Benefit Incidence, Public Spending Reforms, and the Timing of Program Capture

Assessments of the distributional effects of public spendingreforms have generally been based on average rates of programparticipation by income or expenditure group. This practicecan be deceptive because the socioeconomic composition of participantscan change as a social program expands or contracts. The geographicvariation found in 1993–94 household survey data for ruralIndia is used to estimate the marginal odds of participatingin schooling and antipoverty programs. The results suggest earlycapture of these programs by the nonpoor. It is shown that conventionalmethods for assessing benefit incidence underestimate the gainsto the poor from higher public outlays and underestimate thelosses from cuts.     

Fiscal Response to a Temporary Trade Shock: The Aftermath of the Kenyan Coffee Boom

The appropriate fiscal response to a temporary terms of tradewindfall is difficult to determine, even in an unregulated economy.But controls, such as those in force during the 1976–79coffee boom in Kenya, introduce special problems. For example,foreign exchange controls make the private investment of boomincome inefficient by causing it to be undertaken too rapidly.In Kenya the boom induced a massive increase in public expenditure,far in excess of the increase in public revenue. The net effecton capital formation was negative because the fiscal responseexacerbated the rise in the relative price of nontraded capitalgoods, and because resources were preempted for government consumption.     

Consequences of a Commodity Boom in a Controlled Economy: Accumulation and Redistribution in Kenya 1975-83

The economic theory of "Dutch disease" is extended and appliedto the 1976–79 coffee boom in Kenya in this article. Whena commodity boom is perceived as temporary, a large fractionwill tend to be saved out of transient income. The spendingeffect of the boom is supplemented by relative price changesresulting from capital stock increases. In the presence of foreignexchange and import controls, the benefits of a sudden exportprice increase may be transferred intersectorally. Using a generalequilibrium model, it is estimated that in Kenya the benefitsof the boom were largely transferred from coffee growers tourban groups.     

Agency and Optimal Investment Dynamics

Agency problems limit firms’ access to capital markets,curbing investment. Firms and investors seek contractual waysto mitigate these problems. What are the implications for investment?We present a theory of a firm’s investment dynamics inthe presence of agency problems and optimal long-term financialcontracts. We derive results relating firms’ investmentdecisions, current and past cash flows, firm size, capital structure,and dividends. Among the results, optimal investment is increasingin current and past cash flow; and optimal investment is positivelyserially correlated over time (after controlling for investmentopportunities). These results hold for a range of agency problems.(JEL G30, G31, G32, G35, D82, D86, D92)     

The Dynamic Effects of Public Capital: VAR Evidence for 22 OECD Countries

The issue of whether public capital is productive has received a great deal of recent attention. Yet, empirical analyses of public capital productivity have been limited to a small sample of countries for which official capital stock estimates are available. Building on a new database that provides internationally comparable capital stock estimates, this paper estimates the dynamic effects of public capital using the vector autoregressive (VAR) methodology for a large set of OECD countries. The empirical results suggest that there is evidence for positive output effects of public capital in OECD countries, but hardly any evidence for positive employment effects.JEL Code: C32, E62, H54     

On the outcome of inconsistent programs under exchange rate and monetary rules: Allowing the market to compensate for government mistakes

This paper studies the case of ‘inconsistent’ programs of monetary policy — that is, programs incompatible in the long run with a given budget deficit, so that at some point in the future there is an eventual crisis and demise of the program, all of which is from the outset anticipated by the public. The context is one of a small open economy, with perfect foresight, in which two sets of possibilities are analyzed: (i) a ‘monetary’ or an ‘exchange rule’ for the conduct of monetary policy and (ii) presence or absence of capital mobility. It is found that while the choice of the rule is ‘unimportant’, restrictions on capital mobility determine a very different response, for the case of either rule, concerning side effects of the program on non-monetary variables and on the post-crisis level of country indebtedness.     

Will African Agriculture Survive Climate Change?

Measurement of the likely magnitude of the economic impact ofclimate change on African agriculture has been a challenge.Using data from a survey of more than 9,000 farmers across 11African countries, a cross-sectional approach estimates howfarm net revenues are affected by climate change compared withcurrent mean temperature. Revenues fall with warming for drylandcrops (temperature elasticity of –1.9) and livestock (–5.4),whereas revenues rise for irrigated crops (elasticity of 0.5),which are located in relatively cool parts of Africa and arebuffered by irrigation from the effects of warming. At first,warming has little net aggregate effect as the gains for irrigatedcrops offset the losses for dryland crops and livestock. Warming,however, will likely reduce dryland farm income immedia-tely.The final effects will also depend on changes in precipitation,because revenues from all farm types increase with precipitation.Because irrigated farms are less sensitive to climate, wherewater is available, irrigation is a practical adaptation toclimate change in Africa.     

VC Fund Financial Performance: The Relative Importance of IPO and M&A Exits and Exercise of Abandonment Options

By combining data from two sources, we are able to examine how fund financial performance is related to fund outcomes (initial public offering [IPO] and merger & acquisition (M&A) percentages) and abandonment practices. We also are able to relate fund performance to the track record of the venture capital firm. Our primary findings include: 1) fund IPO and M&A outcomes are statistically significantly related to financial performance, 2) M&A success is around 60% to 80% as important as IPO success in explaining performance, 3) except among the top performers, funds with aggressive exercise of abandonment options outperform those that continue to support a large percentage of their initial investments, and 4) prior performance of the firm, in terms of success percentages and abandonment practices, is significantly related to fund performance. Results are robust to controlling for selection bias of the reporting entities, as well as biases related to looking back at the performance of earlier funds survivorship, and attrition. Quantile regression estimates establish that our results hold across the full range of realized performance levels.     

Cross-Sectional and Time-Series Determinants of Momentum Returns

Portfolio strategies that buy stocks with high returns overthe previous 3–12 months and sell stocks with low returnsover this same time period perform well over the following 12months. A recent article by Conrad and Kaul (1998) presentsstriking evidence suggesting that the momentum profits are attributableto cross-sectional differences in expected returns rather thanto any time-series dependence in returns. This article showsthat Conrad and Kaul reach this conclusion because they do nottake into account the small sample biases in their tests andbootstrap experiments. Our unbiased empirical tests indicatethat cross-sectional differences in expected returns explainvery little, if any, of the momentum profits.     

The long-term effects of bank recapitalization: Evidence from Indonesia

Do government-sponsored bank recapitalization programs spur lending and reduce risk? This paper assesses the impact of Indonesia’s bank recapitalization program on lending and bank risk following the Asian financial crisis of 1997. Using unique bank-level data, difference-in-differences estimates suggest that recapitalization increased lending (and more so for larger banks), but also boosted bank risk in the long term. Results remain robust to considerations of (1) bank-level differences in political connections, business group affiliation, ownership type, and (2) changes in macroeconomic conditions, capital requirements, accounting regulations, and public credit registry availability.     

The Poor and the Social Sectors during a Period of Macroeconomic Adjustment: Empirical Evidence for Jamaica

Considerable uncertainty remains about the human impact of macroeconomicadjustment. Analysis of the impact of adjustment on the poorand on the social sectors is difficult because it involves evaluatinga counterfactual situation in which households are affectedby prices, incomes, and public services with the possibilityof substantial substitutions—all within an economywideframework with complicated concurrent and lagged interactions.In this article, we utilize time-series data for Jamaica toexamine whether macroeconomic adjustment, initiated in the early1980s but intensified in 1984–85, was associated withsignificant deterioration in various indicators of health, nutritional,and welfare outcomes, particularly among the poor. Althoughwe find evidence of substantial cuts in governmental expenditureson social services, there is little confirmation of significantshort-run deterioration in human capital indicators during theadjustment period.     

Theory and Evidence on the Resolution of Financial Distress

We analyze a financially distressed owner-managed project. Themain results of the model are: (1) borrower default is an endogenousresponse to the anticipated restructuring–foreclosureoutcome; (2) the lender’s restructuring–foreclosuredecision depends critically on the interaction between projectvalue and industry liquidity; and (3) the lender waits for theindustry to recapitalize before selling assets obtained throughforeclosure. Empirical analysis of a large sample of defaultedcommercial real estate loans supports many of the model predictions,including restructuring–foreclosure outcomes that areconsistent with endogenous borrower default and firesale discountsthat vary depending on industry market conditions at the timeof foreclosure. (JEL G33)     

Labor Income and Predictable Stock Returns

We propose a novel economic mechanism that generates stock returnpredictability in both the time series and the cross-section.Investors’ income has two sources, wages and dividendsthat grow stochastically over time. As a consequence the fractionof total income produced by wages fluctuates depending on economicconditions. We show that the risk premium that investors requireto hold stocks varies with these fluctuations. A regressionof stock returns on lagged values of the labor income to consumptionratio produces statistically significant coefficients and largeadjusted R²s. Tests of the model’s cross-sectional predictionson the set of 25 Fama–French portfolios sorted on sizeand book-to-market are also met with considerable support.     

Option Coskewness and Capital Asset Pricing

This article shows how the market coskewness model of Rubinstein(1973) and Kraus and Litzenberger (1976) is altered when a nonredundantcall option is optimally traded. Owing to the option’snonredundancy, the economy’s stochastic discount factor(SDF) depends not only on the market return and the square ofthe market return but also on the option return, the squareof the option return, and the product of the market and optionreturns. This leads to an asset pricing model in which the expectedreturn on any risky asset depends explicitly on the asset’scoskewness with option returns. The empirical results show thatthe option coskewness model outperforms several competing benchmarkmodels. Furthermore, option coskewness captures some of thesame risks as the Fama–French factors small minus big(SMB) and high minus low (HML). These results suggest that thefactors that drive the pricing of nonredundant options are alsoimportant for pricing risky equities.(JEL G11, G12, D61)     

Warrants on the London Stock Exchange: Pricing Biases and Investor Confusion

This study of warrants on the London Stock Exchange examineswhether they display particular pricing biases and whether investorsunderstand how to value them at the time of issue. In a sampleof 72 warrants on closed-end funds (investment trusts) overthe 1985–94 period, more than one third of the 12,673prices are anomalously low. The other two thirds behave likestock options, with lower volatility when they are in-the-moneyor have a long time until maturity. Despite their frequent undervaluation,it is rational to add warrants to a new equity issue: an examinationof 127 new equity issues (95 with warrants) reveals that attachingwarrants significantly increases market value. The reason forthis appears to be investor confusion: they do not seem to understandthat the more the warrants are worth, the less the value ofthe ordinary shares.     

LARCH, Leverage, and Long Memory

We consider the long-memory and leverage properties of a modelfor the conditional variance of an observable stationary sequence X_t, where is the square of an inhomogeneous linear combination of X_s, s < t, withsquare summable weights b_j. This model, which we call linearautoregressive conditionally heteroskedastic (LARCH), specializes,when depends only on X_t–1, to theasymmetric ARCH model of Engle (1990, Review of Financial Studies3, 103–106), and, when depends only on finitely many X_s, to a version of the quadratic ARCH modelof Sentana (1995, Review of Economic Studies 62, 639–661),these authors having discussed leverage potential in such models.The model that we consider was suggested by Robinson (1991,Journal of Econometrics 47, 67–84), for use as a possiblylong-memory conditionally heteroskedastic alternative to i.i.d.behavior, and further studied by Giraitis, Robinson and Surgailis(2000, Annals of Applied Probability 10, 1002–1004), whoshowed that integer powers , =" BORDER="0">2 can have long-memory autocorrelations. We establish conditionsunder which the cross-autocovariance function between volatilityand levels, , decays in the manner of moving average weights of long-memory processes on suitable choiceof the b_j. We also establish the leverage property that h_t <0 for 0 < t k, where the value of k (which may be infinite)again depends on the b_j. Conditions for finiteness of thirdand higher moments of X_t are also established.     

The impact of strategy communications, incentives and national culture on balanced scorecard implementation

Professionals are challenged daily with difficult decisions. Capital budgeting decisions are one type of difficult decision, especially in firms that embrace a Balanced Scorecard management philosophy. In these firms, the decision maker frequently must choose among multiple options on the basis of multiple criteria with no one option dominating across all criteria. Not only must the decision maker evaluate each option on each criteria, the decision maker also must weigh the relative importance of each criteria when making a final judgment. When faced with difficult decisions, decision makers will resort to various coping behaviors, such as decision avoidance or delay, status quo bias, deferral to others' preferences, or reliance on decision aids. In a Balanced Scorecard environment, one important type of decision aid is the strategy map. The ambiguity introduced by multiple options and multiple criteria also creates a condition in which the subjective biases of the decision-maker can easily manifest in the absence or despite decision aids. Among those potential biases are self-interests and national culture. In this study we examine the effects on capital budgeting decisions of two common types of strategy maps as well as incentive effects and national culture. An objective of Balanced Scorecard management practices is to overcome a common North American fixation on short-term financial outcomes. Recent research submits that an appropriate strategy map will facilitate that end by overcoming certain other cognitive limitations (such as fixation on common metrics). Our inquiry will examine whether biases related to self-interests and national culture persist in the presence of two common strategy maps. A behavioral experiment was conducted in which 140 MBA students from Spain and the U.S. with average work experience of 10 years participated. Findings were that significant fixation on short-term financial outcomes persists in the presence of one common strategy map, but not in the presence of an alternate common strategy map, and that incentive and national culture biases persist in the presence of both. In addition, all three experimental variables exhibited significance and equivalent influence, although prior research has only addressed the influence of incentives.     

Auctions vs. Bookbuilding and the Control of Underpricing in Hot IPO Markets

Market returns before the offer price is set affect the amountand variability of initial public offering (IPO) underpricing.Thus an important question is "What IPO procedure is best adaptedfor controlling underpricing in "hot" versus "cold" market conditions?"The French stock market offers a unique arena for empiricalresearch on this topic, since three substantially differentissuing mechanisms (auctions, bookbuilding, and fixed price)are used there. Using 1992–1998 data, we find that theauction mechanism is associated with less underpricing and lowervariance of underpricing. We show that the auction procedure'sability to incorporate more information from recent market conditionsinto the IPO price is an important reason.     

On the Long Run Effects of Public Capital and Disaggregated Public Capital on Aggregate Output

We study the cointegration properties of data on aggregate output, five proxies for labor, two proxies for private capital, public capital, and disaggregated public capital for the United States for 1948–1993. We find evidence of multiple cointegrating vectors; we typically find three or four cointegrating vectors depending on which combination of proxies is evaluated. When public capital is disaggregated by type there is less evidence for cointegration. Finally, innovations in public capital have long lasting effects on output, labor, and private capital, and innovations to output, labor, and private capital also have long lasting effects on public capital.     

Corruption and Transparency in a Growth Model

We develop a Ramsey type model of economic growth in which the “Engine of Growth” is public capital accumulation. Public capital is a public good, and is financed by taxes on private output. The government may either use the taxes gathered to fund public capital accumulation or consume the resourses itself; that is engage in corruption. There is an irreducable level of endogenously determined corruption which constitutes rents for which potential governments compete. This competition takes the form of choosing a time path for public capital invesment, which implies time paths for output and household consumption. We study both the model’s steady state, and dynamical behavior along the saddle path. The predictions of our theory accord well with the existent empirical evidence on the relationships between the level and growth rate of output, corruption, public investment and fiscal transparency. Our analysis also provides a perspective on the transition experiences of several Eastern European economies. JEL Code: O41, H41