Profit Share and Partner Choice in International Joint Ventures

This paper suggests a new approach to the determination of profit allocation between the partners in international joint ventures (IJVs). We also examine the issue of partnership choice. The foreign firm gives a large share of profits to its partner and in return receives a better tax treatment from the host government. Under linearity of costs and demand functions, it would choose the more efficient domestic firm as an IJV partner, and the domestic firms would happily accept the offer of partnership from the foreign firm. However, the host government, under certain situations, may persuade the foreign firm, by a suitable lump‐sum transfer, to form a partnership with the less efficient firm.     

Strategic delegation under quality competition

This paper examines strategic manipulations of incentive contracts in a model where firms compete in quality as well as in price. Compensation schemes for managers are based on a linear combination of profits and sales. For a given level of quality, a firm desires to reduce the manager's compensation when product sales increase; this serves as the firm's commitment to raise prices. Nevertheless, in general, a manager has a stronger incentive to produce goods of higher quality if he is compensated according to sales. Therefore, a compensation scheme that penalizes a manager when sales increase may result in products that are inferior to those of its rival. We show that, depending on the nature of quality, a positive weight on sales may be desirable when firms compete in quality and price. Welfare implications are also explored.     

Strategic incentive in mixed oligopoly

This paper develops a two stage game model with two competing firms in a mixed oligopolistic market, a public firm and a private firm, and only the public firm giving its manager an incentive contract. The paper presents three types of public firm owner’s objective function and each objective function corresponds to three types of delegation, either of a profit-revenue type, or of a relative performance, or, finally, of a market share one. In an equilibrium, the public firm owner has a dominant strategy to reward his manager with an incentive contract combining own profits and competitor’s profits. Different from Manasakis et al. (2007), this paper suggests that the dominant strategy of the public firm owner is to reward his manager with a profit-revenue type of contract or a market-share type of contract, that is to say profit-revenue is identical with market-share. Using relative-performance type of contract will move the manager away from the owner’s true objective function when the public firm owner only pursues maximizing the social welfare. The private firm will be crowded out and the public firm is the only producer of the market. Under profits-revenues type of contract, the owner’s objective of maximizing the summation of the profit and consumer surplus leads the manager more aggressive. Different combinations give us different results. By comparing the results, each type of incentive contract is an owner’s best response to his decision.     

STRATEGIC DELEGATION UNDER UNIONISED DUOPOLY: WHO WILL BARGAIN WITH UNIONS?

This paper investigates the choice of a firm's delegate (either the owner or the manager) bargaining wages and employment with a union under a unionised duopoly. We show that if an owner delegates the task of bargaining to a manager, the owner always compensates the manager for profits by penalising sales, regardless of whether the rival owner delegates or not. Moreover, we show that an owner's decision to delegate the task of bargaining to a manager depends on the incremental benefit of delegating and the cost of hiring a manager. The asymmetric outcome (wherein one owner delegates but the other does not) can occur if there is a sufficiently large disparity of hiring costs between the owners. Finally, we show that the union in an owner‐managed firm always earns more than the union in a managerial firm.     

The Strategic Choice Of Managers And Managerial Discretion

Managerial discretion is likely to be beneficial to shareholders because of strategic cross-effects in an oligopoly. In certain circumstances, shareholders deliberately retain managerial discretion in equilibrium even when the reduction of managerial discretion is cost free. It is found that the positive effect of managerial discretion on profits can only be created by power-building (shirking) managers if quantity (price) competition prevails in the market. Consequently, the dominant strategy for the owners of a quantity- (price-) competing company is to employ a power-building (shirking) manager. The strategic effect of such a match between the type of manager and the form of competition exists for all managerial decisions as far as firms interact with each other.     

Labor Taxation and Foreign Direct Investment*

In this paper, we analyze the implications of the effective taxation of labor for profits and, hence, the decisions made by multinational enterprises concerning the location of their headquarters. If a higher employee‐borne tax burden reduces manager effort, it should also negatively affect firm profits and the location of the headquarters. We compile data on personal income tax profiles for 52 economies and the year 2002 at different moments of the distribution of gross wages. Our findings suggest that higher employee‐borne labor taxes are less conducive to the location of headquarters and foreign direct investment stocks in a given host economy.     

Strategic delegation in consumer cooperatives under mixed oligopoly

The main aim of this paper is to study the propensity of consumer cooperatives (Coops) to use incentive schemes in situations of strategic interaction with profit-maximizing firms (PMFs). Our model provides a reason why Coops are less prone than PMFs to pay variable bonuses to their managers. We show that this occurs under price competition when in equilibrium the Coop prefers to pay a flat wage to its manager relying instead on her intrinsic motivation, whereas the profit-maximizing rival adopts a variable, high-powered incentive scheme. The main rationale is that, by recruiting a manager whose preferences are aligned with the company goals (e.g., a consumer-owner), the Coop is per se highly expansionary in term of output. Therefore, the Coop does not need to rely on an externally hired manager who sets prices aggressively to expand market share and quantity. Furthermore, adopting a monetary reward based on sales and profits leads to distorted incentives with respect to the Coop’s goal, which after all is the welfare of its members.     

Efficiency,access, and the mixed delivery of health care services

Universal health systems often rely on both pubic provision and contracting arrangements with private hospitals. This paper studies the optimal mix of public and private provision of health care services. We propose a model in which the regulator acts as athird-party payer, and aims to ensure universal access to treatment at minimal cost. Patients need one unit of medical services and differ in the severity of illness. A private and a public hospital are available. Under incomplete contracts, ownership affects the regulatory constraints and the power of managerial incentives. Only the private manager internalizes profits, and has incentives to reject costly patients and to exert effort in cost reduction. Contracting with the private hospital is optimal when managerial effort is relatively effective in reducing costs. By using the public hospital as a last resort provider, the regulator can ensure access, provide incentives to the private manager, and internalize part of the resulting cost savings. Imposing a no-dumping constraint on the private hospital reduces the power of incentives and is not always optimal.     

Delegation and commitment in durable goods monopolies

This paper studies a simultaneous-move infinite-horizon delegation game in which the principal of a durable goods monopoly entrusts pricing decisions to a manager who enjoys consuming her monetary rewards but dislikes production effort. The delegation contract allows for continual interference with managerial incentives: in each period the principal rewards the manager according to her performance. We show that when the cost of delegation is low relative to profits, the principal can attain the precommitment price plan in a perfect rational expectations equilibrium. The paper analyzes the robustness of this result under alternative specifications of timing and objectives. We also provide a numerical characterization of the equilibrium strategies for the case of linear-quadratic payoffs.     

Strategic Delegation of Multiple Tasks

This paper studies both the owner–manager relationship and the union–firm relationship in a model of unionised duopoly to analyse whether a firm's owner delegates the task of wage bargaining to a manager along with the task of output determination. We also analyse the profit and welfare effects of multiple‐task delegation. It has been shown in the literature that, when there is only one delegation task – output determination – delegation of output decisions to managers leads to lower profits for owners than non‐delegation as pure profit‐maximisation. However, when there are two delegation tasks as in our model – output determination and wage bargaining – we show that owners are better off delegating both tasks than delegating only the output decision or not delegating at all. This result provides a rationale and managerial insight for strategically delegating multiple tasks to managers. Moreover, we show that union utility, consumer surplus and social welfare are all higher when owners do not delegate the task of wage bargaining than when they do. This result suggests that governments implement union contracts that require owners, rather than managers, to negotiate wages with unions in order to benefit unions and consumers and to improve social welfare as well.     

Tax Overpayments, Tax Evasion, and Book-Tax Differences

A strictly risk-averse manager makes joint decisions on a firm's tax payments and book profit declarations according to accounting standards. It is analyzed how the incentives to overpay or evade taxes and to inflate book profits are influenced by (1) the composition of the manager's remuneration, (2) the ability to control the manager's actions, (3) the costs of making untruthful profit declarations, and (4) the tax rate. If the firm's owner or the government take into account these effects when pursuing their own objectives, the changes in tax payments and book profit declarations become theoretically more ambiguous.     

Allocation of resources in a team

The informational efficiency of “price” and “demand” messages in a resource allocation mechanism is studied here with the aid of the theory of teams¹. In the usual analysis of adjustment mechanisms (tâtonnement, decomposition), the adjustment process is assumed to run to completion, so that all the allocation and resource decisions can be made on the basis of enough information to guarantee optimal decisions². If, however, decisions must be made before the adjustment process is completed, say, after only a few iterations, then the decisions must be taken with limited information, and thus under conditions of uncertainty. This paper discusses a simple model in an attempt to examine explicitly these problems of uncertainty and limited information. A set of enterprise managers are assumed to produce various commodities, using scarce resources allocated to the enterprises by a resource manager. The enterprise managers also make decisions that affect their individual outputs. Varous kinds of communication among the managers, together with the corresponding information structures, are formulated, including the communication of price and demand messages. Optimal decision rules for the managers are calculated for the objective of maximizing the expected value of an index of total output. (It is assumed that the production functions and the supplies of scarce resources are stochastic, but are observed by the respective managers.) It is shown that optimal decision rules based on a single exchange of price and demand messages, between the resource manager on the one hand and the enterprise managers on the other, produces as good results as rules based on (1) complete information for the resource manager, and (2) information about the supplies of resources on the part of the enterprise managers. Furthermore, these price and demand messages produce approximately fully optimal results when the number of enterprises is large. However, the optimal decisions of the enterprise managers do not maximize profits, at least relative to any price that is the same for all enterprises. An assumption that the production functions are quadratic plays a key role.     

The impacts of suppliers and mutual outsourcing on organizational forms

We consider a downstream duopoly model with a monopolistic common supplier and mutual outsourcing between the two symmetric downstream firms. The market structure captures the recent procurement environment in the smartphone industry. We also incorporate managerial delegation into the duopoly model because deciding on organizational forms within a firm is critical to achieving better performance in almost all industries. There is an equilibrium in which only one of the firms delegates its downstream production to its sales manager. A delegating firm becomes less aggressive. The profits when both firms delegate can be higher than those when no firm delegates. Social welfare when both firms delegate can be smaller than that when no firm delegates.     

Stackelberg financial-leader in insider trading model

In this paper, we extend the Jain-Mirman [Jain, N., & Mirman, L. (2000). Real and financial effects of insider trading with correlated signals. Economic Theory, 16, 333–353, Jain, N., & Mirman, L. (2002). Effects of insider trading under different market structures. The Quarterly Review of Economics and Finance, 42, 19–39] and the Daher-Mirman [Daher, W., & Mirman, L. (2006). Cournot duopoly and insider trading with two insiders. The Quarterly Review of Economics and Finance, 46, 530–551, Daher, W., & Mirman, L. (2007). Market structure and insider trading. International Review of Economics and Finance, 16, 306–331] papers on competition, and postulate that the competition among the insiders in the financial market be Stackelberg. However, an owner high in the organizational hierarchy, who designs manager compensation mechanisms and chooses a manager to serve his purpose, should have information on the manager's reaction and act as a Stackelberg leader in the financial sector. We show that owner's profit can definitely enlarged while the manager's profits may decrease or increase depending on the variances in the two sectors, which are the exogenous parameters.     

Attribution of hedge fund returns using a Kalman filter

Hedge funds offer attractive investment possibilities because they engage in investment styles and opportunity sets which – because they are different from traditional asset class funds – generate different risk exposures. Conventional wisdom holds that hedge funds add value and provide unique investment opportunities because of their ability to invest in disparate risk exposures, and via the manager’s skill in selecting stocks and timing the market. In this article, a Kalman filter is used to decompose the time series of hedge fund returns into market timing and stock selection factors to establish whether fund managers really do generate statistically significant abnormal profits. Compelling evidence supports an alternative interpretation for the market timing return constituent. This work represents the first time the Kalman filter has been used to extract a time series of the capital asset pricing model’s dynamic variables for determining return component magnitudes.     

Profits in the UK economy: some Kaleckian models ∗

Official statistics on profits in the UK economy during the 1980s show a substantial increase in the share of profits in GDP after 1981. However, these figures are based on companies' own returns which have been distorted by changes in accounting practices and taxation, privatization and the arbitrary allocation of profits by multinational companies. Kalecki's theory of profits provides a way of systematically determining gross profits in national income. However, the use of this method is complicated by the absence of data on the distribution of savings and consumption between wages and profits, and Kalecki's own estimates of the equation appear to be flawed in their statistical methodology.

A number of ways of overcoming the distributional problem are explored in this paper, using data from the sectoral capital accounts of the UK during the 1980s. The methodology suggested by Asimakopulos to estimate Canadian profits turns out to be the weakest on theoretical and statistical grounds. All estimates are highly correlated with the officially reported profit series. However, in real terms (defined in Keynes' wage units as a proportion of implied wage income), they all show a profits cycle in which real profits in the second half of the 1980s are lower than they were at the end of the 1970s. The conclusion that there was no upward trend in the profits cycle suggests that the UK government's supply-side policies, designed to make the economy more profitable, did not achieve this purpose during the 1980s.

This article is an investigation of what happened to profits in the UK using Kaleckian models of how profits are determined to supplement the rather unreliable data that is provided by the government's Central Statistical Office. In the course of the investigation, a number of different models derived from Kalecki's fundalmental profits equations are presented. Two of them turn out to have a high correlation with the official published data, but contrary to that information suggest that there has been no upward trend in profits.     

Forming and Dissolving Partnerships in Cooperative Game Situations

A group of players in a cooperative game are partners (e.g., as in the form of a union or a joint ownership) if the prospects for cooperation are restricted such that cooperation with players outside the partnership requires the accept of all the partners. The formation of such partnerships through binding agreements may change the game implying that players could have incentives to manipulate a game by forming or dissolving partnerships. The present paper seeks to explore the existence of allocation rules that are immune to this type of manipulation. An allocation rule that distributes the worth of the grand coalition among players is called partnership formation‐proof if it ensures that it is never jointly profitable for any group of players to form a partnership and partnership dissolution‐proof if no group can ever profit from dissolving a partnership. The paper provides results on the existence of such allocation rules for general classes of games as well as more specific results concerning well‐known allocation rules.     

网络外部性下基于投资溢出的企业合作研发博弈模型

本文建立了网络外部性环境下基于投资溢出的企业合作研发博弈模型,研究了企业合作研发策略,分析了网络外部性、兼容性以及投资溢出等对企业合作研发动机、企业利润和社会福利等的影响。研究表明,合作研发能提高企业利润和社会福利;兼容性较大或外部性较小时,提高产品外部性会增强企业合作研发意愿;提高兼容性或投资溢出则始终会增强企业合作研发意愿,提高企业利润和社会福利。因此,政府应鼓励企业生产高网络外部性和高兼容性的产品,并增强投资溢出效应,激励企业投入更多研发资源,提高企业利润和社会福利。     

Microdata evidence on rent-sharing

We examine the effect of firm profits on wages for individual workers while focusing on the empirical complications associated with estimating the extent of rent-sharing. Controlling for worker and firm fixed-effects and using several instruments to deal with the endogeneity of profits, we report results indicating that Ordinary Least Square (OLS)-estimates strongly underestimate the effects of profits on wages. Moreover, the effect of profits on wages are estimated separately for firms with increasing and decreasing profits within a given time period. We find a positive and stable effect only in firms with increasing profits. This is in line with the idea that falling profits do not lead to wage cuts while increasing profits imply higher wages.     

Wages and profits

Wages and profits must be regarded as simultaneously determined—profits must not be regarded as a residual. In the short period both are determined by current demand, profits fluctuating much more strongly than wages. More important is the long-period factor, which depends upon capital-labor substitution elasticity.