from flexibility to insecurity how vertical separation amplifies firm level uncertainty this article presents a model where firms may endogenously externalize part of their production process we start from the premise that adaptation to uncertainty cannot be contracted upon in the worker employer relationship vertical separation then balances flexibility gains against hold up costs of opportunistic behavior by outside contractors in equilibrium the degree of separation is shown to depend on the degree of product market competition contractor s bargaining power and the volatility of demand shocks our main result is that an increase in the degree of vertical separation amplifies the elasticity to demand shocks of firms sales and employment it does not however amplify aggregate uncertainty evidence from firm level data is shown to be largely consistent with the main implications of our theory jel l16 l23 l24

implications of corporate capital structure theory for banking institutions the determination of an optimal capital structure for commercial banks has stimulated discussion and controversy among scholars bankers and regulators for many years while numerous studies e g 5 16 18 19 21 24 have explored this issue the underlying question remains unresolved at the same time the issue of optimal capital structure has seen a resurgence of interest in the corporate finance literature in recent years the effects on corporate capital structure of the tax system 15 agency costs 10 23 and bankruptcy costs 9 as well as the combined effects of these factors 2 6 have all come under scrutiny although several previous papers e g 3 5 8 24 have argued that banks are susceptible to corporate capital structure theory to our knowledge the full range of recent developments in this theory has not been brought to bear on the bank capital decision the purpose of this paper then is to draw implications from this theory for the determinants of bank capital structure over time and across banks of different size in section 1 below we briefly review recent work in corporate finance theory on the capital structure effects of taxes and agency costs in section 2 we discuss the effects of the interaction between the tax system and the production function for financial services on commercial bank capital structures in section 3 we analyze the nature of bankruptcy and agency costs in banking and their potential influence on bank capital finally in section 4 we summarize and draw conclusions from our analysis

taxation of interest income deregulation and the banking industry removing interest rate ceilings on bank deposits or reducing the tax rate applicable to the interest earned on such deposits are alternative means of increasing the after tax return to depositors these alternatives however have differing impacts on the structure of a competitive banking industry this paper develops a model which focuses on a bank s choice between paying an explicit interest rate on its deposits and paying a return in the form of services the model allows banks to differ in their production technologies and depositors in their marginal tax rates and preferences for services the effects of tax rate changes and a ceiling on the explicit deposit interest rate are analyzed coinciding with the rise in market interest rates to levels significantly above regulation ceiling rates on bank and savings and loan deposits has been a move to reduce the level of taxation on interest income general proposals to reduce the tax on interest income seem to have gained support as a means of increasing after tax rates of return in order to increase aggregate savings while proposals to allow banks and savings and loans to offer tax free savings certificates are supported as a means of reducing the cost of funds for such thrift institutions for example the tax exempt all savers certificates were designed to yield higher after tax rates of return for some individuals while simultaneously lowering the cost of funds to the issuing institutions as a means of providing a higher return to depositors an obvious alternative to reducing the tax on interest income would be to speed the removal of interest rate ceilings which apply to deposits at banks and savings and loans tax changes and deregulation would both affect the banking industry by leading to changes in the after tax interest rate on deposits the composition of deposit return between explicit taxable interest payments and the provision at below cost of nontaxable services might also be affected along with the optimum level of deposits for an individual bank and the size of the banking industry unfortunately none of these implications all of which are relevant for analyzing recent tax and deregulation proposals have been studied within the framework of a model of the banking industry this paper develops a model which focuses on the bank s choice between paying an explicit interest rate on its deposits and paying a return in the form of services previous models have often ignored this choice assuming that only the total return and not its composition mattered to the bank kareken 11 klein

vertical integration and firm boundaries the evidence since ronald h coase s 1937 seminal paper a rich set of theories has been developed that deal with firm boundaries in vertical or input output structures in the last twenty five years empirical evidence that can shed light on those theories also has been accumulating we review the findings of empirical studies that have addressed two main interrelated questions first what types of transactions are best brought within the firm and second what are the consequences of vertical integration decisions for economic outcomes such as prices quantities investment and profits throughout we highlight areas of potential cross fertilization and promising areas for future work

incomplete contracts and the product cycle the incomplete nature of contracts governing international transactions limits the extent to which the production process can be fragmented across borders in a dynamic general equilibrium ricardian model of north south trade the incompleteness of international contracts is shown to lead to the emergence of product cycles because of contractual frictions goods are initially manufactured in the north where product development takes place as the good matures and becomes more standardized the manufacturing stage of production is shifted to the south to benefit from lower wages following the property rights approach to the theory of the firm the same force that creates product cycles i e incomplete contracts opens the door to a parallel analysis of the determinants of the mode of organization the model gives rise to a new version of the product cycle in which manufacturing is shifted to the south first within firm boundaries and only at a later stage to independent firms in the south relative to a world with only arm s length transacting allowing for intrafirm production transfer by multinational fi rms is shown to accelerate the shift of production towards the south while having an ambiguous effect on relative wages the model delivers macroeconomic implications that complement the work of krugman 1979 as well as microeconomic implications consistent with the findings of the empirical literature on the product cycle

scale economies in banking a restructuring and reassessment the issue of scale economies in banking has a rich history most earlier studies report modest operating cost scale economies for small institutions those with less than about 50 million of deposits in 1968 dollars but are unclear where these economies might end if at all unfortunately these studies are limited in four important respects first those that were well specified did not measure the total cost of banking operations but concentrated on estimating scale economies for individual banking functions e g demand deposits separately from commercial loans second an average cost curve that could take a u shape over the full range of banks was not fitted either because larger banks were not included or because of the functional form used cobb douglas consequently the optimum or minimum cost size of a bank or office could not be determined third the variables measuring the costs of branching were misspecified fourth the branch

licensing versus direct investment a model of internalization by the multinational enterprise a firm must decide whether to serve a foreign market by exporting building a foreign branch plant or licensing the production to an existing foreign producer the existence of reputations implies that any licensing agreement must provide a licensee with the incentive to maintain the reputation this creates a motive for the firm to internalize transactions by building a branch plant i e by becoming a multinational the model reflects a more general notion that the inability of the firm to control a licensee s agent s actions can provide incentives for multinational activity the paper explores the determinants of the firm s mode of operation as well as the consequences of certain government policies

incomplete contracts and the boundaries of the multinational firm a b s t r a c t using data on u s intra firm and arm s length imports for 5705 products imported from 220 countries we examine the determinants of the share of u s imports that are intra firm we examine two predictions that arise from antras 2003 antras and helpman 2008 and antras and helpman 2004 first we find that consistent with the implicit logic of antras 2003 and the explicit predictions of antras and helpman 2008 vertical inte gration is increasing in the importance of non contractible headquarter inputs relative to non contractible supplier inputs in other words we show that only non contractible head quarter inputs affect the firm s make or buy decision second we also provide empirical support for the antras and helpman 2004 prediction that intra firm trade is largest where non contractible headquarter inputs are important and productivity is high

multinational firms and technology transfer the authors construct an oligopoly model in which a multinational firm has a technology superior to those of local firms in the host country workers employed by the multinational acquire knowledge of the superior technology and can spread their knowledge to local firms by switching employers the multinational chooses to pay a wage premium to prevent local firms from hiring away its workers if the local firms are sufficiently disadvantaged or if there are enough local firms diffusion of the superior technology benefits local firms at the expense of workers whose wages suffer the host government might have an incentive to attract foreign direct investment even when technology transfer will not result because of the wage premium local employees of the multinational firm earn also foreign direct investment with technology transfer may reduce the total economic rent the host country earns

consumer benefited cartels under strategic capital investment competition abstract the purpose of this paper is to refute the genrally accepted idea that a cartel raises producers surplus at the expense of consumers surplus if firms in an industry expect that a cartel in which the output is allocated on the bases of the capital equipment will be formed then each firm tries to make a larger capital investment than before which may lead to larger consumers surplus through this argument i shall present one of the reasons why heavy industries had excess capacity in postwar japan

the distinction between inventory holding and stockout costs implications for target invemtories asymmetric adjustment and the effect of aggregation on production smoothing this paper shows that differences between the costs of holding inventories and the costs of incurring stockouts provide a convenient theoretical distinction between production to stock and production to order industries furthermore differences in holding and stockout costs can cause a firm to replenish inventories following a positive demand surprise at a different speed than it reduces stocks following unexpectedly low sales this asymmetric adjustment lessens the tendency for firm specific production shocks to cancel out in aggregation and can cause industry output to be more variable than industry sales even when representative firms exhibit production smoothing behavior copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

four formal izable theories of the firm in this essay i define and compare elemental versions of four theories of the firm these elemental theories are distilled from important contributions by hart holmstrom klein williamson and others although these contributions have been widely cited and much discussed i have found it difficult to understand the commonalities distinctions and potential combinations of these seemingly familiar contributions in this essay therefore i attempt to clarify these issues in three steps i begin with informal summaries of the theories then turn to simple but formal statements of each elemental theory and finally nest the four elemental theories in an integrative framework

fluctuations in uncertainty this review article tries to answer four questions i what are the stylized facts about uncertainty over time ii why does uncertainty vary iii do fluctuations in uncertainty matter and iv did higher uncertainty worsen the great recession of 2007 2009 on the first question both macro and micro uncertainty appears to rise sharply in recessions on the second question the types of exogenous shocks like wars financial panics and oil price jumps that cause recessions appear to directly increase uncertainty and uncertainty also appears to endogenously rise further during recessions on the third question the evidence suggests uncertainty is damaging for short run investment and hiring but there is some evidence it may stimulate longer run innovation finally in terms of the great recession the large jump in uncertainty in 2008 potentially accounted for about one third of the drop in gdp

the theory of the firm as governance structure from choice to contract the propositions that organization matters and that it is susceptible to analysis were long greeted by skepticism by economists one reason why this message took a long time to register is that it is much easier to say that organization matters than it is to show how and why the prevalence of the science of choice approach to economics has also been an obstacle as developed herein the lessons of organization theory for economics are both different and more consequential when examined through the lens of contract this paper examines economic organization from a science of contract perspective with special emphasis on the theory of the firm

investment and demand uncertainty this paper investigates the effects of uncertainty on the investment decisions of a sample of italian manufacturing firms using information on the subjective probability distribution of future demand for firms products according to the entrepreneurs the results support the view that uncertainty weakens the response of investment to demand thus slowing down capital accumulation consistent with the predictions of the theory there is considerable heterogeneity in the effect of uncertainty on investment it is stronger for firms that cannot easily reverse investment decisions and for those with substantial market power we show that the negative effect of uncertainty on investment cannot be explained by uncertainty proxying for liquidity constraints

self employment over the business cycle in the usa a decomposition entry rates into self employment increase during recessions and decrease during economic upswings i show that this is mostly explained by the higher unemployment rate during a recession together with the fact that at all times unemployed persons have a relatively high propensity to become self employed out of necessity i use econometric decomposition techniques to quantify these effects based on the monthly matched us current population survey before during and after the great recession i also document that the entry rate into self employment with unincorporated businesses strongly increased during the recession but not into self employment with incorporated businesses this highlights the association of unincorporated and incorporated self employment with necessity and opportunity entrepreneurship respectively the results are useful for policymakers and practitioners to understand forecast and act on the different types of self employment that can be expected over the business cycle there are also important implications for theories of the cyclicality of unemployment and entrepreneurship plain english summary self employment will increase during recessions when unemployment is high but it may not boost innovation during recessions increased unemployment underlies the higher entry rate into self employment our evidence is from representative survey data from the usa covering the great recession the upside is that self employment enables workers who lose their jobs to continue to work which can speed up the subsequent economic recovery thus public policy should enable people to start businesses however as during recessions the unemployed mostly start unincorporated businesses one cannot expect them to boost innovation as much as start ups during better economic times these insights also speak to the 2020 recession triggered by covid 19 if unemployment remains high after the relaxation of the lockdowns a rise can be expected especially in non innovative self employment thus the principal policy implication of this study is that policymakers should ensure that their expectations for new businesses started during deep recessions are realistic for the circumstances

competitive interest payments on bank deposits and the long run demand for money reply this paper tests two assumptions made in previous demand for money studies the first assumption concerns the role assigned to the interest rate in the demand for money function common practice identifies the rate of interest with the opportunity cost of holding money in section i this formulation is shown to blur an important distinction between the price of money and the price of money substitutes and to implicitly assume that the relevant price variable is the difference between these two distinct prices a second assumption is that the current ban on interest payments on demand deposits is fully effective in section ii i operationally define these price variables and estimate perfectly competitive interest payments on commercial bank deposits this is done by crudely measuring commercial bank marginal costs and assuming that all excess profit is passed on to depositors in indirect ways section iii presents estimates of a more complete longrun demand for money relationship which explicitly includes an own price and a cross price as separate influences and assumes that the prohibition of the payment of interest on deposits is totally ineffective although no firm conclusion is reached concerning the proper functional specification of the demand function the results significantly improve upon previous demand for money estimates which assumed that the interest payment prohibition is totally effective in section iv the results are summarized and implications of the analysis for monetary theory are presented my competitive demand for money formulation leads to a reinterpretation of the existing evidence on what is generally referred to as the interest elasticity of demand for money this estimate is shown to be significantly biased downward it also implies that the demand for and supply of money are more interdependent than is usually assumed

determinants of vertical integration an empirical test this paper tests models of vertical integration with emphasis on incentives that arise from transactions costs and demand variability the tests are based on a logit analysis of firms backward integration choices in a sample of thirty four chemical products the results are consistent with recent transactions cost theories and the demand variability model proposed by carlton 1979 copyright 1991 by blackwell publishing ltd

research note the role of production lead time and demand uncertainty in marketing durable goods firms often have to make their production decisions under conditions of demand uncertainty this is especially true for product categories such as automobiles and technology goods where the lead time needed for manufacturing forces firms to make production decisions well in advance of the selling season once the firm has produced the goods the available production volume affects the firm s subsequent marketing decisions in this paper we study the relationship between the firm s production and marketing decisions for a durable goods manufacturer we develop a dynamic model of a durable product market in which the demand functions are developed from a micromodeling of consumer utility functions and an equilibrium analysis of consumer strategies after taking into account the demand uncertainty as well as the potential for cannibalization of future sales the manufacturer makes its production and sales decisions we find that the firm s optimal inventory level is u shaped in the durability of the product and that the firm suffers a larger loss due to uncertainty when it is leases rather than sells its products furthermore unlike the case for nondurables for durable goods we find that the effect of uncertainty persists even after the uncertainty has been resolved