efficiency growth and concentration an empirical analysis of hospital markets taking an evolutionary view of markets harold demsetz hypothesized that firms differ persistently in efficiency and that industry concentration results from growth of efficient firms at the expense of inefficient ones we test the hypothesis with high quality microdata from the us hospital industry an industry of keen policy and scientific interest we measure efficiency by firm in the early 1980s and relate it to subsequent growth of efficient firms to the persistence of profit differences and to changes in the concentration of markets initial hospital efficiency and subsequent growth and profitability are significantly and positively related also greater initial variation in hospital efficiency within local markets is positively related to subsequent growth in market concentration these findings support the logic of demsetz s evolutionary efficiency hypothesis though they cannot confirm the stronger idea that variation in firm efficiency is the dominant explanation for changes in concentration

meta analysis in model implementation choice sets and the valuation of air quality improvements this research illustrates how the methods developed for meta analysis can serve to document and summarize voluminous information derived from repeated sensitivity analyses our application is to the sensitivity of welfare estimates derived from discrete choice models to assumptions about the choice set these assumptions affect welfare estimates through both the estimated parameters of the model and conditional on the parameters the substitution among alternatives in our specific application the evaluation is in terms of estimated benefits of air quality improvements in los angeles based on discrete choices of neighborhood and housing copyright 2007 john wiley sons ltd

optimal asset allocation and risk shifting in money management this article investigates a fund manager s risk taking incentives induced by an increasing and convex relationship of fund flows to relative performance in a dynamic portfolio choice framework we show that the ensuing convexities in the manager s objective give rise to a finite risk shifting range over which she gambles to finish ahead of her benchmark such gambling entails either an increase or a decrease in the volatility of the manager s portfolio depending on her risk tolerance in the latter case the manager reduces her holdings of the risky asset despite its positive risk premium our empirical analysis lends support to the novel predictions of the model

a three gap model of foreign transfers and the gdp growth rate in developing countries abstract a simplified macroeconomic framework is developed for the fiscal gap which is considered to be an important stumbling block for adjustment with growth in highly indebted developing countries distinctive characteristics of a fiscally constrained economy are compared with those of economies constrained either by the availability of savings or foreign exchange tentative implications for external conditionality accompanying debt relief measures are derived

the nature and extent of the market for high quality beef in japan before the abolition of import quotas it is examined whether wagyu beef produced in japan and high quality beef produced in the united states and exported to japan are components of the same product market in addressing this issue an approach is used for defining the nature and extent of a product market relying on the concept of instantaneous causality the results for selected cuts of beef suggest that the markets are in fact separate

leveraged investments and agency conflicts when cash flows are mean reverting we analyse the effect of mean reverting cash flows on the costs of shareholder bondholder conflicts arising from partially debt financed investments in a partial equilibrium setting we find that such agency costs are significantly lower under mean reverting mr dynamics when compared to the ubiquitous geometric brownian motion gbm the difference is attributed to the stationarity of the mr process in addition through the application of a novel agency cost decomposition we show that for a larger speed of mean reversion agency costs are driven mainly by suboptimal timing decisions as opposed to suboptimal financing decisions in contrast under the standard gbm assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates

motivations for aid to developing countries abstract this paper attempts to identify the underlying principles of aid allocation and particularly the balance of motivations as between the needs of recipient countries and the interests of donor countries two alternative models are fitted by cross country regressions to bilateral and multilateral aid flows to some 80 developing countries in 1969 1970 and 1978 1980 the first recipient need model assumes that all aid is given to compensate for shortfalls in domestic resources this model provides a reasonable explanation for the distribution of multilateral aid but it is clearly not applicable for bilateral aid flows the second donor interest model assumes that all aid serves only donor interests defined to cover political security investment and trade interests this model gives generally good explanations of bilateral aid but is a poor fit for multilateral aid the relative importance of the various donor interests differs sharply among donors the paper ends with an analysis of the shift in the balance of aid over the 1970s towards the recipient need element and with a reference to the sharp change in policy in the 1980s towards increasing emphasis on donor interest aid

spatial boundaries and choice set definition in a random utility model of recreation demand we are concerned with the definition of choice set used in random utility models of recreation demand in particular we are concerned with the spatial boundaries used to define choice sets in this paper using a model of day trip fishing in maine we examine the sensitivity of parameter and welfare estimates to changes in the spatial boundary we find that there exists some threshold distance beyond which adding more sites to the choice set has negligible effects on the estimation results

a note on the estimation of the demand for sugar in the usa in the presence of measurement error in the data inaccuracy in the measurement of the price data for the substitute sweeteners for sugar is a problem encountered in the estimation of the demand for sugar two diagnostics are introduced to assess the effect that this measurement error has on the estimated coefficients of the sugar demand relationship the regression coefficient bounds diagnostic is used to indicate a range in which the true price responsiveness of consumers to changes in the price of sugar substitutes lies the bias correction factor is computed to evaluate the magnitude of the overestimation of the responsiveness of the quantity of beverage sugar and non beverage sugar demanded to a change in the price of sugar

estimating the degree of market integration existing tests of spatial market integration are commonly based on statistical criteria without an explicit link to an economic model of price determination this article proposes new measures of market integration defined directly in terms of a well known spatial price determination model and develops an econometric methodology for estimating these measures due to the intractability of the conditional density function of prices we use indirect inference to estimate the model parameters and market integration measures the methodology is illustrated with simulated data and is applied to soybean price data for the united states brazil and the eu copyright 2008 oxford university press

estimation of distance decay functions to account for substitution and spatial heterogeneity in stated preference research in a site selection choice experiment various hypotheses are tested related to spatial heterogeneity in willingness to pay wtp for environmental improvements spatial heterogeneity is measured through distance decay effects substitute sites inside and outside the experiment s choice set and spatial trend variables we demonstrate that distance decay functions differ between users and nonusers and across study sites also the distance to substitutes outside the choice set explains spatial variation in wtp we show that further extending the model with spatial trend variables reveals additional spatial heterogeneity in choices accounting for spatial heterogeneity patterns results in significantly different wtp estimates for environmental improvements jel q25 q51

a general framework for evaluating executive stock options abstract motivated by recent recommendations by both european and american accounting standards boards that executive stock options be expensed in firms statements we provide an analytical and flexible framework for their evaluation our approach takes into account the vesting period american style resetting and reloading provisions that are features of many option programs and also considers the trading restriction on executives we identify a recursive structure in the stream of options that are granted to the executive over the course of her employment by exploiting this we are able to obtain a near explicit formula for the option value this enables us to discuss the joint effects of the different features on the exercising strategies and firms granting cost especially we highlight some significant interactions among these features

human capital bankruptcy and capital structure we derive a firm s optimal capital structure and managerial compensation contract when employees are averse to bearing their own human capital risk while equity holders can diversify this risk away in the presence of corporate taxes our model delivers optimal debt levels consistent with those observed in practice it also makes a number of predictions for the cross sectional distribution of firm leverage consistent with existing empirical evidence it implies persistent idiosyncratic dierences in leverage across firms an important new empirical prediction of the model is that ceteris paribus firms with more leverage should pay higher wages

anticipated development assistance temporary relief aid and consumption behaviour of low income countries much debate about the effectiveness of foreign aid to developing countries focuses on the assumption that aid flows mainly enhance current consumption rather than being channelled into investment this paper seeks to establish what proportion of foreign assistance is used to finance current consumption the principal hypothesis to be tested is that aid transfers include very heterogeneous components with different marginal propensity to raise consumption estimating the average marginal propensity to consume of all the components of aid as is commonly done may lead to erroneous results the flow of foreign aid from high to low income countries can be classified into two types the first includes income transfers of a relief nature such as emergency and distress relief including drought related food transfers medical and refugee relief and balance of payments crisis support these transfers are generally a temporary response to unanticipated events or shocks to the economy they can be perceived as an attempt by the donor community to help finance what is denoted in the permanent income theory as transitory consumption friedman i957 in addition they can be viewed as an attempt to maintain a subsistence level of consumption by absorbing the shocks to income entirely by changes in savings the low level of savings however and the constraints on foreign borrowing lead to dependency on foreign transfers and prevent domestic savings from being the residual that is almost all of

an empirical investigation of u s firms in reorganization the purpose of this paper is to understand the institutional features of chapter 11 from an empirical examination of thirty firms that have emerged from reorganization we find the recontracting framework of chapter 11 to be complex lengthy and costly violations of absolute priority in favor of stockholders are frequently encountered these deviations may result from the bargaining process of chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder oriented management to preserve firm value an example of such recontracting addresses myers underinvestment problem an investigation of the effects of chapter 11 on the pricing of risky debt is also provided the purpose of this paper is to understand the institutional features of chapter

irreversible investment managerial discretion and optimal capital structure abstract we explore the significance of employee compensation and alternative reservation income on investment timing endogenous default yield spreads and capital structure in a real options setting a manager s incentive to under over invest in a project is associated to labor income he has to forego in order to work on the project the manager s salary his stake on the project s equity capital and his subsequent income should he decide to terminate operations we find that the optimal level of coupon payments decreases with managerial salary and ownership stake while it is increasing in the manager s reservation income yield spreads optimal leverage ratios are increasing decreasing in the manager s salary and ownership stake while they are decreasing increasing in the manager s reservation income exploring agency costs of debt as deviations from a value maximizing investment policy we document a u shaped relationship between agency costs of debt and the managerial compensation parameters the manager s reservation income salary and ownership share

leverage decision and manager compensation with choice of effort and volatility abstract we study the incentive effects of granting levered or unlevered stock to a risk averse manager the stock is granted by risk neutral shareholders who choose leverage and compensation level the manager applies costly effort and selects the level of volatility both of which affect expected return the results are driven by the attempt of the risk neutral shareholders to maximize the value of their claims net of the compensation package we consider a dynamic setting and find that levered stock is optimal for high type managers firms with high momentum large firms and firms for which additional volatility only implies a modest increase in expected return

managerial incentives risk aversion and debt we investigate the risk choices of risk averse ceos following recent theoretical work we expect ceo risk aversion to be more pronounced in firms with high leverage or high default probability we find that the ceos of these firms reduce firm risk even in the presence of strong risk taking incentives our results are robust to controls for the sensitivity of ceo wealth to stock price changes firm risk determinants the endogenous feedback effects of firm risk on ceo incentives unobserved firm and market effects and debt governance the impact of ceo risk aversion is economically significant

antitrust and merger policy a review and critique a ny antitrust policy that tries to put some restrictions on mergers must have a conceptual basis one such framework might be a populist approach in which only absolute or relative size of the merger partners and or the resulting entity would be the criterion political rhetoric often embodies this approach an alternative approach the one that underlies the 1982 department of justice merger guidelines concerns itself with the possible exercise of market power 1 i believe this second approach is more consistent with the language of section 7 of the clayton act itself which instructs the department of justice and the federal trade commission to prevent those mergers the effects of which may be substantially to lessen competition or to tend to create a monopoly this market power approach also places merger policy in a realm that is susceptible to economic analysis for this reason as well this approach appeals to me the merger guidelines are firmly rooted in the standard oligopoly theory developed by chamberlin 1933 fellner 1949 and stigler 1964 and strengthened

two stage estimation to control for unobservables in a recreation demand model with unvisited sites the role of unobserved site attributes is a growing concern in recreation demand modeling one solution in random utility models rums involves separating estimation into two stages where the rum is estimated with alternative specific constants ascs in the first stage and the estimated ascs are regressed on the observed site attributes in the second stage prior work estimates the second stage with ordinary least squares ols and two stage least squares regression we present an application with censored regression in the second stage we show ols produces inconsistent parameters when there are unvisited sites with no estimable ascs and that censored regression avoids this problem

optimal compensation and pay performance sensitivity in a continuous time principal agent model this paper studies the optimal contract between risk neutral shareholders and a constant relative risk aversion manager in a continuous time model several interesting results are obtained first the optimal compensation is increasing but concave in output value if the manager is more risk averse than a log utility manager second when the manager has a log utility a linear contract is optimal when there is no explicit lower bound on the compensation and an option contract is optimal when there is an explicit lower bound third optimal effort is stochastic state dependent fourth consistent with empirical findings and contrary to standard agency theory predictions the relationship between pay performance sensitivity and firm performance and that between pay performance sensitivity and firm risk can be nonmonotonic this paper was accepted by wei xiong finance

modelling the effect of chronic wasting disease on recreational hunting site choice preferences and choice set formation over time chronic wasting disease cwd is a prion disease that affects deer elk and other cervid wildlife species although there is no known link between the consumption of cwd affected meat and human health hunters are advised to have animals from cwd affected areas tested and are advised against consuming meat from cwd infected animals government of alberta 2010 we model hunter response to the knowledge that deer in a wildlife management unit have been found to have cwd in alberta canada we examine hunter site choice over two hunting seasons using revealed and stated preference data in models that incorporate preferences choice set formation and scale we compare a fully endogenous choice set model using the independent availability logit model swait in probabilistic choice set formation in transportation demand models dissertation mit 1984 with the availability function approach cascetta and papola in transp res c 9 4 249 263 2001 that approximates choice set formation we find that cwd incidence affects choice set formation and preferences and that ignoring choice set formation would result in biased estimates of impact and welfare measures this study contributes to the broader recreation demand literature by incorporating choice set formation scale and temporal impacts into a random utility model of recreation demand

on the internal contradictions of the law of one price as stated originally the venerable law of one price succinctly describes long run equilibrium in a perfectly competitive market the law was later amended defining a market as the geographic area within which the same thing sells for the same price at the same time allowance being made for transportation costs modified in that way the law has two plausible interpretations by one interpretation every production site is a market by the other prices in fact do not differ by transportation costs the transportation cost amendment thus introduces internal contradictions that render the revised law of one price either useless or wrong jel d40 l10 a market according to the masters is the area within which the price of a commodity tends to uniformity allowance being made for transportation costs that is two places are in the same market for a good if the prices at the two places differ by transportation costs stigler 1987 77 economic terms seem to pass in their historical development through a series of stages which without pretension to rigidness may be described as follows first no definition is given but it is assumed that every one has a sufficiently clear idea of the subject to make a formal definition unnecessary second a definition is attempted and a number of exceptional forms are noted third with the further increase of data the relative importance of the various forms changes confusion in discussion is introduced logomachy takes the place of constructive investigation fourth a complete classification of the forms embraced under the original term is made and problems are investigated with reference to these classes the bewildering vagueness of economic theory is largely due to the fact that the terms used are in all of these stages of development moore 1906 211 i introduction delineating the boundaries of markets engaged economists attention early on many product attributes are important to consumers but price is an objectively measurable margin along which rivalry is sharply engaged market prices transmit information about changing demand and supply conditions to buyers and sellers and widening price cost margins signal profit opportunities to which alert entrepreneurs respond price consequently has held center stage in economists attempts to define markets augustin cournot 1927 51 for instance wrote that a market is the entire territory of which the parts are so united by the relations of unrestricted commerce that prices take the same level throughout with ease and rapidity alfred marshall 1930 325 supplied a similar definition in his celebrated declaration that the more nearly perfect a market is the stronger is the tendency for the same price to be paid for the same thing at the same time in all parts of the market more recently joseph stiglitz 1993 19 summarized what he called the law of the single price stating that under this law there is a uniform price in the market and price differences are quickly eliminated by arbitrage 1 marshall 1930 325 introduced an important qualification however when he observed that but of course if the market is large allowance must be made for the expense of delivering the goods to different purchasers each of whom must be supposed to pay in addition to the market price a special charge on account of delivery that qualification subsequently found its way into stigler s price theory textbook quoted in the epigraph intentionally or not the law of one price was thereby converted into a law of different prices other economists subsequently added transaction costs and information costs to the list of caveats culminating in a multiplicity of prices nevertheless claimed to be consistent with the law of one price economics has few laws

choice set formation for outdoor destinations the role of motivations and preference discrimination in site selection for the management of public expenditures on protected areas effective public expenditure currently dominates the management focus of many protected areas this calls for explicit modeling of constraints and motivations that respectively obstruct and stimulate visits to selected outdoor destinations choice set formation is the result of screening and or inclusion of specific sites alternatives to form the set of sites considered in real choices evidence shows that the omission of a structural representation of choice set formation is harmful to econometric inference yet the literature has largely ignored the underlying behavioral phenomenon we show using a discrete choice experiment involving selection among seven recreational sites in an italian national park that choice set formation is behaviorally relevant even after controlling for preference discrimination motivations why visit are important determinants of preliminary site screening for choice set inclusion as well as site selection justifying the additional value of such modeling extension

market definition in antitrust analysis a regression based approach alleged violations of either sherman 2 s antimonopoly strictures or clayton 7 s proscriptions against anticompetitive mergers necessarily involve a particular product and must occur in a particular place that is the plaintiff in either a 2 or 7 suit must define a relevant market within which the violation alleged has occurred even in the most mundane antitrust analysis however market definition is rarely readily accomplished and unaccompanied by a series of caveats and the possibility of the opposing parties in an antitrust suit failing to contest each other s proffered definition is virtually nil 2 because economists from

an efficiency approach to choice set formation theory and application to recreational destination choice an unresolved debate in behavioural choice research surrounds specifying individual choice sets to overcome the limitations of deterministic and probabilistic approaches in a framework consistent with individual optimizing behaviour this study develops an efficient frontiers approach to the choice set problem in the context of revealed preference destination choice stochastic frontier models relating costly inputs to utility generating outputs are estimated to measure the efficiency of sites choice sets are then formed by retaining sites that exceed alternative efficiency thresholds choice set composition site choice efficiency and probability of selection and consumer surplus are evaluated in the case of fishery site choice in maine

incentives and performance in the presence of wealth effects and endogenous risk abstract two of the most widely tested predictions of agency theory are that there exists a negative association between an agent s pay performance sensitivity pps and the risk of output and that pps enhances performance empirical evidence has been mixed this paper proposes a new utility function and develops a model that introduces a wealth effect and also allows the agent to control the idiosyncratic risk of output when risk is endogenous the paper shows that the two predictions may not hold

how closely do hypothetical surveys and laboratory experiments predict field behavior we compare the ability of three preference elicitation methods hypothetical choices nonhypothetical choices and nonhypothetical rankings and three discrete choice econometric models the multinomial logit mnl the independent availability logit ial and the random parameter logit rpl to predict actual retail shopping behavior in three different product categories ground beef wheat flour and dishwashing liquid overall we find a high level of external validity our specific results suggest that the nonhypothetical elicitation approaches especially the nonhypothetical ranking method outperformed the hypothetical choice experiment in predicting retail sales we also find that the rpl can have superior predictive performance but that the mnl predicts equally well in some circumstances experiment

dynamic resource allocation with hidden volatility abstract we study a firm s internal resource allocation using a dynamic principal agent model with endogenous cash flow volatility the principal supplies the agent with resources for productive use but the agent has private control over both project volatility and resource intensity and may misallocate resources to obtain private benefits the optimal contract can yield either overly risky or overly prudent project selection it can be implemented with a constant pricing schedule i e a static decentralized linear mechanism giving the agent control over the resource quantities project risk and agent s equity share the implementation rationalizes the use of hurdle rates above a firm s cost of capital and transfer prices above marginal cost while showing that hurdle rates or transfer prices may not vary with the agent s risk choice

macro economic aspects of the effectiveness of foreign aid on the two gap model home goods disequilibrium and real exchange rate misalignment we construct an open economy disequilibrium model to assess the welfare effects of aid in different macroeconomic regimes aid is shown to have different effects in different unemployment regimes because it increases the social costs of wage price rigidities in the classical regime but decreases them in the keynesian unemployment regime a link is made with the two gap model but we highlight the role of real exchange rate misalignment failure to clear the nt goods market

the integration of the market for soybeans and soybean products abstract this article addresses the question of whether soybeans soybean meal and soybean oil produced in the usa and exported were part of a single world geographic market during the decade of the 1980s an answer to this question is sought using an approach to defining a geographic market based on the notion of instantaneous causality the empirical results based on prices for soybeans soybean meal and soybean oil for three spatially diffuse locations suggest that there was but a single identifiable world market for these commodities over the period of study this has implications for the continued presence of soybean production subsidies and discussions on international agreements designed to reduce or eliminate these subsidies

an equilibrium model of asset pricing and moral hazard this article develops an integrated model of asset pricing and moral hazard it is demonstrated that the expected dollar return of a stock is independent of managerial incentives and idiosyncratic risk but the equilibrium price of the stock depends on them thus the expected rate of return is affected by managerial incentives and idiosyncratic risk it is shown however that managerial incentives and idiosyncratic risk affect the expected rate of return through their influence on systematic risk rather than serve as independent risk factors it is also shown that the risk aversion of the principal in the model leads to less emphasis on relative performance evaluation than

aid the public sector and the market in less developed countries a reply the article in this journal by mosley et al i987 concludes its analysis of aid effectiveness as demonstrating inability of development aid over more than twenty years to provide a net increment to overall growth in the third world p 636 this note purports to show that this conclusion which is ostensibly distressing as the authors claim is not warranted the section of the study which is the basis of the conclusion cited and the subject of this note is a cross section regression analysis full details of which are shown in mosley et al table 3 the note is concerned with the relation between the dependent variable specified as the growth rate of real gdp per cent per annum hereafter gdp and aid specified as a percentage of gdp hereafter aid the aid results with only two significant positive coefficients in one subsample certainly give no basis for claiming aid effectiveness in terms of gdp growth the intention in this note is to interpret the results which are assumed to be valid this is made possible by the fact that the authors have helpfully provided the full input set of mean values derived from the raw data from this it is possible to calculate the gdp aid relationship for each country for the second and third period the procedure for deriving these relationships is as follows for each country the mean values of the time series of gdp and aid are extracted from the data for i 960 70 and for i 970 80 using i 960 70 as the base the signs of the change in the levels of the gdp and aid mean values between periods are recorded this is repeated for i980 4 with i970 80 mean values as the base the relationship between the two signs is an indication of the effect of aid on gdp in the period in which the change in levels is effected thus in the case of an increase in aid being combined with a decrease in gdp the latter must have fallen relatively to the former and aid effectiveness is negative mutatis mutandis for the other three sign combinations thus generating the appropriate gdp aid relationship for each country in each period a frequency distribution of the four sign combinations relating to the full sample is presented in table i since the signs of the changes in the levels of gdp and aid are derived by making explicit the arithmetic relationship implicit in the data they form a valid base from which to draw conclusions without requiring any test of

the effect of consumers real world choice sets on inferences from stated preference surveys for stated preference sp studies we develop a model that assesses the influence of choice set misspecification arising from the omission of perceived substitutes among real world alternatives in the same class of goods this problem is most likely to be present when individuals are allowed to select a no purchase option instead of being forced to choose from an explicit set of sp alternatives with hypothetical attribute levels a convenient feature of our model is that researchers do not need to know exactly which omitted real substitute the individual most prefers only the set of real substitutes that exists in our empirical illustration a comparison of rival models suggests researchers who overlook the presence of perceived real alternatives related to an sp experiment can end up with noticeably biased welfare estimates our more general model suggests that it may be prudent for future sp researchers to anticipate then test and possibly correct for distortions in utility parameter estimates that result from this problem

latent consideration sets and continuous demand systems this paper develops a theoretically consistent continuous demand system model that incorporates latent probabilistic consideration sets in contrast to existing discrete choice consideration models the proposed model is econometrically tractable with consumption data for many goods the model s empirical properties are illustrated with an 89 site recreation data set from the 1994 national survey of recreation and the environment nsre parameter and welfare estimates suggest that the latent consideration set models fit the data better and may imply a bias variance tradeoff relative to traditional models

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

implications of the sharpe ratio as a performance measure in multi period settings we study efiects of using sharpe ratio as a performance measure for compensating money managers in a dynamic and frictionless market setting first we demonstrate that with such a performance measure the manager s focus on the short horizon performance is detrimental to the investor s long horizon performance numerical experiments illustrate that when returns are iid the performance loss is signiflcant even when the investor s investment horizon is not much longer than the manager s when expected returns are mean reverting the performance loss is exacerbated second we show that sharpe ratio maximization strategies tend to increase decrease the risk in the later part of the optimization period after a bad good performance in the earlier part of the optimization period as illustrated by a simulation exercise this prediction is in agreement with empirical observations and it presents a rational expectations alternative to the prevalent tournament theory explanation

exogeneity tests of market boundaries applied to petroleum products us antitrust law makes market definition and the calculation of marketshare statistics an integral part of the determination of the anticompetitive impact of a merger because markets frequently overlap however market definition is rarely an easy task a statistical test that can be used as an aid in defining markets is proposed here time series techniques are used to test if price in one region is exogenous to the process that determines price in another the rejection of exogeneity can be an indication that the two regions are economically linked and thus may belong to a common geographic market the test is applied to petroleumproduct prices from various regions of the united states time series techniques have long been appreciated by macroeconomists the uses to which they have been put range from testing for the exogeneity of variables used in the construction of macroeconomic models sims 1972 for example to discovering empirical regularities in macroeconomic data without imposing a priori structure on the observations ashenfelter and card 1982 for example in contrast these techniques have not been so

optimal exercise prices for executive stock options although exercise prices for executive stock options can be set either below or above the grant date market price in practice virtually all options are granted at the money we offer an economic rationale for this apparent puzzle by showing that pay to performance incentives for risk averse undiversified executives are typically maximized by setting exercise prices at or near the grant date market price we provide an operationally useful alternative to black scholes 1973 for the purpose of both valuing executive stock options and measuring the incentives created by options our framework has implications not only for exercise price policies but also for indexed options option repricings exchanges of cash for stock based compensation and the design of bonus plans

activities in models of recreational demand scholars have taken divergent approaches to incorporating on site activities into their empirical specifications of site choice models we provide a framework for assessing this methodological heterogeneity through a model that explicitly allows individuals to choose both on site activities and site attributes this model not only conditions the marginal value of site attributes on the choice of an activity but also explicitly recovers the marginal rates of substitution across activities this eliminates previously unrecognized biases in the welfare analysis of changes in site attributes we test hypotheses generated by our model by comparing rival models of demand for access to beaches in costa rica

on the extent of the market wholesale gasoline in the northeastern united states this paper develops the classical view of the extent of markets by introducing explicitly in the analysis the concept of arbitrage costs arbitrage or transaction costs imply that market boundaries are essentially stochastic while a set of products or regions may have binding arbitrage conditions i e may be in the same market at a given point in time they may not at another thus in defining a market the probability that a set of agents or regions would h3ve binding arbitrage conditions has to be assessed this paper develops an econometric methodology to estimate the transaction costs required to arbitrage among a given set of products as well as the probability that that set of products would be bound by binding arbitrage condi tions finally the methodology is applied to wholesale gasoline in the northeastern part of the united states address for communications pablo t spiller herbert hoover memorl l bldg 9348 stanford ca 94305

global dynamic inefficiency in the absence of international policy coordination a north south case abstract this paper demonstrates that decentralized behavior reflected in non coordinated resource pricing and investment strategies may lead to global dynamic inefficiency it is shown that in a north south world capital accumulation in the north reduces the social cost associated with the presence of labor market imperfections of the lewis type in the south whereas resource pricing in the south affects investment decisions in the north thus international policy coordination is required for attaining global dynamic efficiency

accounting for choice set endogeneity in random utility models of recreation demand abstract modeling the choice among a discrete set of recreation alternatives is driven by the possible patterns of substitution among sites researchers typically assume that the individual s choice set is the same as the set of alternatives included in the recreation survey instrument our endogenous choice set model is a generalization of the standard multinomial logit random utility model which allows for the possibility of heterogeneous choice sets that are endogenously determined in the model using two examples we show that parameter and compensating variation estimates differ greatly between the endogenous choice set model and the traditional logit model

why foreign economic assistance there is general agreement in the economics literature that resource flows among countries in response to market incentives enhance global economic efficiency and welfare in both rich and poor countries it has also been argued that in the presence of capital market imperfections the transfer of resources from developed country governments to the governments of developing countries on commercial terms either directly or through multilateral agencies can normally be expected to be welfare enhancing in both developed and developing countries 1 these arguments do not apply however to official development assistance that involves a substantial grant element two arguments have typically been used in support of transfers that include a grant component one set is based on the economic and strategic self interest of the donor country the second is based on the ethical or moral responsibility of the residents of wealthy countries toward the residents of poor countries both sets of arguments have been the subject of continuous challenge i argue in this article that neither the donor self interest nor the ethical responsibility argument can be rejected on logical or theoretical grounds i also assert that the empirical evidence in support of both the economic and the strategic self interest arguments is exceedingly weak the ethical responsibility arguments impose less burden on the empirical evidence but they are subject to continuous challenge by political theorists and moral philosophers donor self interest

sociopolitical and economic dimensions of development a cross section model 1 of the most important requisites of development is to cultivate those conditions which are appropriate for the generation of a surplus the distribution of which in turn usually generates friction among the various social classes and factions that advance claims to it thus modernization being a process of change has economic social political and institutional dimensions and the changes can result in sociopolitical instability which affects the continuation of the ability of the economy to grow and of the society to develop the objective of this paper is to test for a feedback mechanism that links all the dimensions of modernization together and the introduction of variables that can reflect it in a model and to present some results of an econometric investigation that recognizes this interaction estimation for the model is based on a sample of 104 noncommunist countries for the year 1967 that includes economic and noneconomic variables the model is used to predict the values of the per capita income and gross capital formation both within and outside of the sample period its predictive ability is remarkable as the statistics represented in the tables and charts demonstrate the model is also used in a number of simulations reflecting a variety of social and political conditions and scenarios in this relation it is found for example that the social and political atmosphere has profound effects on the economic evolution of a society the sociopolitical gap defined as the difference between actual sociopolitical envirnoments characterized by various degrees of instability and the sociopolitically stable environment characterized by no sociopolitical violence retards the development process the presence and the magnitude of this gap as well as the various trade offs lead the author to a conclusion of guarded pessimism in relation to the choices and future of developing countries an appendix lists the types of political violence identified as variables

top management compensation and capital structure the interrelationship between top management compensation and the design and mix of external claims issued by a firm is studied the optimal managerial compensation structures depend on not only the agency relationship between shareholders and management but also the conflicts of interests which arise in the other contracting relationships for which the firm serves as a nexus we analyze in detail the optimal management compensation for the cases when the external claims are 1 equity and risky debt and 2 equity and convertible debt in addition to the role of aligning managerial incentives with shareholder interests managerial compensation in a levered firm also serves as a precommitment device to minimize the agency costs of debt the optimal management compensation derived has low pay performance sensitivity with convertible debt instead of straight debt the corresponding optimal managerial compensation has high pay to performance sensitivity a negative relationship between pay performance sensitivity and leverage is derived our results provide a reconciliation of the puzzling evidence of jensen and murphy 1990 with agency theory other testable implications include 1 a relationship between the risk premium in corporate bond yields and top management compensation structures and 2 the announcement effect of adoption of executive stock option plans on bond prices the model yields implications for management compensation in banks and federal deposit insurance reform our results explain the dynamics of top management compensation in firms going through financial distress and reorganization

indirect competition with spatial product differentiation although two markets may appear to be separate sometimes one firm participates in both of them that firm provides a link between the two markets such a straddling firm transmits indirect competition from each market to the other since its actions reflect competitive conditions in both markets in a model of spatial product differentiation the author shows that indirect competition may make a market perform significantly better than the number of firms would indicate moreover total consumer surplus increases if two previously distinct markets are linked by a straddler finally the author considers implications of these results for antitrust analysis copyright 1989 by blackwell publishing ltd

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

the length of stay in the demand for tourism abstract one of the main characteristics of current tourism is the reduction in the length of stay at a destination nevertheless this variable has received little attention in literature this paper examines the microeconomic determinants of the length of stay at one of the mediterranean s leading sun and sand destinations the estimation of a conditional demand function model highlights the explanatory power of the tourist s sociodemographic profile and of holiday characteristics as well as the sensitivity of the length of stay to price changes

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

linearity with project selection and controllable diffusion rate in continuous time principal agent problems i extend holmstrom and milgrom s model by allowing the agent to control privately or publicly the diffusion rate process and show that the optimal contract is still linear i discuss the conditions under which conflicts over the choice of diffusion rate do and do not arise as an application i examine project selection problems of a firm conflicts between the manager and investors arise because giving the manager too much incentive to work to increase the profit from ongoing operations can induce him to be too conservative in project selection possibly resulting in optimal contracts with low sensitivities

the extent of information its relevance for random utility models this paper examines the effect of the researcher s definition of a recreator s choice set on the parameter and welfare estimates from standard random utility models three choice set definitions are compared choice sets based on all alternatives within the survey those alternatives within a specified distance from the respondents home and alternatives familiar to the individual we show that parameter and welfare estimates are sensitive to the definition of the choice set welfare measures of site closures differ in varying ways depending on the familiarity level of the sites in question

performance standards and optimal incentives abstract this paper analyzes incentive design when agents effort influences an uncertain output governed by a random process with semi heavy tails we find that the second best incentive contract pays an output increasing but bounded fee with a shape resembling performance standard contracts that pay a fixed salary plus a capped bonus in this contract the pay performance sensitivity around the standard increases decreases with the frequency with which performance is measured and with the kurtosis volatility parameter of the performance probability distribution we also find that the optimal maximum bonus increases with volatility but decreases with the kurtosis parameter of the performance distribution

brand choice and purchase frequency revisited an application to recreation behavior the role that total purchases play in determining the choice among brands has been considered in microeconomic theory for quite some time but for traditional goods only consumption of outdoor recreation is an unusual good most often measured using an individual s recreational trip adding the trips made on a number of choice occasions seems the obvious way to aggregate this good but doing so leads to several problems in defining a meaningful price index the hicks leontief conditions for aggregation suggest that trips to destinations may be thought of as brand choices on consumption occasions andthe continuous analogue to total purchases may in fact be the individual s total travel an empirical example of the model is used to estimate welfare impacts for a group of anglers

real options and earnings based bonus compensation this study extends the works of mauer and sarkar 2005 and andrikopoulos 2009 by incorporating a regime dependent earnings based bonus into managerial compensation examining the individual effects of ownership shares and earnings based bonus compensation we find that the former provides managers with incentives to issue debt whereas the latter induces the opposite result although consistent impacts are found for the two types of compensation on both agency costs and the optimal investment decisions of managers when managerial compensation comprises both ownership shares and an earnings based bonus there are significant differences in the effects of these two types of performance compensation on managers optimal investment and financing decisions agency costs optimal debt ratios and credit spreads as a result of the specific interactions between the investment and financing decisions

optimal strike prices of stock options for effort averse executives abstract this paper evaluates the common practice of setting the strike prices of executive option plans at the money hall and murphy hall brian murphy kevin j 2000 optimal exercise prices for executive stock options american economic review 90 2 209 214 claim this practice to be optimal since it maximizes the sensitivity of compensation to firm performance however they do not incorporate effort and the possibility that managers are effort averse into their model we revisit this question while explicitly introducing these factors and allowing the reward package to include fixed wages options and stock grants we simulate the manager s effort choice and compensation as well as the value of shareholders equity under alternative compensation schemes and identify schemes that are optimal our simulations indicate that when abstracting from tax considerations it is optimal to award managers with options that will most likely be highly valuable i e substantially in the money on their expiration date prior to 2006 the tax code and financial reporting standards provided incentives to award options that are closer to the money when issued than the options that were optimal in the absence of these considerations recent tax and reporting changes voided these incentives and thus we predict that these changes will induce firms to issue options with lower strike prices than those that were issued prior to 2006

the maturity structure of corporate debt we provide an empirical examination of the determinants of corporate debt maturity our evidence offers strong support for the contracting cost hypothesis firms that have few growth options are large or are regulated have more long term debt in their capital structure we find little evidence that firms use the maturity structure of their debt to signal information to the market the evidence is consistent however with the hypothesis that firms with larger information asymmetries issue more short term debt we find no evidence that taxes affect debt maturity

donor bias towards small countries an overlooked factor in the analysis of foreign aid and economic growth the consensus of the literature is that international cross sectional data do not reveal a stable relationship between foreign aid and economic growth a conclusion which weakens the case for giving aid however previous econometric analysis has not made allowance for the fact that larger countries grow faster but receive less aid in this paper it is demonstrated that when due allowance is made for the effects of country size a positive and significant relationship between aid and growth can be shown to exist

open access and the evolution of the u s spot market for natural gas federal regulations promoting open access transportation dramatically altered the organizational structure of the u s market for natural gas in the 1980s generally unbundling the merchant and transport functions of interstate pipelines an empirical analysis of wellhead spot prices is undertaken to examine the effect of open access on the geographic scope of the spot market using monthly spot price data from 1984 91 three statistical tests are applied and compared price correlations granger causality and cointegration we find that open access integrated the regional wellhead markets into a national competitive market for natural gas the effects of unbundling on contracts for natural gas are then investigated incentives for long term contracts between pipelines and producers are shown to be effectively removed by the introduction of competitive buying and selling of gas at the wellhead through open access

market integration efficiency of arbitrage and imperfect competition methodology and application to u s celery this paper develops and applies a methodology to test for efficiency of interregional commodity arbitrage application of the methodology requires only time series data on prices for alternative cities regions countries or product forms yet the approach is capable of generating evidence on a number of market parameters including market integration arbitrage efficiency the magnitude of marketing margins product substitutability and competitiveness of markets estimation is based on a switching regression model with three regimes efficient arbitrage relative shortage and relative glut results from application of the model to u s celery marketing indicated significant departures from efficient arbitrage for both california and florida celery

does option compensation increase managerial risk appetite this paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls under the manager s optimal policy the option ends up either deep in or deep out of the money as the asset value goes to zero volatility goes to infinity however the option compensation does not strictly lead to greater risk seeking sometimes the manager s optimal volatility is less with the option than it would be if he were trading his own account furthermore giving the manager more options causes him to reduce volatility managers with convex compensation schemes play an important role in financial markets this paper solves for the optimal dynamic investment policy for a risk averse manager paid with a call option on the assets he controls the paper focuses on how the option compensation impacts the manager s appetite for risk when he cannot hedge the option position on one hand the convexity of the option makes the manager shun payoffs that are likely to be near the money under the optimal policy the manager either significantly outperforms his benchmark or else incurs severe losses furthermore in examples of optimal trading strategies asset volatility goes to infinity as asset value goes to zero yet option compensation does not strictly lead to greater risk seeking as asset value grows large or if the evaluation date is far away the manager moderates asset risk for example if the manager has constant relative risk aversion crra asset volatility converges to the merton constant as asset value goes to infinity in some situations the manager actually chooses a lower asset volatility than he would if he were investing on his own because the leverage inherent in his option magnifies his exposure to the asset volatility in addition with all constant or decreasing absolute risk averse utility functions from the hyperbolic absolute risk averse hara class giving the manager more options causes him to reduce asset volatility in the crra case for example the manager targets a fixed volatility for his personal

modelling choice and switching behaviour between scottish ski centres the paper identifies the need to model the skier s choice of centre and the basic ideas underlying discrete choice models and their estimation it then identifies data requirements and sources the final choice of specification and the estimated parameters of the resultant nested multinomial logit model the results indicate two quite distinct markets for day trippers snow cover cost and to a lesser extent the journey length were the critical factors for those staying overnight the key determinant in this market seems to be accommodation interestingly centres which for the day tripper are competitors become for the overnight customer complementary

narrow choice sets in a random utility model of recreation demand we consider the implications of narrow choice sets on welfare estimation in a random utility model of recreation demand we hypothesize that careful formulation of the choice set focusing on the sites of policy interest and their closest substitutes will give reasonably accurate welfare estimates we use nearby sites as close substitutes and treat more distant sites as aggregate alternatives in our application to fishing in maine we find that the welfare estimates are rather sensitive to narrowing choice sets in this manner the sensitivity largely tracts variation in the estimated travel cost coefficient across the different models considered