asymmetric benchmarking in compensation executives are rewarded for good luck but not penalized for bad abstract principal agent theory suggests that a manager should be paid relative to a benchmark that removes the effect of market or sector performance on the firm s own performance recently it has been argued that such indexation is not observed in the data because executives can set pay in their own interests that is they can enjoy pay for luck as well as pay for performance we first show that this argument is incomplete the positive expected return on stock markets reflects compensation for bearing systematic risk if executives pay is tied to market movements they can only expect to receive the market determined return for risk bearing this argument however assumes that executive pay is tied to bad luck as well as to good luck if executives can truly influence the setting of their pay they will seek to have their performance benchmarked only when it is in their interest namely when the benchmark has fallen using industry benchmarks we find significantly less pay for luck when luck is down in which case pay for luck would reduce compensation than when it is up these empirical results are robust to a variety of alternative hypotheses and robustness checks and they suggest that the average executive loses 25 45 less pay from bad luck than is gained from good luck

a general equilibrium model with external scale economies in production abstract a general equilibrium model of an urban economy is described the standard residential land use model is extended to include a well defined production employment sector external scale economies occur in the production of the city s export good the model is designed for the numerical computation of equilibria and optima

the role of aggregate demand in classical marxian models of economic growth this paper argues that classical marxian models of economic growth are similar to neoclassical models in neglecting the role of aggregate demand either by omitting aggregate demand issues altogether or by relegating the role of aggregate demand to the short run by reviewing the writings of classical marxian authors and by examining recent contributions to the classical marxian literature it discusses the implicit assumptions that allow these theories to neglect the role of aggregate demand by examining alternative growth theories in which aggregate demand has a major role to play it also assesses to what extent classical marxian economists are justified in neglecting aggregate demand as a determinant of long run growth copyright the author 2010 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

commitment and fairness in a dynamic regulatory relationship this paper considers a multiperiod model of a regulated firm that has stationary private information which may be revealed through performance if it cannot make commitments to future policies the regulator has an incentive to exploit any information the firm reveals and laffont and tirole show that there is no regulatory policy that is separating over any closed interval a fairness arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods the properties of such arrangements are studied and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment

regulating banks through market discipline a survey of the issues abstract the interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed new capital accord this paper reviews the potential role market discipline can play in financial regulation we start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms next a definition of market discipline as a regulatory mechanism is advanced we evaluate the disciplining power various market participants have finally we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism in this respect the basle committee has taken the right approach

second best congestion pricing schemes in the monocentric city abstract this paper considers second best congestion pricing in the monocentric city with endogenous residential density and endogenous labour supply a spatial general equilibrium model is developed that allows consideration of the three way interactions between urban density traffic congestion and labour supply congestion pricing schemes are analysed that are second best by design and not because distortions exist elsewhere in the spatial economy like cordon charging and flat kilometre charges both for cobb douglas utility and for ces utility the analyses suggest that the relative welfare losses from second best pricing compared to first best pricing are surprisingly small

bank based versus market based financial systems a growth theoretic analysis abstract we study bank based and market based financial systems in an endogenous growth model lending to firms is fraught with moral hazard as owner managers may reduce investment profitability to enjoy private benefits bank monitoring partially resolves the agency problem while market finance is more hands off a bank based or market based system emerges from firm financing choices neither system is unequivocally better for growth which crucially depends on the efficiency of financial and legal institutions but a bank based system outperforms a market based one along other dimensions investment and per capita income are higher and income inequality lower under a bank based system bank based systems are also more conducive for broad based industrialization

institutional ownership stability and bhc performance abstract in this study the association between performance of bhcs and institutional ownership stability is investigated and contrasted to those found for the less regulated utility and industrial firms in order to determine whether regulation displaces owner monitoring we employ a simultaneous equations model treating firm performance and institutional ownership stability as endogenous variables several results are obtained first bhc performance is positively associated with institutional ownership stability second this association is weaker for bhcs than for comparable utility and industrial firms possibly because of the substitution of regulation for owner monitoring in banking third this association is stronger in the recent deregulated years and for bhcs with lower likelihood of regulatory intervention

parking transit and employment in a central business district abstract in this paper we present a general equilibrium model to examine the role of parking and transit subsidy policy on the size of a central business district cbd cbd land values and the market shares of cars and transit the three main features of the model are 1 agglomeration economies increase continuously with labor market size 2 congestion arises from auto use only transit is noncongestible and 3 locational equilibrium is maintained in the sense that firms and individuals cannot reduce costs or increase utility by moving given equilibrium prices and city size we derive the conditions under which parking taxes can be levied and used to subsidize transit and increase equilibrium cbd size and land values we compute an optimal parking tax that maximizes cbd size and land values and derive relationships among parking taxes transit use and congestion we find nonmonotonic relationships among parking taxes land values and transit use

the disciplinary role of takeovers this paper presents a theory of the disciplinary role of takeovers based on an explicit model of managerial incentive problems stemming from asymmetric information it is argued that an informed raider can reduce incentive problems by making managerial compensation more sensitive to information unavailable to shareholders the paper also highlights the importance of specifying the source of contractual inefficiencies when analyzing the effect of takeovers on incentives

takeovers managerial incompetence or managerial shirking agency theory identifies managerial shirking as the cause for takeovers while other explanations focus on low ability managers this paper formalizes jensen s free cash flow variant of agency theory by constructing a simple two period game which captures the distinctive empirical implications of the two theories using data for petroleum firms following the oil price shock of 1979 80 we find that firms undergoing financial restructuring exhibited higher values of tobin s q additionally evidence of management turnover and workforce cuts emphasizes that takeovers appear primarily designed to address agency concerns i introduction recent explanations for the causes of takeovers focus on the need to enhance managerial efficiency but there are two competing theories grossman and hart 1980 and shleifer and vishny 1986 postulate that takeovers replace managers of low ability jensen 1986 in contrast argues that takeovers emerge from agency problems specifically the need to restrain managers from dissipating free cash flow 1 to jensen takeovers increase managerial effort by raising debt obligations which commit otherwise free cash flows thus a takeover could be required either to replace incompetent managers or to constrain existing managers to more effectively pursue shareholder interests an agency problem unlike previous research which tends to be either theoretical 2 or empirical 3 this paper formalizes and tests a general model of takeovers that incorporates both types of managerial inefficiencies we attempt to bring out the distinctive implications of these theories and then test between them our theoretical model building on the earlier work of grossman and hart 1980 1982 and shleifer and vishny 1986 uses a game theoretic framework to formalize how free cash flow affects the incentives of managers it shows how stochastic shocks financial structure and the probability of bankruptcy interact to determine the optimal level of managerial effort one implication of the agency explanation for managerial inefficiency is that an exogenous increase in earnings will decrease managerial effort below efficient levels to attenuate this agency problem firms will financially recapitalize by increasing the debt equity ratio restoring the effort of existing managers to ex ante efficient levels alternatively when managerial incompetence motivates takeovers the target firms should be underperforming the industry the takeover should then lead to changes in management rather than recapitalization this paper uses a unique data set from the petroleum industry in the early 1980s to test between these distinctive theories the heavy takeover activity in this industry provides an excellent sample for empirical tests by restricting the analysis to firms within the same industry we control for inter industry effects which could otherwise vitiate the empirical findings the broad similarity of the firms also permits us to use tobin s q as a measure of firm performance since the asset bases and competitive conditions of the firms are highly similar another key advantage of using this industry is the availability of independent valuations of individual petroleum firm s assets this independent measure enables us to reliably measure asset values which can also limit tobin s q analysis section ii describes the theoretical model section iii examines three highly varied types of empirical evidence each aimed at separating the effects of managerial ability versus managerial effort as explanations for takeovers section iv recapitulates the major findings ii a game theoretic model of takeovers incorporating agency effects grossman and hart 1980 pioneered the development of game theoretic models of takeovers leading to further advances by shleifer and vishny 1986 in borrowing extensively from these earlier works our objective is to construct a simple model incorporating both types of managerial inefficiencies in order to derive their distinctive empirical implications

second best policies for congestion externalities abstract this is the third in a series of three articles on the topic of congestion externalities we use an urban general equilibrium model to test the efficiency of several second best policies for congestion externalities the most efficient second best policy is a program of land use controls the program generates a welfare gain of 3 38 per household per week a unit tax on commuting is a less efficient policy with a welfare gain of 1 15

from institutions to financial development and growth what are the links this paper presents an integrated overview of the literature linking institutions financial development and economic growth from the large body of research on institutional development the paper first selects those contributions that make it possible to study the role of institutional arrangements in ameliorating worsening the information frictions and transaction costs that characterize the development of financial markets the paper then investigates the theoretical mechanisms by which these specific frictions affect economic growth and presents the stock of empirical evidence quantifying the impact of institutions on growth through financial development

slack in the state owned enterprise an evaluation of the impact of soft budget constraints abstract in this paper slack in resource utilization is estimated using data envelopment analysis for a sample of 67 indian state owned 63 private sector and 27 foreign owned enterprises on a comparative basis the study is cross sectional and carried out for the year 1991 to assess how far the operation of soft budget constraints has had an impact on the economic performance of indian firms particularly operated as state owned enterprises specifically the presence of debt capital provided primarily by government owned financial institutions is strongly and negatively related to performance the results show that if firms turn out to be all equally efficient then average materials costs human capital usage costs costs associated with other operating items and physical capital usage by each state owned enterprise sampled can be reduced by rs 203 million rs 201 million rs 53 million and rs 255 million respectively if existing levels of inputs are used efficiently then the average addition to the value of output by each state owned enterprise can rise by rs 693 million the analyses reveal significant slack in resource utilization in indian state owned firms resulting from soft budget constraints and the implications of the existence of slack are discussed

cordon pricing and land use regulation this study explores the simultaneous imposition of cordon pricing and land use regulations in a continuous and closed monocentric city with homogeneous households results reveal the optimal level of a single cordon toll and its location and the optimal floor area ratio far regulation clarifying what distortions remain in the existence of cordon pricing and far regulation among other results this paper shows that with an optimal cordon toll far regulation should alternate between a minimum and a maximum regulation both inside and outside the cordon line

taxing away m a capital gains taxation and acquisition activity abstract capital gains taxation distorts the market for corporate control by imposing a cost on selling shareholders in acquisitions this lock in effect increases premiums required for deal completion preventing some m as from taking place at all we estimate the effect of capital gains taxation on the quantity of realized m a deals and compute the deadweight loss related to taxing these transactions we find that a one percentage point increase in the capital gains tax rate reduces acquisition activity by around 1 annually for the united states this implies unrealized synergy gains of 9 3 billion each year due to capital gains taxes

competition and the evolution of efficiency abstract this paper presents an evolutionary model of the relationship between inter firm competition and intra firm organizational or x efficiency we model x inefficiency within the firm as a prisoner s dilemma effort monitoring problem whose evolution is influenced by external competitive pressure from other firms a closed form stochastic equilibrium displaying survival of the fittest dynastic cycles is derived and analyzed the main result is that there exists a well defined sense in which competition is a surprisingly powerful force for efficiency

optimal cordon pricing abstract this paper presents a simple spatial model of traffic congestion for a monocentric city to investigate the effects of cordon pricing on trip making and congestion level in each location optimal cordon pricing is obtained as a combination of the cordon location i e distance of the cordon from the cbd and the amount of toll charged there that maximizes the total social surplus in a city under optimal cordon pricing trips originating from locations inside the cordon are under priced those just outside the cordon are over priced and those near the urban fringe are under priced numerical simulations using the parameter values based on japanese data suggest that cordon pricing attains an economic welfare level very close to the first best optimum

the role of competition for an x inefficiently organized firm abstract this paper presents a manager controlled firm which does not minimize long run costs even though the manager is the residual claimant maximizing a profit depending salary the inefficiency results because the employment contracts are not binding in the long run the manager is afraid of being replaced by a rival therefore he invests too much to strengthen his bargaining position in the contract renegotiation the inefficiency is reduced by competition in the output market

the general equilibrium effects of congestion externalities abstract this is the second in a series of three articles on the topic of congestion externalities we use an urban general equilibrium model to compute two types of cities the market equilibrium city in which congestion externalities occur and the optimum city the optimum city has a more dispersed distribution of employment and a more concentrated distribution of residence if the population of the city is fixed the optimum pricing of transportation generates a per capita welfare gain of 3 78 per week if the population of the city is endogenous the internalization of congestion externalities causes the city to grow

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

economic analyses of industrial research institutes in developing countries the indian experience abstract recent changes in the indian government s economic policies have raised questions about the performance of its industrial research institutes iris regression tests with data supplied by three of the iris show a modest but significant improvement in their performance one iri has increased its earned revenues by more than the increases in its expenditures and has also more than offset the cuts in government funding another iris profile of development projects showed a significant shift from collaborative to sponsored projects and the latter have lower developmental costs for given duration the third iri has succeeded in attracting a larger number of client enterprises and also increased the overall sales of its new developments these improvements in the iris performance may also have enhanced wider aspects of economic welfare though further policies to spread these benefits are desirable

on the structure of take over models and insider outsider conflicts in negotiated take overs abstract we model a takeover game where the players can bid or bargain without the traditional exogenous constraints on the order length and number of alternating stages in our european setting dominant shareholders can appoint and dismiss management implying that we have an insider outsider conflict rather than a management shareholder agency problem and that the distribution of sizeable private benefits is a crucial issue the bargaining solution determines the price even if no explicit negotiations are observed while bargaining strength and scope for exclusion determine the type of takeover pre negotiated or not discriminatory or not

discouraging rivals managerial rent seeking and economic inefficiencies we argue here for a broader view of the biases in managers decisions in general managerial rent seeking affects not only the level of investment but also the form our basic hypothesis is simple given the now well established scope for managerial discretion managers have an incentive to exercise that discretion to enhance their income any managerial contract is subject to renegotiation and a manager s pay is the outcome of an often bewildering bargaining process between management the board of directors and rival management teams or takeover artists this abstract was borrowed from another version of this item

optimal bypass and cream skimming this paper develops a normative model of regulatory policy toward bypass and cream skimming it analyzes the effects of bypass on second degree price discrimination on the rent of the regulated firm and on the welfare of low demand customers it shows that pricing under marginal cost may be optimal for the regulated firm excessive cream skimming occurs if access to the bypass technology is not regulated and the prohibition of bypass may increase or decrease the regulated firm s rent jel 026 613 the regulation of natural monopolies is often associated with policies toward competition including restrictions on entry this paper is concerned with a common form of competition which threatens the regulated firm on its most lucrative markets examples abound in the telecommunications industry the development of microwave radio and communication satellites in the 1960 s introduced the possibility that big telecommunication customers might bypass the major common carrier att and the 1978 natural gas policy act in the united states has created the possibility for industrial plants to bypass the local distribution utilities by building direct connections to the pipelines gas producers or intermediaries

partial privatization and firm performance most privatization programs begin with a period of partial privatization in which only non controlling shares of firms are sold on the stock market since management control is not transferred to private owners it is widely contended that partial privatization has little impact this perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner using data on indian state owned enterprises we find that partial privatization has a positive impact on profitability productivity and investment widespread privatization in recent decades has generated a large empirical literature concerning the effect of ownership on firm performance most studies find that privatization has a positive impact on the profitability and efficiency of firms see megginson and netter 2001 for a recent survey 1 the firms in these studies have had a majority of their assets privatized and control rights have been transferred from the government to private owners surprisingly little is known about the effect of partial privatization where the government remains the controlling owner this paper seeks to address this gap in the literature by investigating whether the performance of state owned enterprises in india is affected by the sale of non controlling equity stakes on the stock market

privatisation and x inefficiency a bargaining approach the usual analysis of privatization and x inefficiency uses agency theory to model managerial effort the authors model worker effort as determined by a bargain between firms and workers workers dislike effort because it lowers utility firms prefer high effort because it raises productivity public sector firms are assumed to be social welfare maximizers and therefore compared to private sector firms they bargain lower effort levels since they have the interests of consumers and workers at heart the authors model predicts that under certain conditions privatization should raise effort and so lower x inefficiency and that wages may increase or decrease copyright 1995 by blackwell publishing ltd

the nature of discipline by corporate takeovers this paper provides a comprehensive examination of the disciplinary role of the corporate takeover market using a sample of u s target firms over the period 1979 to 1998 the time period spanned allows a broader study not only of the disciplinary role of the takeover market in general but also of the interaction between the takeover market and alternative governance mechanisms during the 1980s and 1990s overall our evidence is consistent with the view of the corporate takeover market as a court of last resort that is it is an external source of discipline that intercedes when internal control mechanisms are relatively weak or ineffective copyright 2004 by the american finance association

a reply to amitava dutt the role of aggregate demand in the long run in an article in this journal amitava dutt comments on our 1999 paper being keynesian in the short term and classical in the long term the traverse to classical long term equilibrium contending that aggregate demand may affect the long term equilibrium we agree to some extent but contend that these mechanisms do not question the fundamental difference between the classical marxian perspective in which u gravitates in the long term around u u and the post keynesian perspective in which the long term equilibrium position of u depends on the level of aggregate demand the basic controversy harks back to harrod s investment function in which the only long term equilibrium is u u u we solve the problem of harrodian instability in reference to the action of monetary authorities and governments dutt s defence of the post keynesian investment function is unconvincing

breach of trust in takeovers and the optimal corporate charter this paper analyzes how takeovers various takeover defenses and golden parachutes affect the value of target companies using an incomplete contracts framework the author considers a raider who can improve the efficiency of production and appropriate rents of stakeholders of the company anticipating the expropriation of his rents the manager s relationship specific investments will be too small which may offset the value increase through the takeover the simultaneous use of poison pills and golden parachutes can solve the underinvestment problem without forgoing profitable takeovers however the privately optimal level and composition of takeover defenses need not be socially efficient copyright 1995 by blackwell publishing ltd

information expropriation and moral hazard in optimal second source auctions abstract government mandated technology transfers from the developer of a product to a second source offer a potential gain of reduced information rents and procurement costs to provide appropriate incentives technology must sometimes be transferred even when the second source is less efficient than the first additionally when developer moral hazard exists with respect to investments in cost reducing technology the optimal auction will make the developer s success in the auction more sensitive to the developing firm s announced costs

why hang on to losers divestitures and takeovers we study the divestiture decisions of managers who care about their reputations managers divestiture and investment decisions are publicly observable but managers privately observe signals with respect to the future payoff distribution of investments they have initiated we establish that in equilibrium there is too little divestiture these inefficiencies create the opportunity for wealth enhancing divestiture motivated takeovers a key result is that only managers of targets with middle of the road asset specificity should consider the takeover threat credible these findings suggest that uniqueness of assets is an important determinant of both agency costs and takeover activity our analysis leads to several empirical predictions overwhelming empirical evidence has documented large gains in shareholder wealth that arise from takeovers jarrell brickley and netter 1988 and jensen and ruback 1983 the source of these gains has remained elusive however although takeovers are followed by some infusion of new managerial talent we have not witnessed the kind of profound post takeover restructuring of the productive activities of target firms that would readily justify the documented wealth gains a commonly observed post takeover initiative is divestiture of some of the target s lines of business bhide 1989 and bhagat shleifer and vishny 1990 what is puzzling is that if the gains from takeovers stem from the anticipation of such divestitures then why were these divestitures not undertaken by the target firm s management in the first place the purpose of this paper is to provide a possible answer to this question our focus is on the divergence in incentives between managers and shareholders with respect to divestitures of ongoing projects we show that managers might rationally decide to hang on to projects that should be divested in

varieties of capitalism and the internationalization of state owned enterprises this article sheds light on how the internationalization of state owned enterprises is influenced by the state involvement in ownership and by the home country s institutional settings integrating international business literature with the debate on the varieties of capitalism we contend that state dominated enterprises internationalize more less than privately owned enterprises in coordinated liberal market economies whereas they exhibit an inconstant behavior in state influenced market economies our analysis on a sample of enterprises pertaining to 20 oecd countries supports our hypotheses this article adds to studies on the influence of institutions on firms internationalization and has implications for both managers and policymakers

the welfare gains from pricing road congestion using automatic vehicle identification and on vehicle meters it is a widely accepted proposition that there is a general underpricing of auto travel in u s cities auto travel imposes a congestion externality with an efficient peak period level estimated at lo 23t per mile on urban freeways small 1121 2 3 but for most urban auto travel tolls consist almost entirely of the gasoline excise tax at a fuel economy of 15 miles per gallon the auto toll implied by the current high gas tax in the united states of 25e per gallon is only 1 7e per mile this is much too low for most peak period travel and even underprices some off peak travel the purpose of this study is to estimate the welfare gains which are possible under different regimes for imposing higher auto tolls in urban areas the three regimes studied are associated with a higher gas tax and systems called automatic vehicle identification and on vehicle metering the framework for the study is a model of a city whose shape is that of a wedge or pie slice of a circle the model s features include

entrenchment governance and the stock price reaction to sudden executive deaths abstract to study managerial entrenchment i use the stock price reaction to unexpected senior executive deaths if a highly effective manager dies unexpectedly the stock price reaction should be negative if however death removes an entrenched manager when the board would or could not the stock price reaction should be positive while individually age and tenure only weakly correlate with the stock price reaction to a sudden death the reaction is strongly positive 6 8 if 1 the executive s tenure exceeds 10 years and 2 abnormal stock returns over the last three years are negative