Pricing of the time-change risks

We develop an equilibrium endowment economy with Epstein-Zin recursive utility and a Lévy time-change subordinator, which represents a clock that connects business and calendar time. Our setup provides a tractable equilibrium framework for pricing non-Gaussian jump-like risks induced by the time-change, with closed-form solutions for asset prices. Persistence of the time-change shocks leads to predictability of consumption and dividends and time-variation in asset prices and risk premia in calendar time. In numerical calibrations, we show that the risk compensation for Lévy risks accounts for about one-third of the overall equity premium.     

Not enough money or not enough time to satisfy the Thrifty Food Plan? A cost difference approach for estimating a money–time threshold

Food production at home requires money and time. Food assistance programs focus exclusively on the money cost, while ignoring the time cost. This one-dimensional focus could undermine the effectiveness of food assistance programs. In the spirit of Vickery (1977), this paper uses a cost difference approach to develop a money–time threshold, and several related metrics, to determine whether money or time is the most limiting resource in reaching the Thrifty Food Plan (TFP) target. In our empirical analysis we find that when time is ignored, single headed households spend on average 35% more than required to meet the TFP target. However, when time is included, these households spend on average 40% less than required to meet the TFP target. In addition, we find that when time is ignored, 62% of single headed households on average spend enough money to reach the TFP target, but when time is included, only 13% of single headed households spend enough on average to reach the TFP target. Our empirical results suggest that time is more constraining than money in reaching the TFP target. These results imply that metrics solely focusing on money could severely underestimate the gap between actual expenditures and those required to reach the TFP target.     

THE SUBSTANCE OF ACCOUNTING FOR PUBLIC‐PRIVATE PARTNERSHIPS

This article evaluates Public‐Private Partnerships (PPP) accounting practice and the related financial accounting and reporting requirements. Governments across the world are seeking to access private finance to improve public infrastructure. Accounting for PPPs has encountered many difficulties, one of which is the practice by which PPPs are not accounted for as fixed assets on the balance sheet of either the public sector client or the private sector operator. Accounting for PPPs has grown in importance at a time of transition from national Generally Accepted Accounting Practice (GAAP) to International Financial Reporting Standards (IFRS). Under UK GAAP, both client and operator accounting adopt the reasoning – familiar from leasing standards – of the allocation of risks and rewards between the parties to determine the party which should recognize the fixed asset on its balance sheet. The gap in IFRS with regard to operator accounting has been filled by the interpretation IFRIC 12 on service concession agreements: this moves the reasoning from risks and rewards to control, familiar from consolidation standards. The UK Treasury and the International Public Sector Accounting Standards Board (IPSASB) have required/proposed the adoption of the mirror‐image treatment of IFRIC 12. In most, but not all, cases, control will be assessed to rest with the client, which will recognize property, plant and equipment, and not with the operator, which will recognize either a financial asset or an intangible asset on the basis of an assessment of which party bears the majority of risks and rewards. Under both UK GAAP and IFRS, accounting policy choices are strongly influenced by, for the client, governmental control frameworks, and for the operator, by the implications for the profile of distributable profits and for taxation. An important public policy issue is that the national accounts, which for European Union member states must comply with European System of Accounts 1995, will remain on a risks and rewards basis. It is these numbers that will be used in assessments of macro‐fiscal policy and fiscal risks, notwithstanding that the Eurostat version of risks and rewards is even more open to manipulation than were the national financial reporting standards.     

Financial crisis and accounting quality: Evidence from five European countries

This study investigates how the economic crisis affects the scope for earnings manipulation and the value relevance of reported financial numbers for companies that are audited by a big 4 auditor. The analysis is focused on Portuguese, Irish, Italian, Greek and Spanish listed companies. The findings show that Portugal, Italy and Greece tend to engage more in earnings management in their effort to improve their lower profitability and liquidity, and accommodate their higher debt and growth. Ireland exhibits less evidence of earnings manipulation, while the findings for Spain are to some extent conflicting. Additionally, the reported financial numbers of Portuguese and Greek companies that are audited by a big 4 auditor were found to be of higher quality before the crisis. In contrast, Irish, Italian and Spanish companies report more value relevant financial numbers during the crisis. The results of this study are particularly useful for accounting regulators when preparing accounting rules that seek to reduce information asymmetry and earnings manipulation and increase the quality of reported disclosures in light of a crisis and for investors that need further assistance for the establishment of a profitable investment strategy in periods characterized by high uncertainty and volatility.     

Alan Gillie,Input-Output Economics.

Turnovsky observes that “the rational expectations hypothesis has had a profound impact on macroeconomic theory and policy during the past decade.” Tracing briefly the evolution of the ideas involved, he concludes that “… a consensus view is emerging that in fact under quite plausible conditions the policy neutrality proposition does not hold; therefore, there is still scope for policy rules to play an important role in stabilizing output.”

The mathematics used in the article is expository rather than analytical, requiring of the reader only somewhat more than the usual amount of persistence, faith in the author's interpretation of the literature, and a willingness to accept the integrity of economic models as representative of the real world. This is “required” reading for those teaching macroeconomics.     

Technical Progress and Product Reliability under Competition and Monopoly

Technical progress lowers costs and prices but appears to have an ambiguous effect on product reliability. This paper presents a simple model which explains this observation. Copyright © 2013 John Wiley & Sons, Ltd.     

Performance Contracting In Practice: Experience and lessons from the water sector in Ghana

This article provides some insights into how performance contracting works in practice in a developing country context, using the case of the Ghana Water and Sewerage Corporation (GWSC). Performance contracting has been a useful instrument for restructuring the state-owned enterprises (SOE) sector in Ghana, and the GWSC has made some moderate improvements since its introduction. However, the article highlights some of the institutional constraints and capacity issues that reformers will have to pay attention to, including overstretched capacity of the monitoring agency, a weak information management system and inconsistent compliance to contract by government. The findings also highlight the difficulty of separating politics from operational/management issues, especially in politically sensitive public services, yet performance contracting relies on such separation to be effective. Also it shows how informal behaviour undermines the formality of performance contracting.