Optimal fiscal policies and market structures with monopolistic competition

International Tax and Public Finance - This paper develops a unified imperfectly competitive macroeconomic model, and uses it to analyze optimal fiscal policies in the presence of market...     

Currency hedging for multinationals under liquidity constraints

This paper examines the impact of liquidity risk on the behavior of a risk-averse multinational firm (MNF) under exchange rate uncertainty in a two-period dynamic setting. The MNF has operations domiciled in the home country and in a foreign country, each of which produces a single homogeneous good to be sold in the home and foreign markets. To hedge the exchange rate risk, the MNF has access to one-period currency futures and option contracts in each period. The MNF is liquidity constrained in that it is obliged to terminate its risk management program in the second period whenever the net loss due to its first-period hedge position exceeds a predetermined threshold level. We show that the MNF optimally sells less (more) and produces more (less) in the foreign (home) country in response to the imposition of the liquidity constraint. We show further that the liquidity constrained MNF optimally uses the currency option contracts in the first period for hedging purposes in general, and opts for a long option position if its utility function is quadratic in particular.     

Credit risk transfer and bank competition

We present a banking model with imperfect competition in which borrowers’ access to credit is improved when banks are able to transfer credit risks. However, the market for credit risk transfer (CRT) works smoothly only if the quality of loans is public information. If the quality of loans is private information, banks have an incentive to grant unprofitable loans that are then transferred to other parties, leading to an increase in aggregate risk. Higher competition increases welfare in the presence of CRT with public information. In contrast, welfare eventually decreases for high levels of competition in the presence CRT with private information due to the expansion of unprofitable loans. This finding coincides with the decrease in credit quality observed during the late years of the credit boom preceding the subprime crisis.     

Fiscal equalisation schemes under competition

This paper considers optimal fiscal equalisation in a federation that competes with other federations for business tax base. It formalises the argument that, under certain circumstances, federations have an incentive to foster tax competition among their subunits in order to attract tax base from other federations. We show that optimal fiscal equalisation serves the purpose of redistributing income from rich to poor subunits and of choosing an optimal level of tax competition. The latter is chosen as a trade-off between three goals. First, decentralised tax rate setting has positive fiscal externalities within the federation and, thus, tax rates are inefficiently low. Second, in the presence of hold-up problems in investment, tax rates may be inefficiently high. Then, tax competition serves as a commitment device for low future tax rates and is, thus, welfare enhancing. Third, generous fiscal equalisation within the federation is a commitment to not aggressively compete with subunits outside the federation for tax base; as a consequence, with optimal equalisation, equilibrium tax rates are higher within and outside the federation—and even higher than in the case of centralised (i.e. federal level) tax rate setting.     

An example of indifference prices under exponential preferences

The aim herein is to analyze utility-based prices and hedging strategies. The analysis is based on an explicitly solved example of a European claim written on a nontraded asset, in a model where risk preferences are exponential, and the traded and nontraded asset are diffusion processes with, respectively, lognormal and arbitrary dynamics. Our results show that a nonlinear pricing rule emerges with certainty equivalent characteristics, yielding the price as a nonlinear expectation of the derivatives payoff under the appropriate pricing measure. The latter is a martingale measure that minimizes its relative to the historical measure entropy.Received: July 2003, Mathematics Subject Classification: 93E20, 60G40, 60J75JEL Classification: C61, G11, G13The second author acknowledges partial support from NSF Grants DMS-0102909 and DMS-0091946. We have received valuable comments from the participants at the Conferences in Paris IX, Dauphine (2000), ICBI Barcelona (2001) and 14th Annual Conference of FORC Warwick (2001). While revising this work, we came across the paper by Henderson (2002) in which a special case of our model is investigated     

Minimum option prices under decreasing absolute risk aversion

We establish bounds on option prices in an economy where the representative investor has an unknown utility function that is constrained to belong to the family of nonincreasing absolute risk averse functions. For any distribution of terminal consumption, we identify a procedure that establishes the lower bound of option prices. We prove that the lower bound derives from a particular negative exponential utility function. We also identify lower bounds of option prices in a decreasing relative risk averse economy. For this case, we find that the lower bound is determined by a power utility function. Similar to other recent findings, for the latter case, we confirm that under lognormality of consumption, the Black Scholes price is a lower bound. The main advantage of our bounding methodology is that it can be applied to any arbitrary marginal distribution for consumption. This revised version was published online in June 2006 with corrections to the Cover Date.     

Fast approximations of bond option prices under CKLS models

A new computational method for approximating prices of zero-coupon bonds and bond option prices under general Chan–Karolyi–Longstaff–Schwartz models is proposed. The pricing partial differential equations are discretized using second-order finite difference approximations and an exponential time integration scheme combined with best rational approximations based on the Carathéodory–Fejér procedure is employed for solving the resulting semi-discrete equations. The algorithm has a linear computational complexity and provides accurate bond and European bond option prices. We give several numerical results which illustrate the computational efficiency of the algorithm and uniform second-order convergence rates for the computed bond and bond option prices.     

Audit Labor Usage and Fees under Business Risk Auditing

The adoption of business risk audit (BRA) approaches during the 1990s by several leading audit firms has been the subject of considerable scrutiny and commentary. Under BRA, the auditor responds to the increasing complexity of auditee financial reports by acquiring a deep and comprehensive understanding of the auditee's industry, strategy, business models, and processes—tasks best accomplished by higher-ranked labor—and by employing this understanding to make audit labor allocations. Using proprietary data for 165 audits conducted in 2002, we investigate three propositions about audit labor use under BRA. First, relative to pre-BRA benchmarks for the same auditor, we expect BRA audits to use a greater proportion of higher-ranked labor. Second, we expect engagements with high assessed auditor business risk (ABR), a summary risk assessment that reflects the BRA auditor's rich understanding of the auditee, to be allocated more labor and more higher-ranked labor than pre-BRA benchmarks. Third, at all ranks of labor, we expect a positive association between assessed ABR and levels of labor use. We find empirical evidence consistent with these propositions. We also find that total labor use in our sample is only modestly lower than pre-BRA norms. Analysis of fee data from these engagements suggests that audit fees in 2002 are substantially less than would be expected under pre-BRA benchmarks. After controlling for audit labor use, both total fees and fees per hour increase with assessed ABR for first-year auditees but not for continuing auditees. Overall, our results provide evidence on the impact of the BRA audit regime and speak to the likely impact of BRA on audit effectiveness and efficiency.     

The welfare ranking of prices and quantities under noncompliance

We study the welfare ranking of an emission tax and emissions trading when firms self-report their emissions to the regulator and may be noncompliant. We allow for the subjective probabilities of auditing and, using conventional assumptions, find that an emission tax produces a higher level of welfare than emissions trading under noncompliance. The main driver of the result is that the compliance pattern of the firms affects the marginal compliance cost (price of emissions) in the case of permits, thus affecting the level of emissions and welfare. The result also holds when enforcement and sanctioning costs are taken into account and differs from the result found by Montero (J Public Econ 85:435–454, 2002). We also show that the ranking may be reversed if these costs are taken into account and the regulator must audit at least one firm. We also analyze the welfare ranking when the expected penalties depend on relative violations.     

竞争合作关系下的中国私人银行业务发展

随着中国内地拥有高额个人资产的富有阶层迅速崛起，他们对财富管理的需求不断增强，因此，中外金融机构纷纷把中国内地视为私人银行业务极具潜力的市场。在与某些外资私人银行合作、学习其管理经验的同时，中资银行面临更多的是与外资私人银行的竞争。文章分析了中资银行开展私人银行业务的背景和重要性，以及具有的优势、劣势，面对的机遇、挑战，提出了中资私人银行的构建途径和开展私人银行业务的对策。     

Inter-market competition for NYSE-listed securities under decimals

Blume and Goldstein (J Finance 52:221–244, 1997) suggest that quote competition between trading venues may diminish following tick size reductions. We test this suggestion by studying the competitive landscape in the NYSE-listed stocks before and after decimalization. We find that NBBO (National Best Bid and Offer) participation by non-NYSE venues declines following decimalization consistent with the prediction. At the same time, the importance of quote competitiveness in attracting order flow increases. In addition, although not as active in determining and maintaining the best quotes under decimals, non-NYSE venues become more active in price discovery. Finally, decimalization leads to lower trading costs and to smaller differences in trading costs across trading venues.     

美国与墨西哥的审计准则与事务所内部治理

去年底,中注协审计准则与事务所内部治理考察团一行6人,先后拜访了美国加利福尼亚州注册会计师协会洛杉矶分会、美国公众公司会计监督委员会(PCAOB)、美国注册会计师协会和     

Dual transfer pricing with internal and external trade

This paper examines a transfer pricing problem between two divisions of a decentralized firm. The selling division is privately informed about its own costs and produces a good that is sold both externally in an intermediate market and internally within the firm. Unlike most previous work, we focus on dual transfer pricing systems that allow the selling division to be credited for an amount that differs from the amount charged to the buying division. We identify conditions under which efficient decentralized trade and external price setting incentives can be provided with a properly chosen set of dual transfer prices that do not rely on direct communication. Instead, the optimal dual transfer prices will depend only on public information about the market price charged by the upstream division in the external market, which indirectly communicates information about production costs to the downstream division. For a variety of well-known demand functions, the optimal transfer prices will be linear functions of the market price. Our main results hold when the upstream division faces multiple internal buyers or faces a binding capacity constraint.     

The interaction among disclosures,competition, and an internal control problem

This paper studies the effect of an internal control problem on a firm's disclosure policy where firms compete in non-cooperative investment game, with each firm deciding to invest in its current technology or to invest in a non-proprietary innovation. By adopting the innovation, a firm earns higher revenues at the expense of its non-adopting rival. Each principal decides on a disclosure policy for its firm that entails releasing an agent's internal cost report of the firm's current technology to the rival firm. The agent has private information about the current technology's cost and an incentive to overstate the cost. An effect of disclosures is to increase coordination between the firms, which, without a control problem, increases firm profits. However, under the same conditions that disclosures were beneficial without the control problem, disclosures may be harmful to the principal with the control problem because increased coordination between the firms allows the agent to earn higher rents. Competition substitutes for commitment to an investment policy that limits the agent's rents and this disciplining role of competition is diminished with disclosures.     

The new multinationals: Developing-country firms in international markets

Driven by a variety of factors, including deficiencies in domestic demand, developing-country firms are increasing their direct foreign investment in, and sales of technology to, other developing countries. The recipients usually gain various benefits that they would not in similar deals with OECD multinationals. But any increase in such international flows depends heavily on the strategic choices of OECD corporations (ie which markets they move out of) and on the pattern of government incentives and controls in the countries of origin and destination.     

Tax competition and fiscal equalization under corporate income taxation

This paper challenges the view that tax base equalization by the so-called representative tax system (RTS) removes inefficient undertaxation in corporate tax competition. The innovation of the paper is that it focuses on a tax on corporate income, instead of the unit tax on capital considered in previous studies. We employ a tax competition model with fiscal equalization and show that the RTS fails to fully internalize pecuniary and fiscal externalities. As a consequence, the RTS yields inefficiently low tax rates in the Nash equilibrium of the tax competition game between governments. Tax revenue equalization performs even worse, but combined with equalization of private income it implements the efficient tax rates on corporate income.     

Fast estimation of true bounds on Bermudan option prices under jump-diffusion processes

Fast pricing of American-style options has been a difficult problem since it was first introduced to the financial markets in 1970s, especially when the underlying stocks’ prices follow some jump-diffusion processes. In this paper, we extend the ‘true martingale algorithm’ proposed by Belomestny et al. [Math. Finance, 2009, 19, 53–71] for the pure-diffusion models to the jump-diffusion models, to fast compute true tight upper bounds on the Bermudan option price in a non-nested simulation manner. By exploiting the martingale representation theorem on the optimal dual martingale driven by jump-diffusion processes, we are able to explore the unique structure of the optimal dual martingale and construct an approximation that preserves the martingale property. The resulting upper bound estimator avoids the nested Monte Carlo simulation suffered by the original primal–dual algorithm, therefore significantly improving the computational efficiency. Theoretical analysis is provided to guarantee the quality of the martingale approximation. Numerical experiments are conducted to verify the efficiency of our algorithm.     

ERM框架影响下的内部审计的新发展

内部审计参与风险管理具有外部审计及其他职能部门不可比拟的优势.内部审计部门在风险管理过程中的作用有一个发展过程:从不在风险管理过程中起任何作用,到作为内部审计工作计划的一部分对风险管理过程进行审计,再到积极持续地支持并参与风险管理过程.在不同的发展阶段中,内部审计的工作重点有所不同.