Price‐increasing competition

In a discrete choice model of product differentiation, the symmetric duopoly price may be lower than, equal to, or higher than the single‐product monopoly price. Whereas the market share effect encourages a duopolist to charge less than the monopoly price because a duopolist serves fewer consumers, the price sensitivity effect motivates a higher price when more consumer choice steepens the firm's demand curve. The joint distribution of consumer values for the two conceivable products determines the relative strength of these effects. The analysis provides precise conditions for price‐increasing competition and reveals that it is unexceptional from a theoretical perspective.     

Banks' consumer lending reaction to fintech and bigtech credit emergence in the context of soft versus hard credit information processing

Access to credit information and the ability to process this information effectively determine the conditions of competition in the credit market. Traditionally, local banks have had an advantage in relationship lending (based on soft credit information), whereas foreign banks are considered to base on hard credit information. With the advent of financial technology (or “fintech”) companies (or “fintechs”) and giant technology (or “bigtech”) companies (or “bigtechs”) providing alternative credit, the conditions of competition in the credit market have changed. In this empirical study, we shed light on the nature of the information advantages fintech and bigtech companies have compared to banks and how alternative lenders use them. We analyze competition in the consumer lending segment between banks and fintechs as well as bigtechs providing alternative lending. We used a database combining bank-level characteristics and country-level proxies for 72 countries from 2013 to 2018. We find that in developed markets, the relationships between fintech and bigtech credit providers and banks are similar and competitive in nature. However, banks' consumer lending grows simultaneously with fintech credit market development in emerging economies, but decreases in the aftermath of the emergence of bigtech credit. Fintech credit seems to penetrate market segments not serviced by banks; thus, it plays a complementary role, however only in emerging economies. Bigtech companies compete even more with banks and push some banking offers out of the market, both in emerging and developed economies. Furthermore, we show that domestic and privately-owned banks are more negatively affected by competition from technology-based lending, particularly bigtech, than foreign banks. Thus, bigtech lending may be treated as a serious competition for banks' relationship lending based on soft credit information processing, traditionally provisioned by local banks.     

Aggressive leaders

I characterize the incentives to undertake strategic investments in markets with Nash competition and endogenous entry. Contrary to the case with an exogenous number of firms, when the investment increases marginal profitability, only a “top dog” strategy is optimal. For instance, under both quantity and price competition, a market leader overinvests in cost reductions and overproduces complement products. The purpose of the strategic investment is to allow the firm to be more aggressive in the market and to reduce its price below those of other firms. Contrary to the post‐Chicago approach, this shows that aggressive pricing strategies are not necessarily associated with exclusionary purposes.     

DESIGNING ACCOUNTABILITY: THE MANAGERIAL SEMIOTICS PROJECT

The empirical occasion of this paper is an experiment by the Sharp electronics company in the application of semiotics to the management of aesthetic design. On the assumption that the visual “signs” incorporated into products are freely translatable to and from linguistic messages, a verbal-visual “dictionary of translation” was built up from designers' own accounts of the reasons behind their design decisions. The aim was to construct a form of accountability for design so as to render it transparent to managerial control. This exercise is viewed as an example of the continuing pressure upon management science (“consumer behaviour” in this instance) to produce languages of accountability through which expertise can be made to report to the inexpert. It is suggested that the market for such languages of accountability is rooted in virtual universality of the “task-discontinuous status organisation” (Offe, 1976). Organisations of this kind are characterised by horizontal discontinuities at which the hierarchy of expertise gives way to one of managerial technology. It is these which pose the problem of agency to which languages of accountability appear as an answer. The problem is that such languages are constrained by their market to represent expert practice as intelligible to, and controllable by, a stratum of general managers. Where this is not the case, as is arguably so with aesthetic design, attempts to control practice on the basis of a misleading picture of that practice are likely to result in dysfunctionalities. In the case of the Sharp experiment the outcome was a naive attempt to convey a complex textual message through the choice of a colour for one of the company's products. The paper then discusses the alternative of allowing languages of accountability to emerge from the culture of practice itself. The problem here is that the resulting forms of accountability are likely to allow generous space for professional self-interest. A third possibility is then indicated: that of negotiating forms of accountability between practitioner and user on the model of community participation in architectural design.     

Agency costs and product market competition: The case of audit pricing in Greece

Jensen and Meckling (1976) argue that agency costs are not dependent on product market competition. However, elsewhere in the economics literature, theoretical analysis and empirical research have indicated that product market competition reduces agency costs by reducing the marginal cost of eliciting effort from agents. We investigate the relationship between product market competition and audit fee, as an example of agency cost. Taking advantage of a proprietary data set for Greek audit firms, we find that the audit fee and audit hours are inversely associated with client firm product market competition. We conclude that audit effort, as an agency cost, is reduced where competitive forces reduce the need for shareholders to bear the costs of monitoring agents.     

On the Stewardship and Valuation Implications of Accrual Accounting Systems

In this paper we explore the role of accruals in determining “earnings quality” from both a stewardship and a valuation perspective. We show that the valuation and stewardship qualities of accrual accounting are maximized by either an “aggressive” or a “conservative” accrual strategy. Furthermore, accrual strategy choices can be delegated to management as it does not benefit by implementing a strategy that is not in the best interests of the shareholders. We also investigate the implications of accrual strategies for standard empirical measures of “earnings quality”: regression coefficients and R²s from price‐earnings and market‐to‐book regressions. We show that such measures respond differently, and in some cases adversely, to the kind of strategies that make accounting constructs more correlated with the underlying economic activities of firms.     

Information congestion

Unsolicited advertising messages vie for scarce attention. “Junk” mail, “spam” e‐mail, and telemarketing calls need both parties to exert effort to generate transactions. Message receivers supply attention according to average message benefit, while the marginal sender determines congestion. Costlier transmission may improve average message benefit so more messages are examined. Too many (too few) messages may be sent, or the wrong ones. A Do‐Not‐Call policy beats a ban, but too many individuals opt out. A monopoly gatekeeper performs better than personal access pricing if nuisance costs to receivers are moderate. The welfare results still hold when messages are presorted (triage).     

Favoritism in Mutual Fund Families? Evidence on Strategic Cross‐Fund Subsidization

We investigate whether mutual fund families strategically transfer performance across member funds to favor those more likely to increase overall family profits. We find that “high family value” funds (i.e., high fees or high past performers) overperform at the expense of “low value” funds. Such a performance gap is above the one existing between similar funds not affiliated with the same family. Better allocations of underpriced initial public offering deals and opposite trades across member funds partly explain why high value funds overperform. Our findings highlight how the family organization prevalent in the mutual fund industry generates distortions in delegated asset management.     

中国资本产出、资本回报与资本流向之谜--基于劳动力价格扭曲视角北大核心

本文通过建立生产部门的要素买方垄断市场均衡模型,利用1996-2016年中国省级面板数据测算中国劳动力价格扭曲程度,并使用固定效应模型(FE)及面板固定效应的工具变量(IV)估计方法加以分析,从劳动力价格扭曲视角解答了中国资本产出、资本回报与资本流向之谜,即中国经济如何在赶超阶段面临资本深化不断加剧和TFP增长乏力的情况下,依靠劳动力价格扭曲实现低资本产出与高资本回报水平共存,从而维持长期高速资本积累以及优质的资本流向结构。实证研究表明:劳动力价格扭曲降低了资本产出效率,但这并不能掩盖由劳动力向资本方转移的垄断利润对资本回报的直接补贴,因此劳动力价格扭曲对中国维持高资本回报水平起到了重要的支撑作用,并通过高资本回报水平实现了地区资本快速积累,劳动力价格扭曲对资本流向的积极作用还体现在抑制资本"脱实向虚"及吸引外资流入。因此,应正视劳动力价格扭曲在赶超阶段的特殊作用,在矫正扭曲的过程中循序渐进,更积极采取措施规避其对资本回报和资本流向可能产生的不利影响。     

Competition for attention in the Information (overload) Age

The Information Age has a surfeit of information received relative to what is processed. We model multiple sectors competing for consumer attention, with competition in price within each sector. Sector advertising levels follow a constant elasticity of substitution (CES) form, and within‐sector prices are dispersed with a truncated Pareto distribution. The “information hump” shows highest ad levels for intermediate attention levels. Overall, advertising is excessive, although the allocation across sectors is optimal. The blame for information overload falls most on product categories with low information transmission costs and low profits.     

An Economic Approach to Capital Allocation

This article starts with primitive assumptions on preferences and risk. It then derives prices consistent with a social optimum within an insurance company and the consumer‐level capital allocation implied therein. The allocation “adds up” to the total capital of the firm (a result echoing findings in the congestion pricing literature—where optimal tolls exactly cover the rental cost of the highway). The allocation follows each consumer's share of recoveries in states of insurer default, weighted by the severity of the default in terms of welfare impact. However, the article argues that an economic approach technically restricts only the capital allocated to marginal units of coverage: inframarginal units could in principle receive different allocations.     

Board 3.0: What the Private‐Equity Governance Model Can Offer Public Companies∗

The authors view board structures as an adaptive institution that responds to the key challenges faced by public companies: helping management solve the problems of production and organization of large‐scale enterprise; limiting managerial agency costs; serving as a delegated monitor of the firm's compliance obligations; and responding to the governance environment of changing shareholder ownership patterns. U.S. company board structures are shown to have evolved over time, often through discontinuous lurches, as particular functions have waxed and waned in importance. This article is part of a larger project that traces two iterations of the public company board, what the authors call Board 1.0 (the “advisory board”) and Board 2.0 (the “monitoring board”). The authors argue in particular that Board 2.0, as embedded in both current practice and regulation, now fails the functional fit test for many companies. First, it does not scale to match the dramatic increase in the size and complexity of many modern public corporations. Second, at a time of reconcentrated ownership achieved through institutional investors and increased activism, it does not have the expertise and commitment needed to resolve the tension between managerial or market myopia, or “short‐termism,” and managerial “hyperopia.” This article holds out an optional alternative, Board 3.0, which would bring to the public company board some strategies used by private equity firms for their portfolio company boards. Such “Portco” boards consist of directors who are “thickly informed,” “heavily resourced,” and “intensely interested.” Bringing such “empowered directors” to public company boards could facilitate evolution of the public company board model in response to dramatic changes in the corporate business environment. The authors also suggest possible routes for implementing Board 3.0, including the enlisting of PE firms as “relational investors” that would have both capacity and incentives to engineer changes in board structure.     

The form of incentive contracts: agency with moral hazard,risk neutrality,and limited liability

The analysis obtains a complete characterization of the optimal agency contract with moral hazard, risk neutrality, and limited liability. We introduce a “critical ratio” that indicates the returns to providing the agent with incentives for effort in each random state. The form of the contract is debt (a capped bonus) when the critical ratio is increasing (decreasing) in the state. An increasing critical ratio in the state‐space setting corresponds to the hazard rate order for the reduced‐form distribution of output, which we term the “decreasing hazard rate in effort property” (DHREP). The critical ratio also yields insights into agency with adverse selection.     

Alliances and corporate governance

We study the link between a firm's quality of governance and its alliance activity. We consider alliances as a commitment technology that helps a company’ Chief Executive Officer overcome agency problems that relate to the inability to ex ante motivate division managers. We show that well-governed firms are more likely to avail themselves of this technology to anticipate ex post commitment problems and resolve them. The role of governance is particularly important when the commitment problems are more acute, such as for significantly risky/long-horizon projects (“longshots”) or firms more prone to inefficient internal redistribution of resources (conglomerates), as well as in the absence of alternative disciplining devices (e.g., low product market competition). Governance also mitigates agency issues between alliance partners; dominant alliance partners agree to a more equal split of power with junior partners that are better governed. An “experiment” that induces cross-sectional variation in the cost of the alliance commitment technology provides evidence of a causal link between governance and alliances.     

Contracting with Present-Biased Consumers in Insurance Markets

Present bias challenges consumers with self-control problems when they implement precautionary efforts in insurance markets. To explore how rational insurance companies respond to this bias, this paper analyzes a contract design problem in a monopolistic insurance market with ex ante moral hazard. We consider two types of consumers with this bias: the “naifs”, who do not foresee the present bias and make decisions in a myopic way, and the “sophisticates”, who foresee the bias and incorporate it in the decision process. Relative to the benchmark case where consumers are time-consistent, we show that (i) present bias reduces the monopoly profit, regardless of the consumer type; (ii) present bias can either reduce or increase the coverage of the profit-maximizing insurance contract depending on the extent of the bias; and (iii) when present bias is severe, the insurance company can profitably exploit naifs but not sophisticates. These results still hold when consumers are heterogeneous and their types are unknown to the insurance company.     

Towards market differentiation in the accounting profession: The case of Australia and New Zealand

The literature on the evolution of the accounting profession has frequently explained that the changes in the structure of the profession over the last century or more have often been used to achieve closure of the profession. The profession is once again in a state of flux. The Australian accounting profession has undergone major changes and is contemplating more transformation. The sole accounting body in New Zealand has made a major shift from monopoly over accounting practice to free competition for all. Examining the recent developments in Australia and New Zealand, the paper shows that the objectives behind the current changes in the two countries are identical. They are primarily no longer seeking closure and are moving towards achieving market differentiation. The paper then demonstrates that this strategy shift can be seen as an outcome of the new market orientated socio-economic environment of these countries. The outcome of the change is a profession that is trying to be consumer focused with a corporatist structure, within the shade of professional identity.     

Convex duality in optimal investment and contingent claim valuation in illiquid markets

This paper develops duality theory for optimal investment and contingent claim valuation in markets where traded assets may be subject to nonlinear trading costs and portfolio constraints. Under fairly general conditions, the dual expressions decompose into three terms, corresponding to the agent’s risk preferences, trading costs and portfolio constraints, respectively. The dual representations are shown to be valid when the market model satisfies an appropriate generalization of the no-arbitrage condition and the agent’s utility function satisfies an appropriate generalization of asymptotic elasticity conditions. When applied to classical liquid market models or models with bid–ask spreads, we recover well-known pricing formulas in terms of martingale measures and consistent price systems. Building on the general theory of convex stochastic optimization, we also obtain optimality conditions in terms of an extended notion of a “shadow price”. The results are illustrated by establishing the existence of solutions and optimality conditions for the nonlinear market models recently proposed in the literature. Our results allow significant extensions including nondifferentiable trading costs which arise, e.g., in modern limit order markets where the marginal price curve is necessarily discontinuous.     

The Evolution of Private Equity in Emerging Markets: The Case of Poland

In the last ten years, there has been a pronounced shift toward emerging markets in institutional investor allocations of capital to private equity. While the lion's share of the allocations to emerging markets have gone to the “BRIC” nations, lesser‐known markets like Poland are threatening to steal the spotlight. Economic stabilization, development of the private sector, a favorable business outlook, and continuous improvement of the local institutional infrastructure (laws, accounting rules, and fiscal regimes) have all contributed to the development of a vibrant private equity industry in Poland. Most private equity firms in Poland structure their deals around five broad investment themes: technology; media; and telecommunications; manufacturing; consumer services; business services; and financial services. Local private equity firms have traditionally adopted two different strategies towards these sectors. The first group of private equity firms initially targeted manufacturing, with the conviction that, as the Polish economy developed, the satisfaction of consumer needs for basic products would be the largest source of market demand. The second group assumed that the market would require access to more services to accommodate the growing local economy. Both approaches have proved reasonably successful, as the leaders among these two groups of firms have continued to succeed in raising new funds while achieving high returns for their limited partners. And while the accomplishments of the private equity industry have been made possible by the extent of Poland's transformation from a socialist into a market economy, the industry itself continues to play an important role in this transformation by providing both outside capital and know‐how for local firms and managers.     

Asset Fire Sales and Purchases and the International Transmission of Funding Shocks

We identify a new channel for the transmission of shocks across international markets. Investor flows to funds domiciled in developed markets force significant changes in these funds' emerging market portfolio allocations. These forced trades or “fire sales” affect emerging market equity prices, correlations, and betas, and are related to but distinct from effects arising purely from fund holdings or from overlapping ownership of emerging markets in fund portfolios. A simple model and calibration exercise highlight the importance to these findings of “push” effects from funds' domicile countries and “co‐ownership spillover” between markets with overlapping fund ownership.     

A retail benchmarking approach to efficient two‐way access pricing: no termination‐based price discrimination†

We study access pricing rules that determine the access prices between two networks as a linear function of marginal costs and (average) retail prices set by both networks. When firms compete in linear prices, there is a unique linear rule that implements the Ramsey outcome as the unique equilibrium, independently of underlying demand conditions. When firms compete in two‐part tariffs, there exists a class of rules under which firms choose the variable price equal to the marginal cost. Therefore, the regulator can choose among these rules to pursue additional objectives such as increasing consumer surplus or promoting socially optimal investment.