Nepotism,Discrimination, and the Persistence of Utility-Maximizing,Owner-Operated Firms: Comment

A recent thoughtful paper by Singell and Thornton (thereafter ST) in the Southern Economic Journal deviates in definitions, modeling, and a result from the traditional literature on tastes for discrimination and nepotism that originates with Becker and Arrow. This comment provides a critique of these three aspects of the ST analysis. In particular, it shows that ST's astonishing result that discrimination will persist in a competitive labor market is unjustified, ST's unconventional definitions of owners with unbiased and biased preferences are wrong, and ST's unique modeling of discrimination and nepotism is unsupported.     

Contestability and Pay Differential in the Executive Suites

In comparison to the abundant evidence on CEOs' compensations, little is known about the compensation of other senior executives, and on how the pay differential between CEO and other senior executives affects firm performance. We examine several potential explanations of the pay differential in the executive suite, using a sample of 367 Israeli firms listed on the Tel-Aviv Stock Exchange. The empirical results fail to support the tournament and pay equity models. Instead, our evidence suggests a model where senior executives are encouraged (by the structure implied in their pay contract) to cooperate with each other (the team playing model). In a subset of firms managed by their owners we observe greater pay differentials between the owner-CEO and other senior executives. Interestingly, only in this subset of owner-managed firms, higher pay differentials can be associated with better firm performance.     

Hedging Strategies of Financial Intermediaries: Pricing Options with a Bid-Ask Spread

This paper uses a model similar to the Boyle-Vorst and Ritchken-Kuo arbitrage-free models for the valuation of options with transactions costs to determine the maximum price to be charged by the financial intermediary writing an option in a non-auction market. Earlier models are extended by recognizing that, in the presence of transactions costs, the price-taking intermediary devising a hedging portfolio faces a tradeoff: to choose a short trading interval with small hedging errors and high transactions costs, or a long trading interval with large hedging errors and low transactions costs. The model presented here also recognizes that when transactions costs induce less frequent portfolio adjustments, investors are faced with a multinomial distribution of asset returns rather than a binomial one. The price upper bound is determined by selecting the trading frequency that will equalize the marginal gain from decreasing hedging errors and the marginal cost of transactions.     

The invalidity of the Condorcet Jury Theorem under endogenous decisional skills

The current note clarifies that Condorcet Jury Theorem cannot be generalized to the extended setting where individual decisional skills are not assumed to be exogenous parameters even when these skills are homogeneous. This is true when skills are determined endogenously either by a central planner or, in a decentralized strategic setting, by the decision makers themselves.     

RENT SEEKING AND SOCIAL INVESTMENT IN TASTE CHANGE*

We study the social allocation of resources to the alteration of preferences. Such taste changes are Pareto-preferred if, according to both the original and the new taste regime, the resource allocation resulting from the taste change constitutes an improvement. According to this criterion, a degree of altruism is in general Pareto-preferred, because it reduces socially wasteful activities, such as lobbying, bargaining and other rent seeking activities designed to increase one agent's expected share of the contested rent. We present a stylized model that captures the role of education in generating altruism and thus reducing the expenditure on rent seeking.