On adjusting for risk changes when assessing the profitability effects of regulatory changes

Since regulatory changes affect the profitability and the systematic risk of regulated firms, standard ‘residual’ analysis may not uncover the true impact of regulatory changes. This paper presents a method, based on the CAPM which uses pre- and post regulatory change information, to differentiate risk from profit related changes in stock market valuations.     

Dynamics of firm's network community associations and firm's innovation performance

ABSTRACT

R&D network structures have crucial impacts on firm's innovation performance. However, most previous studies have been based on the whole or ego network perspective, few studies have investigated the influence of community structure that a firm is engaged in on its innovation performance, and it is still unclear how a firm's relation to network community affect its innovation performance. This research aims to address this gap by focusing on the dynamics of firm's network community associations, empirically investigate the relationship between dynamics of firm's network community associations and its innovation performance. Based on the unbalanced panel data of smartphone R&D network during year 2004–2017, the results demonstrate that change in community member associations and movement across communities both have inverted-U-shaped effects on firm's innovation performance. Moreover, innovation openness depth has moderating effects on the relationships between dynamics of firm's network community associations and its innovation performance.     

How a firm's position in a whole network affects innovation performance

A whole network consists of the relationships that exist among members of a population. However, prior studies treated the whole network as a metaphor, and consequently, existing empirical research is limited. As such, this paper investigates the effects of a whole network on firm innovation performance among firms engaged in the Korean semiconductor industry using three variables, namely main component, eigenvector centrality, and closeness centrality. The effects are then analysed using two-step generalised method of moments estimates. The results show a firm is included among the main component in a whole network, and the more centralised it is in terms of connectivity and distance, the more advantageous it is for firm innovation. The significance of this paper is two-fold; First, unlike previous studies that use variables reflecting collective characteristics, this study uses variables reflecting the characteristics of individual firms in a whole network. Second, it is a rare empirical study of a whole network.     

Bottleneck co-ownership as a regulatory alternative

This paper proposes a regulatory mechanism for vertically related industries in which the upstream “bottleneck” segment faces significant returns to scale while other (downstream) segments may be more competitive. In the proposed mechanism, the ownership of the upstream firm is allocated to downstream firms in proportion to their shares of input purchases. This mechanism, while preserving downstream competition, partially internalizes the benefits of exploiting economies of scale resulting from an increase in downstream output. We show that this mechanism is more efficient than a disintegrated market structure in which the upstream natural monopoly bottleneck sets a price equal to average cost.     

On the profitability of self‐sabotage

We demonstrate how a supplier can enhance his expected profit by intentionally increasing his expected production costs or limiting his ability to reduce these costs. Such self‐sabotage benefits the supplier when it induces a buyer to implement a more favourable procurement policy, i.e., one that motivates the supplier to deliver cost‐reducing effort systematically rather than selectively. We also demonstrate how the seemingly inefficient persistent implementation of a procurement contract that does not change as the prevailing environment changes can reduce procurement costs by deterring self‐sabotage.     

On the efficiency of environmental instruments in a spatial economy

This paper develops an efficiency criterion to evaluate environmental policy instruments in a spatial economy. We call an environmental policy regime at the regional level efficient if it guarantees not only an efficient distribution of emission permits within a region, but also an efficient locational pattern of mobile firms across the regions of a federation. Using marketable pollution rights or emission taxes, efficiency in this broad sense can only be achieved if revenues of regional environmental agencies are not transferred to regional firms. Direct controls neither support an efficient allocation of emission rights within a region nor locational efficiency of firms.     

Choice and design of regulatory instruments in the presence of green consumers

Using a vertically differentiated product model, this paper examines welfare implications of various government policies in a situation where consumers are environmentally discerning. It studies ad valorem taxes/subsidies and emission taxes. The optimal policy depends on the magnitude of damage parameter associated with environmental externality. For a given distribution of tastes and preferences, as the damage parameter increases from a low to a high value, the optimal policy shifts from an ad valorem tax to an ad valorem subsidy. It also shows that for a sufficiently low damage parameter, an ad valorem tax dominates an emission tax.     

On the profitability of commercial banks: the Sri Lankan case

This study determines the factors affecting the profitability of licensed commercial banks (LCBs) in Sri Lanka, including the effect of the prolonged conflict which ended in 2009. Using an error correction model together with data for the period 2006–2014 of 10 major LCBs, the results reveal that, in the short run, capital and liquidity have a positive effect on bank profitability and default loans, interest margin (IM), operating cost, and interest rates (IRs) have a negative effect. In the long run, bank profitability is significantly impacted by default loans, IM, real GDP, inflation, IRs, capital, operating cost, and conflict. The ending of the prolonged conflict has significantly contributed to improved bank performance.     

Evaluating the performance of non-Bayesian regulatory mechanisms

This paper compares the performance of two prominent non-Bayesian regulatory mechanisms: Sappington and Sibley's (1988) Incremental Surplus Subsidy (ISS) and Hagerman's (1990) refinement of the Vogelsang-Finsinger (1979) mechanism. The two mechanisms are shown to induce identical, non-zero levels of abuse—unproductive expenses that benefit the firm—though neither induces pure waste. ISS pareto-dominates the Hagerman mechanism when lump-sum transfers to the firm are non-distortionary, but the Hagerman mechanism generates greater welfare and consumer surplus when the distortionary effects of transfers are large. For a wide range of intermediate parameter values, the quantitative difference in performance between the two mechanisms is surprisingly modest.This paper has benefited from the comments of Keith Crocker, Steve Hackett, John Mayo, David Sibley, Ted Stefos, Lester Taylor, two anonymous referees, and seminar participants at the 1992 American Economic Association meetings, the Tenth Annual Eastern Conference of the Rutgers University Center for Research in Regulated Industries, the Pennsylvania State University, GTE Laboratories, and the Management Science Group, Department of Veterans Affairs, Bedford, Massachusetts.     

An alternative approach to relative indices of development and potential for change of the nation-state

Quantitative indices are proposed to reflect the degree of development and the potential for change of the nation-state. The former index is based upon the intensity of energy consumption, while the latter is defined as the product of agricultural land per capita and gross national product per capita. It is shown that acceptable levels of some welfare functions are achieved above a critical energy intensity called the development threshold, and it is postulated that above a higher critical level of energy intensity significant environmental deterioration will occur. Data is presented for 104 countries and high levels of change potential are shown to be correlated with a relatively large number of options for further development. On the other hand, very low levels of change potential are found in countries which have difficulty in supporting their populations. It is postulated that change potential is more useful than either population density or poverty as an indicator of when a country is in need of a vigorous population policy. It is concluded that below the development threshold further industrialization is beneficial while above it this may not be true. It is also concluded that at high levels of the change potential and at intensities below the development threshold high population growth rates may be tolerated.     

Prices vs. quantities: Public finance and the choice of regulatory instruments

Since Montgomery [1972. Markets in licenses and efficient pollution control programs. Journal of Economic Theory 5, 395-418] and Weitzman [1974. Prices vs. quantities. Review of Economic Studies 41, 477-491], it has generally been assumed that, in a full-information setting, tradable quotas and taxes are equivalent regulatory instruments. We demonstrate that, if the government is movitated by public-finance concerns, this equivalence holds only if quotas are short lived. Moreover, the government prefers quotas with the shortest possible lifetime, or, what is equivalent in our setting, taxes.     

A simple explanation of the relative performance evaluation puzzle

We study a simple moral hazard model in which two risk-neutral owners establish incentives for their risk-averse managers to exert effort. Because the probability distributions over output realizations depend on a common aggregate shock, optimal contracts make the compensation of each manager contingent on own performance but also on a performance benchmark—the performance of the other firm. If the marginal return of effort depends on the aggregate state, optimal contracts are not monotonically decreasing in the performance benchmark. This provides a simple explanation of the Relative Performance Evaluation (RPE) Puzzle—the documented lack of a negative relationship between CEO compensation and comparative performance measures, such as industry or market performance. Our simple model can also explain one-sided RPE—the documented tendency to insulate a CEO's rewards from bad luck, but not from good luck. We clarify that our results are robust in several dimensions and we discuss other applications of our findings.     

Interactions of the firm's real and financial decisions

This paper provides an integrated approach to the theory of the firm. Under technological uncertainty, corporate taxes, risky debt and risk neutrality it is shown that the firm's investment production and financing decisions are made simultaneously. It is demonstrated that the relationship between optimal capital (or labour) and debt is not strictly negative as in Dotan and Ravid (1982) nor strictly positive as in Hite (1977). The direction of this relationship depends on the characteristics of debt and the characteristics of the firm's production function. Given the simultaneity of the real and financial decisions, it is shown that an interior optimum exists for the firm's value as a function of debt.     

On the normality of relative price changes

The purpose of this paper is to present evidence on the non-normality of relative price changes in West Germany based on annual data for forty industries [Krengel et al. (n.d.)]. The question of normality is examined only for Germany.     

On the martingale property of economic and financial instruments

The solutions to many economic and financial instruments are stochastic processes that are required to be arbitrage-free or martingale under an equivalent probability measure known as martingale measure. The main vehicle to verify the existence of an equivalent martingale measure is the Girsanov theorem. This study shows that some of the usual assumptions regarding the underlying stochastic base often employed in applied literature could nullify the theorem and its applications. Further, it is shown that the infinite-horizon Girsanov setting may not contain an equivalent martingale measure.     

The optimal initial allocation of pollution permits: a relative performance approach

The initial allocation of pollution permits is an important aspect of emissions trading schemes. We generalize the analysis of Böhringer and Lange (2005, Eur Econ Rev 49(8): 2041–2055) to initial allocation mechanisms that are based on inter-firm relative performance comparisons (including grandfathering and auctions, as well as novel mechanisms). We show that using firms’ historical output for allocating permits is never optimal in a dynamic permit market setting, while using firms’ historical emissions is optimal only in closed trading systems and only for a narrow class of allocation mechanisms. Instead, it is possible to achieve social optimality by allocating permits based only on an external factor, which is independent of output and emissions. We then outline sufficient conditions for a socially optimal relative performance mechanism.     

On some alternative criteria for justice between generations

This paper is concerned with Rawls' principle of just savings. Both the intergenerational maxi–min solution and the Nash equilibrium are analyzed in the context of a simple growth model and a specific preference structure. The results are compared to the Utilitarian solution. The maxi–min solution is intertemporally inconsistent and all the Nash equilibria are Pareto inefficient. The latter part of the paper analyzes intergenarational strong equilibria, the α-core and the β-core. It is shown that for the model in question the set of strong equilibria is empty, and that both the α- and β-cores are roughly speaking equal to the set of all Pareto efficient programmes of accumulation.