Regulatory enforcement with competitive endogenous audit mechanisms

This article adds to the regulatory compliance literature through the theoretical development and experimental testing of two endogenous audit mechanisms that use contemporaneous relative comparisons, based on disclosed information or imperfect signals of compliance effort, to generate a compliance competition among agents. This type of audit mechanism has some advantages over the more widely studied dynamic audit mechanisms that condition an agent's audit probability on past compliance, and provides an alternative explanation for the stylized fact, in many settings, that most agents are compliant most of the time even though audit rates and expected penalties are low.     

Imperfect competition and quality signalling

We examine the interplay of imperfect competition and incomplete information in the context of price competition among firms producing horizontally and vertically differentiated substitute products. Incomplete information about vertical quality (consumer satisfaction) signalled via price softens price competition. Low‐quality firms always prefer the incomplete information game to the full‐information analog. Moreover, for “high‐value” markets with a sufficiently high proportion of high‐quality firms, these firms also prefer incomplete information to full information. We find that an increase in the loss to consumers associated with the low‐quality product may perversely benefit low‐quality firms; we consider applications to tort reform and professional licensing.     

The Impact of Capital Structure on Efficient Sourcing and Strategic Behavior

We model the capital structure choice of a firm that operates under imperfect competition. Extant literature demonstrates that debt commits a firm to an aggressive output stance, which is an advantage to the firm under Cournot competition. However, empirical evidence, indicates that debt is a disadvantage under imperfect competition. We reconcile the theory with the evidence by incorporating firms' relations with their suppliers, in a model of strategic firmrival interactions. Under imperfect competition and incomplete contracting, we show that although debt financing improves a firm's input sourcing efficiency it could also benefit the firm's rivals by lowering their input costs. This effect offsets the benefits due to aggressive product market strategies that result from increased debt. Under certain conditions this subsidy effect is sufficiently strong that debt is suboptimal in equilibrium and leads to an increase in rival's shareholder value.     

Product markets and industry‐specific training

We develop a product market theory to explain why firms provide their workers with skills that are also useful to their competitors. Firms first decide whether to invest in industry‐specific training, then make wage offers for each others’ trained employees and finally engage in imperfect product market competition. Equilibria with and without training can emerge. If competition is soft, firms invest in training if others do. Thereby, they avoid having to pay high wages for trained workers. Furthermore, we draw welfare conclusions from the analysis. Finally, we discuss how our ideas apply to supplier relationships and to general training.     

Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition

This paper analyzes the competitive effects of regulatory minimum capital requirements on an oligopolistic loan market. Before competing in loan rates banks choose their capital structure, thereby making an imperfect commitment to a loan capacity. It is shown that due to this imperfect commitment, regulatory requirements not only increase the marginal cost of loan supply, but can also have a collusive effect resulting in increased profits. This paper derives the threshold value from which capital requirements can turn one round Bertrand competition into a two‐stage interaction with capacity commitment, leading to Cournot outcomes. Therefore, it provides theoretical support for the applicability of the Cournot approach when modeling imperfect loan competition.     

Barriers to Trade and Imperfect Competition: The Choice of Commodity Tax Base

Recent work has started to analyze the choice of international commodity tax base under conditions of imperfect competition. This paper focuses on the effects of changing levels of trade barriers in a model where firms engage in duopoly competition and governments set commodity taxes non-cooperatively. It is shown that the consumption base (destination principle) dominates the production base (origin principle) when trade costs are high, but the ranking of the two tax bases is reversed for low levels of trade costs. We conclude that the case for origin-based commodity taxes becomes stronger when barriers to trade fall.     

The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition

The ad valorem versus unit tax debate has traditionally emphasized tax yield. On this criterion, ad valorem taxes outperform unit taxes in terms of welfare for a wide range of imperfect competition settings including Dixit–Stiglitz monopolistic competition. However, in a number of policy fields such as environmental, health, and trade economics, policy makers use taxes to reduce the production/consumption volume in an industry, i.e., to correct an externality rather than to improve tax yield. This paper compares the two tax instruments with respect to equal corrective effect in a Dixit–Stiglitz setting with love of variety, entry, exit, and redistribution of tax revenues. We find that unit taxes lead to more firms in the industry, less output per firm, less tax revenue, but higher welfare compared to ad valorem taxes.      

The environment and system-response capability

Just as the economic environment can be viewed as having evolved through three stages (perfect competition, imperfect competition, oligopoly), so the wider sociocultural environment has evolved. And each phase has its appropriate behaviour pattern, for individuals and for organisations. The author argues fthat we are now making the transition to a fourth, turbulent, type of environment. The conventional responses are no longer adequate, and indeed cause dissonances which lead to the loss of the stable state. The new environment requires a new response pattern.     

When Does Information Asymmetry Affect the Cost of Capital?

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.     

Impact of Imperfect Information on the Optimal Exercise Strategy for Warrants

In this paper, we determine the optimal exercise strategy for corporate warrants if investors suffer from imperfect information and we evaluate the impact of this friction on the value of a warrant. For this purpose, we address both exercises at maturity, where imperfect information about the firm value is present, and exercises before maturity which are impacted by imperfect information about the size of the dividend. We model imperfect information so that all warrant holders know that they obtain biased signals of the true state without observing the signals of other warrant holders. The optimal exercise strategy follows from a complex game among warrant holders in which every individual warrant holder must account for the potential signals of the other warrant holders and their resulting exercise decisions. The main findings are that due to imperfect information warrant holders optimally start to exercise their warrants later than without imperfect information. Moreover, a simple block exercise strategy is always an equilibrium strategy for a high degree of imperfect information before maturity, even though a partial exercise can be the unique strategy without imperfect information. Remarkably, imperfect information does not necessarily result in a lower warrant value. As long as a warrant holder has a signal that allows for correct exercise decisions, then imperfect information enhances the warrant value due to suboptimal exercises by other investors.     

Optimal taxation and redistribution in an OLG model with unemployment

This paper concerns redistribution via nonlinear income taxation in an overlapping generations model with two ability-types. We assume that the wage rates are determined by bargaining between unions and firms, meaning that the equilibrium is characterized by involuntary unemployment. We show that the policy instruments that are used to calculate the marginal labor income tax rate for each ability-type give rise to intertemporal tax base effects. In addition, since the relationship between the employment and the capital stock implies intertemporal production inefficiency at the second best optimum, imperfect competition in the labor market may itself justify capital income taxation.      

人民币汇率传递机制研究与启示

汇率传递是指汇率波动通过直接或间接的渠道影响国内价格，影响汇率传递的因素主要包括外贸依存度、市场竞争和市场创新等方面。我国汇率传递效应受市场不完全竞争的影响，其汇率传递效应亦不完全。可以通过企业加速产品结构调整和技术创新，适应汇率弹性增强的需要；加快产业升级与结构调整；并继续实行富有弹性的汇率制度。     

Taxing capital and labor when both factors are imperfectly mobile internationally

International Tax and Public Finance - We revisit the standard theoretical model of tax competition to consider imperfect mobility of both capital and labor. We show that the mobility of one factor...     

Bank size and risk-taking under Basel II

We analyze the relationship between bank size and risk-taking under the Basel II Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an internal ratings based (IRB) approach improves upon flat capital requirements if the approach is applied uniformly across banks and if the costs of implementation are not too high. However, the banks’ right to choose between the standardized and the IRB approaches under Basel II gives larger banks a competitive advantage and, due to fiercer competition, pushes smaller banks to take higher risks. This may even lead to higher aggregate risk-taking.     

Informed and Strategic Order Flow in the Bond Markets

We study the role played by private and public information inthe process of price formation in the U.S. Treasury bond market.To guide our analysis, we develop a parsimonious model of speculativetrading in the presence of two realistic market frictions—informationheterogeneity and imperfect competition among informed traders—anda public signal. We test its equilibrium implications by analyzingthe response of two-year, five-year, and ten-year U.S. bondyields to order flow and real-time U.S. macroeconomic news.We find strong evidence of informational effects in the U.S.Treasury bond market: unanticipated order flow has a significantand permanent impact on daily bond yield changes during bothannouncement and nonannouncement days. Our analysis furthershows that, consistent with our stylized model, the contemporaneouscorrelation between order flow and yield changes is higher whenthe dispersion of beliefs among market participants is highand public announcements are noisy.     

Market structure and diversification of mutual funds

This study characterizes a systematic relationship between the diversification incentives and the market structure of the mutual funds industry with investors differentiated by their attitude towards risk. With sufficiently low competition the subgame perfect portfolio equilibrium exhibits maximal risk differentiation. With intensified competition intermediate funds, i.e., those attracting investors with intermediate attitudes towards risk, select diversified portfolios. Finally, we offer a general characterization of how imperfect competition between risk-differentiated funds will generate an equilibrium relationship between risk and expected returns.     

A partial adjustment theory of the balance of payments

This paper develops a partial adjustment theory of the balance of payments by incorporating the inter-temporal optimizing behavior of the two agents of the society: the public and the central bank. The central bank is viewed as the government's regulator of domestic credit and its objectives are taken as distinct from and possibly at odds with the public's objectives due to imperfect competition in the political marketplace. The final equation derived here implies that the balance of payments reflects both the active behavior of the central bank concerning foreign reserves and the contribution of the public's flow demand for money.     

The Effect of the Transparency of Order Flows in a Dealer Market with Several Securities

This paper compares two trading mechanisms in a dealer market with several securities exhibiting asymmetric information and imperfect competition. These two market structures differ in the information received by market-makers. While in the first of them when setting the price of an asset, they observe the order flows of all assets, in the second one they only observe the order flow corresponding to this asset. In order to make this comparison, we analyze several market indicators such as the informed expected traded volume, the market depth, the volatility and the informativeness of equilibrium prices, and the informed traders' ex-ante expected profits. Journal of Economic Literature Classification Numbers: G10.     

Financial Reporting and Credit Ratings: On the Effects of Competition in the Rating Industry and Rating Agencies' Gatekeeper Role

This paper studies firms' financial reporting incentives in the presence of strategic credit rating agencies and how these incentives are affected by the level of competition in the rating industry and by rating agencies' role as gatekeepers to debt markets. We develop a model featuring an entrepreneur who seeks project financing from a perfectly competitive debt market. After publicly disclosing a financial report, the entrepreneur can purchase credit ratings from rating agencies that strategically choose their rating fees and rating inflation. We derive the following core results: (1) More rating industry competition leads to stronger corporate misreporting incentives if ratings are sufficiently precise or if rating agencies assume a gatekeeper role. Under imperfect rating industry competition, (2) agencies' gatekeeper role primarily weakens firms' misreporting incentives, which then influences rating agencies' strategies, and (3) firms' misreporting and rating agencies' rating inflation can be strategic complements when agencies assume a gatekeeper role. (4) Regulatory initiatives aimed at increasing rating industry competition or at weakening rating agencies' gatekeeper role improve investment efficiency as long as corporate misreporting incentives are not significantly strengthened.     

Preferences,entry, and market structure

We provide a unified approach to imperfect (monopolistic, Bertrand, and Cournot) competition when preferences are symmetric over a finite but endogenous number of goods. Markups depend on the Morishima elasticity of substitution and on the number of varieties. The comparative statics of free‐entry equilibria is examined, establishing the conditions for markup neutrality with respect to income, market size, and productivity. We compare endogenous and optimal market structures for several non‐CES examples. With a generalized linear direct utility, the markup can be constant and optimal under monopolistic competition, and nonmonotonic in the number of firms under Bertrand or Cournot competition.