the forward market in emerging currencies less biased than in major currencies abstract many studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate usually the forward discount actually points in the wrong direction but at least until recently those studies applied only to advanced economies and major currencies we apply the same tests to a sample of 14 emerging market currencies we find a smaller bias than for advanced country currencies the coefficient is on average positive i e the forward discount at least points in the right direction it is never significantly less than zero to us this suggests that a time varying exchange risk premium may not be the explanation for traditional findings of bias the reasoning is that emerging markets are probably riskier yet we find that the bias in their forward rates is smaller emerging market currencies probably have more easily identified trends of depreciation than currencies of advanced countries

exact and heuristic solutions of the global supply chain problem with transfer pricing we examine the example of a multinational corporation that attempts to maximize its global after tax profits by determining the flow of goods the transfer prices and the transportation cost allocation between each of its subsidiaries vidal and goetschalckx vidal c j goetschalckx m 2001 a global supply chain model with transfer pricing and transportation cost allocation european journal of operational research 129 1 134 158 proposed a bilinear model of this problem and solved it by an alternate heuristic we propose a reformulation of this model reducing the number of bilinear terms and accelerating considerably the exact solution we also present three other solution methods an implementation of variable neighborhood search vns designed for any bilinear model an implementation of vns specifically designed for the problem considered here and an exact method based on a branch and cut algorithm the solution methods are tested on artificial instances these results show that our implementation of vns outperforms the two other heuristics the exact method found the optimal solution of all small instances and of 26 of medium instances

interpreting comovements in the trade balance and the terms of trade abstract i examine the relation between the trade balance and the terms of trade in a two country dynamic stochastic exchange economy with complete markets along an equilibrium path for this economy the relation is governed by the substitutability between foreign and domestic goods i find in contrast to non stochastic analyses of the harberger laursen metzler effect that a positive association does not require persistent shocks or non constant rates of time preference this contrast highlights the role played by the structure of asset markets complete and otherwise in generating equilibrium comovements

solving exchange rate puzzles with neither sticky prices nor trade costs we present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved the flexible price two country monetary model is extended to include a consumption externality with habit persistence habit persistence is modeled using campbell cochrane preferences with deep habits along the lines of the work of ravn schmitt grohe and uribe by deep habits we mean habits defined over goods rather than countries the model is simulated using the artificial economy methodology it offers a neo classical explanation of the meese rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting finally the model naturally generates the negative slope in the standard forward market regression

measuring the default risk of small business loans a survival analysis approach in this paper we report that although medium maturity loans originated under the sba 7 a loan guarantee program are targeted to small firms that fail to obtain credit through conventional channels the default experience is comparable to that of a large percentage of loans held by larger commercial banks we establish that the default behavior of these loans is time sensitive as a loan seasons the likelihood of default increases initially peaks in the second year and declines thereafter using a discrete time hazard framework we show that the likelihood of default is conditional on borrower lender and loan characteristics and changes in economic conditions

entry strategies for multinational enterprises and host countries abstract a multinational enterprise mne has a number of investment strategies to enter into a foreign market such as foreign direct investment fdi joint venture jv exclusive licensing el and others in contrast a host government also has the choice to introduce a suitable entry strategy into its local market with the objective of maximizing its tax revenue or national social welfare in this paper we explore the optimal strategies for not only a mne but also a host country

asset prices and risk sharing in open economies this paper proposes a two good two country general equilibrium model with external habits and home biased preferences that addresses a number of international nance puzzles speci cally the model reconciles the high degree of international risk sharing implied by relatively smooth exchange rates with the modest cross country consumption growth correlations seen in the data resolving the brandt cochrane and santa clara 2006 puzzle furthermore the model matches the empirically observed low correlation between exchange

tax policy and aggregate demand management under catching up with the joneses this paper examines the role for tax policies in productivity shock driven economies with catching up with the joneses utility functions the optimal tax policy is shown to affect the economy countercyclically via procyclical taxes i e cooling down the economy with higher taxes when it is overheating in booms and stimulating the economy with lower taxes in recessions to keep consumption up thus models with catching up with the joneses utility functions call for traditional keynesian demand management policies but for rather unorthodox reasons

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

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

exchange rate puzzles and distorted beliefs abstract we propose a new explanation for the foreign exchange forward premium and delayed overshooting puzzles we show that both puzzles arise from a systematic distortion in investors beliefs about the interest rate process accordingly the forward premium is always a biased predictor of future depreciation the bias can be so severe as to lead to negative coefficients in the fama regression delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of misperception we document empirically the extent of this distortion using survey data for g 7 countries against the u s and find that it is strong enough to account for these irregularities

the forward premium in a model with heterogeneous prior beliefs abstract this paper explores a model of bond prices where agents have diverse prior beliefs about domestic and foreign inflation in the long run the foreign exchange forward premium reflects expected differences in inflation but in the short run it depends upon the diversity of prior beliefs if some people have diffuse priors about a country s inflation process then its currency commands a forward premium that is eventually dissipated using data on the dollar mark premium from the 1980s it shows that this kind of diversity really matters thus models with a single representative agent give an inadequate description of the data

the double marginalization problem of transfer pricing theory and experiment in this paper we find that the idea of using optional two part tariffs as a basis for tariff renegotiations in a bilaterally monopoly setting is a solution to the double marginalization problem that theoretically 1 creates a stable equilibrium 2 at the overall efficient level 3 without the presence of a central management through experimental testing we find that the efficiency of this mechanism is significantly higher than the efficiency of simple direct negotiation both under symmetrically and asymmetrically distributed information

credit card debt and default over the life cycle this paper solves an empirically parameterized model of life cycle consumption which allows for uncollaterized borrowing and the possibility of default the simulation results show that i social stigma and credit limit have a very large impact on default rates ii education level also has a significant effect on the probability of default namely through differences in the shape of lifetime labor income profiles and iii the response of simulated default rates to labor income shocks is determined by the nature of labor income uncertainty temporary versus permanent additionally the model generates simultaneous consumer holdings of credit card debt and liquid assets

availability of mortgage loans in volatile real estate markets abstract this paper presents a default model for mortgages on single family houses implying a higher probability of negative equity and thus default in real estate markets with high price volatility mortgage lenders compensate for the increased default probability in volatile markets by demanding higher downpayments or increased creditworthiness of loan applicants thus making mortgage loans more difficult to obtain an empirical analysis finds greatly varying price volatility in single family real estate markets in a sample of 42 cities consistent with the implications of the model the empirical analysis finds that the fraction of low downpayment loans declines in volatile markets

less of a puzzle a new look at the forward forex market abstract the two country monetary model is extended to include a consumption externality with habit persistence the model is simulated using the artificial economy methodology the puzzles in the forward market are re examined the model is able to account for a the low volatility of the forward discount b the higher volatility of expected forward speculative profit c the even higher volatility of the spot return d the persistence in the forward discount e the martingale behavior of spot exchange rates and f the negative covariance between the expected spot return and expected forward speculative profit it is unable to account for the forward market bias because the volatility of the expected spot return is too large relative to the volatility of the expected forward speculative profit

carry trades order flow and the forward bias puzzle we investigate the relation between foreign exchange fx order flow and the forward bias we outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time varying risk premium consistent with that bias using 10 years of data on fx order flow we find that more than half of the forward bias is accounted for by order flow with the rest being explained by expectational errors we also find that carry trading increases currency crash risk in that order flow generates negative skewness in fx returns

consumer durables and risky borrowing the effects of bankruptcy protection abstract there exist substantial differences in the generosity of bankruptcy protection across u s states this paper exploits cross state variation in exemption levels to assess the dual role of durable goods as informal collateral for unsecured debt and self insurance against bad shocks to earnings the generosity of bankruptcy protection is found to change both the incentives and the ability of households to accumulate durable wealth the gains from a high level of insurance are reduced by the effect of tighter credit constraints so that the net effects of a change in exemption are very small a more generous bankruptcy regulation reduces net durable wealth in the first half of the life cycle in addition the optimal level of exemption is positive but low

loss given default of residential mortgages in a low ltv regime role of foreclosure auction process and housing market cycles abstract using loan level foreclosure auction data we study the loss given default lgd of defaulted residential mortgages originated in korea a low ltv regime we find that senior mortgages generate very low loss rates 5 10 while losses of subordinated claims are in 30 50 range we document the effects of housing market cycles on loss severity by showing that collateral characteristics that are overvalued during the boom increase loss severity during the market downturn we also investigate how a broad set of time of origination and post origination information on loan collateral and borrower characteristics and foreclosure auction process influence the lgd of residential mortgages

personal bankruptcy and credit supply and demand this paper examines how personal bankruptcy and bankruptcy exemptions affect the supply and demand for credit while generous state level bankruptcy exemptions are probably viewed by most policy makers as benefiting less well off borrowers our results using data from the 1983 survey of consumer finances suggest that they increase the amount of credit held by high asset households and reduce the availability and amount of credit to low asset households conditioning on observable characteristics thus bankruptcy exemptions redistribute credit toward borrowers with high assets interest rates on automobile loans for low asset households also appear to be higher in high exemption states

cost based transfer pricing under r d risk aversion in an integrated supply chain abstract this paper examines the economic role of transfer pricing for a vertically integrated supply chain when a risk averse production division manager faces uncertainty on the outcomes from r d investment in particular we compare two representative cost based transfer pricing methods full cost and variable cost pricing we construct an economic model based on the assumption that r d investment reduces the expected fixed costs of a production factor as well as the variable production costs we show that a firm s profit under full cost transfer pricing is greater than that under variable cost transfer pricing under certainty contrary to this benchmark result variable cost pricing becomes more profitable than full cost pricing when the risk averse manager bears relatively high risk

predictability and pricing efficiency in forward and spot developed and emerging currency markets abstract we study the predictability of forward and spot exchange rates of currencies of emerging and developed economies from 1994 to 2016 our purpose is to shed light on the efficiency of currency markets and how and why it has evolved over this time for the currencies of emerging economies our analysis of rates of return on forward contracts finds some evidence of excess predictability especially in the earlier parts of the sample period consistent with the view that this portion of the foreign exchange market has only become efficient in recent times when we turn our attention to excess returns computed from spot exchange rates and spot interest rates however we find much less predictability in particular over our full sample period we find no evidence of excess predictability in contrast with the results reported by hsu et al 2016 but in agreement with kuang et al 2014 the different predictability of spot excess returns and rates of return on forward contracts is a manifestation of the widespread violation of covered interest parity which emerged with the onset of the 2008 financial crisis

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

a game theoretic approach to transfer pricing in a vertically integrated supply chain we study the problem of setting transfer prices in a vertically integrated supply chain in which the divisions share technology and transactions costs we develop a cooperative game that provides transfer prices for the intermediate products in the supply chain this model is applied both when the market prices for these products are known and also when their valuations differ we provide a solution that is fair and acceptable to all divisions in the perfect information case the shapley value generates the transfer prices while in the asymmetric case we obtain transfer prices from the solution to a linear program

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

is the elasticity of intertemporal substitution constant in all common models of inter temporal allocation the assumption of a constant elasticity of intertemporal substitution eis imposes surprising limitations on within period budget allocations consequently the constant eis assumption can be tested with demand data in fact the eis is pinned down completely by the shape of engel curves if the eis is constant then the eis can be estimated without variation in the interest rate that a price elasticity can be estimated without variation in the relevant price illustrates just how strong the constant eis assumption is the constant eis assumption is rejected by demand data

transfer pricing of a service department facing random demand copyright c 1996 elsevier science b v all rights reserved most servic departments have occasionally idle capacity and occasionally saturated capacity the reason for these phenomena is that a service department faces a random demand for the service it renders how shall its transfer pricing be influenced by this randomness we discuss this question by analyzing an abstract model of a service department the model depicts a service department as an m d 1 queueing system with an upper limit ul on the time in the system potential input to the system is operating departmentsr requests for service which arise according to a poisson process all requests for service take the same amount of time the net benefit defined as the benefit minus any direct costsr of satisfying a request is uniformly distributed and is known at the time the request materializes if the net benefit is larger than the net transfer price defined as the transfer price minus any direct costsr and the delivery time does not exceed ul then the request is submitted to the service department we develop two algorithms to find the optimal transfer pricing and the best simple transfer price respectively numerical computations indicate that the expected net benefits earned per unit time by employing the solutions found by the two algorithms differ by at most 3 we also investigate the relationship between the best simple net transfer price and the cost of service capacity

a general unconstrained model for transfer pricing in multinational supply chains multinational supply chains operate in more than one country or tax jurisdiction and face decision problems concerned with trade flows of resources products and services transfer prices and allocation of transport costs between their divisions these decisions must consider for the sake of optimality corporate and governmental parameters such as the payment of dividends and royalties ownership of and control over subsidiaries income taxes differentials duties and quotas etc in this paper we generalize and extend the theory of the multinational firm to the case of multinational supply chains we propose a model that is more general and comprehensive than the previous ones proposed in the literature to be more specific our model integrates many of the previous research factors and includes new ones such as transport costs and duty drawbacks which are critical for supply chains that operate under international trade regulations under the maximization of the repatriated earnings objective we study the optimality conditions of the corporate decision variables to derive managerial guidelines and to determine how decisions regarding trade quantities transfer prices and transport cost allocations affect the amount of taxes to be paid to host governments as well as the total after tax repatriated earnings of the corporation

risk external adjustment and capital flows abstract this paper studies the process of external adjustment i develop an open economy model with endowment and preference shocks that can account for the empirical behavior of real exchange rates interest rates and consumption in the u s and europe the model includes cross border holdings of bonds and equity and financial frictions that impede international risk sharing i find that external adjustment following endowment shocks predominantly takes place via trade flows consistent with the intertemporal approach to the current account in contrast preference shocks that change investors risk aversion induce adjustment via the trade and valuation channels where the latter includes the effects of unexpected capital gains and loss on existing cross border holdings and changes in the expected future return differentials between foreign assets and liabilities the model estimates imply that the valuation channel of external adjustment is more important for the u s than the trade channel consistent with this implication i show that forecasts of future return differentials contributed most to the volatility of the u s net foreign asset position in the post bretton woods era

vertical control and price versus nonprice competition this paper considers a manufacturer distributing a product through retailers who compete in price and service which reduces the time it takes to purchase a good the mix of these instruments that maximizes collective profit is determined by the tastes of consumers on the product margin whereas decentralized retailers consider as well the tastes of consumers on the interretailer margins given search or travel costs consumers with low time costs are overrepresented on the interretailer margins in considering customers on the wrong margin retailers are therefore biased toward price competition this distortion that can be corrected with vertical restraints

fair transfer price and inventory holding policies in two enterprise supply chains abstract a key issue in supply chain optimisation involving multiple enterprises is the determination of policies that optimise the performance of the supply chain as a whole while ensuring adequate rewards for each participant in this paper we present a mathematical programming formulation for fair optimised profit distribution between echelons in a general multi enterprise supply chain the proposed formulation is based on an approach applying the nash bargaining solution for finding optimal multi partner profit levels subject to given minimum echelon profit requirements the overall problem is first formulated as a mixed integer non linear programming minlp model a spatial and binary variable branch and bound algorithm is then applied to the above problem based on exact and approximate linearisations of the bilinear terms involved in the model while at each node of the search tree a mixed integer linear programming milp problem is solved the solution comprises inter firm transfer prices production and inventory levels flows of products between echelons and sales profiles the applicability of the proposed approach is demonstrated by a number of illustrative examples based on industrial processes

a global supply chain model with transfer pricing and transportation cost allocation abstract we present a model for the optimization of a global supply that maximizes the after tax profits of a multinational corporation and that includes transfer prices and the allocation of transportation costs as explicit decision variables the resulting mathematical formulation is a non convex optimization problem with a linear objective function a set of linear constraints and a set of bilinear constraints we develop a heuristic solution algorithm that applies successive linear programming based on the reformulation and the relaxation of the original problem our computational experiments investigate the impact of using different starting points the algorithm produces feasible solutions with very small gaps between the solutions and their upper bound ub

volatile and persistent real exchange rates with or without sticky prices the flexible price two country monetary model is extended to include a consumption externality with habit persistence two methodologies are employed to explore this model s ability to generate volatile and persistent exchange rates in the first actual data is used for the exogenous driving processes in the second the model is simulated using estimated forcing processes the theory in both cases is capable of explaining the high volatility and persistence of real and nominal exchange rates as well as the high correlation between real and nominal rates

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

an operational profit sharing and transfer pricing model for network manufacturing companies abstract new age companies are forging partnerships with other firms to market products that have been assembled through manufacturing activities distributed at different locations these locations belong to more than one company and the product passes through these different sites during its manufacturing stages this manufacturing collaboration is known as network manufacturing according to the network philosophy companies form alliances to manufacture a product and share in its operating profits this paper proposes a framework and methodology for profit sharing and transfer pricing between network companies we propose a paradigm that enables maximization of operating profits by the manufacturing network in its larger supply chain suggesting a departure from the model that maximizes profits for the individual company within the sphere of its own supply chain

gray market trade with product information service in global supply chains abstract this paper investigates the economic effects of a product information service when potential consumers who are segmented by their taste exist in gray markets specifically we construct an economic model that considers a multinational firm mnf who expands business to a country and chooses whether to provide information service regarding product characteristics if receiving the information consumers in a specific segment whose taste suits the characteristics have positive utility from consuming the product while those in other segments have no utility by contrast consumers in all segments have positive expected utility before consuming the product without information with these settings we demonstrate that there arises the equilibrium that the mnf provides no information service when gray market trade i e parallel trade is allowed in the country leading to lower consumer welfare than when it is prohibited a primary finding in the equilibrium is that such a situation arises especially when potential consumers are less segmented in this situation the regulator in the country should ban the parallel imports so as to enhance consumer welfare the result is counterintuitive and notable because one might intuitively infer that gray market trade is less desirable when customers are more minutely segmented and the product information service is thus more specific and necessary

returns policy new model introduction and consumer welfare abstract this paper investigates how economic outcomes differ for new model introduction between two extreme contracts outright sales contract and returns policy contract with full credit under the outright sales contract we show that the retailer s incentive to introduce a new model can lead to a reduction of consumer welfare when the retailer is moderately risk averse the primary conclusion from this study is that the returns policy contract resolves this conflict between firms and consumers and that the supply chain introduces the new model only when consumer surplus from the new model is higher than that from the old model

courts and banks effects of judicial enforcement on credit markets the cost of enforcing contracts is a key determinant of market performance we document this point with reference to the credit market in a model of opportunistic debtors and inefficient courts according to the model improvements in judicial efficiency should reduce credit constraints and increase lending with an ambiguous effect on interest rates that depends on banking competition and on the type of judicial reform these predictions are supported by panel data on italian provinces in provinces with longer trials or large backlogs of pending trials credit is less widely available

an empirical analysis of personal bankruptcy and delinquency this article uses a new dataset of credit card accounts to analyze credit card delinquency personal bankruptcy and the stability of credit risk models we estimate duration models for default and assess the relative importance of different variables in predicting default we investigate how the propensity to default has changed over time disentangling the two leading explanations for the recent increase in default rates a deterioration in the risk composition of borrowers versus an increase in borrowers willingness to default due to declines in default costs even after controlling for risk composition and economic fundamentals the propensity to default significantly increased between 1995 and 1997 standard default models missed an important time varying default factor consistent with a decline in default costs debt issued by consumers is an understudied asset class there has been particularly little academic study of recent trends in default on this debt between 1994 and 1997 the number of personal bankruptcy filings in the united states rose by about 75 the 1 35 million filings in 1997 represented well over 1 of u s households delinquency rates on credit cards rose almost as sharply federal reserve bank of cleveland 1998 the resulting losses to lenders amounted to a sizable fraction of the interest payments they collect potentially raising the average cost of credit these trends in default both in bankruptcy and delinquency are especially surprising in light of the strong economy over the period they provide an unusually rich source of variation to test the stability of models that forecast personal default and of credit risk models more generally there are two leading explanations for these trends first the risk composition of borrowers might have worsened under the risk effect less

coordinating advertising and pricing in a manufacturer retailer channel abstract cooperative advertising is a practice that a manufacturer pays retailers a portion of the local advertising cost in order to induce sales cooperative advertising plays a significant role in marketing programs of channel members nevertheless most studies to date on cooperative advertising have assumed that the market demand is only influenced by advertising expenditures but not by retail price this paper addresses channel coordination by seeking optimal cooperative advertising strategies and equilibrium pricing in a two member distribution channel we establish and compare two models a non cooperative leader follower game and a cooperative game we develop propositions and insights from the comparison of these models the cooperative model achieves better coordination by generating higher channel wide profits than the non cooperative model with these features a the retailer price is lower to consumers and b the advertising efforts are higher for all channel members we identify the feasible solutions to a bargaining problem where the channel members can determine how to divide the extra profits

parallel imports challenges from unauthorized distribution channels we examine the problem of parallel imports unauthorized flows of products across countries which compete with authorized distribution channels the traditional economics model of a discriminating monopolist that has different prices for the same good in different markets requires the markets to be separated in some way usually geographically the profits from price discrimination can be threatened by parallel imports that allow consumers in the high priced region some access to the low priced marketplace however as this article shows there is a very real possibility that parallel imports may actually increase profits the basic intuition is that parallel importation becomes another channel for the authentic goods and creates a new product version that allows the manufacturer to price discriminate we propose a two country three stage model to quantitatively study the effects and strategies in the third stage and in the higher priced country where parallel imports have entered we characterize the resulting market segmentation one segment of consumers stays with the authorized version as they place more value on the warranty and services that come with the authorized version another segment switches to parallel imports because a lower price is offered due to lack of country specific features or warranties parallel imports also generate a third and new segment that would not have bought this product before unlike counterfeits that are fabricated by imitators all parallel imports are genuine and sourced from the manufacturer in the lower priced country through authorized dealers therefore the manufacturer s global sales quantity should increase but profit may rise or fall depending on the relative sizes and profitability of the segments a profit maximizing parallel importer should set price and quantity in the second stage after observing the manufacturer s prices in both countries there will be a threshold of across country price gap above which parallel imports would occur in the first stage the manufacturer can anticipate the possible occurrence of a parallel import its price and quantity and its effect on authorized sales in each country to make a coordinated pricing decision to maximize the global supply chain profit under some circumstances the manufacturer should allow parallel imports and under others should prevent them through a stackelberg game we solve for the optimal pricing strategy in each scenario we then find in one extension that when the number of parallel importers increases the optimal authorized price gap should narrow but the prices and quantities of parallel imports may rise or fall in another extension we nd that when the manufacturer has other means such as monitoring dealers differentiating designs and unbundling warranties to contain parallel imports the authorized price gap can widen as a function of the effectiveness of nonpricing controls in summary parallel imports may help the manufacturer to extend the global reach of its product and even boost its global profit if the manufacturer offers a discount version through its authorized dealers it is running a high risk of confusing customers and tarnishing brand images parallel imports may cause similar concerns for the manufacturer but unauthorized dealers are perceived as further removed from the manufacturer therefore there is less risk of confusing consumers when parallel imports are channeled through unauthorized dealers furthermore they are more nimble in diverting the product whenever their transshipment and marketing costs are small enough not to offset the authorized price gap and the valuation discount this may explain why some manufacturers fiercely fight parallel imports while others knowingly use this alternative channel

credit rationing in the u s mortgage market evidence from variation in fha market shares abstract this paper examines the nature of mortgage credit rationing across geographic markets and time particular attention is paid to the response of conventional mortgage supply to higher risk conditions associated with regional recessions we develop a series of four indirect tests based on the spatial variation of the fha share of mortgages both endorsements and applications as well as fha and conventional rejection rates results of these four tests indicate that conventional mortgage underwriting criteria do not become more flexible and may even become more demanding when local economic conditions deteriorate this result indicates the use of non price credit rationing in the mortgage market and suggests a special role for fha insured mortgages as a mechanism for maintaining mortgage credit supply in declining housing markets

accounting for forward rates in markets for foreign currency absteract forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure the intertemporal marginal rate of substitution representative agent theory with time additive preferences cannot account for either of these properties we show that the theory does considerably better along these dimensions when the representative agent s preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data in particular the strong autocorrelation of forward premiums since the advent of flexible exchange rates in the early 1970s a large body of statistical work has established that forward rates for major currencies are not optimal predictors of future spot rates relevant evidence is reported in studies by baillie lippens and mcmahon 1983 bekaert 1991 bilson 1981 boothe and longworth 1984 cumby 1988 cumby and obstfeld 1984 fama 1984 gregory and mccurdy 1984 hansen and hodrick 1983 hodrick and srivastava 1984 and korajczyk and viallet 1990 a more complete list of references is provided by hodrick 1987 these papers indicate that returns from speculation in forward and spot currency markets are predictable and that the predictable components vary considerably over time a number of alternative explanations have been offered for the predictable variation in foreign currency market excess returns kaminsky 1988 korajczyk 1985 and krasker 1980 suggest that infrequent extreme events may make returns appear predictable in small samples the so called peso problem lewis 1989 argues that rational learning following infrequent changes in the process governing equilibrium prices can explain part of the ex post predictability of currency returns froot and frankel 1989 and froot and thaler 1990 examine the hypothesis that market forecasts of future spot

order flow and the monetary model of exchange rates evidence from a novel data set we propose an exchange rate model that is a hybrid of the conventional specification with monetary fundamentals and the evans lyons microstructure approach we estimate a model augmented with order flow variables using a unique data set almost 100 monthly observations on interdealer order flow on dollar euro and dollar yen the augmented macroeconomic or hybrid model exhibits greater in sample stability and out of sample forecasting improvement vis a vis the basic macroeconomic and random walk specifications

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

profitable pricing when market segments overlap in this paper we analyze profitable pricing strategies when market segments overlap overlapping markets are segments that are not perfectly sealed and leakage between them can occur different consumers are assumed to incur possibly different transaction costs if they choose to purchase in the low price market a monopolist seller knows the distribution of transaction costs across consumers and must choose an optimal pricing strategy in particular the monopolist must decide whether to charge a single price or to price differentiate conditions are derived under which price differentiation will be the most profitable strategy when price differentiation is optimal the equilibrium amount of leakage is determined endogenously unlike the standard economics textbook model of price discrimination in which zero leakage is determined exogenously and is usually given as a necessary condition for price discrimination we show that zero leakage is not necessary for differential pricing to be optimal and that

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

the impact of parallel imports on investments in cost reducing research and development abstract we develop a two country model of endogenous investment in process innovation by a manufacturer facing competition from parallel imports pi we find that the distortions associated with pi inhibit innovation however the difference between the manufacturer s expected profits under successful and failed innovation is u shaped in the cost of engaging in pi thus the reduction in r d investment depends on both legality of pi and transport costs the reduction in innovation could harm global welfare depending on whether the manufacturer was deterring pi with a high wholesale price if so banning such trade would raise expected welfare

the household bankruptcy decision personal bankruptcy filings have risen from 0 3 percent of households per year in 1984 to around 1 35 percent in 1998 and 1999 transforming bankruptcy from a rare occurrence to a routine event lenders lost about 39 billion in 1998 due to personal bankruptcy filings but economists have little understanding of why households file for bankruptcy or why filings have increased so rapidly until very recently studying the household bankruptcy decision was very difficult because no household level data set existed that included information on bankruptcy filings in this paper we use new data from the panel study of income dynamics which includes information on bankruptcy filings to estimate a model of households bankruptcy decisions we find support for the strategic model of bankruptcy which predicts that households are more likely to file when their financial benefit from filing is higher our model predicts that an increase of 1 000 in households financial benefit from bankruptcy would result in a 7 percent increase in the number of bankruptcy filings our model also predicts that if the 1997 national bankruptcy review commission s proposed changes in bankruptcy exemption levels were implemented there would be a 16 percent increase in the number of bankruptcy filings each year but if the 100 000 cap on homestead exemptions recently passed by the u s senate were adopted our model predicts that there would be only a negligible effect on the number of filings we find little support for the nonstrategic model of bankruptcy which predicts that households file when adverse events occur which reduce their ability to repay finally controlling for state and time fixed effects our model shows that households are more likely to file for bankruptcy if they live in districts with higher aggregate filing rates

optimal transfer pricing schemes for work averse division managers with private information abstract this paper models a decentralized firm under information asymmetry and effort disutility on the part of managers we assume that managers choose efforts before observing some private information however after the effort choice managers receive private information on their cost parameters which they report to the headquarters there exist many situations in which managers need to take efforts before obtaining private information for example the regular maintenance effort on the machine the effort on rd 2 under certain demand conditions managers cannot receive any information rent benefit for their private information even if they have the option to renege on the contract after obtaining their private information

the time variation of risk and return in foreign exchange markets a general equilibrium perspective this article successively introduces variable velocity durability and habit persistence in a standard two country general equilibrium model and explores their effects on the variability of exchange rate changes forward premiums and the foreign exchange risk premium a new feature of the model is that agents make decisions at a weekly frequency and face conditionally heteroskedastic shocks nevertheless even the most complex model fails to deliver sufficiently variable risk premiums without causing forward premiums and exchange rates to be excessively variable unlike previous models the model can roughly match the persistence of forward premiums article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

when does uncovered interest parity hold a consensus is emerging that returns to the currency carry trade are driven by two factors one of these is probably consumption risk but there is widespread disagreement about the identity of the remaining factor this paper bolsters the case for volatility being the unknown factor a structural model that specifies that monetary volatility is the second factor is tested for 56 monetary regimes using the artificial economy methodology the negative slope in the fama regression arises when monetary volatility is low and the precautionary savings motive dominates the intertemporal substitution motive when monetary volatility is high the fama slope is positive in line with uncovered interest parity we conclude that given the predominance of precautionary savings the degree of monetary volatility explains whether uncovered interest parity holds

predicting loss severities for residential mortgage loans a three step selection approach abstract this paper develops a novel framework to model the loss given default lgd of residential mortgage loans which is the dominant consumer loan category for many commercial banks lgds in mortgage lending are subject to two selection processes default and cure where the collateral value exceeds the outstanding loan amount we propose a three step selection approach with a joint probability framework for default cure i e zero lgd and non zero loss severity information the proposed methodology demonstrates improved performance in out of time predictions compared to widely used ols regressions

fixed versus flexible lessons from ems order flow abstract we extend the literature on regime dependent volatility in two ways first our microstructural model provides a qualitatively new explanation second we test implications of our model using europe s recent shift to rigidly fixed rates ems to emu in the model shocks to order flow induce more volatility under flexible rates because the elasticity of speculative demand is endogenously low leading to pronounced portfolio balance effects new data on ff dm transactions show that order flow had persistent effects on the exchange rate before emu parities were announced after announcement the ff dm rate was decoupled from order flow as the model predicts

pricing to habits and the law of one price this paper proposes a novel international transmission mechanism based on the assumption of deep habits the term deep habits stands for a preference specification according to which consumers form habits on a good by good basis under deep habits firms face more elastic demand functions in markets where nonhabitual demand is high relative to habitual demand creating an incentive to price discriminate we refer to this type of price discrimination as pricing to habits in the presence of pricing to habits innovations to domestic aggregate demand induce a decline in markups in the domestic country but not abroad leading to a departure from the law of one price in this way the proposed pricing to habit mechanism can explain the observation that prices of the same good across countries expressed in the same currency vary over the business cycle furthermore it can account for the empirical fact that in response to a positive domestic demand shock such as an increase in government spending the real exchange rate depreciates domestic consumption expands and the trade balance deteriorates

theory and evidence on the resolution of financial distress we analyze a financially distressed owner managed project the main results of the model are 1 borrower default is an endogenous response to the anticipated restructuring foreclosure outcome 2 the lender s restructuring foreclosure decision depends critically on the interaction between project value and industry liquidity and 3 the lender waits for the industry to recapitalize before selling assets obtained through foreclosure empirical analysis of a large sample of defaulted commercial real estate loans supports many of the model predictions including restructuring foreclosure outcomes that are consistent with endogenous borrower default and firesale discounts that vary depending on industry market conditions at the time of foreclosure jel g33 copyright 2006 oxford university press

an economic theory of vertical restraints vertical restraints imposed by manufacturers on the prices locations and sales of retail firms represent a puzzling departure from the simple price mediated exchange of conventional markets in this article we analyze the theoretical basis for these restraints in a setting where retailers inform consumers and are imperfectly competitive and where a manufacturer has some monopoly power we identify three potential externalities affecting retailers decisions these externalities lead to the failure of simple uniform price contracts to coordinate the incentives of retailers with the objective of maximizing combined manufacturer and retailer profits we identify the packages of vertical restraints that are minimally sufficient under various conditions to neutralize the externalities and to achieve the joint profit maximum

impact of state exemption laws on small business bankruptcy decision 1 introductionsmall businesses are a primary source of employment in the u s economy employing over half of the private sector workforce small businesses are responsible for about two thirds of all net new jobs created according to the 2002 small business economic indicators sbei 1 over 99 7 of the 5 7 million firms in the united states are classified as small to medium sized businesses hence small businesses are a substantial contributor to economic growth in the united states small business owners enjoy more flexibility and freedom to capitalize on profitable opportunities than their larger business competitors hence they challenge the larger firms to be more efficient which is ultimately beneficial to consumers unfortunately small and medium sized businesses have a very low survival rate sbei 2002 in 2002 on the heels of the 2001 recession there were 550 100 small business births and 584 500 small business terminations both academics and public policy analysts have become increasingly concerned about the success of small businesses recently there has been a surge in small business research particularly surrounding small business credit supply and demand not surprisingly much of the literature has been focused on changes in lending technologies relationship2 versus scored3 information processing technologies soft versus hard 4 loan size considerations 5 and loan type considerations6 as they relate to small business supply and demand however very few have actually examined why small and medium sized businesses have very low survival rates some studies have analyzed the sensitivities of small business administration sba guaranteed loans to macroeconomic changes industry risks maturity structures 3 7 and 15 year maturities as well as lender and debt characteristics e g glennon and nigro 2001 2002 dunsky and pennington cross 2003 meanwhile agarwal chomsisengphet and liu 2003 empirically assessed the significant importance of owner and firm characteristics in determining the risk of small business default while controlling for the macroeconomic and industry risks with bankruptcy filings continuing to rise significantly in recent years many policy makers are turning their attention to bankruptcy laws specifically congress is considering reforming personal bankruptcy laws that if passed will significantly impact the demand for and supply of both consumer credit and small business funding white 2001 concludes that this bankruptcy reform could potentially reduce small business ownership but increase the supply of small business credit and in turn affect the growth of the u s economy small business owners have an incentive to file for personal bankruptcy when their indebtedness exceeds the value of their assets because both their personal and business debts can be discharged 7 though the bankruptcy exemption law is primarily designed for consumers the personal bankruptcy exemption law is a de facto bankruptcy procedure for small business owners because the debt of a noncorporate firm is the personal liability of the entrepreneur owner fan and white 2003 hence investigating the potential impact of the exemption law on small business bankruptcy decisions may provide some insight into how the bankruptcy laws should be reformed further fan and white 2003 argue that while the expected return to creditors should be lower in states with higher exemption level upon small business shutdown it is not entirely clear whether lenders will actually shut down a financially troubled small business while they empirically find that small businesses in high exemption states are more likely to be shut down this positive relationship is statistically insignificant the authors conclude that additional research will be needed to determine if a significant relationship exists p

the effect of state foreclosure laws on loan losses evidence from the mortgage insurance industry this paper analyzes the effect of three major provisions of state foreclosure laws procedure redemption period and provision for deficiency judgment on loan losses as reflected in the claims paid by private mortgage insurers and the fha it also explores the significance of the incentive conflict between the lender and the insurer in terms of the presence or absence of a coinsurance relationship and the existence of a deficiency judgment the results demonstrate that foreclosure laws have a significant effect on loan losses and that the existence of a deficiency judgment affects the incentive conflict between lender and insurer copyright 1990 by ohio state university press

the impact of monetary policy on the exchange rate a high frequency exchange rate puzzle in emerging economies abstract this study investigates the impact of monetary policy shocks on the exchange rates of brazil mexico and chile we find that even a focus on 1 day exchange rate changes following policy events which reduces the potential for reverse causality considerably fails to lend support for the view that associates unexpected interest rate hikes with immediate appreciations this lack of empirical backing for the predictions of standard open economy models persists irrespective of whether we use the us dollar or effective exchange rates whether changes in the policy rate that were followed by exchange rate interventions are excluded whether contaminated events are dropped from the analysis or whether we allow for non linearities we argue that it is difficult to attribute this stronger version of the exchange rate puzzle to fiscal dominance as unexpected rate increases are not associated with increases in risk premia and similar results are obtained in the case of chile a country that has had the highest possible short term credit rating since 1995 and a debt gdp ratio below 10

strategic interactions between channel structure and demand enhancing services in this paper we investigate how opportunities to invest in demand enhancing services for a product line affect the interactions between a manufacturer and her dealer many demand enhancing services e g after sales support warranty repair etc can be provided either by the manufacturer or they can be delegated to the dealer we first show that when a manufacturer retains control of such services the dealer will have an incentive to choose a decentralized organizational structure as a means of committing to non product line pricing since this will encourage the manufacturer to invest more in demand enhancing services we then consider a game that is played between the manufacturer and the dealer in which the dealer chooses between centralized product line pricing or decentralized non product line pricing operations and the manufacturer chooses between insourcing the services i e providing them herself or outsourcing them to the dealer we find that the equilibrium depends on which if any channel partner has the ability to act as a stackelberg leader if the dealer can move first then the equilibrium will always be outsourced services and centralized dealer operations however if either the manufacturer moves first or if neither partner can move first then the equilibrium can be either insourced services and decentralized dealer operations or outsourced service and centralized dealer operations

a market driven transfer price for distributed products using mathematical programming a distributed product has its manufacturing activities distributed among many locations these locations could belong to one or more firms in a manufacturing network often components needed to manufacture a distributed product move through different nodes in the network and sometimes across international borders hence a transfer price is needed for the purpose of estimating duties and drawbacks being aware of the fact that transfer price can be used to manipulate taxable profits many countries have instituted rules concerning transfer price estimation for example in the united sates the internal revenue service irs says that the right price is the market value but for many components it is difficult to find a free market similar products may exist in the market but they may have different attributes in such cases it is important to be able to estimate the market driven transfer price given other similar products in the open market we develop a method using a mathematical programming model and providing companies an opportunity to work proactively with the irs in a cooperative manner in order to avoid costly audit and litigation this way companies avoid penalties and also gain certainty regarding tax liability an example illustrating the method is presented

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

transfer pricing and decentralized dynamic lot sizing in multistage multiproduct production processes abstract this paper presents the use of a transfer pricing system to coordinate business units in a wagner whitin type model for a decentralized lot sizing problem in a dynamic multistage multiproduct environment the paper includes two major proofs 1 a transfer pricing system enabling optimal decentralized lot sizing is characterized the transfer pricing system can be interpreted as a generalization of the reciprocal method or step down allocation method in cost location accounting and 2 based on a wagner whitin type theorem and the kakutani fixed point theorem it is shown that such a transfer pricing system exists

on the foreign exchange risk premium in a general equilibrium model abstract the foreign exchange risk premium in a cash in advance model is investigated some weaknesses of the definition of the risk premium generally used are discussed it is shown that the primary ultimate source of foreign exchange risk is the covariance of monetary shocks with real output shocks several studies have assumed this covariance is zero and hence assumed away the major source of risk in the model finally the risk premium generated from standard versions of this model is argued to be very small because it is the same order of magnitudeas covariances of money and output growth rates