Earnings,Book Values,and Dividends in a Stewardship Setting with Moral Hazard*

The paper addresses the following question: in a multiple-date agency setting, under what conditions will the dividend policy be of no incentive relevancy? It is shown that if the accounting data—earnings, book values, and dividends — satisfy standard owners' equity accounting constructs, and if these indicate that paying dividends is a zero NPV activity, then dividend policy incentive irrelevancy applies. The basic idea is to ensure that the (history of) abnormal (residual) earnings summarize the relevant information and the solution to the incentive problem. The paper also compares classical value irrelevancy with incentive irrelevancy, and the analysis shows that conditions for incentive irrelevancy are more stringent.     

A MARKET WITH A SOCIAL CONSUMPTION EXTERNALITY*

We model a spatial market in which the utility of each consumer is affected by the consumers who buy precisely the same product. The marginal contribution of consumers x's purchase on consumer y depends on |x–y|, which declines as |x–y| increases. Such modelling of preferences fits goods that signal a consumer's place in society—clothing styles, automobiles and jewellry are examples. For 2n + 1 firms we find the unique symmetric equilibrium and derive comparative statics on the optimal number of firms, the largest number of firms the market can support, and the behaviour of profits per firm as n increases.     

COMMUNAL DUALITY: AGRICULTURAL SUBSIDIES FROM TVES

The policy of subsidizing agriculture with profits made by township and village enterprises has played an important role in maintaining stability and accelerating balanced economic growth in the Chinese rural areas. It represents an interesting subject in the literature of development economics for two reasons. First, the policy started at a very early stage of industrialization. Second, the policy has been carried out often voluntarily at the community level rather than at the state level. This paper examines the origin and rationales of such a policy and finds that the policy cannot be understood unless we look into a special institutional arrangement: China's unique communal duality. Study of the subject contributes significantly to an understanding of development economics. ( JEL P5, Q0, O2)