rank order contracts for a principal with many agents for a principal with many agents rank order contracts remain incentive compatible even when information about agents performance is known only to the principal because the total payment from the principal to all agents taken together is independent of the outcome that occurs under wider conditions than those considered previously in the literature there is shown to exist a rank order contract equivalent exactly or approximately to any nonlinear piece rate contract under those conditions therefore results that depend on the unenforceability of piece rates under such asymmetric information disappear if rank order contracts can be used in principal agent models compensation paid to agents is based on their outputs because their inputs are not public information in this context information is public if it is verifiable in court so that a contract contingent on it is legally enforceable rank order contracts also called tournaments and contests make each agent s compensation a function solely of the ranking of his output relative to the outputs of other agents in contrast individual piece rate contracts make each agent s compensation a function only of his own output lazear and rosen 1981 green and stokey 1983 and nalebuff and stiglitz 1983 all have results comparing the two when agents actions are not observed by the principal but only for the case in which the principal is risk neutral and the utility function of agents additively separable in income and action the main purpose of the present paper is to show that for the case of a continuum of agents these two kinds of contract are in fact formally equivalent or in some cases approximately equivalent under somewhat more general conditions than those considered so far in the

the possibility of informationally efficient markets abstract a rational expectations equilibrium with positive demand for financial information does exist under fully revealing asset price contrary to a wide held conjecture whereas a continuum of investors is inconsistent with fully revealing equilibrium finitely many investors with average portfolios demand information in equilibrium if they can adjust portfolio size in an additive signal return model more information diminishes the expected excess return of a risky asset so that investors who only have a choice of portfolio composition or whose asset endowments strongly differ from the average portfolio are worse off under fully revealing price information market equilibria both with and without information acquisition are pareto efficient

computer automation of general to specific model selection procedures abstract disputes about econometric methodology partly reflect a lack of evidence on alternative approaches we reconsider econometric model selection from a computer automation perspective focusing on general to specific reductions embodied in pcgets starting from a general congruent model standard testing procedures eliminate statistically insignificant variables with diagnostic tests checking the validity of reductions ensuring a congruent final selection since jointly selecting and diagnostic testing has eluded theoretical analysis we study modelling strategies by simulation the monte carlo experiments show that pcgets recovers the dgp specification from a general model with size and power close to commencing from the dgp itself

delegated portfolio management abstract a problem of screening agents with privately known forecasting abilities and reservation utilities and then eliciting truthful information from these agents once they are employed is considered for the case of risk averse agents and large principals an approximately optimal solution is constructively characterized under the assumption that payoffs are normally distributed a significant extension of the definnetti savage probability elicitation result is developed under this extension knowledge of agent preferences is not required when the underlying conditional distributions are symmetric and this fact is exploited to solve the screening problem in a mean variance formulation

legislated protection and the world trade organization tariff bindings and administered protection are two characteristics of the world trade organization wto that are little understood tariff bindings place a ceiling on tariffs that is not always reached whereas administered protection provides all industries with some minimum import protection effectively creating a floor for protection how do these policies affect applied most favored nation mfn tariff rates that are enacted through the legislature i model tariffs determined by a dynamic legislative process and show that low applied mfn tariffs are less likely with tariff bindings and more likely with administered protection than under purely legislated protection

heterogeneity tournaments and hierarchies tournament contracts are characterized that simultaneously elicit first best efficient effort levels and self selection of risk neutral heterogeneous workers into ability specific contracts comparisons across self selected ability types are shown to be sometimes necessary to attain efficiency rationales are explored for not commonly observing such contracts in hierarchical organizations

moral hazard and the portfolio management problem this paper investigates the significance of nonlinear contracts on the incentive for portfolio managers to collect information in addition the manager must be motivated to disclose this information truthfully we analyze three contracting regimes 1 first best where effort is observable 2 linear with unobservable effort and 3 the optimal contract within the bhattacharya pfleiderer quadratic class we find that the linear contract leads to a serious lack of effort expenditure by the manager this underinvestment problem can be successfully overcome through the use of quadratic contracts these contracts are shown to be asymptotically optimal for very risk tolerant principals

inference in models with adaptive learning abstract identification of structural parameters in models with adaptive learning can be weak causing standard inference procedures to become unreliable learning also induces persistent dynamics and this makes the distribution of estimators and test statistics non standard valid inference can be conducted using the anderson rubin statistic with appropriate choice of instruments application of this method to a typical new keynesian sticky price model with perpetual learning demonstrates its usefulness in practice

optimal vs traditional securities under moral hazard this paper provides an explanation for the widespread use of traditional securities by wellestablished firms standard moral hazard models predict that equity debt and warrants are almost never optimal financing instruments i show that issuing these securities is nevertheless nearly optimal the issuer would gain very little by using non traditional securities instead combined with equity one debt issue without multiple layers of seniority and one warrant issue without multiple exercise prices suffice to achieve near optimality the near optimality of traditional financing depends crucially on the issuer s ability to use war rants in addition to debt and equity

growth adoption and use of mobile e commerce abstract we document some early effects of how mobile devices might change internet and retail commerce we present three main findings based on an analysis of ebay s mobile shopping application and core internet platform first early adopters of mobile e commerce applications appear to be people who already were relatively heavy internet commerce users second adoption of the mobile shopping application is associated with both an immediate and sustained increase in total platform purchasing with little evidence of substitution from the core platform third differences in user behavior across the mobile applications and the regular internet site are not yet so dramatic

assessing the variability of inflation although there has been much argument over the impact of variable inflation rates upon economic performance there has been surprisingly little attempt to define the term variability of inflation carefully or to test proposed hypotheses connecting variability and the level of inflation precise definitions are given in the paper and a model is constructed showing that the level variability hypothesis may be formulated in terms of the presence of heteroscedasticity in a regression model this theoretical model is used to criticize existing studies while an empirical study with australian data illustrates the application of the approach

household responses to food subsidies evidence from india abstractthe indian public distribution system is one of the world s largest food security programs and provides a monthly quota of cereals at discounted prices to poor households i study the effec

reservation wage and optimal contract for experts abstract we examine the optimal contract for experts with type dependent reservation wage we show that bhattacharya and pfleiderer 1985 s result the possibility of achieving the truthful revelation of information with full surplus extraction can be achieved with relaxing the restriction on the shape of reservation wage schedules this outcome can be achieved through payoff functions that are affine in a convex transformation of the ex post error our result is applied to the case of multiple experts

modeling the demand for narrow money in the united kingdom and the united states abstract despite the importance of well specified empirical money demand functions for inference forecasting and policy problems in modeling have arisen concerning the economic theories of money demand the data institutional frameworks financial innovation and econometric implementation by developing constant data coherent m 1 demand equations for the u k and the u s we investigate these issues and explain such puzzles as missing money the great velocity decline and the recent explosion in m 1 the endogeneity of money the lucas critique and the non invertibility of our m 1 models are also discussed

towards a micro founded theory of aggregate labour supply we build a heterogeneous agents life cycle model that captures a large number of salient features of individual male labour supply over the life cycle by education both along the intensive and extensive margins the model provides an aggregation theory of individual labour supply firmly grounded on individual level micro evidence and is used to study the aggregate labour supply responses to changes in the economic environment we find that the aggregate labour supply elasticity to a transitory wage shock is 1 75 with the extensive margin accounting for 62 of the response furthermore we find that the aggregate labour supply elasticity to a permanent compensated wage change is 0 44

new evidence on the forward premium puzzle the forward premium anomaly exchange rate changes are negatively related to interest rate differentials is one of the most robust puzzles in financial economics we recast the underlying parity relation in terms of lagged forward interest rate differentials documenting a reversal of the anomalous sign on the coefficient in the traditional specification we show that this novel evidence is consistent with recent empirical models of exchange rates that imply exchange rate changes depend on two key variables the interest rate differential and the magnitude of the deviation of the current exchange rate from that implied by purchasing power parity

on the political economy of uk pension scheme regulation we take the opportunity of the recent consultation exercise on uk defined benefit pension schemes conducted by the pensions regulator to examine the approach to pension scheme portfolio management that it and the related pension protection fund have adopted after summarising the regulatory basis we identify three essential building blocks for further examination the notion of matching liabilities to long term government bonds the use of standard deviation of return as a measure of risk and the idea that strategic asset allocation is the most important decision in portfolio management this last one the brinson axiom we examine these foundations individually and then collectively with the aid of two unobtrusive postulates the first being the efficient markets hypothesis and the second that pension scheme assets should be used to purchase only those securities with minimal default risk from the perspective of what we have elsewhere called the keynes graham schema we conclude that the foundations are unsound and that the conventional approach adopted not only by both the regulator and the protection fund but also by the major actuarial consultancies induces if not actually requires pension schemes to engage in speculation rather than investment

global value chain perspective of us china trade and employment employment impact of trade is an issue of long debate recent literature seems to focus on partial equilibrium analysis of the jobs destruction in the us due to import competition from low cost countries particularly from china however as noted in world investment report 2011 wir 2012 indirect employment generated by trade can be substantial in addition to jobs directly generated by trade to which end a general equilibrium model is more relevant just as in a relay game it makes little sense to award or punish only the last runner in this paper a global value chain approach is adopted to examine the effects of the us china trade on employment by using a recently constructed world input output data it is made possible to account for jobs created along the value chain process it is found that china s exports to the us and to the world had created more job opportunities for its trade partners than any other countries in the world further china s exports to the us and to the world tended to generate more employment opportunities for the us services sector while us exports created more manufacturing jobs for the chinese workers finally in both countries exports the typical value chain products such as electrical and optical equipment were the most effective creators of jobs for both countries in line with recent work of global value chains our work sheds light on the employment effects of interconnected trade and provides an alternative interpretation for the impact of the us china trade on employment

fee speech signaling risk sharing and the impact of fee structures on investor welfare the fee structure used to compensate investment advisers is central to the study of fund design and affects investor welfare in at least three ways i by influencing the portfolioselection incentives of the adviser ii by affecting risk sharing between adviser and investor and iii through its use as a signal of quality by superior investment advisers in this paper we describe a model in which all of these features are present and use it to compare two popular and contrasting forms of fee contracts the fulcrum and the incentive types from the standpoint of investor welfare while the former has some undeniably attractive features that have in particular been used by regulators to justify its mandatory use in a mutual fund context we find surprisingly that it is the latter that is often more attractive from the standpoint of investor welfare our model is a flexible one our conclusions are shown to be robust to many extensions of interest the results are also extended to consider unrestricted fee structures and competitive markets for fund managers

on the incentives for money managers abstract money managers select weights of managed portfolios to enhance their reputation in the spot market for their services inevitably using their actions to signal their quality we develop a two asset signalling model of money managers a unique screening equilibrium and under certain parameter configurations a host of pooling equilibria survive the cho kreps intuitive criterion in all the equilibria managers behave more aggressively than they would in the absence of the signalling motive exaggerating their position in the risky asset

relative performance of incentive mechanisms computational modeling and simulation of delegated investment decisions this paper evaluates the relative performances of several well known and widely used incentive mechanisms under controlled experimental conditions the scenario utilized is a delegated investment setting where effort and risk aversions contribute to moral hazard among fund managers analytical intractability of the problem requires a computational modeling approach to simulate comparative solutions for specific contracts under different parametric settings through a simulation exercise we consider multiple agents who decide their investment strategy over several consecutive periods agents learn about estimation and market uncertainty through repeated realizations of investment returns in each sequence of periods a number of different incentive mechanisms based on the agent s communication and or outcome are considered results of the computational experiments are presented our results overwhelmingly show the efficacy of the incentive contracts in improving the welfare of the investors in the presence of an estimation risk when agents learn from their past performances the market volatility interacts with the estimation risk that makes risk sharing arrangements such as limited liability overly important paying the agent to assume the risk may no longer lead to the best performance incentives

direct sale of information when precision is unobservable this paper studies the incentives of an information seller to produce precise information in a setting where precision is not observable and investors with rational expectations can extract information from the equilibrium asset price i show that the seller can verify her unknown precision by employing a nonlinear contract proposed by bhattacharya and p eiderer 1985 although precision is not observable buyers can perfectly deduce it from the contract apart from incentives to produce precise information and reveal it truthfully the nonlinear contract also insures against the portfolio risk of information buyers and causes them to trade aggressively for a given precision this increases the extent of information that is built into the equilibrium asset price the seller s equilibrium fee depends on i her inferred precision ii the value of portfolio insurance for buyers and iii the extent of information that leaks from the equilibrium asset price

an econometric model of serial correlation and illiquidity in hedge fund returns the returns to hedge funds and other alternative investments are often highly serially correlated in sharp contrast to the returns of more traditional investment vehicles such as long only equity portfolios and mutual funds in this paper we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure i e investments in securities that are not actively traded and for which market prices are not always readily available for portfolios of illiquid securities reported returns will tend to be smoother than true economic returns which will understate volatility and increase risk adjusted performance measures such as the sharpe ratio we propose an econometric model of illiquidity exposure and develop estimators for the smoothing prole as well as a smoothing adjusted sharpe ratio for a sample of 908 hedge funds drawn from the tass database we show that our estimated smoothing coecien ts vary considerably across hedge fund style categories and may be a useful proxy for quantifying illiquidity exposure

delegated portfolio management a survey of the theoretical literature abstract this paper provides a selective review of the theoretical literature on delegated portfolio management as a principal agent relationship the main focus of the paper is to review the analytical issues raised by the peculiar nature of the delegated portfolio management relationship within the broader class of principal agent models in particular the paper discusses the performance of linear versus nonlinear compensation contracts in a single period setting the possible effects of limited liability of portfolio managers the role of reputational concerns in a multiperiod framework and the incentives to noise trading in addition the paper deals with some general equilibrium dimensions and asset pricing implications of delegated portfolio management the paper also suggests some directions for future research

an alternative approach to the american demand for money with a decade of evidence behind it the profession seems to have agreed on the fact that a structural break shifted the american demand for money shortly after 1973 it is difficult to pinpoint the source of the trouble precisely let alone to explain the event with an econometric model in their survey judd and scadding 1982 tentatively concluded that financial innovation is the source of the problem while this conclusion has not been universally accepted the instability of the money demand function is largely taken as a given stylized fact the primary goal of this article is to provide an alternative solution to the case of the missing money using the methods of hendry 1979 it should be stressed at the outset that as this paper deals with a problem in the applied literature it is unabashedly empirical in nature the paper attempts to explain an empirical difficulty without presenting a new theoretical model of money demand rather in the context of the standard transactions demand theory for narrow money a number of questions are analyzed with an atypical econometric model was there actually a shift or a series of shifts in the demand for money if not why have other investigators concluded that there was in fact a shift most importantly what function seems to be the most reasonable approximation to the data generation process during the period in question

the world trade network and the environment this papers analyses the role of the world trade network on the environment we rely on methods developed for social network analysis to identify the most important countries in connecting trade between all the other countries in the world trade network we then estimate how the network or indirect effects from trade affect the environmental quality of a country as the trade networks are endogenously determined by trade and environmental conditions we use as instrumental variables the growth in the population of trade partners and the growth in the population of trade partners partners to exploit exogenous variation in the world trade network once we simultaneously estimate the environmental trade income and network equations using a three stage least square procedure we find that network effects harm the environmental quality of developed countries but improve the environment of developing countries

brokerage commission schedules it is generally optimal for risk sharing reasons to base a charge for information on the signal realization when this is not possible a charge based on the amount of trading a brokerage commission may be a good alternative the optimal brokerage commission schedule is derived for a risk neutral information seller faced with risk averse purchasers who may differ in their risk aversion revenues from the brokerage commission are compared with those from a fixed charge for information and the optimal mutual fund management fee the brokerage industry is a significant source of information for investors about prospective security returns one indication of this is that of the 11 817 members of the association for investment management and research who listed their occupations as investment management or research in 1991 21 percent worked for brokers and investment dealers another is that since the abolition of fixed commissions a distinction has arisen between full service brokers who provide investors with investment information and discount brokers who charge lower commissions and provide only transaction services 1 the information produced by broker research is typically provided free of charge to investors in the expectation that it will stimulate trade rewarding the brokerage house with commissions 2 this paper compares the sale of investment information in return for a brokerage commission with direct sale for a fixed payment and indirect sale through the provision of investment management services in return for a

in a world without borders the impact of taxes on internet commerce the rapid rise in sales over the internet and the fact that most internet buyers pay no sales tax has ignited a considerable debate over taxes and the internet this paper uses new data on the purchase decisions of approximately 25 000 online users to examine the effect of local sales taxes on internet commerce the results suggest that controlling for observable characteristics people living in high sales taxes locations are significantly more likely to buy online the results are quite robust and cannot be explained by unobserved technological sophistication shopping costs or other alternative explanations the magnitudes in the paper suggest that applying existing sales taxes to internet commerce might reduce the number of online buyers by up to 24 percent

performance fee contract change and mutual fund risk abstract we examine the effect that an exogenously specifically governmentally required change in compensation contract had on a managerial decision we find that a group of mutual funds changed their portfolio risk levels after they were forced to change their performance fee schedules their portfolio risk choices differed predictably from a randomly selected group of nonperformance fee funds and a group of performance fee funds that were not required to change their compensation contracts in addition the affected mutual funds lost both shareholders and assets around the time of the imposition of the restriction while the other funds exhibited little change or gained assets and shareholders

measuring investment performance in a rational expectations equilibrium model much research has been concerned with evaluating the performance of managed portfolios e g mutual funds and examining whether portfolio managers display in some sense superior performance superior performance would seemingly turn on the possession of superior information that is utilized in managing portfolios in general a fund s asset holdings or portfolio weights might not be observable to an outsider whether they are or not however they are likely to change over time this happens especially when better performance is a result of superior information since managers will change their portfolio composition on obtaining private information since such changes must be taken into account the problem of measuring performance of managed portfolios is inherently different from that of evaluating the performance of individual assets groups of assets or generally portfolios with constant and known composition

adverse selection and renegotiation in procurement as was shown by dewatripont optimal long term contracts are generally not sequentially optimal the parties ex post renegotiate them to their mutual advantage this paper fully characterizes the equilibrium of a simple two period procurement situation and studies the extent to which renegotiation reduces ex ante welfare i a central result is that like in the non commitment case the second period allocation is optimal for the principal conditionally on his posterior beliefs about the agent ii the first period allocation exhibits an increasing amount of pooling when the discount factor grows iii with a continuum of types it is never optimal to induce full separation the paper also analyzes whether renegotiated long term contracts yield outcomes resembling those under either unnegotiated long term contracts or a sequence of short term contracts and it links the analysis with the multiple unit durable good monopoly problem

when cheaper is better fee determination in the market for equity mutual funds abstract in this paper we develop a model of the market for equity mutual funds that captures three key characteristics of this market first there is competition among funds second fund managers ability is not observed by investors before making their investment decisions third some investors do not make optimal use of all available information the main results of the paper are that 1 price competition is compatible with positive mark ups in equilibrium and 2 worse performing funds set fees that are greater or equal to those set by better performing funds these predictions are supported by available empirical evidence

the dynamics of portfolio management contracts we consider the multiperiod relationship between a client and a portfolio manager and the resulting problem of motivating a manager of unknown ability to acquire valuable information we explore the contractual forms and the optimal retention policy of the client and find that the optimal initial set of contracts features a smaller performance based fee component paid to the manager than in a first best contract and the contract choice elicits only partial information about the manager as a result ex post performance measurement is critical to future recontracting in general managers are retained only if the returns on their portfolio exceed the benchmark by an appropriate amount article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

management compensation and market timing under portfolio constraints abstract this paper shows that portfolio constraints have important implications for management compensation and performance evaluation in particular in the presence of portfolio constraints allowing for benchmarking can be beneficial benchmark design arises as an alternative effort inducement mechanism vis a vis relaxing portfolio constraints numerically we solve jointly for the manager s linear incentive fee and the optimal benchmark the size of the incentive fee and the risk adjustment in the benchmark composition are increasing in the investor s risk tolerance and the manager s ability to acquire and process private information

optimal retention in agency problems this paper studies the interaction between a single long lived principal and a series of short lived agents in the presence of both moral hazard and adverse selection we assume that the principal can influence the agents behavior only through her choice of a retention rule this rule is further required to be sequentially rational i e no precommitment is allowed we provide general conditions under which equilibria exist where a the principal adopts a cut off rule under which agents are retained only when the reward they generate exceeds a critical bound and b agents separate according to type with better agents taking superior actions we show that in equilibrium a retained agent s productivity is necessarily declining over time but that retained agents are also more productive on average than untried agents due to selection effects finally we show that for each given type agents of that type are more productive in the presence of adverse selection than when there is pure moral hazard i e when that type is the sole type of agent in the model nonetheless adding uncertainty about agent types cannot benefit the principal except in uninteresting cases

modeling inflation in australia this article develops an empirically constant data coherent error correction model for inflation in australia the level of consumer prices is a markup over domestic and import costs with adjustments for dynamics and relative aggregate demand we address issues of cointegration general to specific modeling dynamic specification model evaluation and testing parameter constancy forecasting and exogeneity we also test this model against existing models of australian prices this model encompasses but is not encompassed by the existing models

the demand for broad money in the united kingdom 1878 1993 using annual data from friedman and schwartz 1982 hendry and ericsson 1991a developed an empirical model of the demand for broad money in the united kingdom over 1878 1975 we update that model over 1976 1993 accounting for changed data definitions and clarifying the concept of constancy with appropriate measures of opportunity cost and credit deregulation the model s parameters are empirically constant over the extended sample which was economically turbulent policy implications follow for parameter nonconstancy and predictive failure causation between money and prices monetary targeting deregulation and financial innovation and the effect of policy on economic agents behavior

restrictions on risk prices in dynamic term structure models restrictions on the risk pricing in dynamic term structure models dtsms tighten the link between cross sectional and time series variation of interest rates and make absence of arbitrage useful for inference about expectations this article presents a new econometric framework for estimation of affine gaussian dtsms under restrictions on risk prices which addresses the issues of a large model space and of model uncertainty using a bayesian approach a simulation study demonstrates the good performance of the proposed method data for u s treasury yields calls for tight restrictions on risk pricing only level risk is priced and only changes in the slope affect term premia incorporating the restrictions changes the model implied short rate expectations and term premia interest rate persistence is higher than in a maximally flexible model hence expectations of future short rates are more variable restrictions on risk prices help resolve the puzzle of implausibly stable short rate expectations in th

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

fund families as delegated monitors of money managers because a money manager learns more about her skill from her management experience than outsiders can learn from her realized returns she expects inefficiency in future contracts that condition exclusively on realized returns a fund family that learns what the manager learns can reduce this inefficiency cost if the family is large enough the family s incentive is to retain any given manager regardless of her skill but when the family has enough managers it adds value by boosting the credibility of its retentions through the firing of others as the number of managers grows the efficiency loss goes to zero

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

motivating and compensating investment advisors this paper considers the problem of how an investor can optimally motivate an investment advisor to exert costly effort to gather valuable investment information we show that compensation schemes that are increasing in the investment payoffs may fail to optimally motivate the advisor we then characterize the conditions under which the private nature of the advisor s acquired information affects how he is optimally motivated to work diligently and present the resulting optimal compensation we establish the conditional optimality of benchmark indexed compensation and provide an explanation to the limited use of such compensation schemes in practice

tax compliance and fiscal externalities evidence from u s diesel taxation abstract fiscal externalities across jurisdictions can arise from tax evasion and avoidance while the tax competition literature has generally focused on base shifting and the resulting positive fiscal externalities we show theoretically and empirically that negative fiscal externalities can dominate when the tax base is apportioned across jurisdictions this can lead to a negative relationship between jurisdiction size and the desired tax rate interstate truckers in the united states owe state diesel taxes based on diesel consumption which is apportioned based on the miles driven in each state we find that own state diesel sales fall when the diesel tax rates of other states rise suggesting that tax base evasion is the predominant source of externalities we then estimate a tax reaction specification finding that the own state tax rate is negatively correlated with the tax rates set in other states and with state size both consistent with the sign of the estimated fiscal externality

optimal portfolio choice under incomplete information models of asset pricing generally assume that the variables which characterize the state of the economy are observable however the distributional properties of asset prices that are relevant for portfolio decisions are in general not observable and therefore must be estimated the estimation of expected returns is a particularly difficult problem and estimation errors are likely to be substantial in this light it is reasonable to examine whether the assumption of observability of expected returns and other relevant state variables causes significant mis specification in equilibrium models of asset prices this paper has three main objectives first to derive optimal estimators for the unobservable expected instantaneous returns using observations of past realized returns second to establish that estimation and portfolio choice can be solved in two separate steps third to analyze the impact of estimation error on investment choices the estimators of expected returns are in general not consistent i e the estimation error does not tend to disappear asymptotically the effects of the estimation error therefore cannot be ignored even if realized returns are observed continuously over an infinite time period

tests of market models heteroskedasticity or misspecification abstract this paper investigates the nature and the incidence of heteroskedasticity and misspecification in the market models by utilizing tests that are generally applicable the results show that heteroskedasticity appears more frequently than misspecification even though both are serious problems the evidence also indicates that the use of a quadratic market model or equally weighted market returns may lead to a smaller percentage of heteroskedastic cases but that in general this advantage has to be offset against an increase in the occurrence of specification errors small firms and january returns are also observed to produce a higher incidence of both heteroskedasticity and misspecification

determinants of store level price elasticity using weekly scanner data representing 18 product categories the authors estimated store specific price elasticities for a chain of 83 supermarkets they related these price sensitivities to a com

tournament rewards and risk taking this article considers a lazear rosen tournament model where agents can influence both the spread of their output distribution risk taking and its mean the unique equilibrium induces excessive risk taking and a low level of effort by modifying the tournament to give the highest prize to the agent with the most moderate output a low level of risk taking and high level of effort can be sustained as an equilibrium the first result can be useful to understand the relative performance evaluation puzzle of executive compensation and the second result can be useful to understand puzzling workplace norms promoting mediocrity

private versus public ownership investment ownership distribution and optimality examined in this paper is the choice between private and public incorporation of an asset for an entrepreneur asset owner who hires a manager with superior information about the asset s return distribution public sale of equity is shown to be the preferred alternative when a capital market issue costs are low or b the asset s idiosyncratic risk is high and the owner is either sufficiently risk averse or sufficiently optimistic about the asset s expected return thus those as sets deemed most valuable by their owners will tend to be publicly incorporated the paper also explores the impact of incorporation mode private versus public and information structure on the firm s investment policy and ownership distribution the determinants of corporate ownership structure have attracted much attention see for example demsetz and lehn 7 the recent spate of leveraged buyouts lbo s and other activities designed to consolidate ownership structure and often to take it out of the public domain have raised questions about the optimality of public ownership of corporations a related issue is the link between real output and the mode of incorporation in firms with a separation of ownership and control do privately incorporated firms have systematically different investment policies from publicly incorporated firms if so aggregate output must be a function of the cross sectional distribution of incorporation modes in the economy there is also considerable interest in the impact of insider information a topic that concerns us in this paper we have two principal objectives the first is to explore the conditions that determine an asset owner s choice of incorporation for the asset that is when would the owner prefer to keep asset ownership private as opposed to having a portion of that ownership publicly traded in particular what is the role of the owner s perception of the value of the asset in this determination are the assets being taken privately more or less valuable than those that are publicly traded insights on this score should help in understanding corporate ownership structure evolution our second objective is to examine the impact of information structure symmetric versus asymmetric information and the firm s incorporation

herding in delegated portfolio management when is comparative performance information desirable abstract we address the issue of investors asset allocation decisions when portfolio management is delegated to an agent contrary to predictions from traditional financial theory it is shown that investors may not induce their manager to allocate funds to the asset with the highest return instead they may herd in their asset allocation decision and induce trade in a particular asset because another manager is trading in it and despite the presence of a more profitable alternative doing so allows investors to write an efficiency improving relative performance contract on the other hand herding leads investors to design wage contracts strategically resulting in more aggressive and thus less profitable trade in equilibrium we show that herding occurs when the cost of information is high information precision is low and when managers are sufficiently risk averse moreover when investors can decide whether or not to disclose information about their manager s performance they will not do so

risk taking in selection contests abstract we study contests where the strategic variable is the degree of risk taking rather than the amount of effort the selection efficiency of such contests is examined we show that the selection efficiency of a contest may be improved by limiting the competition in two ways by having a small number of contestants and by restricting contestant quality

does it all add up benchmarks and the compensation of active portfolio managers in this article the authors examine theoretically the use of benchmark portfolios in the compensation of privately informed portfolio managers they find that the use of a benchmark and particularly the types of benchmarks often observed in practice cannot be easily rationalized specifically commonly used benchmark adjusted compensation schemes are generally inconsistent with optimal risk sharing and do not lead to the choice of an optimal portfolio for the investor moreover benchmarks do not help in solving potential contracting problems such as inducing the manager to expend effort or trying to screen out uninformed managers copyright 1997 by university of chicago press

sales taxes and internet commerce we estimate the sensitivity of internet retail purchasing to sales taxes using ebay data our first approach exploits the fact that a seller s location and therefore the applicable tax rate is revealed only after a buyer has expressed interest in an item we document how adverse tax surprises reduce the likelihood of purchase and shift subsequent purchases toward out of state sellers we then use more aggregated data to estimate that every one percentage point increase in a state s sales tax increases online purchases by state residents by almost 2 percent while decreasing their online purchases from state retailers by 3 4 percent jel h71 l81 l86

will destination based taxes be fully exploited when available an application to the u s commodity tax system abstract we develop a tax competition model that allows for the setting of both an origin based and a destination based commodity tax rate in the presence of avoidance and evasion in the presence of evasion jurisdictions will give cross border shoppers tax preferential treatment thus not fully exploiting the potential of destination based taxation moreover the divergence between origin based and destination based taxes is stronger when the incentives for consumers tax arbitrage opportunities increase the united states is one example of many such systems while sales taxes are due at the point of sale use taxes are due on goods purchased out of state we document that when able to set both rates a majority of jurisdictions levy destination based use taxes at a lower rate than origin based sales taxes in response to changes in state level policies that increase tax avoidance opportunities the results of the empirical model broadly confirm our theory

optimal contracts in a continuous time delegated portfolio management problem this article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous time principal agent framework optimal contracts are obtained in closed form these contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee a fraction of the total assets under management plus a bonus or a penalty depending upon the portfolio s excess return relative to a benchmark portfolio the appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time rather than a passive index in which the number of shares invested in each asset remains constant over time fund managers compensation schemes in a delegated portfolio management setting have been of special interest to both academics and practitioners academic interest stems in part from the rapid growth of managed funds over the last two decades gompers and metrick 1998 report that by december 1996 mutual funds pension funds and other financial intermediaries held discretional control over more than half of the u s equity market it is thus of importance to study the impact of institutional trading on asset prices and to integrate into one model both asset pricing and delegated portfolio management compensation as advocated by brennan 1993 allen and santomero 1997 and allen 2001 it is also important to understand the relationship between a manager s trading strategies and his implicit incentives or career concerns see e g brown harlow and starks 1996 brown goetzmann and park 1997 chevalier and ellison 1999 and chen and pennacchi 2000 these concerns include internal promotion from a small to a large fund higher outside offers and the flow of money through the fund under management 1 the importance of fund manager compensation is also underscored by congressional passage in 1970 of the amendment to

a model of the demand for investment banking advising and distribution services for new issues this paper presents a theory of the demand for investment banking advising and distribution services for the case in which the investment banker is better informed about the capital market than is the issuer and the issuer cannot observe the distribution effort expended by the banker the optimal contract under which the offer price decision is delegated to the better informed banker in order to deal with the adverse selection and moral hazard problems resulting from the informational asymmetry and the observability problem is characterized the model demonstrates a positive demand for investment banking advising and distribution services and provides an explanation of the underpricing of new issues an investment banker performs three functions which may be of value to an issuer of new securities underwriting advising and distribution this paper presents a theory of the demand for investment banking advising and distribution services based on an informational asymmetry between an issuer of new securities and an investment banker ultimately a theory of the organization of the financial intermediary industry is required that would predict which firms would use which types of financial intermediaries for which purposes and which firms would raise capital without engaging the services of a financial intermediary only a limited set of such predictions are developed here in the context of a model of a fixedprice offering under a negotiated contract in which the investment banker is

there goes gravity ebay and the death of distance we compare the effect of geographic distance on ebay and total international trade flows we consider the same 61 countries and basket of goods for both types of transactions we find the effect of distance to be on average 65 smaller on ebay we argue this difference is due to a reduction in search costs it increases with product differentiation and is higher when trade partners speak different languages when corruption in the exporting country is high and when uncertainty avoidance is high in the importing country moreover ebay s seller rating technology further reduces the distance effect on ebay

competition in portfolio management theory and experiment we explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor manager relationship is nonexclusive our theory predicts that competition forces managers to promise portfolios that mimic arrow debreu ad securities which investors then combine to fit their preferences a weak version of the capital asset pricing model capm obtains where state prices relative to state probabilities implicit in prices of traded securities will be inversely ranked to aggregate wealth across states our experiment broadly corroborates the price and choice predictions of the theory however price quality deteriorates when only a few managers attract most of the available wealth wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating ad securities as in the theory but also because funds flow to managers who had better performance in the immediate past an observation unrelated to the theory this paper was accepted by jerome detemple finance

gender pay gaps and the restructuring of graduate labour markets in southern europe in this article we investigate whether education job mismatches and growing occupational diversity are important explanatory factors of gender pay gaps amongst university graduates in southern europe namely in portugal spain and italy we use standard decomposition techniques and test the implications of controlling for selection bias our results indicate that over education and greater occupational segregation associated with the emergence of new graduate job profiles are important determinants of earnings inequality whilst our focus is on graduates early careers demonstrating that occupational assignment and selection into employment shape gender pay gaps amongst the highly skilled provides a more pessimistic view on the ability of educational expansion or equal pay legislation to significantly reduce gender pay inequality southern european economies are also particularly interesting to look at since there may be a greater degree of mismatch between the pace of higher education expansion and the changes in the job structure making women particularly vulnerable to over education

an analysis of compensation in the u s venture capital partnership abstract venture capital limited partnerships are an attractive arena to study cross sectional and time series variations in compensation schemes we empirically examine 419 partnerships the compensation of new and smaller funds displays considerably less sensitivity to performance and less variation than that of other funds the fixed base component of compensation is higher for younger and smaller firms we observe no relation between incentive compensation and performance our evidence is consistent with a learning model in which the pay of new venture capitalists is less sensitive to performance because reputational concerns induce them to work hard

delegated portfolio management and optimal allocation of portfolio managers in this article we investigate whether the application of the mean variance framework on portfolio manager allocation offers any out of sample benefits compared to a naive strategy of equal weighting based on an exclusive data set of high net worth hnw investors we utilize a wide variety of methodologies to estimate the input parameters including exponentially weighted moving average ewma generalized autoregressive conditional heteroscedasticity garch and bayes stein shrinkage estimation we apply nine different mean variance models but find that none of these present any consistent benefit over a naive strategy of equal weighting

evidence of heteroscedasticity and mis specification issues in the market model results from the athens stock exchange the traditional tests and the relevant explanations given by researchers on the basis of their empirical results in cases where there is evidence of heteroscedasticity and surrounding mis specification issues in the market model is investigated and criticized to this purpose data from the athens stock exchange are used to get meaningful comparisons and results the authors first apply the classical heteroscedasticity and mis specification tests used in the literature by researchers and analyse the results also under a classical view they then apply more recent and efficient tests to find out contradictions and disproportions between the former and the latter tests as well as to draw comments and conclusions supplementary to the existing evidence and to propose other appropriate ways for estimation and specification of the market model it appears as a general conculsion of the authors work that singnificant distortions are observed in the traditional market model when it is used in small but con

the effectiveness of incomplete and overlapping pollution regulation evidence from bans on phosphate in automatic dishwasher detergent abstract this paper examines the effectiveness of command and control policies in the presence of incomplete and overlapping regulations we study how recent bans on phosphate in household dishwasher detergent affect pollution loads to waterways costs at wastewater treatment facilities and consumer behavior we show that the effectiveness of the bans in reducing effluent depends critically on regulations at receiving treatment facilities as cost minimizers facilities with an emissions standard on phosphorus face no incentive to deviate from the standard we show that bans have weak effects on effluent especially in the most polluted waterways we also use an early isolated ban in spokane washington to study the effect of the bans on consumers we find that this ban shifted approximately 40 of dishwasher detergent sales from spokane to bordering counties until a state wide ban was implemented using these estimates we find that the welfare loss to consumers from recent bans is likely greater than the cost savings to treatment plants

millionaire migration and taxation of the elite evidence from administrative data a growing number of u s states have adopted millionaire taxes on top income earners this increases the progressivity of state tax systems but it raises concerns about tax flight elites migrating from high tax to low tax states draining state revenues and undermining redistributive social policies are top income earners transitory millionaires searching for lower tax places to live or are they embedded elites who are reluctant to migrate away from places where they have been highly successful this question is central to understanding the social consequences of progressive taxation we draw on administrative tax returns for all million dollar income earners in the united states over 13 years tracking the states from which millionaires file their taxes our dataset contains 45 million tax records and provides census scale panel data on top income earners we advance two core analyses 1 state to state migration of millionaires over the long term and 2 a sharply focused discontinuity anal