Environmental regulation and technology transfers

This paper analyzes the situation in which a national government introduces environmental regulations. Within the framework of an international duopoly with environmental regulations, an environmental tax imposed by the government in the home country can induce a foreign firm with advanced abatement technology to license it to a domestic firm without this technology. Furthermore, when the domestic firm's production technology is less efficient than that of the foreign firm, the foreign firm may freely reveal its technology to the domestic firm. These improvements through the voluntary transfer of technology imply that environmental regulations have positive impacts on innovation.     

The effects of abandonment options on operating leverage and investment timing

This paper examines how the presence of an abandonment option affects a firm's investment decision in general, and its operating leverage in particular. We show that the value of the abandonment option is a decreasing function of the firm's operating leverage. Upon the introduction of the abandonment option, the firm as such optimally lowers its operating leverage. We further show that there are direct and indirect effects of the abandonment option on the firm's optimal investment trigger, which act against each other. First, the ability to shut down production offers downside protection to the firm, thereby making the firm more eager to exercise the investment option. This is the negative direct effect that pushes down the investment trigger. Second, introducing the abandonment option to the firm induces the firm to lower its operating leverage, thereby making the firm more reluctant to exercise the investment option. This is the positive indirect effect that lifts up the investment trigger. We numerically verify that the overall effect of the abandonment option on the firm's optimal investment trigger is negative.     

STRATEGIC LOBBYING BY POTENTIAL INDUSTRY ENTRANTS*

A firm which lobbies government for a change in policy, say an import tariff, can increase its profits in two ways. First, the policy can increase the profits of all firms in the industry. This effect therefore involves a free-rider problem. Second, a firm's lobbying expenditures may signal other firms about its costs and interests. For example, a firm with low marginal costs may profit much from an import ban. Other firms which see that this firm expects to profit much from the ban may decide not to enter the industry. This may further increase the low-cost firm's profits.     

Counterparty effects on capital structure decision in incomplete market

This paper builds a static contingent-claim model that allows for examining the optimal capital structure with the joint arguments of counterparty default risk and market incompleteness. A first-passage-time model with jump default barrier is adopted to capture the counterparty effects on the pricing of defaultable claims. Following the framework of Jarrow and Yu (2001), the jump in primary firm's bankruptcy barrier is designed as the loss on capital resulted from secondary firm's bankruptcy. The relevance of market incompleteness in the context of claim-pricing is considered using “good-deal asset price bound” method by Cochrane and Saa-Requejo (2000). We show that the effects of counterparty's default clearly diminish the uses of debt, which indirectly explains the so-called under-leveraged puzzle. We further find that counterparty effects on capital structure are sensitive to market incompleteness and firm's characteristics, such as tax rate and bankruptcy cost rate.     

The effects of irreversibility on the timing and intensity of lumpy investment

This paper examines how changes in irreversibility of investment affect the timing and intensity of lumpy investment. We develop a continuous-time model wherein a firm is endowed with a perpetual option to invest in a project at any time by incurring a partially reversible investment cost at that instant. The amount of the investment cost is directly related to the intensity of investment that is endogenously chosen by the firm at the instant when the investment option is exercised. We show that higher irreversibility of investment induces the firm to raise its optimal investment trigger, thereby deferring the undertaking of the project. Furthermore, we show that changes in irreversibility of investment have no impact on the firm's optimal investment intensity due to two opposing effects that exactly offset each other. Finally, we show that higher irreversibility of investment reduces the value of the investment option and, therefore, makes the firm less valuable.     

Striving to be green: the adoption of total quality environmental management

Many firms are undertaking environment-friendly organizational change by applying the philosophy of total quality management with its emphasis on reducing waste and increasing efficiency. Their objective is to improve their management of pollution and increase customer satisfaction. This article investigates the factors that lead to total quality environmental management (TQEM) by large firms. We find that internal considerations stemming from a firm's technical capability, size (absolute and relative to competing firms), extent of operations and volume of past emissions are strongly associated with the TQEM adoption decision. The first four factors are proxies for the firm's costs and capabilities of adopting TQEM while the fifth factor is related to the benefits from increasing efficiency and waste reduction, and thus proxies for internally generated demand for TQEM. The desire to improve a firm's image with customers, earning good-will with regulators and the anticipation of future regulations do not appear to be associated with the adoption of TQEM. Thus, this article's main conclusion is that the adoption of TQEM is associated mostly with internal factors and motives.     

Socially responsible firms and endogenous choice of strategic incentives

In this paper we are analyzing a mixed quantity-setting duopoly consisting of a socially concerned firm and a profit-maximizing firm. The socially concerned firm considers one group of stakeholders in its objective function and maximizes its profit plus a share of consumer surplus. Both firms have the option to hire a manager who determines the production quantity on behalf of the firm's owner. We find that in the subgame-perfect equilibrium of this game both firms hire a manager and delegate the production choice. If the unit production costs of the firms are similar, then the socially concerned firm has a higher market share and even higher profit. Interestingly, we observe that the relationship between the share of consumer surplus taken into account by the socially concerned firm and its profit is non-monotonic. As the share increases, the socially concerned firm's profit first increases and then decreases. The conclusion is that it pays off to take stakeholder interests into account, but not too much.     

Dumping And Double Crossing: The (In)Effectiveness Of Cost‐Based Trade Policy Under Incomplete Information*

We argue that the rise of antidumping protection and the proliferation of voluntary export restraints (VERs) are fundamentally interrelated. We show that both can be explained by a cost‐based definition of dumping when the domestic government has incomplete information about the foreign firm's costs. Given that its costs are only imperfectly observed and knowing the government's incentives to protect, efficient foreign firms will voluntarily restrain their exports prior to the antidumping investigation. In turn, the VER distorts the government's perception of the foreign firm's efficiency and leads to undesirably high duties regardless of the foreign firm's efficiency.     

Are bid preferences benign? The effect of small business subsidies in highway procurement auctions

Bid preferences in procurement auctions allow firms from an identifiable group an advantage in bidding against unfavored firms. While economic efficiency is expected to fall as a result of bid preferences, government procurement costs may either increase or decrease depending on the competitive response of favored and unfavored firms. This paper uses data from California auctions for road construction contracts, where small businesses receive a 5-percent bid preference in auctions for projects using only state funds and no preferential treatment on projects using federal aid. I show that while firms' bidding behavior matches theoretical predictions, procurement costs are 3.8 percent higher on auctions using preferences. The higher procurement cost in preference auctions is attributed to reduced participation by lower cost large firms.Structural estimates of latent firm costs are then used to evaluate how efficiency and the division of surplus between firms and the government are impacted by bid preferences. Firm profits are 3.1 percent lower under bid preferences, however this is overwhelmed by the efficiency loss due to reduced large firm participation. The efficiency loss conditional on firm participation is estimated to represent around 0.1 percent of overall procurement costs. Including the adverse effect of preferences on the participation of large firms increases the estimated efficiency loss to 3.6 percent, which represents 27 cents for each additional dollar awarded to small businesses through the program. Counterfactual simulations indicate that if participation were instead inelastic to bid preferences, the 5-percent bid preference would be close to the optimal level.     

Competition and Privatisation Policies in a Differentiated Mixed Oligopoly: The Pay‐off‐interdependence Approach

I revisit the relationship between competition and privatisation policies in a mixed oligopoly with differentiated goods, following the pay‐off‐interdependence approach in the fashion of Matsumura and Okamura. We find that although the intensity of market competition increases with the degree of importance of each firm's relative performance, the optimal degree of privatisation can decrease in a differentiated goods mixed oligopoly in both the increasing marginal costs case and the constant marginal costs case. Further, given the degree of importance of each firm's relative performance and the number of private firms, we find that the optimal degree of privatisation can decrease as the degree of product differentiation declines. Finally, by considering an alternative‐pay‐off model in both cases, we compare the optimal degree of privatisation of the public firm.     

Export rivalry,vertically-related markets,and optimal public ownership policy

This paper considers the optimal public ownership policy of an upstream firm which competes with a foreign private rival. Both firms supply a produced input to the domestic and foreign downstream firms that compete in an export market. The paper shows that complete privatization of the domestic upstream firm is never optimal. It will likely be fully nationalized if its market share is high, the domestic downstream firms' market share is low, and the total number of firms in the downstream is large. Simulation results reveal that the public firm's optimal profit margin may be negative and that the government ownership level may exhibit a reswitching phenomenon as the number of domestic downstream firms keeps growing. The paper sheds light on the possibility of using government ownership policy as a pseudo-trade and industrial policy.     

Optimal Trade Policy with Horizontal Differentiation and Asymmetric Costs

This paper examines the optimal export policy under Bertrand competition when the products exhibit horizontal differentiation and production costs are asymmetric. The focus of this paper is on the product‐differentiation effect in the determination of the optimal export policy. We show that given that the equilibrium characteristic of a foreign firm's product R&D lies to the left‐hand side of its initial level , since the foreign firm has a unit cost advantage and the efficiency of its R&D technology is sufficiently low, a rise in the export subsidy of the domestic country increases a domestic firm's profits and then welfare by extending the degree of horizontal differentiation between the two products. Thus, the optimal export policy under Bertrand competition may turn out to be an export subsidy rather than an export tax. This result is in sharp contrast to that of Eaton and Grossman (1986 ).     

Corporate financial policy with pension accounts: an extension of the Modigliani–Miller theorem

We build a model of an incomplete market economy with a firm, which we apply to the study of corporate financial policies with pension accounts. We show that prior to ERISA, even though the sponsoring firm's integral financial policy is neutral for its market value, it may affect the economy by creating a pension call option. On the other hand, in the post‐ERISA periods, the firm's financial policy is not only neutral for its value but also has no real effect on the economy. Thus, the Modigliani–Miller theorem is valid in this sense.     

Progressive taxation,tax exemption,and corporate liquidation policy

This paper develops a real options model of a firm that operates in continuous time with an infinite horizon. The firm receives stochastic profit flows that are subject to progressive taxation. Tax progression arises from an exogenously given tax exemption threshold that makes the average tax rate increase with the tax base. The firm possesses an option to liquidate its operation, which is optimally exercised when the firm's profit flow reaches an endogenously determined threshold level (the liquidation trigger) from above. We show that the firm's liquidation trigger under progressive taxation increases with either a reduction in the tax exemption threshold or an increase in the corporate income tax rate. Corporate income taxes are thus not neutral when tax schedules are progressive.     

Export market participation with sunk costs and firm heterogeneity

In this article we investigate the importance of sunk costs, firm characteristics and spillovers from nearby exporters on a firm's decision to participate in exporting. The empirical analysis involves the estimation of a nonstructural, discrete choice, dynamic model with firm heterogeneity. By using panel data for Estonian companies from 1994 to 1999 we find that: (i) both sunk costs and observable firm characteristics are important determinants of export market participation; (ii) previous history matters, in that, if a firm has been exporting the previous period or the period before, it significantly increases the likelihood of the firm exporting in the current period; (iii) larger firms with high capital intensity and foreign ownership are more likely to be exporters; (iv) operating in an export-oriented industry increases a firm's likelihood of exporting.     

Adjustment Costs,Inventories and Output

This paper analyzes the optimal adjustment strategy of an inventory‐holding firm facing price‐ and quantity‐adjustment costs in an inflationary environment. The model nests both the original menu‐cost model that allows production to be costlessly adjusted, and the later model that includes price‐ and quantity‐adjustment costs, but rules out inventory holdings. It is shown that the firm's optimal adjustment strategy may involve stockouts. At low inflation rates, output is inversely related to the inflation rate, and the length of time demand is satisfied increases with the demand elasticity but decreases with the storage cost and the real interest rate.     

Real option analysis for effects of emission permit banking on investment under abatement cost uncertainty

The present paper analyzes the investment effects of emission trading scheme (ETS) when emission permits are bankable and there is technological uncertainty with regard to the abatement cost. A real option model is employed to accommodate irreversibility of investment and cost uncertainty. In the absence of abatement cost uncertainty, a bankable ETS reduces a firm's incentive for environmental investment, because the firm can utilize the banked permits for future compliance which act as substitutes for abatement investment. However, when cost uncertainty is prevalent, investment may reduce the opportunity cost of irreversible investment under the banking system, thereby increasing a firm's investment incentive. The condition is derived under which a bankable ETS provides higher investment incentives than a non-bankable ETS does.     

Government and the Reverse-Holdup Problem

When the government bargains with a private firm, the firm cares about only its own profits, but the firm's profits may also enter into the government's utility function. As a result, the government will not bargain as aggressively for a low price. This can lead the government to “over pay” for quality. In contrast to the standard holdup problem, this reverse‐holdup problem can give the firm an incentive to overinvest in non‐contractible quality. The paper also discusses some examples where the reverse‐holdup problem may explain excessive quality in government procurement.     

Export Flexibility And Currency Hedging*

This article studies the behavior of an export‐flexible firm under exchange rate uncertainty. We show that the separation theorem holds if selling exclusively in the domestic market is suboptimal even under the most unfavorable spot exchange rate. Otherwise, the firm's optimal output depends on its preferences and on the underlying uncertainty. We further show that the full‐hedging theorem holds only when the firm always finds it optimal to sell its entire output in the foreign market. Otherwise, export flexibility introduces a convexity into the firm's foreign exchange risk exposure, which calls for the use of currency options for hedging purposes.