Does ethnic diversity decrease economic interactions? Evidence from exchange networks in rural Gambia

Using a unique dataset collected in 59 rural Gambian villages, we study how ethnic heterogeneity is related to the structure of four economic exchange networks: land, labour, inputs and credit. We find that different measures of village‐level ethnic fragmentation are mostly uncorrelated with network structure. At a more disaggregated level, household heads belonging to ethnic minorities are not less central than those from the predominant ethnicity in any of the networks and, at the dyadic level, the fact that two households share ethnicity is not an economically significant predictor of link formation. Our results indicate that, in the particular setting of our study, the structure of the exchange networks is better defined by other variables than ethnicity and that ethnic heterogeneity is unlikely to be a driver for sub‐optimal economic exchanges.     

Transport infrastructure equities in mixed-asset portfolios: estimating risk with a Garch-Copula CVaR model

Transport infrastructure is an important subsector within infrastructure, but knowledge of its equities in terms of risk-return characteristics and contribution to portfolio performance is still limited. This study assesses the subsector individually and in a multi-asset, index-based portfolio. In doing so, we apply a t-Copula-based Conditional Value-at-Risk model to simulate risk and returns. Our findings reveal that the subsector has a relatively low dependency on other equities, performs like other alternative asset classes such as general real estate, and does not grant significant risk diversification benefits for mainstream institutional investors such as pension funds. Investors aiming for higher target returns may however assign substantial weights to transport infrastructure, supporting our conjecture that it does not share the same asset class characteristics as general infrastructure. By contrasting Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) scores for both the mean-variance framework and the t-Copula simulation, we further document the limitations of traditional VaR approaches. Hence, this study’s results support the use of risk assessment tools that incorporate non-normal distributions to represent multivariate dependence structures.     

Optimal mixed taxation,credit constraints,and the timing of income tax reporting

We study optimal income and commodity tax policy with credit‐constrained low‐income households. Workers receive an even flow of income during the tax year, but report their incomes and make tax payments (receive transfers) at the end of the year. They spend their disposable income on multiple commodities over the year. We show that differentiated subsidies on commodities can be optimal even if the Atkinson–Stiglitz Theorem conditions apply. When the optimal policy leaves low‐income households with binding credit constraints, it may be optimal to subsidize differentially the good that they consume in higher proportion. Uniform subsidies would also relax the credit constraint, but would be more costly to the government since they would equally benefit unconstrained households. Numerical examples suggest that commodity tax differentiation increases with basic needs and with the interest rate at which government borrows.     

Reducing reporting risk: Designating foreign currency forward contracts as cash flow hedges

We present an example that compares the effects on earnings of designating a foreign currency forward contract as either a cash-flow or fair-value hedge of a foreign currency denominated receivable. Entities engaging in exchange transactions not denominated in their functional currency frequently enter into foreign currency forward contracts in order to mitigate their foreign exchange rate risk exposure. The aggregate effect on earnings of the transaction gain or loss on the foreign currency receivable and the gain or loss on the forward contract is known on the date the forward contract is initiated. The effect on each period’s earnings during the term of a forward contract designated as a cash-flow hedge is also known on the date the contract is initiated; whereas the effect on each periods’ earnings from a fair-value hedge cannot be determined until the respective balance sheet dates. Therefore, designating forward contracts as cash-flow hedges may suppress volatility in reported earnings compared to designating forward contracts as fair-value hedges. In addition, the reporting risk (the amount of uncertainty surrounding the pending measure of an item to be reported in the financial statements) is lower when a forward contract is designated as a cash-flow hedge relative to designating it as a fair-value hedge. This suggests foreign currency forward contracts designated as cash-flow hedges are more consistent with the purpose of hedge accounting: to mitigate the effects on earnings of applying different measurement criteria for the hedge and the hedged item.     

Strategic R&D investment,competitive toughness and growth

We show, within a single industry, the possibility that R&D‐investment is non‐monotonically related to competitive toughness: increasing when competition is soft and decreasing when competition is tough. This possibility results from the combination of a Schumpeterian markup squeezing effect discouraging innovation, and a concentration effect spurring innovators. It is obtained in a sectoral model where the number of innovators is random and where non‐successful investors may remain productive. The result is extended to a multisectoral stochastic endogenous growth model with overlapping generations of consumers and firms, the number of which is endogenously determined in the capital market.     

Cost-benefit analysis of the Dutch nature policy: Transaction costs and land market impacts

This paper analyses the financial and economic costs and benefits of the large scale National Ecological Network (NEN) nature conservation project in the Netherlands, taking into account transaction costs and land market impacts of different institutional arrangements. The net financial costs associated with achieving the current plan are equivalent with an annual amount €876 per hectare. Of the costs, transaction costs amount about 16% or €140 per hectare. The substantive land purchases involved in the plan will lead to land price increase of 20%. Nature management by agriculture turns out to be a relatively cheap option.     

Environmental Policy,Rankings and Stock Values

This paper examines the impact of Newsweek's ‘The Greenest Big Companies in America’ on stock values for large companies. Newsweek ranks the biggest Companies in America from one to 500. An event window of ten days following the rankings release to the public was examined to analyze the impact of relative rankings on stock values. Dummy variables were constructed denoting firms ranked in the highest and lowest quartiles. Control variables included return to the Dow Jones Industrial Average, the firm's beta coefficient and total revenue. The main finding of the study is that inclusion in the top quartile of the rankings has a positive and statistically significant impact on firms' stock values, while the coefficient for the lowest quartile was not statistically different from zero. The results provide evidence of a positive impact on stock values from favorable environmental recognition but no effect for low ranked firms. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.     

Managing The Volatility Of Gaap Earnings

Abstract

The adoption of Statement of Financial Accounting Standards No. 97 (SFAS 97) eliminated the “lock-in” concept introduced in SFAS 60. Since many of the actuarial assumptions used in the calculation of the deferred acquisition cost (DAC) asset are difficult to predict over an extended period of time, “dynamic unlocking” was a sensible solution. Although this “dynamic unlocking” keeps the assumptions in line with recent experience, it comes at a cost—increased volatility of GAAP earnings. Some of the causes of this volatility are warranted since it accentuates the effects on earnings due to certain changes in the underlying experience. Other causes of this volatility may be unwarranted because of a misapplication of the principles underlying SFAS 97 and SFAS 120 or the manner in which changes in experience were reflected. In addition, most analysts expect the amortization of deferred acquisition costs to increase when earnings are better than expected. Conversely, analysts expect the amortization of deferred acquisition costs to decrease when earnings are worse than expected. Often the amortization of deferred acquisition costs behaves in a manner contrary to their expectations. This article analyzes what causes this volatility, explains why the amortization can behave contrary to expectations, and suggests several techniques for minimizing these unwarranted results.