covered interest rate arbitrage in the interwar period and the keynes einzig conjecture keynes 1923 conjectured that deviations from covered interest rate parity would not be arbitraged unless a profit of at least a half of one percent on an annualized basis was available and that larger deviations would still be moderately persistent because of less than perfect elasticity of supply of arbitrage funds this two part conjecture was given further emphasis by other writers on this period notably einzig 1937 we apply nonlinear econometric techniques to a previously unexploited weekly data base for the 1920s london and new york markets and find strong support for the conjecture

incomplete contracts and strategic ambiguity why are observed contracts so often incomplete in the sense that they leave contracting parties obligations vague or unspecified traditional answers to this question invoke transaction costs or bounded rationality in contrast the authors argue that such incompleteness is often an essential feature of a well designed contract specifically once some aspects of performance are unverifiable it is often optimal to leave other verifiable aspects of performance unspecified the authors explore the conditions under which this occurs and investigate the structure of optimal contracts when these conditions are satisfied copyright 1998 by american economic association

non linearity between finance and growth abstract we present a simple model which establishes a non linear and possibly non monotonic relationship between financial development and economic growth applying a threshold regression model to king and levine s q j econ 109 1993 83 data set we find evidence consistent with the theoretical model

how smooth is price discovery evidence from cross listed stock trading abstract the adjustment to parity can be nonlinear for a cross listed pair convergence may be quicker when the price deviation is sufficiently profitable we propose a threshold error correction model ecm to gauge the market respective information shares of canadian listings traded on the toronto stock exchange tsx and the new york stock exchange nyse since dynamics may alternatively be gradual we further generalize the threshold framework to a smooth transition ecm the empirical implications are as follows first the tsx and the nyse appear to have integrated over time second parity convergence accelerates upon discounts on the cross listings on the nyse third we find a larger feedback from the nyse if the price gap exceeds the threshold required arbitrage return fourth informed traders tend to cluster on the nyse upon discounts on the cross listings fifth information share and threshold are affected by the relative degree of private information market friction and liquidity measures firm level characteristics and aggregate risks

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

the interaction of implicit and explicit contracts in repeated agency abstract in a repeated principal agent model in which the agent s actions are observable to the principal but not verifiable in court the agent s incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior explicit short term contracts are designed to enhance the effectiveness of the infinite horizon implicit contract between principal and agent in a constrained efficient equilibrium bonuses smooth the consumption path of the risk averse agent by moving in the opposite direction from salaries total consumption and expected discounted utility for the rest of the game journal of economic literature classification numbers c7 c73 d8

subjective performance indicators and discretionary bonus pools key indicators of managerial performance are frequently subjective that is they are difficult to specify and or verify for contracting purposes when a principal must rely on subjective information to create incentives for a group of agents discretionary bonus pools are shown to be optimal mechanisms despite their optimality however discretionary bonus pools entail an additional agency cost relative to the benchmark of optimal contracts based on objective and verifiable information our analysis identifies circumstances under which this additional agency cost is small for example the subjective information signals are precise or the number of agents participating in the bonus pool increases when incentive schemes can be based on both objective and subjective performance indicators the relative weights to be placed on alternative signals are shown to differ from the ones predicted by models with objective signals only we also demonstrate that correlation in measurement errors has a different impact on the structure of optimal incentive schemes when the performance indicators are merely subjective

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

justifying the first order approach to principal agent problems it is of interest to know when the incentive compatibility conditio n in principal agent problems can be replaced by the condition that the agent s expected utility be stationary in effort the mirrlees rogerson conditions do not work if the principal can observe more than one observable statistic also the mirrlees rogerson assumption that the distribution function of output is convex in the agent s action is unsatisfactory even in the context of the basi c model it is too restrictive the paper presents a suite of conditio ns that are applicable to the multistatistic case and replaces the objectionable convex distribution function assumption copyright 1988 by the econometric society

nonlinear mean reversion in the term structure of interest rates abstract the expectations hypothesis implies that the yield curve provides information on the future change in the short term interest rate however transaction costs exist in the financial market which prevent investors from realizing the arbitrage opportunity when the arbitrage does not fully cover the transaction costs the purpose of this paper is to assess the effect of transaction costs on the predictability of the term structure by using the threshold vector error correction model which allows for the nonlinear adjustment to the long run equilibrium relationship a significant amount of threshold effect is found and the adjustment coefficients are regime dependent the empirical result supports the nonlinear mean reversion in the term structure of interest rates

price transmission dynamics between adrs and their underlying foreign securities abstract this paper extends previous research by considering three pricing factors for american depository receipts adrs the price of the underlying shares in the local currency the relevant exchange rate and the us market index using both a vector autoregressive var model with a cointegration constraint and a seemingly unrelated regression sur approach we examine the relative importance of and the speed of adjustment of adr prices to these underlying factors our results show that while the price of the underlying shares is most important the exchange rate and the us market also have an impact on adr prices while the bulk of the shocks to the pricing factors are reflected in the adrs within the same calendar day there are indications that the adjustments are not completed until the following day curiously the adrs appear to initially overreact to the us market index but underreact to changes in underlying share prices and exchange rates

firms choice of method of pay using data from the bls industry wage survey the author tests the theory that firms choose their methods of pay by balancing the gains from more precise links between performance and pay against m

modelling the demand for loans to the private sector in the euro area this article studies the determinants of loans to the private sector in the euro area using the johansen methodology the study identifies one cointegrating relationship linking real loans gdp and interest rates this relationship implies that in the long run real loans are positively related to real gdp and negatively to real short term and long term interest rates both the signs and the magnitude of the coefficients suggest that the cointegrating vector describes a long run demand equation the short run dynamics of the demand for euro area real loans is subsequently modelled by means of a vector error correction model vecm a number of specification tests performed on the vecm produce satisfactory results with tests of stability of the model parameters showing no signs of structural breaks during the sample period 1980 1 1999 2 all of this suggests that developments in real loans to the private sector in the euro area can be reasonably explained by the model

optimal contracting with subjective evaluation this paper extends the standard principal agent model to allow for subjective evaluation the optimal contract results in more compressed pay relative to the case with verifiable performance measures moreover discrimination against an individual implies lower pay and performance suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination finally the optimal contract entails the use of bonus pay rather than the threat of dismissal hence neither efficiency wages nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract

searching for threshold effects in the evolution of budget deficits an application to the spanish case abstract in this paper we use recent developments on threshold autoregressive tar models that allow us to derive endogenously threshold effects in the evolution of the spanish budget deficit specifically a mean reverting dynamic behaviour of the budget deficit should be expected once such threshold is reached

the relation between savings and growth cointegration and causality evidence from asia the direction of causality between savings and growth remains unclear even though it is of critical importance for development policy in this paper granger causality analysis is undertaken for seven asian countries using the vecm engle and granger and var procedures we find that in most cases the direction of causality runs primarily from growth or income to savings although in some countries there is also evidence of a feedback effect from savings to income and growth thus development policy should focus less on promoting high savings rates and more on promoting high growth rates estimation of the savings functions are presented using engle and granger s static ols and stock and watson s dynamic ols dols procedures where appropriate the high savings rates in asia are found to be due to the high rate of growth of income per capita declining shares of dependent population and some special institutional features such as the high central provident fund rates in singapore interest rates ar

the dynamic relationship between the prices of adrs and their underlying stocks evidence from the threshold vector error correction model this paper sets out to estimate the dynamic relationship that exists between the prices of adrs and their underlying stocks in both the short run and the long run using a number of recent developments of the threshold cointegration framework the empirical results support the notion of nonlinear mean reversion of the prices of adrs and their underlying stocks

accounting in partnerships in 1914 an accounting professor named arthur andersen founded a public accounting practice that became the world s largest professional services firm for years preceding the enron debacle and andersen s collapse the firm had struggled to create incentives within the organization for partners to provide highquality service develop and sell new services and meet the compensation expectations of various factions of partners a years long dispute over the division of profits between the firm s consulting and accounting arms led to the 1998 separation of the consulting practice from the audit and tax practices the rise break up and fall of andersen underlines the importance of questions concerning incentive structures within public accounting firms in particular and partnerships of professionals in general this paper offers a perspective on partner compensation schemes and the accounting information systems that support them in partnerships ownership and control lie with the partners furthermore each member of a partnership is endowed with human capital that may be employed either within the firm or without every partner is simultaneously a principal who shares in the net output of the partnership and an agent who produces output ownership and control are diffused among many persons and partners are subject to moral hazard each must be motivated by his peers it is intuitive that the structure of professional partnerships is a function of the production and monitoring technologies available to the partners as oliver williamson 1975 p 43 points out group affiliation can provide income guarantees to buffer the effects of unanticipated contingencies on terms superior to that which market insurance can provide a group will have an advantage over the market to the extent it is better able to check malingering and other ex post manifestations of moral hazard this advantage requires that performance be accurately assessed

threshold cointegration and purchasing power parity in the pacific nations the paper uses a threshold cointegration methodology to explore the properties of long run purchasing power parity ppp in the pacific nations using japan and the usa as base countries it is shown that long run ppp holds for most asian countries but that the adjustment mechanism is asymmetric in contrast to symmetric error correction models it is found that asymmetric adjustments of nominal exchange rates play an important role in eliminating deviations from long run ppp

implicit contracts and the explanatory power of top executive compensation for future performance recent research suggests that implicit incentive contracts may be based on performance measures that are observable only to the contracting parties we derive and test implications of this insight for the relationship between executive compensation and firm performance if corporate boards optimally use both observable and unobservable to outsiders measures of executive performance and the unobservable measures are correlated with future firm performance then unexplained variation in current compensation should predict future variation in firm performance further compensation should be more positively associated with future performance when observable measures are less useful for contracting our results are consistent with these hypotheses

dynamic hedge ratio for stock index futures application of threshold vecm this study represents one of the first papers in stock index futures arbitrage literature to investigate the effects of arbitrage threshold on stock index futures hedging effectiveness by using threshold vector error correction model hereafter threshold vecm moreover in contrast to prior studies focusing on examining case studies involving mature stock markets this study not only adopts us s p 500 stock market as the sample but also adds an analysis of one emerging stock market hungarian bsi and examines the differences between them finally this investigation employs a rolling estimation process to examine the impact of arbitrage threshold behaviours on the setting of futures hedging ratio the empirical findings of this study are consistent with the following notions first arbitrage behaviour reduces co movement between futures and spot markets and increases the volatility of both futures and spot markets second this article denotes the outer regime of futures spot market for the case of hung

price transmission and asymmetric adjustment in the spanish dairy sector asymmetric threshold vector error correction models are applied to monthly price data to analyse price relationships and patterns of transmission among farm and retail markets for a variety of dairy products in spain the results suggest that asymmetries affect a conspicuous part of the raw milk processed in spain implications for the organizational structure of spanish dairy markets are offered

performance promotion and the peter principle this paper considers why organizations use promotions rather than just monetary bonuses to motivate employees even though this may conflict with efficient assignment of employees to jobs when performance is unverifiable use of promotion reduces the incentive for managers to be affected by influence activities that would blunt the effectiveness of monetary bonuses when employees are risk neutral use of promotion for incentives need not distort assignments when they are risk averse it may sufficient conditions for this are given the distortion may be either to promote more employees than is efficient the peter principle effect or fewer

vegetable oil market and biofuel policy an asymmetric cointegration approach abstract the present paper analyses the long run relationship between vegetable oil prices and conventional diesel prices in the eu for the period 2005 2007 we applied recent developments in the threshold cointegration approach to investigate the presence of asymmetric dynamic adjusting processes between the prices of rapeseed oil sunflower oil and soybean oil and the price of a mineral oil diesel the results presented suggest a two regime threshold cointegration model only for the rapeseed oil diesel price pair thus the rapeseed oil price adjusts rapidly to its long run equilibrium determined by fossil diesel prices but this adjustment is asymmetric it differs if the divergence between the two prices is above or below a critical threshold consequently rapeseed oil appears particularly exposed to external shocks deriving from global political scenarios suggesting the reassessment of the high quota 80 of eu biodiesel represented by this vegetable oil

real exchange rate adjustment in and out of the eurozone it is often suggested that currency unions unduly inhibit the efficient adjustment of real exchange rates recently this has been seen as a key failure of the eurozone this paper presents evidence that throws doubt on this conclusion our evidence suggests that real exchange rate movement within the eurozone was at least as compatible with efficient adjustment as the behavior of real exchange rates for the floating rate countries outside the eurozone this interpretation is consistent with a model in which nominal exchange rate movements give rise to persistent deviations from the law of one price in traded goods

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

using threshold cointegration to estimate asymmetric price transmission in the swiss pork market this paper employs threshold cointegration tests that allow for asymmetric adjustment towards a long run equilibrium relationship to examine the relationship between producer and retail pork prices in switzerland the short run adjustments are also examined with asymmetric error correction models that are compared to the conventional symmetric error correction models the results indicate that price transmission between the producer and retail levels is asymmetric in the sense that increases in producer prices that lead to declines in marketing margins are passed on more quickly to retail prices than decreases in producer prices that result in increases in the marketing margins

spatial market integration in the presence of threshold effects a large body of research has evaluated price linkages in spatially separate markets much recent research has applied models appropriate for nonstationary data such analyses have been criticized for their ignorance of transactions costs which may inhibit price adjustments and thus affect tests of integration this analysis utilizes threshold autoregression and cointegration models to account for a neutral band representing transactions costs we evaluate daily price linkages among four corn and four soybean markets in north carolina nonlinear impulse response functions are used to investigate dynamic patterns of adjustments to shocks our results confirm the presence of thresholds and indicate strong support for market integration though adjustments following shocks may take many days to be complete in every case the threshold models suggest much faster adjustments in response to deviations from equilibrium than is the case when threshold behavior is ignored a large amount of empirical research has evaluated the extent to which spatially separate markets are integrated though the term is used loosely in the literature tests of market integration usually consider the extent to which shocks are transmitted among spatially separate markets the integration of markets can have important implications for price discovery and the operation of the market since persistent deviations from integration may imply riskless profit opportunities for spatial traders

spatial market arbitrage and threshold cointegration goodwin and piggott reported that corn and soybean prices in spatially separated markets in north carolina exhibited threshold cointegration and that commodity prices in different markets may persistently diverge here a multivariate approach is used to test for threshold cointegration and nonlinear cointegration the results suggest that departures from the law of one price do not persist indefinitely goodwin and piggott gp examined daily corn and soybean prices across spatially separated markets in north carolina and reported that bivariate pairings of prices were threshold cointegrated gp used a twothreshold model in which price differences across markets could persist indefinitely they concluded that empirical models should consider threshold effects in order to adequately characterize spatially integrated markets the purpose of this article is to extend the gp analysis in several directions gp employed the techniques of martens kofman and vorst which involve a multistepped search for thresholds in the residuals of a cointegrating regression this single equation search process is subject to potential misspecification so it is interesting to determine whether the direct multivariate test of threshold cointegration of hansen and seo provides confirmatory evidence in addition gp allowed two thresholds to affect each commodity pair without directly testing for the number of thresholds the second extension uses hansen tests to determine the number of thresholds two thresholds imply no arbitrage bounds that allow persistent departures from the law of one price one threshold is consistent with the traditional view that price differentials are fleeting as arbitrageurs drive excess returns to zero the final extension recognizes that spatially integrated markets might follow a nonlinear relationship that depends on transactions costs peter s sephton is professor school of business queen s university kingston ontario canada the author would like to thank nick piggott for providing his dataset and the dean s research fund in the school of business for financial assistance two anonymous referees provided helpful comments sufficiently large deviations from the law of one price should lead to a reduced price dispersion a direct test of nonlinear cointegration demonstrates that price differences tend to be resolved over time background