Corporate governance and incentive contracts: Historical evidence from a legal reform

This paper proposes to exploit a reform in legal rules of corporate governance to identify contractual incentives from the correlation of executive pay and firm performance. In particular, we refer to a major shift in the legal and institutional environment, the reform of the German joint-stock companies act in 1884. We analyze a sample of executive pay for 46 firms for the years 1870–1911. In 1884, a legal reform substantially enhanced corporate control, strengthened the monitoring incentives of shareholders, and reduced the discretionary power of executives in Germany. The pay–performance sensitivity decreased significantly after this reform. While executives received a bonus of about 3–5% in profits before 1884, after the reform this parameter decreased to a profit share of about 2%. At least the profit share that is eliminated by the reform most likely was incentive pay before. This incentive mechanism was replaced by other elements of corporate governance.     

Patent Protection, Transnational Corporations, and Market Structure: A Simulation Study of the Indian Pharmaceutical Industry

This study examines the role of patent protection on the behavior of transnational corporations and market structure in the Indian pharmaceutical industry. The method of analysis is the calibration of a theoretical model to firm-level data from two therapeutic groups of the Indian pharmacy market, and a simulation analysis asking the hypothetical question of what the market structure would be if India granted patent protection to pharmaceutical products. The model developed for the simulation analysis explicitly accounts for the complex demand structure for pharmaceutical goods that results from the presence of therapeutic substitute drugs, and product differentiation among chemically equivalent drugs.     

MONETARY POLICY IN EMU WITH ASYMMETRIC TRANSMISSION AND NON-TRADABLE GOODS

Which policy objective should a central bank pursue in a monetary union with asymmetric monetary transmission and different rates of inflation? Should it base its decisions on the EU‐wide average of inflation and growth or should it instead focus on (appropriately weighted) national utility losses based on national rates of inflation and growth? We find that a policy which minimises the sum of national utility losses leads to higher average utility if the variability of common shocks is large relative to idiosyncratic demand shocks in the non‐tradables sectors. We draw conclusions for the appropriate weight of common and national objectives in the union.     

International Cooperation Behind the Veil of Uncertainty – The Case of Transboundary Acidification

The complexities of international environmental problems are only poorly understood. Hence, decision makers have to negotiate about abatement measures even though they do not know the 'true' model of the ecological system and have only a rough idea about the costs and benefits of their action. It will be analysed to what extent this kind of 'model uncertainty' – where players do not only have incomplete information about the payoff functions of the other players, but also about their own payoff function – affects the prospects of international cooperation. Using a simple game-theoretic model, it is shown how countries can use the veil of uncertainty to hide their distributional interests. The arguments are based on a deviation from the common prior assumption, which seems particularly questionable in a setting comprising various countries with different cultural and scientific backgrounds. Finally the model will prove useful to quantitatively and qualitatively illustrate the central role of model uncertainty in the negotiations of the first Sulphur Protocol signed to combat transboundary acidification.     

Stock index dynamics and derivatives pricing with stochastic interest rates

The paper analyzes the equilibrium valuation of stock index derivatives in an economy with stochastic interest rates and with a representative agent having time-additive power utility. The equilibrium short interest rate dynamics and the equilibrium term structure of interest rates are described by an affine one-factor term structure model. In equilibrium the value of the stock index is a non-trivial function of the short interest rate. The paper investigates the consequences of the induced stock index dynamics for the theoretical spreads between index forward prices and index futures prices and the consequences for the valuation of options on stock index futures.The paper was written while the author was a visiting scholar at Department of Finance, Kellogg Graduate School of Management, Northwestern University. I thank for helpful comments and suggestions from Gurdip Bakshi, Avi Bick, Menachem Brenner (the editor), Zhiwu Chen, San-Lin Chung, Mark Fisher, Andreas Höger, Marti Subrahmanyam, two anonymous referees, and participants at the Western Finance Association meeting in San Diego, the European Financial Management Association meeting in Istanbul, the European Finance Association meeting in Vienna, and the Center of Analytical Finance workshop at University of Aarhus. Financial support from the Danish Natural Science and Social Science Reasearch Councils is gratefully acknowledged.     

Nixon’s desperate attempt to fight inflation

Because of continuing Inflation and rising unemployment, Americans were beginning to feel rather frustrated with the Nlxon Administration for their non-actions on the economic front. As an answer to this growing feeling of anxiety the US-President introduced an economic programme which has caused quite a stir in the USA as well as abroad. The author’s intent is to discuss the national and International effects the Nlxon programme will probably have.     

Gefährdet TTIP die ökonomische Zukunftsfähigkeit?

This article contributes to the discussion on the economic effects of TTIP by focusing on the opportunities for the participating economies of enhancing their innovative capacities. Referring to the insights of Neo-Schumpeterian evolutionary innovation economics the article concludes that according to the currently published documents the legal properties of TTIP can harm the ability of states to adapt their regulatory standards — a main instrument for a dynamic and technology-specific innovation policy. The missing flexibility for the new supranational standards can be a major reason for difficulties in the reform of standards aiming at a “creative disturbance” of market processes by the state in order to stimulate innovative activities and to induce additional growth.