interfering with secondary markets we present a model to address in a unified manner four ways in which a monopolist can interfere with secondary markets in the model consumers have heterogeneous valuations for quality so that used good markets play an allocative role our results are the following 1 in contrast to swan s famous independence result a monopolist does not provide socially optimal durability 2 allowing the monopolist to rent does not restore socially optimal durability and increases the monopolist s market power in the used market however forcing the monopolist to sell the goods may be a bad policy because it would lead to either lower output or lower durability 3 the manufacturer benefits from a well functioning used good market despite the fact that used goods provide competition for new goods 4 the monopolist prefers to restrict consumers abilities to maintain the good

debt leases taxes and the endogeneity of corporate tax status we provide evidence that corporate tax status is endogenous to financing decisions which induces a spurious relation between measures of financial policy and many commonly used tax proxies using a forward looking estimate of before financing corporate marginal tax rates we document a negative relation between operating leases and tax rates and a positive relation between debt levels and tax rates this is the first unambiguous evidence supporting the hypothesis that low tax rate firms lease more and have lower debt levels than high tax rate firms many theories of capital structure imply that all else equal the incentive to use debt financing increases with a firm s marginal tax rate due to the tax deductibility of interest expense e g modigliani and miller 1963 deangelo and masulis 1980 conversely leasing models generally predict that firms with low marginal tax rates employ relatively more leases than do firms with high marginal tax rates the logic behind the leasinlg prediction is that leases allow for the transfer of tax shields from firms that cannot fully utilize the associated tax deduction lessees to firms that can lessors e g myers dill and bautista 1976 smith and wakeman 1985 ross westerfield and jaffe 1996 despite these straightforward predictions empirically testing for tax effects is difficult because a spurious relation exists between the financing decision and many commonly used tax proxies specifically both interest expense and lease payments are tax deductible thus a firm that finances its operations with debt or leases reduces its taxable income potentially lowering its expected marginal tax rate if not properly addressed this endogeneity of the tax rate can bias an experiment in favor of finding a negative

south north trade and southern growth bleak prospects from the structuralist point of view abstract a three country three commodity model is developed to illustrate the dynamics of growth among the north the south and opec one conclusion is that the southern growth rate will be increased by faster growth of northern capital with a steady state response coefficient of unity however if the steady state is perturbed by increases in northern productivity or the oil price then the coefficient becomes less than one in the short run higher capital flows from north to south increase the former s growth rate but may have only marginal impact on growth in the south higher productivity in the south will slow its growth rate and reduce its terms of trade when the engel elasticity of northern demand for its exports is less than one these and other results follow from surplus labor in the south and its dependent position in international trade from which it will be difficult to escape

determinants of corporate leasing policy the existing finance literature assumes the real operating cash flows from leasing or owning are invariant to the ownership of the asset and focuses on tax related incentives for corporate leasing policy our analysis suggests that taxes are important in identifying potential lessees and lessors but are less important in identifying the specific assets leased we provide a unified analysis of the various incentives affecting the lease versuspurchase decision we then show how these incentives explain the use of contractual provisions such as maintenance clauses deposits options to purchase the asset and metering when a firm buys an asset it obtains both the right to the services of that asset over the period it is owned plus the right to sell the asset at any future date with a lease the firm acquires only the right to the asset s services for a period specified in the contract the existing finance literature analyzing corporate leasing policy concentrates on the tax related incentives to lease or buy e g see miller and upton 19 myers et al 21 lewellen et al 13 franks and hodges 11 and brealey and young 4 we believe that taxes play an important role in explaining certain dimensions of leasing policy for example the choice between manufacturer and third party leasing however taxes provide only a limited explanation of why specific assets are leased rather than owned and for the choice of provisions in lease contracts in this paper we want to accomplish two things 1 to provide a unified analysis of the various incentives affecting the lease versus buy decision and 2 to employ that analysis to explain observed variation in corporate leasing policy in deriving testable hypotheses about the characteristics of lessees lessors the assets leased and provisions in lease contracts we extend the standard leaseversus buy analysis found in corporate finance textbooks e g brealey and myers

compatibility and bundling of complementary goods in a duopoly this paper presents a simple model of compatibility and bundling in industries where consumers assemble several necessary components into a system that is close to their ideal the authors show that for a wide range of parameters firms will choose to produce compatible components but will offer discounts to consumers who purchase all components from the same firm however firms would be better off if they could commit not to provide such discounts furthermore the equilibrium tends to involve socially excessive bundling finally mixed bundling strategies tend to increase the range of parameters over which socially excessive standardization occurs copyright 1992 by blackwell publishing ltd

desirability of compatibility in the absence of network externalities i compare the incentives firms have to produce individual components compatible with components of other manufacturers instead of systems composed of components that are incompatible with components of competing manufacturers i show that even in the absence of positive consumption externalities network externalities prices and profits will be higher in the regime of compatibility equilibrium total surplus could be higher in either regime both regimes overprovide variety compared to the surplus maximizing solution in today s environment many products are complex specified by a long array of characteristics part of the decision of the firm is to choose if it should break this long array of features into two or more smaller parts and produce the products corresponding to the smaller arrays instead of the product that embodies the full array we will call the products that correspond to these smaller arrays components and the product that corresponds to the full array a system note that components are by their definition complements components produced by different manufacturers are compatible if it is feasible for the consumers to combine them costlessly into a working system in this paper we will assume that there are two components which make up a system we will discuss competition under full compatibility when components produced by all firms are compatible with each other and under incompatibility when no components produced by different firms are compatible and no hybrid systems can exist 2 assuming availability of the same

consumer biases and mutual ownership abstract we show how ownership of the firm by its customers as well as nonprofit status can prevent firms from using contractual terms that take advantage of consumer biases by eliminating an outside residual claimant with control over the firm these alternatives to investor ownership reduce the incentive of the firm to offer such terms however customers who are unaware of their behavioral biases may fail to recognize this advantage of non investor owned firms we present evidence from the consumer financial services market that supports our theory comparing contract terms we find that mutually owned firms offer lower penalties such as default interest rates and higher up front prices such as introductory interest rates than do investor owned firms however consumers most vulnerable to these penalties are no more likely to use mutually owned firms

risk shifting incentives of depository institutions a new perspective on federal deposit insurance reform abstract we characterize the risk shifting incentives of a depository institution as arising fundamentally from the existence of limited liability and the associated convex payoff to equity holders this risk incentive feature is unchanged by deposits being insured and hence excessive risk taking by depository institutions is not solely attributable to the flat rate insurance premium consequently the incentive problem cannot be resolved through a risk based insurance premium contrary to the prevailing view we propose a solution that eliminates risk shifting through an optimal tax structure and specify a corresponding insurance premium that is revenue neutral from the social planner s regulator s standpoint the solution is derived in the context of a social objective function that trades off the benefits of liquidity services by banks and the unique informational role of bank loans with the costs of investment distortions engendered by risk shifting

risky debt investment incentives and reputation in a sequential equilibrium the agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information the incentive effect of risky debt on the investment policy of a levered firm is studied in this context in a sequential equilibrium of the model a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment the incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market this anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium some empirical implications of the model for bond rating debt covenants and bond price response to investment announcements are explored

a keynesian model of north south trade abstract this paper considers a two country two good model of international trade where in each country employment and output are constrained by effective demand it is shown that the country identified as the south exporting consumption goods and importing investment goods in trade equilibrium experiences an unambiguous fall in consumption and employment as trade opens up the other country identified as the north experiences an unambiguous rise in consumption and employment

revisiting dynamic duopoly with consumer switching costs abstract the degree of collusiveness of a market with consumer switching costs is analyzed in an infinite horizon model of duopolistic competition in contrast with previous analyses we assume that firms compete for the demand for a homogeneous good by setting prices simultaneously in each period this problem is formulated as a simple stochastic game and a symmetric stationary markovian perfect equilibrium with distinctive economic features is studied we show that switching costs unambiguously relax price competition in equilibrium but that on the contrary they may make tacit collusion more difficult to sustain journal of economic literature classification numbers c73 d43 l13

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

credit risk in the leasing industry abstract this paper is devoted to the credit risk modeling issues of retail lease portfolios using a re sampling method i estimate the probability density function of losses and var measures in a portfolio of 46 732 leases issued between 1990 and 2000 by a major european financial institution my results show that physical collaterals play a major role in reducing the credit risk associated with lease portfolios however because of insufficient recognition of such collaterals under the new regulatory capital framework basel ii significant differences are observed between the estimated capital requirements and those calculated in accordance with the various basel ii approaches

contract costs and financing decisions like bondholders most agents contract for fixed payoffs thus corporate capital structures which are less than 50 percent debt are less levered than overall contract structures in which about 90 percent of total flows are fixed payoffs the hypothesis analyzed here is that loans and bonds lower contract costs by delegating the monitoring and bonding of the default risks of fixed payoffs to credible specialists financial intermediaries bond holder trustees rating agencies and auditors other agents can then focus on their specialties that is efficient supply of labor materials and other services and the contract problems of these specialties copyright 1990 by the university of chicago

a new perspective on planned obsolescence automobile manufacturers have long had a policy of introducing annual style changes into their new model cars textbook publishers have a policy of periodically bringing out revised editions of their popular books recently ibm changed the operating system used in its personal computers causing a reduction in the compatibility between its old and new machines if one were to ask the typical man in the street to explain what is happening in these markets he would not hesitate before giving the following answer in economists terminology he would say that for the above firms the incentive to introduce new products that make old units obsolete is too high i e the firms have an incentive to practice planned obsolescence of course just as is true for the man in the street economists have also long observed and commented on the speed with which new products are introduced for example galbraith 1958 suggests that the annual model changes of automobile manufacturers are socially wasteful while fisher griliches and kaysen 1962 provide empirical estimates of the costs of these changes there have also been numerous theoretical attempts to model the idea of planned obsolescence or the related idea of killing off the market for secondhand goods but most of these models have in fact considered the choice a monopolist faces concerning how much durability to build initially into his product rather than the monopolist s incentive to introduce new versions of his product over time 1 in this paper i consider planned obsolescence from the standpoint of a firm that can change the nature of what it sells and show that the man in the street is in fact correct in many settings the incentive for a durable goods monopolist to introduce new products that make old units obsolete will be above that which is socially optimal

robust financial contracting and the role of venture capitalists we derive a role for inside investors such as venture capitalists in resolving various agency problems that arise in a multistage financial contracting problem absent an inside investor the choice of securities is unlikely to reveal all private information and overinvestment may occur an inside investor however always makes optimal investment decisions if and only if he holds a fixed fraction contract where he always receives a fixed fraction of the project s payoff and finances that same fraction of future investments this contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds in this article we develop a model of financial contracting with multiple investment decisions and show how conflicts of interest and informational asymmetries can be effectively resolved by an inside investor i e an investor who not only provides capital but also works closely with the firm monitors it frequently and is generally very well informed about the firm s prospects and investment opportunities venture capitalists are obvious examples of inside investors and their function has been an important motivation for this article banks especially in japan and germany are also involved in monitoring and can be viewed as playing the role of inside investors in this article we examine the potential benefits of inside investors in a context where there are no restrictions beyond limited liability on the type of financial contracts that can be written we address a basic financial contracting problem involving an entrepreneur who has an idea for a project but does not have sufficient capital to fund it an important assumption is that there are several stages in the project s development and that a decision must be made at each stage whether the project should be continued or abandoned if the project is continued the amount of additional capital to be invested must also be determined we assume that the entrepreneur as an insider observes private information about the project s profitability at each stage this information is not

consumer myopia standardization and aftermarket monopolization abstract in this paper i show that the standard bertrand competition argument does not apply when firms compete for myopic consumers who optimize period by period i develop the model in the context of aftermarket with overlapping generations of consumers simultaneous product offerings in the primary market and aftermarket establishes a price floor for the primary good this constraint prevents aftermarket rents from being dissipated by the primary market competition duopoly firms earn positive profits despite price competition with undifferentiated products nonetheless government interventions to reinforce aftermarket competition such as a standardization requirement may lead to the partial collapse of the primary market

planned obsolescence and the r d decision by investing in rd i e the r d choice that maximizes current profitability does not maximize overall profitability the result is that if output is sold rather than rented then in its r d decision the monopolist has an incentive to practice a type of planned obsolescence that lowers its own profitability

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

tying foreclosure and exclusion in recent years the leverage theory of tied good sales has faced heavy and influential criticism in an important sense though the models used by its critics are actually incapable of addressing the leverage theory s central concerns here the author reconsiders the leverage hypothesis and argues that tying can indeed serve as a mechanism for leveraging market power the mechanism through which this leverage occurs its profitability and its welfare implications are discussed in detail copyright 1990 by american economic association

network externality compatibility choice and planned obsolescence this paper attempts to provide a formal theory of planned obsolescence based on incompatible technologies in the presence of network externalities the author explores how a monopolist s ability to make the new product incompatible with the old version of a product constrains the optimal dynamic behavior of the monopolist the social optimum and the market equilibrium are compared finally the possibility of quality distortion is considered as a commitment mechanism to the future compatibility choice copyright 1994 by blackwell publishing ltd

the leasing puzzle prevailing theories in finance and economics suggest that leases and debt are substitutes an increase in one should led to a compensating decrease in the other in particular there are three views on the magnitude of the substitution coefficient standard finance theory treats cash flows from lease obligations as equivalent to debt cash flows thus describing the tradeoff between debt and leases as one to one others are willing to use a tradeoff of leases for debt which is less than but close to one the rationale for a dollar of leases using less of debt capacity than a dollar of debt obligation is based upon the differences in the terms and nature of lease and debt contracts finally there are some who argue that since leased assets may be firm specific the risk of moral hazard may be great resulting in a tradeoff of greater than one to one that is a dollar of a lease obligation uses more of debt capacity than a dollar of a debt obligation a series of empirical tests are performed in this study on samples of approximately 600 firms covering the years 1976 through 1981 with none of the three views supported by the results instead the results indicate that leases and debt are complements greater use of debt is associated with a greater use of leasing this finding reappears consistently for each year each definition of leverage ratios and each approach to analysis this complementary relationship persists even after refinements are made to the estimation technique

competitive promotional strategies this article analyzes the equilibrium pricing strategies of brands engaged in a pricing game each brand has a monopoly market loyal consumers and competes with others in a common market called brand switchers in the case of a duopoly it is shown that the behavior of the brand switchers characterizes the equilibrium behavior of the duopolists this article focuses on two key comparative statics namely the depth of discounts away from a regular high price and the probability of giving a deal or the frequency of deals how these properties vary with the size of the loyal markets and the behavior of the brand switching population is discussed copyright 1988 by the university of chicago

the existence of equilibrium in discontinuous economic games i theory the article presents information about the existence of equilibrium in discontinuous economic games in this paper and its sequel presents study the existence of nash equilibrium in games where agents payoff functions are discontinuous the enquiry is motivated by a number of recent studies that have uncovered serious existence problems in seemingly innocuous economic games in the sequel to this paper authors have explained the utility function in the economic games referred to earlier are neither continuous nor quasi concave however they demonstrate that the payoff functions in mildly modified versions of these constructs exhibit two weaker forms of continuity which together with the requirement of quasi concavity suffice for the existence of an equilibrium from this one may conclude that at least in the modified versions of these models discontinuities in the payoff functions are not the real source of the problem rather it is the failure of the payoff functions to the quasi concave which is responsible for the non existence of equilibrium these observations bear on the existence of nash equilibrium in pure strategies

operating leases and the assessment of lease debt substitutability operating leases are estimated in the current paper to be approximately thirteen times larger than finance leases on average in recognition of this the paper investigates the degree of substitutability between leasing and non lease debt using a comprehensive measure of leasing improving on the partial measures used in prior research operating lease liabilities are estimated using the constructive capitalisation approach suggested by imhoff lipe and wright 1991 accounting horizons 5 pp 51 63 modified to incorporate company specific and uk relevant assumptions the results imply that leasing and debt are partial substitutes with 1 of leasing displacing approximately 0 23 of non lease debt on average consistent with the argument that lessors bear some risks which are not inherent in debt contracts these findings suggest that substitution effects are not uniform across lease types

stock and compensation compensation planning within firms creates important corporate financial problems theoretical models and empirical tests of hypotheses in this area should play a much larger role than currently in the modern theory of corporate finance employees fund a large proportion of their firm s activities through deferred compensation arrangements tied to the performance of their company these arrangements are generally put in place for incentive reasons to align the interests of employees more closely with those of shareholders moreover tax rules encourage or discourage these arrangements at various times currently both tax rules and incentive considerations encourage stock buyback programs to fund deferred compensation arrangements prior to the 1980s however tax rules favored funding in other than company stock implying that employees likely held company stock for incentive and not for tax reasons during this time period copyright 1991 by american finance association

is executive compensation a substitute governance mechanism to debt financing and leasing this study examines whether and how ceo equity incentives relate to financing choices i e debt and leases using manually collected ceo compensation and lease data for a sample of large uk firms we found evidence of a negative relationship between ceo equity incentives and firm leverage we also found that ceo equity incentives and leases are negatively related the results are consistent with the theory introduced in this study on the substitutability of executive compensation and firm s debt lease financing our findings represent fresh empirical evidence and renewed interpretation regarding the relationship between executive equity based incentives and firm s financing choices the substitutability theory we introduced here suggests that firms with greater use of debt and or leases will implement less equity based compensation in mitigating the agency cost of equity

consumer inattention and bill shock regulation for many goods and services such as electricity health care cellular phone service debit card transactions or those sold with loyalty discounts the price of the next unit of service depends on past usage as a result consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit i develop a model of inattentive consumption derive equilibrium pricing when consumers are inattentive and evaluate bill shock regulation requiring firms to disclose information that substitutes for attention when inattentive consumers are sophisticated but heterogeneous in their expected demand bill shock regulation reduces social welfare in fairly competitive markets which may be the effect of the federal communication commission s recent bill shock agreement if some consumers are attentive while others naively fail to anticipate their own inattention however then bill shock regulation increases social welfare and can benefit consumers hence requiring zero balance alerts in addition to the federal reserve s new opt in rule for debit card overdraft protection may benefit consumers

ceo compensation in financially distressed firms an empirical analysis this paper studies senior management compensation policy in 77 publicly traded firms that filed for bankruptcy or privately restructured their debt during 1981 to 1987 almost one third of all ceos are replaced and those who keep their jobs often experience large salary and bonus reductions newly appointed ceos with ties to previous management are typically paid 35 less than the ceos they replace in contrast outside replacement ceos are typically paid 36 more than their predecessors and are often compensated with stock options on average ceo wealth is significantly related to shareholder wealth after firms renegotiate their debt contracts however managers compensation is sometimes explicitly tied to the value of creditors claims

refusals to deal and orders to supply in competitive markets abstract a number of recent antitrust cases in north america and europe have involved allegations that manufacturers of durable products have refused to supply parts to independent service organizations apparently to monopolize the market for repairs of their products this paper analyzes such refusals in a competitive market and connected aftermarket in this model the refusals help to support higher prices for high intensity high value users however these higher charges permit the recovery of higher costs incurred during an initial warranty period since full prices equal full marginal costs in equilibrium the refusals permit the attainment of a first best outcome and an attempt by antitrust authorities to force supply will be welfare reducing

top management compensation and capital structure the interrelationship between top management compensation and the design and mix of external claims issued by a firm is studied the optimal managerial compensation structures depend on not only the agency relationship between shareholders and management but also the conflicts of interests which arise in the other contracting relationships for which the firm serves as a nexus we analyze in detail the optimal management compensation for the cases when the external claims are 1 equity and risky debt and 2 equity and convertible debt in addition to the role of aligning managerial incentives with shareholder interests managerial compensation in a levered firm also serves as a precommitment device to minimize the agency costs of debt the optimal management compensation derived has low pay performance sensitivity with convertible debt instead of straight debt the corresponding optimal managerial compensation has high pay to performance sensitivity a negative relationship between pay performance sensitivity and leverage is derived our results provide a reconciliation of the puzzling evidence of jensen and murphy 1990 with agency theory other testable implications include 1 a relationship between the risk premium in corporate bond yields and top management compensation structures and 2 the announcement effect of adoption of executive stock option plans on bond prices the model yields implications for management compensation in banks and federal deposit insurance reform our results explain the dynamics of top management compensation in firms going through financial distress and reorganization

operating lease decision and the impact of capitalization in a bank oriented country abstractthis article explores the reasons why firms engage in operating leases and examines the potential impact of a change in the related accounting rules we focus on the accounting advantage of off balance financing which does not affect the typical accounting based covenants especially important in bank oriented countries however we also consider other economically based arguments using manually collected operating lease data for spanish listed firms we use the constructive capitalization method to measure as if liabilities the results confirm that not only size and industry affect the decision but that firms closer to breaching their covenants are also more inclined to choose operating leases consequently it is argued that such firms will be more affected by the accounting change indeed the inclusion of liabilities in the balance sheet might tighten financial covenants in loan agreements as evidenced in the paper not surprisingly firms are strongly opposed to the accounting change

export led development primary vs industrial exports abstract trade with north can make south poorer if south is a primary exporter manufactured imports from north can cause a decline in the real wage and consequently lower the labour supply the production possibility frontier and hence the gnp of south can shrink while that of north can expand if south gains comparative advantage in manufactured goods and reverses the trade pattern it can turn the tables on north the analysis based on a theoretical model suggests a way to reconcile the divergent views on the desirability of north south trade

mixed pricing in oligopoly with consumer switching costs abstract in this paper we develop an alternative and more natural two period model of duopolistic competition with switching costs we find that overall competition is always less severe when consumers find switching suppliers expensive however the relationship between the strength of competition and the importance of switching costs is not monotonic interestingly competition between ex ante identical firms naturally results in firms having asymmetric market shares in equilibrium

capital market imperfections and the incentive to lease abstract this paper evaluates the influence of financial contracting costs on public corporations incentives to lease fixed capital we argue that firms facing high costs of external funds can economize on the cost of funding by leasing we construct several measures of leasing propensity plus some a priori indicators of the severity of financial constraints facing firms we find that the share of total annual fixed capital costs attributable to either capital or operating leases is substantially higher at lower rated non dividend paying cash poor firms those likely to face relatively high premiums for external funds

a model of add on pricing this paper examines competitive price discrimination with horizontal and vertical taste differences consumers with higher valuations for quality are assumed to have stronger brand preferences two models are considered a standard competitive price discrimination model in which consumers observe all prices and an add on pricing game in which add on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add ons at high unadvertised prices in the standard game price discrimination is self reinforcing the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not the analysis of the add on pricing game focuses on the chicago school argument that profits earned on add ons will be competed away via lower prices for advertised goods a conclusion is that add on practices can raise equilibrium profits by creating an adverse selection problem that makes price cutting unappealing although profitable when jointly adopted using add on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising several models that could account for add on pricing are discussed

independent service organizations and economic efficiency david e mills i introduction many manufacturers of capital equipment provide maintenance service to their equipment users sometimes equipment and service are sold separately and at other times they are bundled for example through leases and rental agreements numerous recent antitrust cases revolve around allegedly anti competitive practices used by some manufacturers to deter independent service organizations isos from servicing the manufacturer s equipment indeed the volume of cases brought by isos in the past decade exceeds litigation in more conventional antitrust areas like antimerger disputes and cases under the robinson patman act 1 the controversial practices in these cases include tying sales of equipment and service tying sales of service and other aftermerket products refusals to sell replacement parts to isos and refusals to license operating or diagnostic software to isos the pivotal issue in these cases is whether practices that deter isos injure competition in the service aftermarket 2 manufacturers claim their customers shop for equipment and service simultaneously that is customers choose a proprietary system comprised of equipment service and other components instead of merely choosing a brand of equipment this line of reasoning holds that interbrand competition for systems disciplines the pricing of every component in tile system and therefore is sufficient to protect equipment users welfare if one manufacturer s equipment is priced above rivals the high priced equipment manufacturer must supply service at a lower price than its rivals to remain competitive on a total cost of ownership tco basis 3 brand specific intrabrand competition in the service aftermarket is not necessary to maximize equipment users welfare because systems competition is sufficient manufacturer practices that deter isos or discourage intrabrand service competition canno t injure competition isos claim that systems competition does not adequately discipline manufacturers service pricing once customers acquire a piece of durable equipment they cannot replace it with another brand without incurring switching costs thus as salop argues such customers become locked in to the manufacturer for maintenance service and are left vulnerable to opportunistic service pricing throughout the useful life of the equipment 1993 the only protection customers enjoy from exploitation by manufacturers in the service aftermarket is the protection afforded by isos in the much cited kodak decision 4 the supreme court rejected the notion that inter brand competition in systems or equipment is always sufficient to prevent the exercise of monopoly power in the service aftermarket the court was influenced by recent economic research that highlights theoretical opportunities for equipment manufacturers to exploit their locked in customers these theoretical opportunities stem from information costs faced by customers and incomplete contracts between manufacturers and their customers 5 carl shapiro recounted the available theories of antitrust injury 1995 485 that apply to these circumstances these theories include i incomplete information where customers who are poorly informed about the tco of competing brands of equipment are exploited by manufacturers once they become locked in ii opportunistic pricing where manufacturers break trust with their locked in customers and sacrifice their reputations by implementing unanticipated increases in service pricing iii inability to commit where higher than competitive service pricing and lower than competitive equipment pricing arise because manufacturers cannot provide contractual assurances about future service prices 6 and iv better opportunities for price discrimination afforded by the absence of independent maintenance providers the price discrimination theory of lock in exploitation differs from the previous three in that price discrimination often improves rather than impairs market performance

market regulation of voluntary add on contracts abstract this paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add on insurance for their products we develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown some consumers do not pay attention to extended warranties before making base product choices but overestimate the value of such warranties at the point of sale under retail competition the consumers option to buy multiple base products can endogenously create a base price floor that may prevent firms from redistributing the full warranty profits via loss leadership inducing competition in the warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard which can even reduce consumer surplus the results are consistent with the effects of recent changes regarding extended warranty regulation by uk legislators

investment incentives debt and warrants abstract this paper models and characterizes investment incentive problems associated with debt financing the decision problem of residual claimants is explicity formulated and their investment policies are characterized the paper also analyzes the use of conversion features and warrants to control distortionary incentives these claims reverse the convex shape of levered equity over the upper range of the firm s earnings and this mitigates the incentive to take risk it is shown that under certain conditions such claims can be constructed to restore net present value maximizing incentives and simultaneously meet the financing requirements of the firm

eliminating the market for secondhand goods an alternative explanation for leasing there are a number of prominent specific instances in which a durable goods manufacturer with significant market power employed a lease only policy i united shoe in the market for shoe machinery ii ibm in the market for computers and iii xerox in the market for copiers the obvious question that arises is why would such a firm prefer leasing over selling in this article i argue that one role of the lease only policy was to eliminate the market for secondhand goods the article formally demonstrates the argument discusses the relationship between this article and earlier literature on secondhand markets and discusses the implications for antitrust policy

taxes institutions and innovation theory and international evidence we develop an international model of the design of institutions for regulating innovative activities of private corporations informational limitations faced by the social planner preclude complete contracting with private firms corporate innovation creates positive and negative externalities the social planner in each country takes into account the legal system in place and designs an umbrella of institutions that include a menu of organizational forms liability structures corporate taxes and subsidies we show that limited liability may be accompanied by excessive innovation however when the nonmonetized benefits are very high private firms may be too conservative in innovation policies firms choose their organizational form and level of innovation consistent with private optimality with the optimal institutional design for each country we demonstrate that private innovation choices are aligned with social optimality in particular we show that the optimally designed corporate tax rate in each country is a decreasing function of its legal effectiveness using data from 63 countries over 2003 2018 we document supporting evidence mncs can take advantage of differential liability and corporate tax structures across national boundaries to circumvent institutional design constraints however when mncs generate positive externalities to host countries their governments may provide subsidies and incentives

the neo luddite s lament excessive upgrades in the software industry we examine two reasons why a monopoly supplier of software may introduce more upgrades than is socially optimal when the upgrade is backward but not forward compatible so users who upgrade reduce others network benefits one explanation involves a commitment problem profits and social welfare may suffer because ex post the monopolist will want to sell the upgraded product to new consumers the second involves consumer heterogeneity here oversupply arises from the difference between the externality that upgrades impose on the marginal and average consumer and from the effect of upgrades on sales of the base good

the priority structure of corporate liabilities most discussions of corporate capital structure effectively assume that all debt is the same yet debt differs by maturity covenant restrictions conversion rights call provisions and priority here we examine priority structure across a sample of 4995 compustat industrial firms from 1981 to 1991 we analyze the variation in the use of capital leases secured debt ordinary debt subordinated debt and preferred stock both as a fraction of the firm s market value and as a fraction of total fixed claims our evidence provides consistent support for contracting cost hypotheses mixed support for tax hypotheses and little support for the signaling hypothesis

trade accumulation and uneven development abstract this paper develops a two country model of capital accumulation and growth where the industrial sector exhibits increasing returns to scale it shows that uneven development is a necessary outcome in such a model an initial discrepancy in capital labor ratios between the two countries will cumulate over time leading to the division of the world into a capital rich industrial region and capital poor agricultural region which region takes on which role depends on primative accumulation that is on which region starts with more capital if capital is mobile internationally the model can given rise to a two stage pattern of development a first stage where trade is the engine of growth in the leading country and a second in which foreign investment takes on that role which is reminiscent of the hobson lenin theory of imperialism