully fund their plans in spite of the tax advantages of doing so

employment based health insurance and job mobility is there evidence of job lock the majority of privately insured americans obtain their health insurance through their own or a family member s employment the rationale for employers to provide health insurance is straightforward by pooling the risks of individuals employers can reduce adverse selection and lower administrative expenses in addition they benefit from tax laws allowing businesses to deduct their health insurance costs these advantages of employer provision however must be weighed against the distortions they may generate in individual labor market decisions in particular health insurance may distort job mobility if employees decide to keep jobs they would rather leave for fear of losing coverage for preexisting conditions a possibility that has been termed job lock this paper attempts to quantify the effect of employer provided health insurance on the labor market mobility of individuals the link between employer provided health insurance and

globalization and capital taxation in consensus and majoritarian democracies this article contributes to the growing literature on the role that domestic political institutions play in mediating globalization pressures by arguing that the capital tax constraints arising from international economic integration are the most severe for countries with majoritarian political institutions in doing so the author solves a tax puzzle that challenges conventional thinking about how institutions condition the relationship between economic globalization and domestic politics he presents a formal game theoretic model to sharpen the basic logic of his argument and then tests some of the model s predictions empirically using both quantitative and qualitative evidence

a theory of the optimal cost barrier to corporate takeovers this paper characterizes financial and employment contracts in the presence of both worker moral hazard and the threat of opportunistic takeovers firms in which worker efforts or specific investments are of greater importance are shown to exhibit a greater degree of deferred compensation supported by governance structures that allow managers to resist hostile takeovers more vigorously this effect is most pronounced in firms where workers pay for their job by accepting low wages early in their careers firms in which large deferred payments cannot be offset by low starting wages will offer less resistance to a hostile bidder copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

can foreign stock investors influence policymaking foreign portfolio stock investors fpsis often attach political criteria to their investment choices sometimes in the hope of pressuring policymakers in boycotted markets to adjust their policies

the labor contract and true economic pension liabilities most pension covered workers in the united states are covered solely or primarily by defined benefit plans in these plans workers are typically promised a pension that is proportional to their years of service in the firm and their final wage depending upon how workers pay for it the existence of a pension in the labor contract may play either an important role or no role at all in the worker firm relationship this paper addresses the issue how workers pay for the cumulating pension benefit over their tenure cycle in the firm and derives several economic implications for the worker firm contract while the theory itself has ambiguous implications the data confirm the longstanding presumption that pensions offer strong incentives for the worker to complete the normal tenure cycle in the firm not to quit early but if this intuitive notion is accepted it is shown that a perhaps less intuitive notion is also true firms make workers longterm bondholders in the firm the same flow of worker pension savings that tie workers to the firm are not accounted for in the pension trust fund pension plans are significantly underfunded in a true economic sense this is a peculiar characteristic of the labor contract which raises several unanswered questions the paper also shows that the nature of the pension contract can play an important role in determining the wage service profile and the capitalized value of the firm recent contributions to the literature pose an interesting and unconventional view of pensions one which leads to the conclusion that pensions play a relatively minor role in the worker firm contract the argument has been implicitly made by burt barnow and ronald ehrenberg 1979 and william sharpe 1976 but has recently been stated more directly by jeremy bulow 1982 2 in essence their views rest on a legal interpretation of pension liabilities namely since the firm can legally terminate its pension plan anytime the firm s pension liabilities cannot exceed the present value of the nominal pension promises it would owe workers if the firm terminated the plan immediately if workers believe the firm will exercise its legal right it is intuitively apparent and easy to show that workers will deposit only that amount of compensation into the pension plan that they expect to receive upon immediate termination using this interpretation of pension plan liabilities pensions have no influence on whether the worker leaves or remains in the firm moreover it will be shown that if the pension contract is written in nominal terms reflecting the legal view workers are not bondholders in the firm pension plans are excessively overfunded an alternative view is that the pension plan is an implicit contract between the worker and the firm see for example jack treynor 1977 an implicit contract theory implies that workers anticipating careers with a firm will consider the package of wage and pension benefits they expect to collect over their life cycle it is shown that these expectations lead quite directly to several implications that the pension contract is written in real terms that firms intend to meet their pension promises and that the firm will re u s department of labor s 4521 washington d c 20210 the views expressed in this paper are my own and do not necessarily represent the views of the department of labor the paper has substantially benefited from the comments of pauline ippolito and discussions with jeremy bulow i am also indebted to robert clark gary fields alan gustman olivia mitchell james pesando john turner michael ward and participants at the labor relations workshop at cornell university and the law and economics workshop at the university of chicago for comments see my 1985a book 2 the argument is also implicit in other related papers see for example martin feldstein and randall morck 1982

employment tenure and earnings profiles in japan and the united states comments the relationship between job tenure and annual earnings in japan has received considerable attention from social scientists examining employment contracts and the japanese compensation system in their widely cited article masanori hashimoto and john raisian 1985 using data for 1980 showed that japanese men have greater job tenure than comparable workers in the united states and that the earnings of japanese men rise more rapidly with increased tenure they found that an additional year of tenure increases earnings in both small and large firms in japan more than does an additional year of general market experience their results for the united states indicate that general market experience increases earnings more than an additional year of job tenure the 1970 s and 1980 s were a period of substantial change in japanese labor markets due to the rapid aging of the population and the restructuring of the economy following the oil crisis the present analysis extends the work of hashimoto and raisian by estimating earnings equations for japanese men for the years 1971 1976 1981 and 1986 specifically we wish to investigate whether hashimoto and raisian s findings have been stable over time or whether changes in the labor market have altered the importance of tenure relative to total labor market experience in the japanese labor market i changes in the labor market

health insurance and job mobility theoryand evidence it is widely hypothesized that health insurance deters job mobility because of imperfections in the labor and health insurance markets this paper describes the nature of the welfare loss attributable to such job lock and reviews several studies that empirically test the job lock hypothesis the authors find that estimates of the magnitude and importance of job lock vary studies that support the job lock hypothesis typically report a 20 to 40 reduction in mobility rates depending on worker marital status and gender their own estimates suggest that although job lock is present in the labor market the proportion of workers affected and the magnitude of the welfare loss are less than generally supposed

two separated effects of employer provided health insurance on job mobility we estimate the effect of employer provided health insurance ephi on job mobility via a dynamic model of joint employment and health insurance decision in the presence of uncertainty about wage rate and health status transitions the model is based on a markov decision process in which a hedonic wage approach provides an economic rationale for the different choices and health insurance serves as an input to the health production process including health transitions in the model helps us to understand how the availability of ephi positive job characteristic and holding ephi the wage health insurance trade off enter into the individuals decisions the model is estimated using the 1999 2000 medical expenditure panel survey panel 4 and the results show that the pure effects of holding ephi are negligible the full effects of ephi are significant and the degrees of the inefficiency vary between 14 and 25 across different states

cash flow variability and firm s pension choice abstract when financial markets are imperfect or financial distress is costly firms may choose to reduce their risk by lowering financial or operating leverage this paper examinines the role of operating leverage in the firm s pension choice contributions to defined contribution plans are more flexible than contributions to defined benefit plans firms may therefore reduce their operating leverage by selecting a defined contribution plan i find empirical support for this hypothesis which is robust to controls for labor market factors and the continuing trend toward defined contribution pension plans

employer size and labor turnover the role of pensions the well documented lower labor turnover in large firms than in smaller firms has been cited as evidence that large firms pay workers above their opportunity wage this study investigates whether t

imperfect information and labor market bias against small and medium sized enterprises a korean case we examine the labor market s bias against small and medium sized enterprises focusing on the seoul digital industrial complex case we adopt heckman s approach to control selection bias and use primary data from questionnaire surveys conducted at both firm and employee levels we find that conventional firm specific factors such as wages fringe benefits and weekly work hours primarily explain the labor market bias but imperfect information is also positively associated with the bias for example a firm s inadequate ability to identify a pool of potential employee candidates or to provide them comprehensive firm or job specific information tends to worsen labor shortages and an employee s ex ante incomplete knowledge of on the job training or education opportunities tends to increase ex post turnover intentions our results suggest that reducing the market bias requires improving imperfect information as well as conventional firm specific conditions

capacity expansion under stochastic demands we consider the problem of optimally meeting a stochastically growing demand for capacity over an infinite horizon under the assumption that demand for product follows either a nonlinear brownian motion or a non markovian birth and death process we show that this stochastic problem can be transformed into an equivalent deterministic problem consistent with earlier work by a manne the equivalent problem is formed by replacing the stochastic demand by its deterministic trend and discounting all costs by a new interest rate that is smaller than the original in approximate proportion to the uncertainty in the demand

pensions and indenture premia the implicit pension contract has provided a theoretical basis for the observed relation between pensions less quitting and earlier retirement but it also has encountered difficulty explaining why wages seem too high in pension firms this anomaly has been taken by some to imply that efficiency wages not pension capital losses explain why quitting is abnormally low in defined benefit pensions in this paper i pursue an alternative explanation that the implicit contract model is oversimplified because it ignores supply conditions facing long tenure firms i show that once an allowance is made for compensation required by workers for entering long term labor contracts numerous anomalous empirical observations in the pension market are explicable

online low price guarantees a real options analysis a common practice among large retailers is the low price guarantee rebating consumers if they find an identical product cheaper elsewhere this provides consumers with some level of comfort in their purchase decision a similar low price guarantee is provided by numerous service industries that allow reservation of capacity yet do not penalize the consumer for failure to keep that reservation examples include hotels and car rental given that a consumer is not required to keep the reservation they may make another reservation either at a competing firm or the same firm if future prices decline the increasing availability of pricing information on the internet affords consumers the opportunity to be more strategic in their purchasing behavior as consumers we are able to quickly and easily check prices from numerous service or goods providers the ease of price information potentially makes these guarantees very costly to the service or good provider we analyze the implied costs associated with these guarantees by making analogies to financial options motivation for this research comes from a large car rental firm dollar thrifty automotive group inc that considered offering a low price guarantee to all consumers that book a reservation though their website

an equilibrium model of health insurance provision and wage determination we investigate the effect of employer provided health insurance on job mobility rates and economic welfare using a search matching and bargaining framework in our model health insurance coverage decisions are made in a cooperative manner that recognizes the productivity effects of health insurance as well as its nonpecuniary value to the employee the resulting equilibrium is one in which not all employment matches are covered by health insurance wages at jobs providing health insurance are larger in a stochastic sense than those at jobs without health insurance and workers at jobs with health insurance are less likely to leave those jobs even after conditioning on the wage rate we estimate the model using the 1996 panel of the survey of income and program participation and find that the employer provided health insurance system does not lead to any serious inefficiencies in mobility decisions

what is a public sector pension worth we measure accruals in defined benefit db pension plans for public and private sector workers in britain using typical differences in scheme rules and sector specific lifetime age wage profiles by sex and educational group we show not just that coverage by db pension plans is greater in the public sector but that median pension accruals as a percentage of salary are more than 6 higher among db covered public sector workers than covered private sector workers this is largely driven by earlier normal pension retirement ages but also by differences in earnings profiles across the sectors

pension reversions and worker stockholder wealth transfers this paper examines the relative importance of transfers from workers to shareholders in the firm s decision to terminate their overfunded defined benefit pension plans in contrast to earlier studies i find evidence that firms terminate their pension plans to relieve themselves of implicit promises to workers of future compensation in addition financing and tax considerations influence the reversion decision the results suggest that the 1986 excise tax on asset reversions reduced termination for reversion by 36 percent in 1986

enjoying the quiet life corporate governance and managerial preferences much of our understanding of corporations builds on the idea that managers when they are not closely monitored will pursue goals that are not in shareholders interests but what goals would managers pursue this paper uses variation in corporate governance generated by state adoption of antitakeover laws to empirically map out managerial preferences we use plant level data and exploit a unique feature of corporate law that allows us to deal with possible biases associated with the timing of the laws we find that when managers are insulated from takeovers worker wages especially those of white collar workers rise the destruction of old plants falls but the creation of new plants also falls finally overall productivity and profitability decline in response to these laws our results suggest that active empire building may not be the norm and that managers may instead prefer to enjoy the quiet life

pensions bonding and lifetime jobs a well known if underappreciated finding in the mobility literature is that turnover is much lower in jobs covered by pensions than in other jobs this could result from capital losses for job changes created by most benefit formulas the tendency of turnover prone individuals to avoid jobs covered by pensions or higher overall compensation levels in such jobs a switching bivariate probit model of pension coverage and turnover is developed to estimate the effect of each of these factors the results show that capital losses are the main factor responsible for lower turnover in jobs covered by pensions but self selection and compensation levels also play an important role this is the first direct evidence that bonding is important for understanding long term employment relationships

globalization taxation and burden shifting in latin america most researchers interested in the relationship between global markets and public policy focus on advanced industrial democracies in contrast we examine competing hypotheses as to globalization s effect on governments by expanding the scope of the discussion to include developing nations more specifically we investigate the relationship between international market integration and the evolving burden of taxation on capital as well as the subsequent response of markets to shifts in tax policy in latin america since the late 1970s consistent with our theoretical expectations we find that global market forces are more constraining vis a vis tax policy in latin america than in the world s wealthiest nations despite these market based pressures however national politics continue to influence tax policy in latin america in a manner consistent with findings on advanced industrial democracies as such developing nations continue to have some room to manipulate policy though within the context of a more strictly neoliberal context than their counterparts in advanced industrial democracies

firm characteristics unanticipated inflation and stock returns this paper re examines the effects of nominal contracts on the relationship between unanticipated inflation and an individual stock s rate of return this study differs in three main ways from previous research first announced inflation data are used to examine the effects of unanticipated inflation second a different specification is used to obtain more efficient estimates third additional nominal contracts are considered the empirical results indicate that time varying firm characteristics related to inflation predominately determine the effect of unanticipated inflation on a stock s rate of return a firm s debt equity ratio appears to be particularly important in determining the response

robust capacity planning under uncertainty the existence of uncertainty influences the investment production and pricing decision of firms therefore capacity expansion models need to take into account uncertainty this uncertainty may arise because of errors in the specification statistical estimation of relationships and in the assumptions of exogenous variables one such example is demand uncertainty in this paper a cautious capacity planning approach is described for solving problems in which robustness to likely errors is needed the aim is to cast the problem in a deterministic framework and thereby avoid the complexities inherent in nonlinear stochastic formulations we adopt a robust approach and minimize an augmented objective function that penalises the sensitivity of the objective function to various types of uncertainty the robust or sensitivity approach is compared with friedenfelds equivalent deterministic demand method using numerical results from a large nonlinear programming capacity planning model it is shown that as ca

what are occupational pension plan entitlements worth in britain the acquisition of rights by workers in private pension plans underpins retirement behaviour recruitment policy and wage structure but there is controversy as to how these individual pension rights should be valued the paper combines four data sets to calculate pension entitlements for a sample of 3000 british workers in 1987 expected scheme tenure is a key variable in valuation younger workers and women face greater initial uncertainty as to their pension outcomes which is resolved as job tenure lengthens given the distribution of tenure durations many employees would obtain higher returns in defined contribution schemes than in a typical final salary defined benefit plan

encouraging long term tenure wage tilt or pensions the author analyzes data on 6 416 persons in 109 firms to determine whether the length of these workers tenure was positively related either to wage tilt the payment of below market wages in the early years of the worker s employment with a firm and above market wages in the later years or to the presence of defined benefit pension plans contrary to the popular but little tested hypothesis that wage tilt is important in inducing workers to make long term commitments to the firm the results show that wage tilt had no significant effect on tenure except indirectly through its effect on pension quit costs in contrast pensions increased tenure in the firm on average by more than 20