Front-Running by Mutual Fund Managers: A Mixed Bag

This paper evaluates the welfare implications of front-running by mutual fund managers. It extends the model of Kyle (1985) to a situation in which the insider with fundamentals-information competes against an insider with trade-information and in which noise trading is endogenized. Noise traders are small investors trading through mutual funds to hedge non-tradable or illiquid assets. The insider with trade-information is one of the fund managers. We find that her front-running activity reduces the liquidity costs of her customers, but it also reduces their hedging benefits. As a result, the customers of the front-running manager may be worse off and place smaller orders. The opposite is true, however, for those investors who are not subject to front-running. In aggregate, front-running has either no or positive consequences for welfare.     

Involuntary Unemplyment in Imperfectly Competitive General Equilibrium Models

This paper is about 'involuntary unemployment' in general equilibrium models with imperfect competition. It surveys papers written after the seminal work of d'Aspremont, Dos Santos Ferreira and Gérard‐Varet (1984). This unemployment is called involuntary because it exists at any wage. It results from imperfect competition in the product markets, more specifically from firms' excessive market power. These papers have focussed their attention on the conditions required for involuntary unemployment. In our presentation, we characterise this form of unemployment through three elements: consumers' preferences, price expectations and Ford effects. Each element is important because it influences the demand for the good and hence its price elasticity, the latter being central in the definition of firms' market power. JEL Classification. D43, E24.     

Interview: The future is bright,the future is hedge funds: An interview with James R. Hedges IV,founder, president,and chief investment officer of LJH Global Investments

Founded in 1992, LJH Global Investments is one of the oldest global hedge fund advisory and fund of hedge funds management firms. Its disciplined approach to evaluating hedge funds and their respective managers is recognized by many financial services firms such as banks, asset management firms, and insurance companies. They rely on the firm as a sub‐advisor to build, manage, and service fund of hedge funds products. Its founder, James R. Hedges IV, was the first fund of hedge funds expert ever invited to speak to the Bank of Japan executives on the burgeoning hedge fund industry. © 2004 Wiley Periodicals, Inc.     

Putting industries into the Eaton–Kortum model

The article introduces the industry dimension into the Eaton-Kortum model of trade. Industries are linked with each other by domestic and international trade in intermediate goods. The model is parametrized using data for eight industries in 1989. It is used to perform several counterfactual simulations that are relevant to today's policy debates. First, the model is used to study the effects of the US–EU trade wars. It is found that trade wars have a greater negative effect on countries with large initial net export positions. It is also found that some trade war scenarios are more beneficial to the US while others to the EU. Second, the model is used to study the effects of trade barrier reductions between the high-income and middle-income countries. The results show that this trade liberalization tends to reinforce the pattern of trade according to technological comparative advantages. The results also show which industries should be targeted for barrier reductions depending on policy goals. The third set of simulations investigates spillovers from the technological growth in the US machinery industry. The results show how geography, technology, and industry links affect the propagation of this growth across countries and industries.     

Friends or Foes? Mobile money interaction with formal and informal finance

Access to formal financial services is a key determinant of financial inclusion and yet, informal mechanisms still dominate the financial system in developing countries. In this context, the purpose of our article is to investigate how the growing effort to harness mobile money designed for unbanked individuals may help to overcome barriers to access formal financial services. Using a unique dataset obtained from an individual-level survey conducted in Burkina Faso, we explore the interplay between mobile money innovation and pre-existing formal and informal financial instruments. Our main findings show that, overall there are no differences in the inclination of mobile money users and non-users to make deposits in formal or informal deposit instruments. However, a closer investigation reveals suggestive evidence that it may increase the probability of participants in informal mechanisms to make deposits in formal financial instruments, especially using a bank account. Moreover, considering disadvantaged groups, we find for women, irregular income and less educated individuals that mobile money may increase their probability to make deposits in a bank and/or credit union accounts. Our results are robust to using instrumental variables and propensity score matching techniques that mitigate the endogeneity problem. They also pass a number of robustness checks as well as considering an alternative dataset. Given the low access to formal financial services in developing countries, our findings taken together indicate how the increasing adoption of mobile money may act as a stepping-stone towards financial inclusion. (JEL Classification C83, D14, G21)     

Entrance into a platform‐dominated market: Virtue of an open strategy on the numerical computation market

Strategic and industrial analysis reveals it is extremely difficult to enter a market dominated by an existing platform. In fact, direct or indirect network effects give the established company's platform a considerable competitive edge. This is true of the numerical computation market and the Matlab + Simulink platform by MathWorks. The case study of Scilab Enterprises helps identify conditions of viability for breaking into such a market. We find that alone, the platform strategy is doomed to fail, but accompanied by an open strategy, entering a platform market becomes possible. We hypothesize that a platform strategy is successful when associated with an open innovation process (integration of the open source community) and supported by a business ecosystem (a huge community of developers, users, and allies). Copyright © 2015 ASAC. Published by John Wiley & Sons, Ltd.     

Capital, technology, and specialization in the neoclassical model

The paper studies the effects of technology and capital stock on trade using simulation. For this purpose, the paper develops and evaluates a model that is distinguished by its use of the Eaton-Kortum framework to explain intra-industry trade instead of the usual Armington assumption. It is found that the magnitudes and in many cases signs of the effects of capital stock and technology on specialization are very country-specific. This implies that the regression studies that estimate cross-country average effects have limited value. Looking at the volume of trade, the paper finds that capital endowments and industry-level comparative advantages have little effect on the volume of trade — the reduced inter-industry trade between more similar countries is compensated by increased intra-industry trade. Producer heterogeneity, on the other hand, has a significant effect on the volume of trade. The paper evaluates the accuracy of the model's forecasts by performing historical simulations for 1975-95, with the results showing that the model's predictions are accurate.     

Book review

The paper develops a general equilibrium model of international production and trade. Technology is carried across borders by multinational producers and the set of technologies being used in a particular country is endogenous. Production locations are chosen based on the costs of production and getting the product to market. A producer may manufacture its product in its home country, target market country, or a third country. Estimated model parameters describe the states of technology in different countries, barriers to international investment, and trade costs. It is found that the barriers to international trade and investment are highly correlated. The model is used to measure the extent of technology diffusion across countries, study the relationship between international production and trade, investigate the effects of free-trade agreements (FTAs) on offshoring, and to quantify the welfare effects of international production and trade.     

A macroeconometric analysis of the effects of taxation on financing and real investment in equipment in Canada

This paper analyses the impact of taxation on corporate financing and corporate investment in machinery and equipment in Canada. A coherent macroeconometric model of the firm's real and financial decision process is theoretically developed and empirically tested on Canadian data. Estimates of the impact of taxation in general and of the 1987 Canadian government's White Paper in particular, are analysed. The estimates suggest that income taxation has a negative but relatively small impact on equipment investment in Canada, and that models that ignore the link between the real and financial decisions overestimate the impact of taxation on real investment. With respect to tax reform, the White Paper reduces the incentive to save and invest in equity capital, and is expected to decrease real capital investment in the long run.