Communication,timing, and common learning

We study the effect of stochastically delayed communication on common knowledge acquisition (common learning). If messages do not report dispatch times, communication prevents common learning under general conditions even if common knowledge is acquired without communication. If messages report dispatch times, communication can destroy common learning under more restrictive conditions. The failure of common learning in the two cases is based on different infection arguments. Communication can destroy common learning even if it ends in finite time, or if agents communicate all of their information. We also identify conditions under which common learning is preserved in the presence of communication.     

Information, bilateral negotiations, and worker recruitment

This paper studies experimentally how firms choose between using a centralized market and bilateral negotiations to recruit new personnel. In the market firms interact with several workers but do not have information about workers’ behavior in the past. In the bilateral negotiations firms negotiate bilaterally with prospective workers and learn about workers’ performance in previous jobs. We show that the interaction between social preferences, the incompleteness of contracts and the existence of information about a worker’s past performance provides an explanation for firms forgoing market opportunities and bilaterally negotiating with a worker. We observe that approximately 30% of all job contracts were bilaterally negotiated when these contracts are incomplete as opposed to only 10% when contracts were complete. The surplus from trade is higher when incomplete contracts can be bilaterally negotiated, which can be attributed to the presence of information.     

Schooling choices: Preferences, discount rates, and rates of return

This paper develops an empirical model to identify the structural parameters of schooling preferences and human capital production. Our model distinguishes between consumption and investment motives with regard to schooling. The results show that both motives matter. Preferences for schooling vary with social background and ability. Children from poorer social backgrounds and of lower ability have a lower preference for schooling. The discount rate that enters the net value of lifetime income varies with social background as well. The marginal rate of return to schooling decreases with ability and schooling. On average the marginal rate of return is 7.3 per cent, which can be contrasted with a `Mincerian' rate of return equal to 4.8 per cent. This indicates that the usual OLS estimate underestimates the true rate of return. First version received: November 1997/Final version received: February 1999     

Keynes, uncertainty and interest rates

Uncertainty plays an important role in The General Theory, particularlyin the theory of interest rates. Keynes did not provide a theoryof uncertainty, but he did make some enlightening remarks aboutthe direction he thought such a theory should take. I arguethat some modern innovations in the theory of probability allowus to build a theory which captures these Keynesian insights.If this is the right theory, however, uncertainty cannot carryits weight in Keynes's arguments. This does not mean that theconclusions of these arguments are necessarily mistaken; intheir best formulation they may succeed with merely an appealto risk.     

Optimal size, optimal timing and optimal financing of an investment

Corporate investment is an important determinant of economic well-being. The existing literature identifies optimal investment size and timing without the possibility of debt financing, as well as the effect of debt financing on investment timing without the option to choose investment size. This paper contributes to the literature by identifying the optimal size, optimal timing and optimal financing for an investment when the firm controls all three decisions (as it usually does in practice). The investment size and investment trigger are generally positively related: when investment is delayed (accelerated) it is larger (smaller) in size, thus the overall effect on investment is ambiguous. However, when tax rate or bankruptcy cost is increased, the trigger rises and size falls, hence the effect on investment is unambiguously negative. The effect of debt financing on investment depends on the amount of debt used; with the optimal amount of debt, investment is delayed relative to the no-debt case, and this delay can be economically significant; however, the investment, when eventually made, will be larger in size. Overall, it is not appropriate to ignore either the firm’s ability to choose investment size or its option to use debt financing, when modeling the investment decision.     

Debt, interest rates, and integration of financial markets

It is commonly believed that higher budget deficits raise interest rates. However, these crowding out effects of increasing public debt have usually been found to be small or non-existent. One explanation is that on globalised bond markets interest rate differentials are offset due to financial integration. This paper tests crowding out, and measures the degree of integration of government bond markets, using spatial modelling techniques. Our main finding is that the crowding out effect of public debt on domestic long term interest rates is small: a 1% increase in the debt ratio pushes up domestic rates by 2 pp at most. Financial integration implies an important spillover effect via international bond markets, but only between OECD, and in particular EU, countries. The feedback effect from these markets on long term interest rates is as important as the domestic crowding out effect of higher public debt. Emerging markets are not as well integrated into international capital markets, causing a stronger crowding out effect.     

Debt policy, corporate taxes, and discount rates

This paper applies the standard risk-neutral valuation framework to tax shields generated by dynamic debt policies. We derive a partial differential equation (PDE) for the value of the debt tax shield. For a class of dynamic debt policies that depend on the asset's free cash flows, value, and past performance, we obtain closed-form solutions for the PDE. We also derive the tax-adjusted cost of capital for free cash flows and analyze the conditions under which the weighted average cost of capital is an appropriate discount rate. Finally, we derive closed-form solutions for equity betas, which differ from the formulas that have traditionally been used to lever and unlever equity betas.     

Trade costs, wage rates, technologies, and reverse imports

Abstract .  This paper explores the effects of transport costs, tariffs, and foreign wage rates on the domestic economy in the presence of reverse imports, with special emphasis on inter-firm cost asymmetry in an international oligopoly model. To serve the domestic market, a foreign firm produces in the foreign country, while two domestic firms produce either at home or abroad. Surprisingly, an increase in the foreign wage rate may increase the profits of a firm producing in the foreign country. Even if all firms produce in the foreign country, an increase in the foreign wage rate may improve domestic welfare.     

Duality,interest rates,and the theory of present value

This paper uses duality theory to simplify and extend previous work which characterized technologies which have present value decreasing in interest rates. For “unbounded” interest rate sets, value nonincreasing is equivalent to truncation never being desirable. For bounded interest rate sets, the result is true if truncation is replaced by limited truncation, appropriately defined. Similarly, for equal forward rates, undesirability of geometric truncation characterizes nonincreasing value. Another result shows that if truncation is undesirable at an internal rate of return, then the internal rate of return is well behaved, even if value is not decreasing everywhere.     

Building confident organizations by filling buckets, building infrastructures, and shining the flashlight

Leaders have the ability to create confidence or fear in the organization. Kanter (2004) writes that confidence is the "...sweet spot between arrogance and despair" (p. 8). Overconfidence causes people to overshoot, and to assume they are invulnerable. Under-confidence is just as harmful because it leads to under-investing in people, under-innovating, and eventually leads to the disenfranchisement of staff and poor morale. If we take Kanter's advice, we will build an infrastructure that creates confidence in everyone and the organization. But we will not stop there. We will focus "flashlights" on people and activities that are inspiring to others.     

A game of timing and visibility

We consider the following abstraction of competing publications. There are n players in the game. Each player i chooses a point x_i in the interval [0,1], and a player's payoff is the distance from its point x_i to the next larger point, or to 1 if x_i is the largest. For this game, we give a complete characterization of the Nash equilibrium for the two-player game, and, more important, we give an efficient approximation algorithm to compute numerically the symmetric Nash equilibrium for the n-player game. The approximation is computed via a discrete version of the game. In both cases, we show that the (symmetric) equilibrium is unique. Our algorithmic approach to the n-player game is non-standard in that it does not involve solving a system of differential equations. We believe that our techniques can be useful in the analysis of other timing games.     

Exchange rates,exchange risk,and Asian export revenue

While depreciation may raise export revenue, associated exchange risk could offset any positive effect. The present paper investigates this net effect for eight Asian countries using a bivariate GARCH-M model that simultaneously estimates time varying risk. The fundamental result is that export markets react differently to exchange rates and associated risk. High degrees of risk apparently stimulate efforts to avoid its impact. Exchange risk has a dominating negative impact for the appreciating Japanese yen. Depreciation has no impact in Malaysia and Singapore, and exchange risk has a negative effect in Singapore. For the other five countries, depreciation stimulates export revenue but risk leads to a negative net effect in Taiwan.     

Measuring the natural rates,gaps, and deviation cycles

One definition of the natural rate is the (time-varying) steady state equilibrium rate. Then the gap is the difference between the actual and natural rates, or the forecastable movement. Although modern business cycle theories study deviation cycles (cycles in the gap), the NBER business cycle reference dates measure classical cycles (cycles in the actual rate) in the US. Measuring deviation cycles requires detrending, and this motivated the invention of the Beveridge–Nelson (B–N) decomposition. This paper considers multivariate detrending, and proposes a Bayesian approach to the multivariate B–N decomposition. An application of the method to US data gives (i) a joint estimate of the natural rates and gaps of output, inflation, interest, and unemployment with reliable error bands, and (ii) the posterior probabilities of positive gap, recession, and revival. These results may help us to identify the four phases of deviation cycles: expansion, recession, contraction, and revival.     

Credit rationing, interest rates and capital accumulation

A simple endogenous growth model is developed to characterize credit rationing through the capital accumulation process. The model shows that credit rationing on investment loans decreases as capital accumulates and the enforcement cost decreases. We find that the evolution of the interest rate factor (lending interest rate/depositing interest rate) has a similar pattern to the credit rationing probability. However, simulations show that the evolution of the interest rate spread through the capital accumulation process depends on the degree of the enforcement cost. In the empirical part of the paper, we consider fifty-two countries, at different stages of development, over the period 1995–2005. We confirm the theoretical findings relative to the evolution of the interest rate spread and interest rate factor with capital accumulation. These results suggest that, for economies endowed with costly contract enforcement, the interest rate factor could be a better proxy of credit rationing than the interest rate spread.     

Continuous-time games of timing

We address the question of existence of equilibrium in general timing games with complete information. Under weak assumptions, any two-player timing game has a Markov subgame perfect -equilibrium, for each >0. This result is tight. For some classes of games (symmetric games, games with cumulative payoffs), stronger existence results are established.     

The effect of education,family size,unemployment and childcare availability on birth stopping and timing

Using data from Portugal’s Fertility and Family Survey, I analyze childbearing decisions up to the third birth using a split-population (SP) model. The advantage of this approach is the separability of the covariates’ impact on birth timing and birth stopping. This paper is the first to apply an SP model to investigate the effect of unemployment and the availability of childcare. I also address how education, family size, age at previous birth of the woman and sex composition of existing children influence childbearing decisions, and provide empirical support for each of these. Comparing these with estimates obtained using survival models that do not include a regression on birth stopping suggest that the results of the latter tend to be unreasonable.