wall street occupations many finance jobs entail the risk of large losses and hard to monitor effort we analyze the equilibrium consequences of these features in a model with optimal dynamic contracting we show that finance jobs feature high compensation up or out promotion and long work hours and are more attractive than other jobs moral hazard problems are exacerbated in booms even though pay increases employees whose talent would be more valuable elsewhere can be lured into finance jobs while the most talented employees might be unable to land these jobs because they are too hard to manage

optimal replication of contingent claims under portfolio constraints we determine the minimum cost of superreplicating a nonnegative contingent claim when there are convex constraints on portfolio weights we show that the optimal cost with constraints is equal to the price of a related claim without constraints the related claim is a dominating claim that is a claim whose payoffs are increased in an appropriate way relative to the original claim the results hold for a variety of options including some path dependent options constraints on the gamma of the replicating portfolio constraints on portfolio amounts and constraints on the number of shares are also considered article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

management of social issues in supply chains a literature review exploring social issues actions and performance outcomes the social dimension of sustainable development and its impact on supply chains have so far received less attention than the environmental dimension the aim of the research is to explore the intersection between social issues corporate social responsibility csr actions and performance outcomes a structured literature review of social issues in supply chains is presented analysing the research published so far in peer reviewed publications linking csr and supply chain management allows the exploration of strategies and performance outcomes with a focus on social issues the corresponding responsible supply chain actions adopted by firms to address these issues are grouped into communication compliance and supplier development strategies social and economic as well as buyer and supplier performance are identified as the key outcomes but the interactions among these constructs would require further research this paper contributes to the understanding of managing social issues in supply chains by linking social issues responsible supply chain actions and performance outcomes the paper consolidates related research by offering an overarching conceptual framework and points to future research directions and simultaneously provides insights into the management of social issues in supply chains

voluntary governance mechanisms in global supply chains beyond csr to a stakeholder utility perspective poor working conditions remain a serious problem in supplier facilities in developing countries while previous research has explored this from the developed buyers side we examine this phenomenon from the perspective of developing countries suppliers and subcontractors utilizing qualitative data from a major knitwear exporting cluster in india and a stakeholder management lens we develop a framework that shows how the assumptions of conventional buyer driven voluntary governance break down in the dilution of buyer power and in the web of factors rooted in suppliers traditions beliefs local demands and resource dependency we reveal out how success in governing collaborative global supply chains often falls short within the subcontracting stage where a stakeholder management mindset is elusive to most participants we suggest that success in governing collaborative global supply chains is dependent on concepts of stakeholder utility and the presence of shared value that is often at odds with the realities of power information asymmetry and compliance reward systems inherent in the non market coordination of global supply chains our findings offer important insights for delineating the concepts of value creation from csr concepts and practices and for modifying the basic assumptions of conventional supply chain governance

did dubious mortgage origination practices distort house prices zip codes with high concentrations of originators who misreported mortgage information experienced a 75 larger relative increase in house prices from 2003 to 2006 and a 90 larger relative decrease from 2007 to 2012 compared with other zip codes several causality tests show that high fractions of dubious originators in a zip code lead to large price distortions originators with high misreporting gave credit to borrowers with high ex ante risk yet further understated the borrowers true risk overall excess credit facilitated through dubious origination practices explain much of the regional variation in house prices over a decade

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

the finance growth nexus evidence from bank branch deregulation this paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the united states we find that the rates of real per capita growth in income and output increase significantly following intrastate branch reform we also argue that the observed changes in growth are the result of changes in the banking system improvements in the quality of bank lending not increased volume of bank lending appear to be responsible for faster growth

strategic price complexity in retail financial markets abstract there is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets there is significant price dispersion even when products are homogeneous also despite the large number of firms in the market prices remain above marginal cost and may even rise as more firms enter in a non cooperative oligopoly pricing model i show that these anomalies arise when firms add complexity to their price structures complexity increases the market power of the firms because it prevents some consumers from becoming knowledgeable about prices in the market in the model as competition increases firms tend to add more complexity to their prices as a best response rather than make their disclosures more transparent because this may substantially decrease consumer surplus in these markets such practices have important welfare implications

wages and human capital in the u s financial industry 1909 2006 we study the allocation and compensation of human capital in the u s finance industry over the past century across time space and subsectors we find that financial deregulation is associated with skill intensity job complexity and high wages for finance employees all three measures are high before 1935 and after 1980 but not in the interim period workers in the finance industry earn the same education adjusted wages as other workers until 1990 and significantly more afterward by 2006 the premium is 40 on average and 200 for top earners and ceos earnings risk and firm size effects account for some of the premium but the majority does not appear to be sustainable

economic experts versus average americans abstract we compare answers to policy questions by economic experts and a representative sample of the us population we find a 35 percentage point difference between the two groups this gap is on

optimal dynamic trading with leverage constraints we solve for the optimal dynamic trading strategy of an investor who faces a leverage constraint i e a limitation on his ability to borrow for the purpose of investing in a risky asset we assume that the investor has constant relative risk aversion and that the value of the risky asset follows a geometric brownian motion in the absence of the leverage constraint the optimal strategy involves investing a fixed proportion of wealth in the risky asset we prove that in the presence of the leverage constraint the optimal investment also involves investing a fixed proportion of wealth in the risky asset when the leverage constraint is not binding however the two proportions are different reflecting the extent to which the investor alters his strategy even when the leverage constraint is not binding because of the possibility that the leverage constraint will become binding in the future

is the glass steagall act justified a study of the u s experience with universal banking before the glass steagall act of 1933 removed commercial banks from the securities underwriting business we evaluate the argument for the separation of commercial and investment banking that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality a comparison of the performance of securities underwritten by commercial and investment banks prior to the act shows no evidence of this instead the public appears to have rationally accounted for the possibility of conflicts of interest and this appears to have constrained the banks to underwrite high quality securities jel g21 g24 n22

clusters chains and compliance corporate social responsibility and governance in football manufacturing in south asia a recent concern in the debate on corporate social responsibility csr in developing countries relates to the tension between demands for csr compliance found in many global value chains gvcs and the search for locally appropriate responses to these pressures in this context an emerging and relatively understudied area of interest relates to small firm industrial clusters local clusters offer the potential for local joint action and thus a basis for improving local compliance on csr through collective monitoring and local governance this article explores the interrelationship between global governance exercised through gvc ties and local governance via cluster institutions in ensuring compliance with csr pressures it undertakes a comparative analysis of two leading export oriented football manufacturing clusters in south asia that have both faced common challenges on child labour the article shows that both forms vertical and horizontal governance have played a part in shaping the response of the two clusters on child labour moreover these two distinct forms of governance have also led to quite differentiated outcomes in terms of forms of work organization and child labour monitoring this raises broader questions on how global csr demands can locally be better embedded and the conditions under which football stitchers labour in these new work forms

option replication in discrete time with transaction costs option replication is discussed in a discrete time framework with transaction costs the model represents an extension of the cox ross rubinstein binomial option pricing model to cover the case of proportional transaction costs the method proceeds by constructing the appropriate replicating portfolio at each trading interval numerical values of these prices are presented for a range of parameter values the paper derives a simple black scholes type approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values

minimum cost portfolio insurance abstract minimum cost portfolio insurance is an investment strategy that enables an investor to avoid losses while still capturing gains of a payoff of a portfolio at minimum cost if derivative markets are complete then holding a put option in conjunction with the reference portfolio provides minimum cost insurance at arbitrary arbitrage free security prices we derive a characterization of incomplete derivative markets in which the minimum cost portfolio insurance is independent of arbitrage free security prices our characterization relies on the theory of lattice subspaces we establish that a necessary and sufficient condition for price independent minimum cost portfolio insurance is that the asset span is a lattice subspace of the space of contingent claims if the asset span is a lattice subspace then the minimum cost portfolio insurance can be easily calculated as a portfolio that replicates the targeted payoff in a subset of states which is the same for every reference portfolio

the real costs of credit access evidence from the payday lending market using geographic differences in the availability of payday loans i estimate the real effects of credit access among low income households payday loans are small high interest rate loans that constitute the marginal source of credit for many high risk borrowers i find no evidence that payday loans alleviate economic hardship to the contrary loan access leads to increased difficulty paying mortgage rent and utilities bills the empirical design isolates variation in loan access that is uninfluenced by lenders location decisions and state regulatory decisions two factors that might otherwise correlate with economic hardship measures further analysis of differences in loan availability over time and across income groups rules out a number of alternative explanations for the estimated effects counter to the view that improving credit access facilitates important expenditures the results suggest that for some low income households the debt service burden imposed by borrowing inhibits their ability to pay important bills copyright 2011 oxford university press

financial development economic growth and convergence clubs abstractto study the role of financial development in economic growth we apply an array of convergence tests designed to capture nonlinear transitional dynamics to real outputs per capita strong evidence of multiple convergence clubs is observed implying that the clubs are formed based on the initial level of real output per capita and average growth rate our empirical results show that the stage of economic growth of each country plays an important role for the composition of the convergence clubs furthermore financial development emerges to be a significant determinant albeit plays differently in the economic growth of each convergence club

leverage constraints and the optimal hedging of stock and bond options this paper considers the problem of a financial institution that needs to hedge a stream of state contingent cash flows while facing borrowing and short sales restrictions the study determines analytically the strategy that minimizes the initial cost of hedging the desired cash flow which is also the upper bound on its market price and shows that the impact of leverage constraints on the cost of hedging call and put options is significant and therefore the biases detected by tests of option pricing models may not represent arbitrage opportunities the paper also shows that with credit limits it is optimal to reduce the rate of trading thus these constraints need to be recognized when estimating the trading volume generated in replicating contingent payoffs such as portfolio insurance

separation of regulators against collusive behavior we show that the separation of powers in regulation may act as a commitment against the threat of regulatory capture splitting regulatory tasks and monitoring technologies among several nonbenevolent regulators may reduce their discretion in engaging in socially wasteful activities when regulators make collusive offers that are accepted by the agent whatever his characteristics competition between regulators relaxes collusion proofness constraints and improves social welfare this result is robust to different specifications of the agent s preferences and to the timing of the game as long as one insists on safe side contracting offers we also discuss how separation affects both allocative efficiency and the distribution of rents in the economy

embedding csr values the global footwear industry s evolving governance structure many transnational corporations and international organizations have embraced corporate social responsibility csr to address criticisms of working and environmental conditions at subcontractors factories while csr codes of conduct are easy to draft supplier compliance has been elusive even third party monitoring has proven an incomplete solution this article proposes that an alteration in the supply chain s governance from an arms length market model to a collaborative partnership often will be necessary to effectuate csr the market model forces contractors to focus on price and delivery as they compete for the lead firm s business rendering csr observance secondary at best a collaborative partnership where the lead firm gives select suppliers secure product orders and other benefits removes disincentives and adds incentives for csr compliance in time the suppliers csr habit should shift their business philosophy toward pursuing csr as an end in itself regardless of buyer incentives and monitoring this article examines these hypotheses in the context of the athletic footwear sector with nike inc and its suppliers as the specific case study the data collected and conclusions reached offer strategies for advancing csr beyond the superficial and often ineffectual code of conduct stage

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

the emergence of corporate social responsibility in chile the importance of authenticity and social networks little is known about how and why corporate social responsibility csr emerged in lesser developed countries in order to address this knowledge gap we used chile as a test case and conducted a series of in depth interviews with leaders of csr initiatives we also did an internet and literature search to help provide support for the findings that emerged from our data we discovered that while there are similarities in the drivers of csr in developed countries there are distinct differences as well in particular we found that different sectors drive csr in chile in contrast to other geographies where consumer demand and government regulation provided the impetus for csr efforts multinational companies mncs and non governmental organizations ngos are key actors in chile mncs imported their csr beliefs skills and processes into chile their efforts resulted in a virtuous cycle once large domestic firms felt pressured by their mnc rivals they too adopted csr initiatives the ability to manage relationships with multiple stakeholders and perceptions of authenticity were also critical to the success of csr in chile using network theory as a lens we suggest that network density and centrality largely determine whether csr efforts will be authentic based on these contentions we suggest avenues for future research

the revolving door and worker flows in banking regulation abstract this paper traces career transitions of federal and state u s banking regulators from a large sample of publicly available curricula vitae and provides basic facts on worker flows between the regulatory and private sector resulting from the revolving door we find strong countercyclical net worker flows into regulatory jobs driven largely by higher gross outflows into the private sector during booms these worker flows are also driven by state specific banking conditions as measured by local banks profitability asset quality and failure rates the regulatory sector seems to experience a retention challenge over time with shorter regulatory spells for workers and especially those with higher education evidence from cross state enforcement actions of regulators shows gross inflows into regulation and gross outflows from regulation are both higher during periods of intense enforcement though gross outflows are significantly smaller in magnitude these results appear inconsistent with a quid pro quo explanation of the revolving door but consistent with a regulatory schooling hypothesis

stakeholder forces of socially responsible supply chain management orientation this project investigates salient stakeholder forces of socially responsible supply chain orientation srsco in the apparel and footwear sector focusing on fair labor management issues srsco was conceptualized as a composite of internal organizational direction and external partnership for a creation and continuation of fair labor conditions throughout the supply chain primary stakeholders identified were consumers regulation industry and media a total of 209 mail survey responses from sourcing managers of u s apparel and footwear companies were analyzed two dimensions of srsco were confirmed internal direction and external partnership consumer and industry peer pressures were found significantly related to internal direction while industry peers and media were significantly related to the external partnership regulation was not significantly related to either internal direction or external partnerships lack of regulation forces to govern labor issues and roles of consumers industry peers and media in promoting fair labor management are discussed in this article

revisiting supplier compliance with mnc codes of conduct recoupling policy and practice at chinese toy suppliers does private regulation of workers rights in global value chains improve working conditions on the factory floor drawing on one of the first systematic longitudinal studies of supplier compliance with multinational corporation mnc codes of conduct this paper finds in contrast to previous research substantial improvements over time while in 2004 the four examined chinese toy suppliers violated most of the evaluated code of conduct criteria and consciously decoupled the code of conduct policy from actual practices by 2009 they had recoupled policy and practice and complied with nearly all examined criteria except working hours the paper contributes to the private regulation literature by challenging previous research claims identifying factors that could make private regulation effective and outlining a research method for empirically studying the effects of codes of conduct over time the paper also contributes to new institutional theory by discussing how recoupling could be influenced by two factors not identified in previous research i trusting relationships between the organization and the stakeholder exerting pressure and ii factors unrelated to main external pressures leading to accidental recoupling

welfare effects of financial innovation in incomplete markets economies with several consumption goods abstract we show that in almost every incomplete markets economy with more than one consumption good and with sufficiently many uninsured states of nature at any general equilibrium of this economy it is possible to arbitrarily perturb the equilibrium utilities merely by introducing the appropriate asset making for example all agents worse off this result demonstrates that the examples given by hart on the optimality of equilibrium when the market structure is incomplete j econ theory11 1975 418 443 and others are actually general phenomena and is in sharp contrast to the intuition that innovation since it expands financial opportunities should benefit all agents journal of economic literature classification numbers d52 d60 g10

deconstructing the relationship between corporate social and financial performance for four decades research on the role and responsibilities of business in society has centered on the business case for corporate social responsibility csr and an increasing number of studies on the corporate social performance csp corporate financial performance cfp link emerged leading to controversial results heeding the call for a deeper understanding of the mechanisms linking certain csr efforts to certain performance outcomes this study provides a stakeholder based organizing framework rooted in an extensive review of existing literature on the link between csp and cfp in so doing we aim at guiding research and practice toward less simplistic understandings of the csp cfp connection thus advancing the debate over the consequences of voluntary integrating csr into business operations and into relationships with stakeholders by disentangling specific drivers and outcomes of the csp cfp link we underline the importance of setting clear boundaries and specifying levels of analysis to generate comparable results

pricing and hedging in incomplete markets abstract we present a new approach for positioning pricing and hedging in incomplete markets that bridges standard arbitrage pricing and expected utility maximization our approach for determining whether an investor should undertake a particular position involves specifying a set of probability measures and associated floors which expected payoffs must exceed in order for the investor to consider the hedged and financed investment to be acceptable by assuming that the liquid assets are priced so that each portfolio of assets has negative expected return under at least one measure we derive a counterpart to the first fundamental theorem of asset pricing we also derive a counterpart to the second fundamental theorem which leads to unique derivative security pricing and hedging even though markets are incomplete for products that are not spanned by the liquid assets of the economy we show how our methodology provides more realistic bid ask spreads

testing the heath jarrow morton ho lee model of interest rate contingent claims pricing this paper presents empirical tests of the constant volatility version of the heath jarrow and morton model which is also the continuous time limit of the ho and lee model using a generalized method of moments gmm test on three years of daily data for eurodollar futures and futures options the model can be rejected for most subperiods various biases in the fitted option prices relative to the market prices are documented through a regression study the small sample properties and power of the gmm framework to this setting are also studied through simulations

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

exploring the manipulation toolkit the failure of doral financial corporation abstractthe 2015 bankruptcy of doral financial corporation once the best u s bank according to u s banker is the largest since april 2010 the bankruptcy concludes years of management manipulation and efforts to recover sec investigation revealed fraud related to doral s valuation of interest only strips ios we show that doral management s misconduct also includes reckless hiring over investing insiders trading and opportunistic stock splits investigating the full range of doral management s misconduct reveals new tactics that managers use to pool with good firms and aids our understanding of the economic impact of managerial misconduct

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

a reason for quantity regulation in a variety of situations governments regulate undesirable activities by controlling quantities rather than charging taxes blue laws prohibit all liquor sales on sundays rather than impose higher taxes on that day zoning restrictions limit commercial construction in residential areas rather than charge for nuisance to neighbors anti smoking and anti trust laws restrict rather than tax particular conduct fishing and hunting rules allow hunting during particular time periods rather than tax the catch pollution controls impose limits rather than tax emissions quantity regulations are common in the financial sphere as well in the united states banking regulations for many years prohibited interstate banking as well as ownership of investment banks by commercial banks in many countries commercial banks are limited in the amount of various activities they can pursue such as real estate investments or borrowing in foreign currency in some countries banking laws prohibit all lending to the parties related to the owners of the bank the so called related lending rather than impose liability rules on loans to related parties that are found to be fraudulent or unsafe rafael la porta et al 2000 despite this common practice economists generally prefer taxes and liability rules to quantity controls and property rights rules robert ellickson 1973 louis kaplow and steven shavell 1996 1997 nathaniel keohane et al 1998 as the instrument for reducing undesirable conduct when explaining why quantity regulations are so pervasive they first make the political economy argument that quantity restrictions are favored by incumbent firms that wish to deter entry james buchanan and gordon tullock 1975 but this argument is not general it does not explain such quantity restrictions as blue laws and hunting and fishing regulations which affect all market participants equally some academics also argue that because certain activities such as smoking are seen as morally wrong by the community their level is regulated at zero in other instances however such as pollution and hunting positive but limited levels of activity are allowed inconsistent with the moral argument that the reason for quantity regulation is the special attraction of zero in this paper we present an alternative reason for quantity regulations one from the perspective of a benevolent government we begin with the observation of gary becker and george stigler 1974 that law enforcement is not free but is fundamentally an economic problem throughout human history and throughout the world today there are chronic problems of under enforcement witness the low level of tax compliance in much of the developing world and over enforcement by politically motivated prosecutors or regulators an analysis of pigouvian taxes versus quantity restrictions must recognize that in reality neither policy is free and automatic to enforce in general the choice of policies itself can facilitate or discourage enforcement in two ways first policies can shape the incentives for enforcement second policies can influence the costs of enforcement in our earlier work glaeser and sheifer 2000 glaeser et al 2001 we have focused on incentives and shown that quantity regulations can be used as an optimal instrument to raise the rewards to law enforcers for identifying violations here we focus not on the incentives for the enforcers but on the costs of finding violations these costs are often lower in the case of quantity restrictions we show that even when quantity regulations unlike taxes restrict some socially efficient conduct the reduced costs of identifying violations can enhance enforcement and overall efficiency such reliance of quantity regulation is especially important when private enforcement is crucial as in the case of enforcing department of economics harvard university cambridge ma 02138 we thank the national science foundation for financial support and louis kaplow for extremely helpful comments

truth telling by third party auditors and the response of polluting firms experimental evidence from india in many regulated markets private third party auditors are chosen and paid by the firms that they audit potentially creating a conflict of interest this article reports on a two year field experiment in the indian state of gujarat that sought to curb such a conflict by altering the market structure for environmental audits of industrial plants to incentivize accurate reporting there are three main results first the status quo system was largely corrupted with auditors systematically reporting plant emissions just below the standard although true emissions were typically higher second the treatment caused auditors to report more truthfully and very significantly lowered the fraction of plants that were falsely reported as compliant with pollution standards third treatment plants in turn reduced their pollution emissions the results suggest reformed incentives for third party auditors can improve their reporting and make regulation more effective jel codes q56 m42 d22 copyright 2013 oxford university press

the impact of financialisation on the wage share a theoretical clarification and empirical test it is frequently asserted that financialisation has contributed to the decline in the wage share this paper provides a theoretical clarification and a systematic empirical investigation we identify four channels through which financialisation can affect the wage share 1 enhanced exit options of firms 2 rising price mark ups due to financial overhead costs for businesses 3 increased competition on capital markets and shareholder value orientation and 4 the role of household debt in increasing workers financial vulnerability and undermining their class consciousness the paper compiles a comprehensive set of empirical measures of financialisation and uses it to test these hypotheses with a panel regression of 14 oecd countries over the 1992 2014 period we find strong evidence for negative effects of financial liberalisation and financial payments of non financial corporations on the wage share that are in the same order of magnitude as the effects of globalisation

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

markets that don t replicate any option abstract it is well known from the work of s ross that a securities market is complete if and only if each call option can be replicated using available securities the present short note announces the following surprising complementary result to ross important contribution if the number of securities is less than half the number of states of the world then generically not a single option can be replicated by traded securities this provides further strong motivation for relaxing the assumption of a perfect market in the theory of option pricing and portfolio insurance

corporate audits and how to fix them auditors are supposed to be watchdogs but in the last decade or so they sometimes looked like lapdogs more interested in serving the companies they audited than in assuring a flow of accurate information to investors the auditing profession is based on what looks like a structural infirmity auditors are paid by the companies they audit an old german proverb holds whose bread i eat his song i sing while this saying was originally meant as a prayer of thanksgiving the old proverb takes on a darker meaning for those who study the auditing profession this paper begins with an overview of the practice of audits the auditing profession and the problems that auditors continue to face in terms not only of providing audits of high quality but also in providing audits that investors feel comfortable trusting to be of high quality it then turns to a number of reforms that have been proposed including ways of building reputation liability reform capitalizing or insuring auditing firms and greater competition in the auditing profession however none of these suggested reforms individually or collectively severs the agency relation between the client management and the auditors as a result the conflict of interest although it can be mitigated by some of these reforms continues to threaten auditors independence both real and perceived in conclusion i ll discuss my own proposal for financial statements insurance which would redefine the relationship between auditors and firms in such a way that auditors would no longer be beholden to management

inconsistent regulators evidence from banking we find that regulators can implement identical rules inconsistently due to differences in their institutional design and incentives and this behavior may adversely impact the effectiveness with which regulation is implemented we study supervisory decisions of u s banking regulators and exploit a legally determined rotation policy that assigns federal and state supervisors to the same bank at exogenously set time intervals comparing federal and state regulator supervisory ratings within the same bank we find that federal regulators are systematically tougher downgrading supervisory ratings almost twice as frequently as do state supervisors state regulators counteract these downgrades to some degree by upgrading more frequently under federal regulators banks report worse asset quality higher regulatory capital ratios and lower return on assets leniency of state regulators relative to their federal counterparts is related to costly outcomes such as higher failure rates and lower repayment rates of government assistance funds the discrepancy in regulator behavior is related to different weights given by regulators to local economic conditions and to some extent differences in regulatory resources we find no support for regulator self interest which includes revolving doors

investment in education do economic volatility and credit constraints matter abstract recent research has focused on the effects of economic volatility on the investment in physical capital this paper shows that economic volatility and the lack of financial markets have a negative effect also on the accumulation of human capital our evidence drawn from cross country and panel regressions is that average secondary enrollment in the period 1970 1972 is negatively affected by the lack of financial markets income or employment volatility and income inequality our results are robust to different specifications of volatility the inclusion of public expenditure in education country specific effects and different sets of regressors

superhedging under ratio constraint abstract we consider superhedging of contingent claims under ratio constraint it has been widely recognized that the minimum cost of superhedging a contingent claim with certain portfolio constraints is equal to the price of a claim with appropriately modified payoff but without constraints in terms of the backward stochastic differential equation bsde and the variational inequality equation approach we revisit this result and provide two counterexamples

presidential address does finance benefit society academics view of the benefits of finance vastly exceeds societal perception this dissonance is at least partly explained by an underappreciation by academia of how without proper rules finance can easily degenerate into a rent seeking activity i outline what finance academics can do from a research point of view and from an educational point of view to promote good finance and minimize the bad

option pricing and replication with transactions costs transactions costs invalidate the black scholes arbitrage argument for option pricing since continuous revision implies infinite trading discrete revision using black scholes deltas generates errors which are correlated with the market and do not approach zero with more frequent revision when transactions costs are included this paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision hedging errors are uncorrelated with the market and approach zero with more frequent revision the technique permits calculation of the transactions costs of option replication and provides bounds on option prices

accounting information disclosure and the cost of capital in this paper we examine whether and how accounting information about a firm manifests in its cost of capital despite the forces of diversification we build a model that is consistent with the capital asset pricing model and explicitly allows for multiple securities whose cash flows are correlated we demonstrate that the quality of accounting information can influence the cost of capital both directly and indirectly the direct effect occurs because higher quality disclosures affect the firm s assessed covariances with other firms cash flows which is nondiversifiable the indirect effect occurs because higher quality disclosures affect a firm s real decisions which likely changes the firm s ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market we show that this effect can go in either direction but also derive conditions under which an increase in information quality leads to an unambiguous decline in the cost of capital

design choices in privatized social security systems learning from the swedish experience in the 2000 u s presidential campaign george w bush advocated a partial privatization of the social security system according to his plan a portion of the payroll tax would be designated for individual savings accounts at the same time as this issue was being debated in the united states sweden was in the process of launching a system that is very similar to president bush s proposal although bush s plan did not get much attention in the early years of his administration the proposal may resurface either in the united states or in other countries if so important lessons can be learned from the swedish experience in particular the swedish plan adopted an interesting mix of design choices that can now be evaluated based on three years of post implementation experience although there is a large literature in economics on the design of social security systems most of that literature is concerned with macroeconomic considerations such as funding in contrast there has been much less attention devoted to the details of how plans might be designed in part because these details do not seem important from a standard economic perspective in this paper we reverse this usual pattern and focus our attention on the design aspects of the swedish plan we find that although most of the design choices are those that might be approved by most economists in some cases these choices produced undesirable consequences

optimal replication of options with transactions costs and trading restrictions this paper analyzes the strategy that minimizes the initial cost of replicating a contingent claim in a market with transactions costs and trading constraints the linear programming and two stage backward recursive models developed are applicable to the replication of convex as well as nonconvex payoffs and to a portfolio of options with different maturities the paper s formulation conveniently accounts for fixed and variable transactions costs lot size constraints and position limits on trading the article shows that in the presence of trading frictions it is no longer optimal to revise one s portfolio in each period at the optimum cash flows in excess of the desired ones may be generated the optimal policy trades off the curvature of the payoff that is generated against the terminal slack

asian transnational corporations and labor rights vietnamese trade unions in taiwan invested companies according to the reports in the past decade some asian subcontractors mainly taiwan hong kong and korea transnational corporations tend to be labor abusive in their overseas investment destinations like china or southeast asia taking vietnam as an example this paper raises questions as to why taiwanese transnational companies can control workplace unions in a trade union supportive regime given the government s constraint of political rights and the individualized workplace unions the function of trade unions in vietnam is destined to be limited the trade unions turn out be an arm of management rather than representing workers interests in these transnational companies this article also explores the influence of the newly developed codes of conducts from western buyers in the survey of three companies which are required to follow the codes of conduct by buyers trade unions had no more freedom than those in companies without codes of conduct the paper discusses the implications of this research offering strategies for labor rights improvements

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

presidential address debt and money financial constraints and sovereign finance economic analyses of corporate finance money and sovereign debt are largely considered separately i introduce a novel corporate finance framing of sovereign finance based on the analogy between fiat liabilities for sovereigns and equity for corporations the analysis focuses on financial constraints at the country level making explicit the trade offs involved in relying on domestic versus foreign currency debt to finance investments or government expenditures this framing provides new insights into issues ranging from the costs and benefits of inflation optimal foreign exchange reserves and sovereign debt restructuring

restoring rational choice the challenge of consumer financial regulation abstract this lecture considers the case for consumer financial regulation in an environment where many households lack the knowledge to manage their financial affairs effectively the lecture argu

a skeptical view of financialized corporate governance managerial compensation typically relies on financial yardsticks such as profits stock prices and return on equity to achieve alignment between the interests of managers and shareholders but financialized governance may not actually work well for most shareholders and even when it does significant tradeoffs and inefficiencies can arise from the conflict between maximizing financialized measures and society s broader interests effective governance requires that those in control are accountable for actions they take however those who control and benefit most from corporations success are often able to avoid accountability the history of corporate governance includes a parade of scandals and crises that have caused significant harm after each most key individuals tend to minimize their own culpability common claims from executives boards of directors auditors rating agencies politicians and regulators include we just didn t know we couldn t have predicted or it was just a few bad apples economists as well may react to corporate scandals and crises with their own version of we just didn t know as their models had ruled out certain possibilities effective governance of institutions in the private and public sectors should make it much more difficult for individuals in these institutions to get away with claiming that harm was out of their control when in reality they had encouraged or enabled harmful misconduct and ought to have taken action to prevent it

fraudulent income overstatement on mortgage applications during the credit expansion of 2002 to 2005 treating fraudulently overstated income on mortgage applications as true income can lead to incorrect conclusions on the nature of the mortgage credit supply expansion toward marginal borrowers from 2002 to 2005 a positive gap between zip code level income growth calculated from mortgage applications and income growth from the irs likely reflects mortgage fraud not an improvement in home buyer income in support of the credit supply view mortgage credit for home purchase expanded significantly more in low credit score neighborhoods on both the extensive and intensive margins from 2002 to 2005 even though these neighborhoods deteriorated on many measures of income prospects

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

does local financial development matter we study the effects of differences in local financial development within an integrated financial market we construct a new indicator of financial development by estimating a regional effect on the probability that ceteris paribus a household is shut off from the credit market by using this indicator we find that financial development enhances the probability an individual starts his own business favors entry of new firms increases competition and promotes growth as predicted by theory these effects are weaker for larger firms which can more easily raise funds outside of the local area these effects are present even when we instrument our indicator with the structure of the local banking markets in 1936 which because of regulatory reasons affected the supply of credit in the following 50 years overall the results suggest local financial development is an important determinant of the economic success of an area even in an environment where there are no frictions to capital movements

the contribution of environmental and social standards towards ensuring legitimacy in supply chain governance increasingly companies implement social and environmental standards as instruments towards corporate social responsibility csr in supply chains this is based on the assumption that such standards increase legitimacy among stakeholders yet a wide variety of standards with different requirement levels exist and companies might tend to introduce the ones with low exigencies using them as a legitimacy front this strategy jeopardizes the reputation of social and environmental standards among stakeholders and their long term trust in these instruments of csr meaning that all expenses for their implementation are of no avail for the companies therefore this paper highlights which criteria are important for the selection implementation and improvement in order to achieve a company s aim but also to strengthen the legitimacy of social and environmental standards this research is based on conceptual thought and some existing empirical research comparing four different social and environmental standards revealing weaknesses and strengths it exposes the basic conditions for the success of such standards among stakeholders and identifies the need for more empirical data

how does household portfolio diversification vary with financial literacy and financial advice household investment mistakes are an important concern for researchers and policymakers alike portfolio underdiversification ranks among those mistakes that are potentially most costly however its roots and empirical importance are poorly understood i estimate quantitatively meaningful diversification statistics and investigate their relationship with key variables nearly all households that score high on financial literacy or rely on professionals or private contacts for advice achieve reasonable investment outcomes compared to these groups households with below median financial literacy that trust their own decision making capabilities lose an expected 50 bps on average all group differences stem from the top of the loss distribution