Financial contracts,opportunism, and disclosure management

This article shows that if all variables that determine a firm's future cash flows are not contractible, it can be ex ante optimal to design a financial contract that admits debtholders waiving debt covenants on a discretionary basis and firms investing opportunistically subsequent to contracting. Further, as the contractible variable becomes less informative, the contract attaches greater significance to it. Finally, uncertainty in the magnitude of reporting latitude induces aggressive reporting by the firm to avoid violating the covenant or to enhance the chances of a waiver. The debtholders respond by sometimes not allowing the firm to implement mutually beneficial projects.     

PRIVATIZATION OF PUBLIC SECTOR ENTERPRISES IN PAKISTAN: PROSPECTS FOR REDUCING REGIONAL IMBALANCES*

This paper tests the somewhat counterintuitive hypothesis that public firms are more efficient than their private sector counterparts. A factor analysis (9 industrial groups/34 industries) indicated that for all Pakistani provinces, public enterprises contributed relatively more value added which supports the findings of Naqvi and Kamal. The paper also concludes that a policy to reduce Pakistan's regional income disparities by privatizing public enterprises would likely be ineffective.     

Race,revenues, and college basketball

Customer discrimination may result in racial differences in the marginal revenue products generated by workers. College basketball data allow for direct comparisons of the racial differences in the marginal revenues generated by players. This article compares the revenue generating potential of the top black and white college basketball players. A highly skilled white college player generates over $100,000 in per game revenues as compared to around $30,000 for a black player of equal talent, providing a strong incentive for colleges to discriminate against recruiting black student-athletes.     

The Role of Principal-Agent Conflicts in the 1980s Thrift Crisis

Agency theory suggests that many of the costs incurred by the taxpayer during the 1980s thrift crisis were the result of conflicts between principals and their agents. This study models the costs associated with three distinct types of agency conflicts involved in closing an insolvent thrift—conflicts between creditors and owners, between owners and managers, and between taxpayers and government officials. Using a model that controls for sample-selection bias, the study presents strong evidence that thrift owners effected wealth transfers from creditors by undertaking high-risk investments, and that government officials pursued policies that increased losses to the thrift deposit insurance fund which ultimately were funded by the taxpayer. The results do not show that managers effected wealth transfers from owners through expense-preference behavior, but rather that inefficient management increased the losses of the deposit insurance fund.     

IS THERE PROGRESS IN ENVIRONMENTAL POLICY?

Environmental reformers often seek to impose partial, market-like mechanisms into costly, complex new environmental statutes. These mechanisms are likely to offset only a small fraction of the loss in economic welfare created by the rest of the legislation. A far better approach is to write cost-benefit requirements directly into all new legislation. Such requirements, when enforced by the courts, are likely to yield far greater improvements in economic welfare than are the weak market mechanisms found in new statutes such as the 1990 Clean Air Act.