HIER 1999 Abstracts
1858. Leslie A. Jeng, Andrew Metrick and Richard Zeckhauser
The Profits to Insider Trading: A Performance-Evaluation Perspective
Abstract
This paper estimates the profits to insiders when they trade their company's stock. We construct a rolling "purchase portfolio" that holds all shares purchased by insiders over the previous year and an analogous "sale portfolio" that holds all shares sold by insiders over the previous year. We then analyze the returns to these value-weighted portfolios using performance-evaluation methods. This approach allows us to study the returns to insider transactions beginning on the day after their execution, and is free of the statistical difficulties that plague event studies on long-horizon returns. Using a comprehensive sample of reported insider transactions from 1975-1996, we find that the purchase portfolio earns abnormal returns of about 40 basis points per month, with about one-sixth of these abnormal returns accruing within the first five days after the initial transaction, and one-third within the first month. The sale portfolio does not earn abnormal returns. Our portfolio-based approach also allows for straightforward decompositions of the purchase and sale portfolios by various characteristics. We find that the abnormal returns to insider trades in small firms are not significantly different from those in large firms, and that top executives do not earn higher abnormal returns than do other insiders.
1859. Martin L. Weitzman
Making Dynamic Welfare Comparisons
Abstract
For guidance in determining which items should be included in comprehensive NDP and how they should be included, reference is often made to the linearized Hamiltonian from an optimal growth problem. The paper gives a rigorous interpretation of this procedure in terms of a money-metric utility function linked to familiar elements of standard welfare theory. A key insight is that the Hamiltonian itself is a quasilinear utility function, so imposing the money-metric normalization is simply equivalent to using Marshallian consumer surplus as the appropriate measure of welfare when there are no income effects. The twin concepts of the "sustainability-equivalence principle" and the "dynamic welfare-comparison principle" are explained, and it is indicated why these two principles are important for the theory of national income accounting.
1860. Martin L. Weitzman
Economic Profitability vs. Ecological Entropy
Abstract
Privately, the most profitable human use of biomass is widespread monoculture, which creates large target hosts that invite potentially lethal pathogens. In analyzing the tradeoffs, I explain how the famous formula for ecological entropy, H'= -E qj log qj, can be given a mathematically rigorous interpretation as measuring the "generalized resistance" of an ecosystem to extinction failure. Using this measure, a relationship is derived between standard economic welfare produced by a specialized biomass regime and the social-texternality risk of its ecosystem failing. The paper shows that efficient combinations may be conceptualized as if there is some overall balance between economic profitability and ecological entropy.
1861. Tor Jakob Klette, Jarle Moen and Zvi Griliches
Do Subsidies to Commercial R&D Reduce Market Failures - Microeconomic Evaluation Studies?
Abstract
A number of market failures have been associated with R&D investments and significant amounts of public money have been spent on program to stimulate innovative activities. In this paper, we review some recent microeconometric studies evaluating effects of government sponsored commercial R&D. We pay particular attention to the conceptual problems involved. Neither the firms receiving support, nor those not applying, can be considered random draws. Furthermore, those not receiving support are often affected by the programs, and spillover effects are often a main justification for R&D subsidies. Constructing a valid control group under these circumstances is challenging, and we relate our discussion to recent advances in econometric methods for evaluation studies based on non-experimental data. We also discuss some analytical questions that need to be addressed in order to assess whether R&D support schemes can be justified. For instance, what are the implications of firms' R&D investments being complementary to each other and to what extent are potential R&D spillovers internalized in the market?
1862. Glenn Ellison and Edward L. Glaeser
The Geographic Concentration of Industry: Does Natural Advantage Explain Agglomeration?
Abstract
1863. Eric Maskin and John Moore
Implementation and Renegotiation
Abstract
The paper characterises the choice rules that can be implemented when agents are unable to commit themselves not to renegotiate the mechanism.
1864. Martin L Weitzman
A Contribution to the Theory of Welfare Comparisons
Abstract
Using only information based on currently-observable market behavior, the paper shows how to make rigorous dynamic welfare comparisons among economies or economic situations having arbitrarily-different endowments and technologies,but sharing a common dynamic preference ordering. The correct answers to seemingly complicated questions, which intrinsically involve comparing wealth-like measures of dynamic well-being, can be translated isomorphically into a simple-minded story told in the familiar language of old-fashioned static consumer-welfare theory.
1865. Laurent E. Calvet
Incomplete Markets and Volatility
Abstract
This paper shows that the precautionary motive, combined with asset incompleteness, is a major source of volatility and indeterminacy in financial markets. Price fluctuations originate from agents' efforts to insure themselves through time by borrowing and lending instead of shifting income across states of nature by trading in risky assets. A high interest rate at a future date reduces the potential for future consumption smoothing across time via borrowing, leading to a strong precautionary motive and a low interest rate in the current period. The negative feedback between future and current interest rates generates fluctuations. This logic is developed in SPEC, a CARA-normal model with many periods, risky time-dependent endowments, and endogenous interest rates. Unlike existing frameworks, SPEC allows us to analyze the effect of financial structure on temporal fluctuations along a given path. In equilibrium, individual consumption is random, but the macro variables are deterministic and vary through time. When there is an intermediate level of market incompleteness and sufficient investor impatience, fluctuations in the real interest rate can be large, even though the aggregate endowment is constant. SPEC has a unique equilibrium under a finite horizon; on the other hand, with a finite number of infinitely-lived agents, there exists a robust continuum of equilibria that are neither bubbles nor sunspots.
1866. David Canning, Clifford W. Jefferson, and John E. Spencer
Optimal Credit Rationing in Not-For-Profit Financial Institutions
Abstract
We examine the dynamic optimization problem of Not-For-Profit (NFP) financial institutions that aim to maximize the welfare of members. We characterize the optimal policy and find that it involves credit rationing. Interest rates set by mature NFPs will typically be more favorable to customers than market rates, as "profits" are distributed in the form of interest rate subsidies. Credit rationing is required to prevent these subsidies from distorting the volume of loans from the efficient level. Efficient credit rationing requires knowledge of the consumer surplus generated by each loan, necessitating a close relationship between the NFP and its members.
1868. Aaron Tornell
Common Fundamentals in the Tequila and Asian Crises
Abstract
We find that in 1995 and 1997 the crisis did not spread in a purely random way. The cross-country variation in the severity of the crisis was largely determined by three fundamentals: the strength of the banking system, the real appreciation, and the international liquidity of the country. We also find that the rule that links fundamentals to the crisis severity has been the same in both the Tequila and Asian crises.
1869. Aaron Tornell
Privatizing the Privatized
Abstract
1870. Glenn Ellison and Drew Fudenberg
The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry
Abstract
1871. Drew Fudenberg and Jean Tirole
Customer Poaching and Brand Switching
Abstract
Firms sometimes try to "poach" the current customers of their competitors by offering them special inducements to switch. We analyze duopoly poaching under both short-term and long-term contracts in two polar cases: either each consumer's brand preferences are constant from one period to the next, or preferences are independent over time. With fixed preferences, poaching induces socially inefficient switching, so welfare is highest when this form of price discrimination is banned; the equilibrium with long- term contracts has less switching than that when only short-term contracts are feasible, so here long-term contracts promote effkiency. With independent preferences, first-period choices do not provide a basis for second-period price discrimination, so the quilibrium with short-term contracts is simply two repetitions of the static equilibrium. and is thus efficient. However. the equilibrium in long-term contracts involves ineffkiently little switching.
1872. Anne Krueger and Aaron Tornell
The Role of Bank Restructuring in Recovering from Crises: Mexico 1995-98
Abstract
1873. Drew Fudenberg and Jean Tirole
Pricing Under the Threat of Entry by a Sole Supplier of a Network Good
Abstract
This paper develops a model of pricing to deter entry by a sole supplier of a network good. We show that the installed user base of a network good can serve a preemptive function similar to that of an investment in capacity if the entrant's good is incompatible with the incumbent's good and there are network externalities in the demand for each good. Consequently, the threat of entry of an incompatible good can lead the incumbent to set low prices. Although the threat of entry is welfare-enhancing in our model, the welfare effects of actual entry are ambiguous. Put differently, a government policy that led to the entry of a firm that otherwise would not have entered, such as an entry subsidy, may lower welfare. We try to identify the main factors that should be considered in thinking about the welfare effects of entry deterrence in similar models.
1874. Edward L. Glaeser
Urban Primacy and Politics
No Abstract
1875. Edward L. Glaeser, David Laibson, Jose A. Scheinkman and Christine L. Soutter
What is Social Capital? The Determinants of Trust and Trustworthiness
Abstract
Using a sample of Harvard undergraduates, we analyze trust and social capital in two experiments. Trusting behavior and trustworthiness rise with social connection; differences in race and nationality reduce the level of trustworthiness. Certain individuals appear to be persistently more trusting, but these people do not say they are more trusting in surveys. Survey questions about trust predict trustworthiness not trust. Only children are less trustworthy. People behave in a more trustworthy manner towards high status individuals, and therefore status increases earnings in the experiment. As such, high status persons can be said to have more social capital.
1876. Gene M. Grossman and Elhanan Helpman
Incomplete Contracts and Industrial Organization
Abstract
We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a unique, specialized component. Vertically integrated firms can manufacture the components they need in the quantity and type that maximizes profits, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but input suppliers face a potential hold-up problem. We study the equilibrium mode of organization when inputs are fully or partially specialized. We consider how the degree of competition in the market and other parameters affect the equilibrium choices, and how the equiliberium compares with the efficient allocation.
1877. Richard N. Cooper
Exchange Rate Choices
Abstract | Paper
By late 1998, 101 countries had declared that their currencies were allowed to float against other currencies, meaning that the currency was not formally pegged to some other currency or basket of currencies. This was up from 38 ten years earlier, suggesting a significant move toward greater flexibility of exchange rates. Yet during the 1990s half a dozen countries installed currency boards, a particular strong form of exchange rate fixity; ten European currencies were eliminated in favor of a common currency, the euro; other countries were actively considering installing currency boards, or even adopting the US dollar for domestic use.
After a quarter century of floating among the major currencies, exchange rate policy is sstill a source of vexation, and the appropriate choise is by no means clear. Should a country allows its currency to float, subject perhaps to exchange market intervention from time to time? Or should it fix its currency to some other currency or currencies, and if so to which one(s)? Economists do not offer clear persuasive answers to these questions. Yet for most countries, all but the largest, with the most develoed domestic capital markets, the choise of excahnge rate policy is probably their single most important macro-economic policy decision, strongly influencing their freedom of action and effectiveness of other macro-economic policies, the evolution of their financial systems, and even the evolution of their economies.
This paper will not answer these questions, but it will suggest that the responses that have been given by many economists over the past few decades are inadequate and possibly quite poor advice to decision-makers.
1878. Edward L. Glaeser and Jose A. Scheinkman
Measuring Social Interactions
Abstract
This paper presents an overview of the economics that lies behind social interaction models and briefly discusses the empirical approaches to social interactions. We present a simple model with local interactions, similar to Glaeser, Sacerdote and Scheinkman (1996) but using aa continuous action space and starting with optimizing behavior. We then extend the model to include both global and local interactions. We suggest and use a methodology for using variation of intra-city aggregates to identify the relative sizes of local and global interactions. We also present a model with endogenous location choice and use the predictions of that model to identify the sources of cross-city variance that are due to sorting and interaction. Finally, we present a brief discussion of using time-series to estimate the social interactions in broad aggregates.
1879. Randall Morck, Bernard Yeung and Wayne Yu
The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?
Abstract | Paper
Stock prices move together more in low-income economies than in high-income economies. This finding is clearly not due to market size differences, and only partially explained by slightly higher fundamentals correlation in low-income economies. However, measures of a country's institutionalized respect for property riights do appear to explain these differences. We conjecture that weak private property rights impede informed trading and increase systematic noise trader risk. We also conjecture that, in countries that protect public investors poorly from corporate insiders, intercorporate income shifting may make firm-specific information less useful to risk arrbitrageurs and therefore impede its capitalization into stock prices. Although our tests support these conjectures to some extent, we invite other explanations of our main finding.
1880. Oliver Hart and John Moore
On the Design of Hierarchies: Coordination Versus Specialization
Abstract | Paper
We develop a model of hierarchies based on the allocation of authority. A firm's owners have ultimate authority over a firm's decisions, but they have limited time or capacity to exercise this authority. Hence owners must delegate authority to subordinates. However, these subordinates also have limited time or capacity and so further delegation must occur. We analyze the optimal chain of command given that different agents have different tasks: some agents are engaged in coordination and others in specialization. Our theory throws light on the nature of hierarchy, the optimal degree of decentralization, and the boundaries of the firm.
1881. Martin L. Weitzman
An "Economics Proof" of a Separating Hyperplane Theorem
Abstract | Paper
Based centrally on the economic concept of a cost function, an "economics proof" (by induction) is given of the supporting hyperplane.
1882. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny
Investor Protection and Corporate Valuation
Abstract | Paper
We present a model of the effects of legal protection of minority shareholders and of cash flow ownership by a controlling shareholder on the valuation of firms. We then test this model using a sample of 371 large firms from 27 wealthy economies. Consistent with the model, we find evidence of higher valuation of firms in countries with better protection of minority shareholders, and weaker evidence of the benefits of higher flow ownership by controlling shareholders for corporate valuation.
1883. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny
Investor Protection: Origins, Consequences, Reform
Abstract | Paper
Recent research has documented large differences between countries in ownership concentration in publicly traded firms, in the breadth and depth of capital markets, in dividend policies, and in the access of firms to external finance. We suggest that there is a common element to the explanations of these differences, namely how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, discuss the possible origins of these differences, summarize their consequences, and assess potential strategies off corporate governance reform. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems.
1884. Aditya Kaul, Vikas Mehrotra and Randall Morck
Demand Curves for Stocks Do Slope Down: New Evidence From An Index Weights Adjustment
Abstract | Paper
Weights in the Toronto Stock Exchange 300 index are determined by the market values of the included stocks' public floats. In November 1996, the exchange implemented a previously announced revision of its definition of the public float. This revision, which increased the floats and the index weights of 31 stocks, conveyed no information and had no effect on the legal duties of shareholders. Affected stocks experienced statistically significant excess returns of 2.3 percent during the event week, and no price reversal occurred as trading volume returned to normal levels. These findings support downward sloping demand curves for stocks.
1885. Simon Johnson and Andrei Shleifer
Coase v. the Coasians
Abstract
1886. Christopher Harris and David Laibson
Dynamic Choices of Hyperbolic Consumers
Abstract
Laboratory and field studies of time preference find that discount rates are much greater in the short-run than in the long-run. Hyperbolic discount functions capture this property. This paper solves the decision problem of a hyperbolic consumer who faces stochastic income and a borrowing constraint. The paper uses the bounded variation calculus to derive the Hyperbolic Euler Relation, a natural generalization of the standard Exponential Euler Relation. The Hyperbolic Euler Relation implies that consumers act as if they have endogenous rates of time preference that rise and fall with the future marginal propensity to consumer (e.g., discount rates that endogenously range from 5% to 41% for the example discussed in the paper). The Hyperbolic Euler Relation implies that hyperbolic consumers will engage in high interest borrowing even when the consumption path is downward sloping, will experience predictable sharp drops in consumption, and will fail to exhibit precautionary savings effects.
1887. Simon Johnson, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer
Tunnelling
Abstract | Paper
Tunnelling is defined as the transfer of assets and profits out of firms for the benefit of their controlling shareholders. We describe the various forms that tunnelling can take, and examine under what circumstances it is legal. We discuss two important legal principles--the duty of care and the duty of loyalty--which courts use to analyze involving tunnelling. Several important legal cases from France, Belgium, and Italy illustrate how and why the law accommodaates tunnelling in civil law countries, and why certain kinds of tunnelling are less likely to pass legal scrutiny in common law countries.
1888. N. Gregory Mankiw
The Savers-Spenders Theory of Fiscal Policy
Abstract
The Macroeconomic analysis of fiscal policy is usually based on one of two canonical models--the Barro-Ramsey model of infinitely-lived families or the Diamond-Samuelson model of overlapping generations. This paper argues that neither model is satisfactory and suggests an alternative. In the proposed model, some consumers plan ahead for themselves and their descendants, while others live paycheck to paycheck. This model is easier to reconcile with the essential facts about consumer behavior and wealth accumulation, and it yields some new and surprising conclusions about fiscal policy.
© 2007 by the President and Fellows of Harvard College