monitoring liquidation and security design by identifying the possibility of imposing a credible threat of liquidation as the key role of informed bank finance in a moral hazard context we characterize the circumstances under which a mixture of informed and uninformed market finance is optimal and explain why bank debt is typically secured senior and tightly held we also show that the effectiveness of mixed finance may be impaired by the possibility of collusion between the firms and their informed lenders and that in the optimal renegotiation proof contract informed debt capacity will be exhausted before appealing to supplementary uninformed finance article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

caps on political lobbying the cost of political campaigns in the u s has risen substantially in recent years for example real spending on congressional election campaigns doubled between 1976 and 1992 steven d levitt 1995 there are many reasons why increased campaign spending might be socially harmful first increased spending means increased fund raising which may keep politicians from their legislative duties 1 second a lobbyist who makes a large campaign contribution may have undue influence on electoral outcomes on the shaping of legislation or on the outcome of regulatory proceedings 2 that is the socially preferred candidate or legislation may not prevail likewise a lobbyist involved in a regulatory matter or a competition for a government contract may benefit unduly from a legislator s intervention 3 third a perception that campaign contributions purchase influence may lead to increased tolerance of corruption in the private sector a desire to control campaign spending has spawned many initiatives to limit both campaign contributions and spending beginning with the passage of the federal election campaign act feca political action committees pacs can contribute at most 5 000 per election to a candidate while individuals can contribute at most 1 000 restrictions have also been put on in kind contributions making it more difficult to circumvent these limits 4 while direct restrictions on campaign spending have proven difficult to implement recent initiatives aim to impose voluntary spending limits and stricter limits on contributions 5 despite the existing legislation and the proposals to limit contributions little is known about the impact of contribution limits on aggregate expenditures while it is intuitively appealing that aggregate expenditures would drop we challenge that intuition here we study a lobbying game and show that a cap on individual lobbyists expenditures may have the perverse effect of increasing aggregate expenditures and loweri this abstract was borrowed from another version of this item

the effect of business risk on corporate capital structure theory and evidence under corporate and personal taxation we demonstrate that the relation between optimal debt level and business risk is roughly u shaped this result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option therefore the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options results of empirical tests offer support for the predicted u shaped relationship

the resolution of financial distress most models of financial structure embody an assumption about financial distress that causes debt to be costly to the issuing firm this approach has been criticized on the grounds that the assumed costs could be avoided by a costless financial reorganization in this article we show that despite the possibility of costless reorganization it may be rational for firms to incur significant costs in the resolution of financial distress the main assumptions that give rise to our results are the existence of asymmetric courts to impose a reorganization on the claimants of a firm article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

defense against an opportunistic challenger theory and experiments abstract this paper considers a contest setting in which a challenger chooses between one of two contests to enter after observing the level of defense at each despite the challenger s chance of success being determined by a proportional contest success function the defenders effectively find themselves in an all pay auction that largely dissipates the value of the defended resources because the challenger will target the weaker defender however if the defenders form a protective alliance then their expected profits increase despite the fact that a successful challenge is theoretically more likely given the overall reduction in defense controlled laboratory experiments designed to test the model s predictions are also reported observed behavior is generally consistent with the comparative static predictions although challengers exhibit the familiar overbidding pattern defenders appear to anticipate this reaction and adjust their behavior accordingly

efforts in two sided contests the degree of rent dissipation is studied in extended two sided contests that in volve two types of efforts while usual contestants expend resources in trying to win the contested prize potential recipients of the rent seeking efforts also participate in the con test this is due to uncertainty regarding the source of power in the contest that induces the bureaucrats to expend resources to increase their share in the rent seeking efforts by try ing to appear as the party controlling the allocation of the prize we show that the existing theoretical and empirical studies are incomplete and may underestimate the extent of rent dissipation

a real options approach to bankruptcy costs evidence from failed commercial banks during the 1990s literature identifies three main aspects of liquidation costs firm size asset specificity and industry concentration this paper unifies the theory behind these aspects of bankruptcy costs by treating them as components of a broader option valuation problem faced by the liquidating trustee testing the hypothesized asset price relationships on fdic failed bank liquidation data yields the appropriate results furthermore it appears that liquidation time alone can be used as an effective second order proxy for asset value growth where market value estimates are unavailable

the exploitation of relationships in financial distress the case of trade credit this paper develops optimal pricing lending and renegotiation strategies for companies in relationships where one firm is highly dependent on the other long term trade creditor firm relationships induce dependent trade creditors to grant more concessions in debt renegotiations than nondependent creditors anticipating these larger renegotiation concessions not only do less financially stable firms prefer trade credit but all firms agree to pay a higher interest rate for trade credit the model also explains the existence of teaser interest rates and convenience classes findings are consistent with those of the relationship lending literature

the value of quality product quality is probably undervalued by firms because there is little consensus about appropriate measures and methods to research quality we suggest that published ratings of a product s quality are a valid source of quality information with important strategic and financial impact we test this thesis by an event analysis of abnormal returns to stock prices of firms whose new products are evaluated in the wall street journal quality has a strong immediate effect on abnormal returns which is substantially higher than that for other marketing events assessed in prior studies moreover there are some important asymmetries in the effect we discuss the research managerial investing and policy implications

taxes and the theory of trade debt in this paper we show that taxes motivate the flow of trade credit without involving the assumption of credit market imperfections the direction of trade credit flow depends on the distribution of marginal tax rates among buyers and sellers in equilibrium the trade credit decision follows a tax induced clientele on both the supply and demand side a glance at the balance sheet of a typical corporation reveals the sizeable investment firms make in accounts receivable 1 in spite of its quantitative importance the analysis of trade credit policy figures far less prominently than other corporate policies in the finance literature although there exists a body of literature on the subject its focus is on the monetary policy implications of trade credit flow and therefore holds only indirect relevance to micro aspects such as the trade credit decision as part of corporate policy in this paper we examine the trade credit decision as a short term financing decision the decision to either grant or issue trade debt is analyzed in the familiar framework of miller 12 this approach establishes the link between existing paradigms on the financing of firms and the formulation of trade credit policies the existing literature provides three possible motives for trade credit they are respectively the transaction motive the price motive and the financial motive the first two motives have been discussed extensively elsewhere see for example smith 18 for a summary it is at the third motive the financial motive that the present paper is directed 2 past studies on the financial motive such as brechling and lipsey 3 jaffee and modigliani 7 laffer 10 schwartz 15 and schwartz and whitcomb 16

competitive price and quality under asymmetric information we present an analysis of equilibrium in markets with asymmetrically informed consumers some consumers know both price and quality of all sellers whereas others know neither but may search among sellers the equilibrium correlation between price and quality generally increases with the level of information in the market and can be negative when this level is sufficiently small a meta analysis of the available empirical studies strongly supports the model s predictions

a new product growth for model consumer durables this article originally appeared in management science january 1969 volume 15 number 5 pp 215 227 published by the institute of management sciences a growth model for the timing of initial purchase of new products is developed and tested empirically against data for eleven consumer durables the basic assumption of the model is that the timing of a consumer s initial purchase is related to the number of previous buyers a behavioral rationale for the model is offered in terms of innovative and imitative behavior the model yields good predictions of the sales peak and the timing of the peak when applied to historical data a long range forecast is developed for the sales of color television sets

defensive marketing strategies this paper analyzes how a firm should adjust its marketing expenditures and its price to defend its position in an existing market from attack by a competitive new product our focus is to provide usable managerial recommendations on the strategy of response in particular we show that if products can be represented by their position in a multiattribute space consumers are heterogeneous and maximize utility and awareness advertising and distribution can be summarized by response functions then for the profit maximizing firm it is optimal to decrease awareness advertising it is optimal to decrease the distribution budget unless the new product can be kept out of the market a price increase may be optimal and even under the optimal strategy profits decrease as a result of the competitive new product furthermore if the consumer tastes are uniformly distributed across the spectrum a price decrease increases defensive profits it is optimal at the margin to improve product quality in the direction of the defending product s strength and it is optimal at the margin to reposition by advertising in the same direction in addition we provide practical procedures to estimate 1 the distribution of consumer tastes and 2 the position of the new product in perceptual space from sales data and knowledge of the percent of consumers who are aware of the new product and find it available competitive diagnostics such as the angle of attack are introduced to help the defending manager this article was originally published in marketing science volume 2 issue 4 pages 319 360 in 1983

evidence on the impact of the agency costs of debt on corporate debt policy in the last several years there has been increased theoretical emphasis on the agent principal problem as it applies to corporate finance this paper is an attempt to empirically test for the presence of the agency costs and their relation to the debt policy of corporations we find that firms with higher insider ownership have greater debt ratios than firms with lower insider ownership which may be explained by the agency costs of debt and or the agency costs of equity other regression results tend to confirm the theoretically optimal relationships put forth by myers we find that high growth firms use less debt rather than more debt high operating risk firms use more debt rather than less debt and firm size appears to be uncorrelated to the level of debt

an empirical investigation of u s firms in reorganization the purpose of this paper is to understand the institutional features of chapter 11 from an empirical examination of thirty firms that have emerged from reorganization we find the recontracting framework of chapter 11 to be complex lengthy and costly violations of absolute priority in favor of stockholders are frequently encountered these deviations may result from the bargaining process of chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder oriented management to preserve firm value an example of such recontracting addresses myers underinvestment problem an investigation of the effects of chapter 11 on the pricing of risky debt is also provided the purpose of this paper is to understand the institutional features of chapter

commodity betas with mean reverting output prices abstract this paper provides a theoretical derivation of commodity beta stock price sensitivity to commodity price using a contingent claim model the model incorporates operating leverage financial leverage costly financial distress and mean reverting commodity prices and highlights the important role played by the speed of reversion of the commodity price it is used to identify theoretically the main determinants of commodity beta commodity beta is predicted to be an increasing function of the operating and financial leverage of the firm and a decreasing function of the company s tax rate and the level volatility and speed of reversion of the commodity price empirical tests with a sample of gold mining firms provide support for these predictions particularly the new implications of the model the effect of the commodity price s speed of reversion and the company s tax rate

the flip side of financial synergies coinsurance versus risk contamination this paper characterizes when joint financing of two projects through debt increases expected default costs contrary to conventional wisdom separate financing dominates joint financing when risk contamination losses that are associated with the contagious default of a well performing project that is dragged down by the other project s poor performance outweigh standard coinsurance gains separate financing becomes more attractive than joint financing when the fraction of returns lost under default increases and when projects have lower mean returns higher variability more positive correlation and more negative skewness these predictions are broadly consistent with evidence on conglomerate mergers spinoffs project finance and securitization

the effect of capital structure on a firm s liquidation decision abstract a firm s liquidation can impose costs on its customers workers and suppliers an agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm as the agent affects other individuals the customers workers and suppliers as principals the analysis in this paper suggests that capital structure can control the incentive conflict problem of this relationship by serving as a pre positioning or bonding mechanism appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex ante value maximizing liquidation policy

corporate bankruptcy reorganizations estimates from a bargaining model this article uses a novel approach to measure the unobserved liquidation value of a firm that relies on the information contained in the allocations that are agreed upon in chapter 11 negotiations i estimate a game theoretic model that captures the influence of liquidation value on the equilibrium allocations using a newly collected data set i find that the liquidation values are higher when the industry conditions are more favorable and the real interest rates are higher i use the estimated model to conduct a counterfactual experiment to quantitatively assess the impact of a mandatory liquidation on the equilibrium allocations

the price elasticity of selective demand a meta analysis of econometric models of sales the author describes a meta analysis of econometric studies that estimated the elasticity of selective sales or market share to price the literature review yielded 367 suitable price elasticities

liquidation costs and capital structure abstract we investigate the relation between liquidation costs of assets and composition of capital structure for firms that reorganized under chapter 11 of the bankruptcy code firms with high liquidation costs emerge from chapter 11 with relatively low debt ratios the debt of these firms is more likely to be public and unsecured and to have less restrictive covenant terms these firms are also more likely to raise new equity capital assets with high liquidation costs thus lead firms to choose capital structures that make financial distress less likely

confidence banking and strategic default abstract securitization relies on confidence as securities are tied to a particular asset or pool of assets and investors lose when the asset defaults the security issuer usually provides further coverage by promising to use the proceedings from other non securitized assets although these promises are difficult to enforce the issuer may still have incentives to strategically avoid default in order to build a reputation of holding high quality assets confidence makes securitization more dependent on the issuer s reputation than other forms of financing and more volatile to forces behind reputation concerns such as expectations about future profits

prize sharing in collective contests the characteristics of endogenously determined sharing rules and the group size paradox are studied in a model of group contest with the following features i the prize has mixed private public good characteristics ii groups can differ in marginal cost of effort and their membership size iii in each group the members decide how much effort to put without observing the sharing rules of the other groups it is shown that endogenous determination of group sharing rules completely eliminates the group size paradox i e a larger group always attains a higher winning probability than a smaller group unless the prize is purely private in addition an interesting pattern of equilibrium group sharing rules is revealed the group attaining the lower winning probability is the one choosing the rule giving higher incentives to the members

are firms underleveraged an examination of the effect of leverage on default probabilities a commonly held view in corporate finance is that firms are less leveraged than they should be given the potentially large tax benefits of debt in this paper i study the effect of firms leverage on default probabilities as represented by the firms ratings using an instrumental variable approach i find that the leverage s effect on ratings is three times stronger than it is if the endogeneity of leverage is ignored this stronger effect results in a higher impact of leverage on the ex ante costs of financial distress which can offset the current estimates of the tax benefits of debt

the evolution of sharing rules in rent seeking contests incentives crowd out cooperation modern societies are characterized by competing organizations that rely predominantly on incentive schemes to align the behavior of their members with the organizations objectives this study contributes to explaining why in so many cases incentive schemes have gradually crowded out cooperation as an organization device our explanation does not draw on free riding the obvious achilles heel of cooperation but relies completely on fundamental group contest mechanisms by investigating a canonical rent seeking model and adopting an evolutionary perspective the analysis identifies shortcomings in previous results sets the record straight and explains why the process of incentivizing organizations is protracted

collective rent dissipation the theory of rent seeking was initiated by tullock 1967 1980 followed by krueger 1974 and posner 1975 and more recently extended in various directions by allard 1988 appelbaum and katz 1986a b c gradstein and nitzan 1989 hillman and katz 1984 1987 hillman and samet 1987 hillman and riley 1989 katz et al 1990 long and vousden 1987 ursprung 1990 and varian 1989 the purpose of this paper is to extend this theory by introducing the possibility of collective group rent seeking with voluntary individual decisions regarding their extent of participation in the collective rent seeking efforts

on the existence of an optimal capital structure theory and evidence one of the most contentious issues in the theory of finance during the past quarter century has been the theory of capital structure the geneses of this controversy were the seminal contributions by modigliani and miller 18 19 the general academic view by the mid 1970s although not a consensus was that the optimal capital structure involves balancing the tax advantage of debt against the present value of bankruptcy costs no sooner did this general view become prevalent in the profession than miller 16 presented a new challenge by showing that under certain conditions the tax advantage of debt financing at the firm level is exactly offset by the tax disadvantage of debt at the personal level since then there has developed a burgeoning theoretical literature attempting to reconcile miller s model with the balancing theory of optimal capital structure e g deangelo and masulis 5 kim 12 and modigliani 17 the general result of this work is that if there are significant leverage related costs such as bankruptcy costs agency costs of debt and loss of non debt tax shields and if the income from equity is untaxed then the marginal bondholder s tax rate will be less than the corporate rate and there will be a positive net tax advantage to corporate debt financing the firm s optimal capital structure will involve the trade off between the tax advantage of debt and various leverage related costs the upshot of these extensions of miller s model is the recognition that the existence of an optimal capital structure is essentially an empirical issue as to whether or not the various leverage related costs are economically significant enough to influence the costs of corporate borrowing the miller model and its theoretical extensions have inspired several timeseries studies which provide evidence on the existence of leverage related costs trczinka 28 reports that from examining differences in average yields between taxable corporate bonds and tax exempt municipal bonds one cannot reject the miller hypothesis that the marginal bondholder s tax rate is not different from the corporate tax rate however trczinka is careful to point out that this finding does not necessarily imply that there is no tax advantage of corporate debt if the personal tax rate on equity is positive indeed buser and hess 1 using a longer time series of data and more sophisticated econometric techniques estimate that the average effective personal tax rate on equity is statistically positive and is not of a trivial magnitude more importantly they document evidence that is consistent with the existence of significant leverage related costs in the economy

optimal dynamic capital requirements we characterize welfare maximizing capital requirement policies in a macroeconomic model with household firm and bank defaults calibrated to euro area data we optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk we find that getting the level right so that bank failure risk remains small is of foremost importance while the optimal sensitivity to default risk is positive but typically smaller than under basel irb formulas when starting from low levels initially both savers and borrowers benefit from higher capital requirements at higher levels only savers are in favour of tighter and more time varying capital charges

internal rent seeking works councils and optimal establishment size abstract using a microeconomic model and data from the establishment panel of the german institute for employment research we analyze the optimal establishment size against the background of rent seeking workers and the influence of works councils the theoretical part shows that establishment size has not only a discouragement effect on the level of individual rent seeking but also a quantity effect as the number of rent seekers increases the interplay of both effects together with technological considerations determines whether the employer chooses an inefficiently small or large establishment size introduction of a works council restores efficient establishment size although it is purely used as rent seeking device whether the employer benefits from a works council or not depends on the degree of contract incompleteness and the degree of worker coordination via a works council the empirical part indicates dominance of the discouragement effect over the quantity effect in establishments without works council as theoretically predicted works councils are beneficial by disentangling rent seeking and production issues thus eliminating the influence of the two rent seeking effects

commentaries and rejoinder to does quality win network effects versus quality in high tech markets a substantial body of theoretical literature indicates that network effects may hinder the entry of higher quality products into markets in which network effects are impor tant however tellis yin and niraj 2009 provide com pelling evidence that in general higher quality offerings win out in software markets after a short time lag because software markets are commonly believed to be susceptible to network effects this finding provides important empiri cal evidence against the hypothesis that network effects impede entry because tellis yin and niraj obtain their results across a large number of product categories and because their analysis holds up across various methods their evidence that high quality trumps network effects is impressive however in the final section of the article tellis yin and niraj are careful to provide a set of limitations for their research because i believe that their results must be quali fied in the light of these limitations i elaborate on some of these in my comment because the authors have gone about as far as possible with the data at their disposal this com ment is intended to stimulate further research on the topic of network effects and quality consistent with tellis yin and niraj s research objec tives their conceptual model focuses on the demand side and factors that might affect consumer response but the supply side is also important in particular it is not known whether the firms refrained from developing or marketing products because they judged that network effects were too difficult to overcome thus the results are subject to a sam ple selection problem in which only products that suppliers believed to be worthy of introduction on the market were selected because the sample is limited to cases in which suppliers believed that introducing the product on the mar ket was justified in the face of any network effects this cre ates an unknown bias toward showing that quality can over come network effects a related consideration is that suppliers have ways of dealing with network effects or even using them to their advantage one is to make the higher quality product com patible with its predecessor such as making excel compati ble with lotus another is to arrange to have software bun dled with the sale of new computers thus forcing its acceptance in the market for example a current buyer of a windows computer must either accept vista or have some one uninstall this software in favor of an older version a time consuming and expensive process this bundling may have facilitated the adoption of windows word excel internet explorer powerpoint aol and possibly other software types supplier actions to mitigate network effects such as compatibility and bundling do not invalidate the general findings in tellis yin and niraj s article rather they may help explain how and why network effects can be overcome

banking risk and macroeconomic fluctuations abstract this paper develops a model of banking frictions and banking risk as a sort of systemic risk changes in banking risk lead to fluctuations in aggregate economic activity we decompose the macroeconomic effect of a banking risk shock into a pure default effect and a risk aversion effect when risk sharing among investors is imperfect when the shock generates a bank risk spread similar to the peak value during the global financial crisis the overall effect is a decline in employment by 4 66 the default effect leads to a 3 40 employment decline by a within model measure and a 3 51 decline by a between model measure the remaining is attributed to the risk aversion effect a practical implication of our analysis is that by developing financial safety net and improving risk sharing among investors the society can mitigate the adverse macroeconomic effects of banking risk shocks to some extent but cannot eliminate all of them

distributional conflict and jurisdictional organization abstract this paper explores the endogenous formation of jurisdictions assuming the political process is a costly fight to acquire shares of the gnp pie in such a setting the stability of a unified jurisdiction is not necessarily determined by the preferences of the richest member region we also show that a system of federalism is especially significant in ameliorating distributional competition and conflict less resources are spent in aggregate on appropriative activities under a hierarchical system of federalism than in a unified jurisdiction with a single central government

the default rate experience on high yield corporate debt recent 1978 83 net returns on high yield low rated debt have been impressive averaging 490 to 580 basis points above the long term government bond index but low rated junk bonds pose a risk of default not present in the higher rated segment of the bond market the authors divided the par value of defaulting debt by total low rated straight debt outstanding to arrive at an estimate of the default rate for high yield bonds excluding johns manville which had the only defaulting debt rated investment grade just prior to the default date for the 1974 84 period this averaged 1 52 per cent or 152 basis points annually year to year variations in the rate were substantial furthermore default experience differed across various industry segments railroads and reits were particularly vulnerable to default in the past although they are unlikely to represent a large portion of future defaults retailer electronic computer airline and oil and gas defaults have become more common in recent years losses from default are actually lower than the default rate alone implies defaulted bonds traded on average at 41 per cent of par shortly after default after accounting for the bonds retained value and the loss of interest the average reduction in return to the investor who had purchased the bonds at par would have been in the range of 96 to 100 basis points annually

monitoring and structure of debt contracts this paper presents a theory of optimal debt structure when the moral hazard problem is severe the main idea is that the optimal debt contract delegates monitoring to a single senior lender and that seniority allows the monitoring senior lender to appropriate the full return from his monitoring activities the theory explains i why debt contracts are prioritized ii why short term debt is senior to long term debt and iii why financial intermediaries usually hold short term senior debt whereas long term junior debt is widely held another implication of the theory is that covenant and maturity structures will be set to conform to the seniority structure

the cost of recessions revisited a reverse liquidationist view the observation that liquidations are concentrated in recessions has long been the subject of controversy one view holds that liquidations are beneficial in that they result in increased restructuring another view holds that this rise in restructuring is costly since liquidations are privately inefficient and essentially wasteful this paper proposes an alternative perspective on the basis of a combination of theory with empirical evidence on gross job flows and on financial and labour market rents we find that cumulatively recessions result in reduced rather than increased restructuring and that this is likely to be socially costly once we consider inefficiencies on both the creation and destruction margins copyright 2005 wiley blackwell

bank capital in the short and in the long run abstract how far should capital requirements be raised to ensure a resilient banking system without imposing undue costs on the real economy capital requirement increases make banks safer and are beneficial in the long run but entail transition costs because they reduce credit supply and aggregate demand on impact in the baseline scenario of a quantitative macro banking model 25 of the long run welfare gains are lost due to transitional costs the strength of monetary policy accommodation and bank riskiness are key determinants of the trade off between the short run costs and long run benefits from capital requirement changes

rent seeking for pure public goods in this paper we present a formal analysis of rent seeking for public goods by two or more groups with different numbers of individuals we begin by considering equally wealthy groups under risk neutrality a case which constitutes our basic model several surprising and interesting results emerge from the analysis of this basic case the problem is then extended to deal with a groups with different wealth levels and b risk aversion this last extension brings about a further crop of interesting and useful results

economic distress financial distress and dynamic liquidation many firms emerging from a debt restructuring remain highly leveraged continue to invest little perform poorly and often reenter financial distress the existing literature interprets these findings as inefficiencies arising from coordination problems among many creditors or an inefficient design of bankruptcy law in contrast this paper emphasizes that creditors lack the information that is needed to make quick and correct liquidation decisions it can explain the long term nature of financial distress solely as the result of dynamic learning strategies of creditors and suggests that it may be an unavoidable byproduct of an efficient resolution of financial distress financial distress is often a long term process and has an impact on the capital structure investment policies and performance of many firms even after they emerge from debt restructurings james 1995 finds that many firms increase their investment expenditures only by very little in the first two years after a debt restructuring hotchkiss 1995 shows that in each of the first five years after emerging from bankruptcy between 35 percent and 41 percent of all firms have negative operating income according to gilson 1997 more than 75 percent of firms that complete debt restructurings emerge with a leverage ratio that is higher than industry median and most are still significantly more highly leveraged than before the onset of financial distress furthermore between one quarter and one third of all distressed firms

rent seeking with non identical sharing rules the primary object of this paper is to examine the role of differential sharing rules within a collective rent seeking setting on the possible non existence of nash equilibrium focusing on groups that distribute part of the rent equally among their members and the residual according to relative effort we show that in rent seeking societies applying the two polar sharing rules equilibrium never exists in the general case where groups apply different but not necessarily the polar sharing rules we study the relationship between group variability in distributing rents and the problem of non existence of equilibrium in the rent seeking game

contests with stochastic abilities we consider the properties of perfectly discriminating contests in which players abilities are stochastic but become common knowledge before efforts are expended players whose expected ability is lower than that of their rivals may still earn a positive expected payoff from participating in the contest which may explain why they participate we also show that an increase in the dispersion of a player s own ability generally benefits this player it may benefit or harm his rival but cannot benefit the rival more than it benefits himself we also explore the role of stochastic ability for sequential contests with the same opponent multibattle contests and with varying opponents elimination tournaments and show that it reduces the strong discouragement effects and holdup problems that may otherwise emerge in such games high own ability dispersion selects such players into the contest and favors them in elimination contests jel d72 d74 i introduction manytournamentsarecharacterizedbymultiple rounds with or without the elimination of some candidates in earlier stages of the process of determining a final winner in the political context electionprocessesthatdetermineparty leadersorpoliticalleadersmoregenerallyconsist ofmultipleconteststages intheracefortheu s presidency severalcompetitionstagesgradually narrowdownthenumberofcompetitors 1 inter

collective contests for commons and club goods abstract this paper focuses on collective contests for commons and club goods our main objective is to examine in this context the effect of group size on its performance the main results specify conditions for the existence non existence of the group size paradox namely the situation where a larger group is less more effective in pursuing its interest because of despite the combined effect of the incentives that result in the free riding problem and the tragedy of the commons the paper also explains under what circumstances there exists a bias towards excessive or inadequate winning group size finally it examines the effect of restricted excludability of the commons good within the winning group on the relationship between group size and its winning probability

investment in the absence of property rights the role of incumbency advantages in many situations the individuals who can generate some output must enter a contest for appropriating this output this paper analyses the investment incentives of such agents and the role of incumbency advantages in the contest depending on the advantages an increase in the productivity of the investment can decrease or increase the amount of investment the results are applied to autocrats investment behavior and job specific investment in organizations

contest efforts in light of behavioural considerations this study shows that distortion of probabilities is a possible reason for rent under dissipation incontests with relatively small number of participants such distortion may also result however inover dissipation of the contested rent focusing on contests with homogeneous contestants and thecommonly studied contest success function our main results clarify under what circumstances i rents are more under dissipated relative to the standard situation where probabilities are notdistorted ii rents are under dissipated yet less intensely relative to the standard situation whereprobabilities are not distorted iii rents are over dissipated and iv the contest does not possess asymmetric interior equilibrium in pure strategies

best of three all pay auctions abstract we study a best of three all pay auction it is shown that with values of winning and without values of losing this auction is less productive the players total expected effort is smaller than the one stage all pay auction however with different values of losing over the contest s stages it may be more productive than the one stage all pay auction

rent seeking with non identical sharing rules an equilibrium rescued nitzan s 1991 analysis of differential sharing rules in a collective rent seeking setting is reconsidered two groups each with more than one member are presumed to use different linear combinations of two sharing rules one based on an equal division of the prize and the other on each member s relative effort we show that an equilibrium always exists for this type of game and then characterize the equilibrium our result is contrary to nitzan s claims that a in the general case an equilibrium often does not exist and b an equilibrium never exists when the groups use the polar extreme rules

conflicts of interest and market illiquidity in bankruptcy auctions theory and tests i develop and estimate a model of cash auction bankruptcy using data on 205 swedish firms the results challenge arguments that cash auctions as compared to reorganizations are immune to conflicts of interest between claimholders but lead to inefficient liquidations i show that a sale of the assets back to incumbent management is a common bankruptcy outcome sale backs are more likely when they favor the bank at the expense of other creditors on the other hand inefficient liquidations are frequently avoided through sale backs when markets are illiquid that is when industry indebtedness is high and the firm has few nonspecific assets the problem of designing an efficient bankruptcy law has received considerable attention in the last decade much of the debate has centered around the optimality of two different stylized bankruptcy procedures cash auctions such as the u s chapter 7 code and structured bargaining represented by the u s chapter 11 reorganization code recently several european countries including france germany and great britain have changed their bankruptcy regulation by introducing reorganization procedures similar to chapter 11 at the same time the chapter 11 code has been criticized by academics including baird 1986 emphasizing that the bargaining procedure frequently results in long and wasteful negotiations these critics argue that chapter 11 should instead be replaced with a mandatory auction procedure other researchers such as aghion hart and moore 1992 and shleifer and vishny 1992 have pointed out that a cash auction is likely to suffer from considerable inefficiencies arising from transaction costs and market illiquidity the nature and costs of the chapter 11 procedure are

systems competition and network effects this paper discusses firm behavior market performance and the public and private institutions that arise in systems markets i e markets where consumers use compatible components together to generate benefits in such markets which include communications networks and hardware software networks popular products are inherently more valuable these network effects can drive corporate strategies and are critical in understanding innovation in many high technology markets the discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects competition between incompatible systems and how suppliers choose which components are compatible and which are not

do reorganization costs matter for efficiency evidence from a bankruptcy reform in colombia this paper studies the effect of reorganization costs on the efficiency of bankruptcy laws we develop a simple model that predicts that in a regime with high costs the law fails to achieve the efficient outcome of liquidating unviable businesses and reorganizing viable ones we test the model using the colombian bankruptcy reform of 1999 using data from 1 924 firms filing for bankruptcy between 1996 and 2003 we find that the pre reform reorganization proceeding was so inefficient that it failed to separate economically viable firms from inefficient ones in contrast by substantially lowering reorganization costs the reform improved the selection of viable firms into reorganization in this sense the new law increased the efficiency of the bankruptcy system in colombia

bidding in hierarchies this paper reconsiders the comparison between hierarchical contests and single stage contests a condition is given that characterizes whether and when the aggregate equilibrium payoff of contestants is higher in the single stage contest and when the single stage contest is more likely to award the prize to the contestant who values it most highly the outcome depends on inter and intra group heterogeneity and is not driven by free rider incentives

the costs of bankruptcy chapter 7 liquidation versus chapter 11 reorganization our paper explores a comprehensive sample of small and large corporate bankruptcies in arizona and new york from 1995 to 2001 bankruptcy costs are very heterogeneous and sensitive to the measurement method used we find that chapter 7 liquidations appear to be no faster or cheaper in terms of direct expense than chapter 11 reorganizations however chapter 11 seems to preserve assets better thereby allowing creditors to recover relatively more our paper also provides a large number of further empirical regularities our paper analyzes the largest sample of corporate bankruptcies to date we research approximately 300 cases from the arizona and new york federal bankruptcy courts from 1995 to 2001 these cases consist of 1 both publicly traded and privately held corporations and 2 both chapter 7 liquidations and chapter 11 reorganizations this sample is practically the entire population of unique corporate bankruptcies in these courts our paper s primary objective is to measure how the two available bankruptcy procedures differ especially but not only in terms of cost we explore four variables namely the change in the estate s value during bankruptcy a measure of indirect costs the time spent in bankruptcy another and more common measure of indirect costs the expenses submitted to and approved by the bankruptcy court a measure of direct costs and the recovery rates for creditors and apr violations our most important findings are that chapter 7 liquidations are not cheaper than chapter 11 reorganizations particularly after we control for endogenous self selection of firms into bankruptcy procedure bankruptcy professionals attorneys accountants trustees regularly end up with most of the post bankruptcy firm s value in chapter 7 arturo bris is at imd yale school of management and ecgi ivo welch is at brown uni

bidding for a group specific public good prize abstract we examine the equilibrium effort levels of individual players and groups in a contest in which two groups compete with each other to win a group specific public good prize the players choose their effort levels simultaneously and independently and the winning group is determined by the selection rule of all pay auctions we first prove nonexistence of a pure strategy nash equilibrium and then construct a mixed strategy nash equilibrium at the nash equilibrium the only active player in each group is a player whose valuation for the prize is the highest in that group all the other players expend zero effort and the equilibrium effort levels depend solely on two values the highest valuation for the prize in each group

how organizational structure can reduce rent seeking in multi tiered organizations individuals can engage in unproductive rent seeking activities both within and between the divisions of the organization nevertheless a multi tiered organizational structure can induce efficiency gains by decreasing rent seeking we present a model of production and simultaneous internal and external rent seeking assuming a logistic contest success function in equilibrium there is generically either internal or external rent seeking but not both a multi tiered organization leads to less rent seeking and higher welfare even though the production technology gives no reason for any specific organizational structure our findings constitute a new efficiency rationale for multi tiered organizations

to deter or to moderate alliance formation in contests with incomplete information we consider two players choice about the formation of an alliance ahead of conflict in a framework with incomplete information about the strength of the potential ally when deciding on alliance formation players anticipate the self selection of other players and the informational value of own and other players choices in the absence of these signaling effects strong players have an incentive to stand alone which leads to a separating equilibrium this separating equilibrium can be destabilized by deception incentives if beliefs are updated on the basis of endogenous alliance formation choices weak players may find it attractive to appear strong in order to deter competitors from positive effort choices strong players may find it attractive to appear weak in order to give their competitors a false sense of security and then beat them with little effort moreover appearing weak allows players to free ride when alliances are formed jel d72 d74