investment in cleaner technology and signaling distortions in a market with green consumers abstract i analyze the pricing and investment behavior of a firm that signals the environmental attributes of its production technology through its price to uninformed environmentally conscious consumers i then analyze the effect of change in environmental regulation on the signaling outcome and the firm s ex ante incentive to invest in cleaner technology when regulation is weak a firm signals cleaner technology through higher price in this case the firm earns lower profit when it has cleaner technology and thus has no incentive to invest in cleaner technology the price charged by the clean firm declines sharply beyond a critical level of regulation when regulation is sufficiently stringent the firm with cleaner technology charges lower price but earns higher signaling profit and ex ante the firm has positive incentive to invest in cleaner technology with weak regulation the incentive of the firm to directly disclose its environmental performance rather than signal it through price is increasing in the level of regulation the opposite holds when regulation is sufficiently stringent

eco labelling consequences in general equilibrium a graphical assessment international environmental groups propose to implement new standards of forest management through programs that certify producers who meet criteria to enhance biodiversity or sustainability these producers could earn an eco label that identifies their products for consumers we consider whether a market economy might generate feedbacks that produce undesirable side effects as consumers respond to price changes while the general case is ambiguous the theoretical framework shows the potential that certification may lead to a reallocation of land toward less ecologically sustainable uses with the possibility of sufficient impact to diminish global biodiversity or sustainability of forest products

optimal replication of contingent claims under portfolio constraints we determine the minimum cost of superreplicating a nonnegative contingent claim when there are convex constraints on portfolio weights we show that the optimal cost with constraints is equal to the price of a related claim without constraints the related claim is a dominating claim that is a claim whose payoffs are increased in an appropriate way relative to the original claim the results hold for a variety of options including some path dependent options constraints on the gamma of the replicating portfolio constraints on portfolio amounts and constraints on the number of shares are also considered article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

rewarding risk taking or skill the case of private equity fund managers abstract we examine whether typical private equity fund compensation contracts reward excessive risk taking rather than managerial skill our analysis is based on a novel model of investment value cash flows and fee dynamics of private equity funds given the embedded option like fee components our results demonstrate that fund managers indeed have an incentive for excessive risk taking when only fee income from the current fund is considered however when managers also consider potential compensation from follow on funds their risk taking incentives depend on their individual skill levels and skilled managers will have an incentive to reduce fund risk we also show that managers must generate substantial abnormal returns in order to compensate investors for the given fee components

evaluation of biodiversity policy instruments what works and what doesn t w e review and confirm the claim that credible evaluations of common conservation instru ments continue to be rare the limited set of rigorous studies suggests that protected areas cause modest reductions in deforestation however the evidence base for payments for ecosystem services decentralization policies and other interventions is much weaker thus we renew our urgent call for more evaluations from many more biodiversity relevant locations specifically we call for a programme of research conservation evaluation 2 0 that seeks to measure how programme impacts vary by socio political and bio physical context to track economic and environmental impacts jointly to iden tify spatial spillover effects to untargeted areas and to use theories of change to characterize causal mechanisms that can guide the collection of data and the interpretation of results only then can we usefully contribute to the debate over how to protect biodiversity in developing countries

leverage constraints and the optimal hedging of stock and bond options this paper considers the problem of a financial institution that needs to hedge a stream of state contingent cash flows while facing borrowing and short sales restrictions the study determines analytically the strategy that minimizes the initial cost of hedging the desired cash flow which is also the upper bound on its market price and shows that the impact of leverage constraints on the cost of hedging call and put options is significant and therefore the biases detected by tests of option pricing models may not represent arbitrage opportunities the paper also shows that with credit limits it is optimal to reduce the rate of trading thus these constraints need to be recognized when estimating the trading volume generated in replicating contingent payoffs such as portfolio insurance

private equity and regulatory capital regulatory capital requirements for european banks have been put forward in the basel ii capital framework and subsequently in the capital requirements directive crd of the eu we provide a detailed discussion of the capital requirements for private equity investments under different approaches for the internal model approach we present a structural model that we calibrate to a proprietary dataset we modify the standard merton structural model to make it applicable in practice and to capture stylized facts of private equity investments we also implement the early default feature with a fast simulation algorithm our results support capital requirements lower than in basel ii but not as low as in crd thereby giving adverse incentives to banks for using advanced risk models a sensitivity analysis shows that this finding is robust to parameter uncertainty and stress scenarios

a dynamic approach to voluntary environmental contributions in tourism abstract in an evolutionary game theoretical model of tourism firms that use an endogenous natural common pool resource cpr we show that stable equilibria with voluntary environmental initiatives may coexist with other equilibria where voluntary abatement is absent the basins of attraction of the equilibria are identified and a bifurcation analysis is carried out producing two results with policy implications first there is a highly non linear relationship between the cost of abatement required to be green and the share of green firms second increases in the number of the cpr s users will ultimately dissipate the incentives to make abatement beyond regulation

eco labels as a multidimensional research topic trends and opportunities abstract this study analyzes the importance of ecolabels as an eco innovation tool that can contribute to the sustainable design production and consumption of products our research has a dual objective the first is to build a theoretical framework that explains the relationship between ecolabels and eco innovation their determinants demand supply and institutional and political influences and the dimensions that arise from them second according to this framework a systematic literature review was carried out to identify the trends and opportunities in ecolabeling as a multidimensional topic from empirical geographical and sectorial perspective the main contributions of this paper are a proposal for cyclical ecolabeling innovation process an understanding of the ecolabeling dimensions according to the studies analyzed and ecolabel performance in the market additionally the systematic literature review revealed that ecolabels have been mainly explored in food sectors and developed countries and researchers tend to assess their performance from the dimension of market dynamics

green greener greenest eco label gradation and competition abstract this paper analyzes two common features of markets in which eco label programs certify that products are green gradation single programs offering multiple certification standards e g platinum gold silver and competition multiple programs vying to certify to their respective standards we find that depending on whether programs are sponsored by industry environmental groups or a government they have strikingly different incentives to grade or compete industry sponsors are indifferent about both environmentalist sponsors optimally grade or compete with other environmentalist sponsors only if consumer preferences for green consumption are skewed in a specific way and government sponsors decisions depend on the relative importance of private vs public benefits generated by the green market we find also that it is no accident that green markets frequently have an environmentalist program competing with an industry one for each of the cases examined our analysis is consistent with casual empirical evidence

greener than thou the political economy of fish ecolabeling and its local manifestations in south africa summary developing country governments and industries have been reluctant to support ecolabels fearing their potentially protectionist effects this reluctance has been countered by international organizations such as fao and ecolabel initiatives with assurances of transparency non discrimination and technical assistance the analysis of the marine stewardship council msc label shows that developing country fisheries and small scale ones in particular have been marginalized furthermore the msc certification of the hake industry in south africa illustrates that ecolabeling is sought in the context of competitive pressures and specific political economies not simply on the basis of value free science and systemic management this article concludes that developing country producers need dedicated systems of standards and verification procedures not only special flexibilities

the economics of private equity funds this article analyzes the economics of the private equity industry using a novel model and dataset we obtain data from a large investor in private equity funds with detailed records on 238 funds raised between 1993 and 2006 we build a model to estimate the expected revenue to managers as a function of their investor contracts and we test how this estimated revenue varies across the characteristics of our sample funds among our sample funds about two thirds of expected revenue comes from fixed revenue components that are not sensitive to performance we find sharp differences between venture capital vc and buyout bo funds bo managers build on their prior experience by increasing the size of their funds faster than vc managers do this leads to significantly higher revenue per partner and per professional in later bo funds the results suggest that the bo business is more scalable than the vc business and that past success has a differential impact on the terms of their future funds jel g10 g20 g24

secrets of the academy the drivers of university endowment success university endowments have received much attention recently for their superior investment returns compared with other institutional investors this study documents trends in college and university endowment returns and investments in the united states between 1992 and 2005 using data on over a thousand schools such endowments have generally performed well over this time period with a median growth rate of 7 4 percent per year and median return of 6 9 percent this sector has been dominated both in size and performance by the endowments of elite universities such as the ivy league schools the top 20 endowments grew more than 9 percent annually on a real basis between 1992 and 2005 as of 2007 the two largest endowments belonging to harvard and yale have grown to 35 billion and 22 billion in size respectively much of the growth in endowment size has been driven by investment performance as we will show in the paper the top endowments posted impressive returns in 2005 averaging a net real return of 12 3 percent compared to 4 4 percent posted by the s p 500 index in the same year we investigate the underlying drivers of these high returns and show that performance is related to the size of endowment the quality of the student body and the use of alternative investments we caution ordinary investors that mimicking the strategies of the top endowments would not necessarily result in similar returns

green public procurement of certified wood spatial leverage effect and welfare implications certified and conventional products are not traditional substitute goods green public procurement stimulates certification globally but not in each region public procurement of the cheaper unsustainable product does not maximise welfare increasing the price premium for certified wood creates a trade barrier the high costs of forest certification exclude vulnerable producers

information and the provision of quality differentiated products governments often enact information provision policies to overcome asymmetric information of product qualities we show that increasing awareness among consumers of the quality of a good can but will not always encourage firms to produce goods with higher levels of quality even if product qualities increase social welfare may fall as information provision results in too much product differentiation we show that the effectiveness of emission taxes and output subsidies are affected by the level of consumer knowledge of product quality and we identify conditions under which information provision is welfare enhancing relative to these price instruments jel l15 q58 i introduction in the past 20 years consumers have become increasinglyconscious ofthe undesirable health and safety attributes of the products they consume and surveys suggest that a growing percentage of consumers are willing to pay more for higher quality products such as organic foods and household cleaners and detergents that contain less toxic ingredients guber 2003 other high quality products facing higher demand include energy efficient products like extended life lightbulbs and improved home insulation often these highquality products provide private benefits that are excludable to buyers as well as public benefits that are nonrival and nonexcludable for example reduced pesticide and chemical residue on food may lower the risk of cancer while also reducing contaminated run off that degrades ground and surface water quality extended life lightbulbs and improved home insulation may reduce an individual s utility bill while also reducing greenhouse gas emissions from lower energy consumption although interest in these types of high quality productsisgrowing demand isoften relatively small market shares of organic produce for

credence goods efficient labelling policies and regulatory enforcement we analyse the optimality of information revelation of hidden attributes of credence goods via alternative labelling procedures when consumers are heterogeneous in their willingness to pay for the hidden attribute producers can either self label their products or have them certified by a third party the government can impose self or third party labelling requirements on either the green or the brown producers our benchmark model develops a condition that links the optimal imposition of third party labelling to the relative market share of each type of the good under complete information we extend our analysis to incorporate asymmetric information and cheating by the producers when corrupt producers can affix spurious labels the government needs to supplement the labelling policy with costly monitoring activities we find that mandatory self labelling schemes generally dominate mandatory third party labelling unless the market share effect greatly exceeds the incentive to cheat effect

effects of carbon reduction labels evidence from scanner data we investigate the effects of carbon reduction labels using a detailed scanner data set using a difference in differences estimation strategy we find that having a carbon label has no impact on detergent prices or demand we also investigate possible heterogeneous effects of carbon labels using the synthetic control method we find no evidence to indicate that the prices for the counterfactual detergents without the label would have been any different from the prices of the carbon labeled detergents we investigate the reasons for these results and conclude that the specific design of the carbon label is responsible for its lack of success jel d12 d83 l15 q54

the bright and dark side of staging investment performance and the varying motivations of private equity firms previous papers that examined investment decisions by private equity funds are divided on whether staging has a positive or negative effect on returns we believe these opposing views can be reconciled by studying when staging is used during the life of the investment relationship we find that staging has a positive effect on investment returns in the beginning of the investment relationship consistent with the notion that staging helps mitigate information asymmetry however staging appears to be negatively associated with returns when used prior to the exit decision our unique dataset allows us to measure these intertemporal effects precisely

superhedging under ratio constraint abstract we consider superhedging of contingent claims under ratio constraint it has been widely recognized that the minimum cost of superhedging a contingent claim with certain portfolio constraints is equal to the price of a claim with appropriately modified payoff but without constraints in terms of the backward stochastic differential equation bsde and the variational inequality equation approach we revisit this result and provide two counterexamples

environmental cleanliness as a public good welfare and policy implications of nonconvex preferences abstract this paper explores the implications of a form of nonconvexity in individual preferences over the public good cleanliness the implications of this nonconvexity on equilibrium outcomes welfare analysis the process of development and optimal government policy are examined the nonconvexity can imply a role for government in providing a commitment to a clean environment even if the government has a cost disadvantage in cleaning compared with individuals by providing a credible commitment to a clean environment the government can induce private individuals to undertake optimal levels of cleaning on their own

venture capital funds flow performance relationship and performance persistence this paper finds that venture capital funds that are expected to be backed by more skilled investors show no performance persistence but a significant flow performance relationship in contrast funds that are expected to be backed by less skilled investors show performance predictability and have a non significant flow performance relationship these results suggest that only skilled investors use all available information to adjust their capital allocation and as a result eliminate performance predictability as argued theoretically by berk and green 2004 results also show that kaplan and schoar 2005 overstate the persistence in fund performance by not using an ex ante measure of the performance of earlier funds whether or not an ex ante measure is used however the persistence is largely due to unsophisticated investors when investors are sophisticated the performance of earlier funds sequence and fund size do not help predict the performance of the focal fund

price premiums for eco friendly commodities are green markets the best way to protect endangered ecosystems green markets represent a means through which public goods can be privately provided a green product is an impure public good consisting of a private good e g rain forest honey bundled with a jointly produced public good e g biodiversity protection in the context of ecosystem protection popular green commodities include eco tourism excursions coffee grown under forest canopies shade grown tagua nuts for buttons and ornaments rainforest nuts and oils for cosmetic products and rain forest honey we examine the dynamic efficiency of eco friendly price premiums in achieving ecosystem protection and rural welfare goals by contrasting the use of price premiums to the use of payments that are tied directly to ecosystem protection we demonstrate analytically and empirically that direct payments are likely to be more efficient as a conservation policy instrument depending on the available funds the direct payments may be better or worse than green price premiums in achieving rural welfare objectives if direct payments are not feasible for social or political reasons we demonstrate analytically and empirically that the price premium approach is likely to be more effective at achieving conservation and development objectives than the currently more popular policy of subsidizing capital acquisition in eco friendly commercial activities

the cost effectiveness of conservation payments international donors invest billions of dollars to conserve ecosystems in low income nations the most common investments aim to encourage commercial activities such as ecotourism that indirectly generate ecosystem protection as a joint product we demonstrate that paying for ecosystem protection directly can be far more cost effective although direct payment initiatives have imposing institutional requirements we argue that all conservation initiatives face similar challenges thus conservation practitioners would be well advised to implement the first best direct payment approach rather than a secondbest policy option an empirical example illustrates the spectacular cost savings that can be realized by direct payment initiatives

skill and luck in private equity performance we evaluate the performance of private equity pe funds using a variance decomposition model to separate skill from luck we find a large amount of long term persistence and skilled pe firms outperform by 7 to 8 annually but this performance is noisy with a large amount of luck so top quartile performance does not necessarily imply top quartile skills making it difficult for investors lps to identify skilled pe firms buyout bo firms show the largest skill differences implying the greatest long term persistence venture capital vc performance is the most noisy making good vc firms hardest to identify and implying the smallest amount of investable persistence

the effect of leverage on the cost of capital of us buyouts abstract this paper addresses the problem to assess the effect of leverage on the cost of capital for buyout performance analyses it draws on a unique and proprietary set of data on 133 us buyouts between 1984 and 2004 for each of them we determine a public market equivalent that matches it with respect to its timing and its systematic risk we show that under realistic mimicking conditions the average cost of capital is below the commonly used benchmark s p 500 thereby we control for two important aspects for the risks taken by lenders in the buyout transactions which affects the sponsors risks and for the corresponding cost of debt which lowers the return of the public market equivalent only with borrowing and lending at the risk free rate is the average cost of capital close to the average index return this finding is particularly important as existing literature on that topic tends to rely on benchmarks without a proper risk adjustment

competitive investment in clean technology and uninformed green consumers abstract in a market where consumers and the regulatory authorities are not fully informed about the actual production technology or environmental performance of firms that engage in strategic competition i study the effect of environmental consciousness of consumers on firms incentive to invest in cleaner technology firms compete in prices and may signal their environmental performance to uninformed consumers through prices i also analyze the effect of an expected liability on firms in this setting compared to full information incomplete information generates higher strategic incentive to invest in cleaner technology particularly when consciousness and or expected liability are not too high requiring mandatory disclosure of technology or environmental performance may discourage such investment even though consumers and the regulator are uninformed competition has a positive effect relative to monopoly on the incentive to invest

voluntary eco labeling and the price premium international environmental organizations propose voluntary eco labeling as a market incentive to promote industry to operate in an ecologically sustainable and environmentally friendly manner a microeconomic analysis questions whether voluntary eco labeling will cause producer profits in a competitive industry to decline and whether eco labeling will necessarily generate different prices for labeled and unlabeled product using wood product as an example results identify conditions that may exist when firms lose profits even under a voluntary system and where existing production constraints may lead to a single price regardless of labeling

private equity returns and disclosure around the world to obtain more funds from the institutional investors private equity pe fund managers may report inflated valuations of private investee companies that are not yet sold however such overvaluations may result in a reputational cost when those investments are realized using evidence from 39 countries we show that there are significant systematic biases in managers reporting of fund performance we find that these biases depend on the accounting and legal environment in a country and on proxies for the degree of information asymmetry between institutional investors and pe fund managers

a qualitative meta synthesis of the benefits of eco labeling in developing countries eco labeling or environmental certification is often promoted as a regulatory instrument capable of incentivizing sustainable resource use even in the absence of stringent government environmental regulations despite slow uptake in developing countries and high producer costs a growing body of case study evidence suggests that producers benefit in varied ways from certification a qualitative meta synthesis approach is applied to this body of evidence in order to assess the type and extent of producer benefits reported in case studies of forest stewardship council fsc and marine stewardship council msc certification in developing countries while benefits from price premiums and market access appear to be limited less tangible benefits were more common including learning governance community empowerment and reputational benefits these benefits may justify the cost of certification