On the efficiency of monetary policy rules with flexible prices and rational expectations

The classic Sargent–Wallace–Lucas (SWL) rational expectations-flexible price model is usually interpreted as implying “policy ineffectiveness”: systematic monetary rules cannot affect the distribution of real output. A contrary but not widely-appreciated result of Dotsey and King suggests that there exist “prospective feedback” rules (future money depending systematically on current but as yet unobserved information) which improve output distribution by means of improving agents’ ability to perceive relative prices.We show the Dotsey–King proposition in fact to be a colossal understatement: prospective feedback rules applied vigorously enough (and even “contemporaneous feedback” rules based on current interest rates, provided at least one prospective feedback is active) can in the limit drive price-perception errors to zero. This is not to say such a policy would be desirable. Feedback parameter combinations that reduce current price level misperception tend to produce high forecast error variances with respect to future prices, with attendant loss in capital market efficiency. Whatever the desirable frontier among these different social cost-producing variables, feedback parameters will in general be needed in order to get on the frontier as well as to move along it. Monetary policy clearly produces social gain even in a version of this model which contains no elements of price “friction,” inefficient use of available information, or asymmetry in information as between the government and the public.     

Doha Development Round Perspectives

The Doha round got back on track in the summer of 2004. Where does it stand today? Has market access policy gained predominance over market regulation policy? Is the promotion of economic and social development becoming the “mainstream” of negotiations? What role does trade facilitation in developing countries play in this context? Is multilateral liberalisation compatible with the regional and bilateral opening of markets? Is further institutional reform of the WTO beyond the Doha agenda necessary? If so, what form could this take?*This article is based on a contribution made by the author to the International Policy Dialogue “Doha Development Round: Status and Prospects for Success” organised by the InWEnt gGmbH’s Development Policy Forum (Entwicklungspolitisches Forum, EF) in Berlin on 7/8 June 2005.     

Human capital and financial equilibrium

This article investigates the effect of incorporating human capital—an expansion of the investment opportunity set—into the analysis of portfolio investment decisions. The “production function” of human capital displays decreasing returns to scale. The return on human capital is a product of two factors: a “market” return and return unique to each individual. Financial equilibrium results are derived and tested empirically using U.S. data and an international sample. The main findings are that demand for financial assets relates positively to human capital risk and negatively to financial capital risks.     

Building industrial cooperation through Japanese strategies

Joint industrial policies undergird Japanese international growth. That policy of “unite and conquer” already has caught on in other Asian countries and in Europe. American companies, although hamstrung by laws that equate “big” with “bad,” are doing their utmost to remain competitive by pursuing Japan's cooperative strategies.     

Does self-employment reduce unemployment?

This paper investigates the dynamic relationship between self-employment and unemployment rates. On the one hand, high unemployment rates may lead to start-up activity of self-employed individuals (the “refugee” effect). On the other hand, higher rates of self-employment may indicate increased entrepreneurial activity reducing unemployment in subsequent periods (the “entrepreneurial” effect). This paper introduces a new two-equation vector autoregression model capable of reconciling these ambiguities and estimates it for data from 23 OECD countries between 1974 and 2002. The empirical results confirm the existence of two distinct relationships between unemployment and self-employment: the “refugee” and “entrepreneurial” effects. We also find that the “entrepreneurial” effects are considerably stronger than the “refugee” effects.     

The Performative Nature of Consumer Research: Consumers’ Environmental Awareness as an Example

This article considers the way “green consumers” are constructed – or performed – in studies on consumer environmentalism aiming to inform policy makers. The focus is on concrete data gathering operations, which are exemplified by four brief examples from the author’s own research experience. The conclusion is that consumer research is a creative process, in which consumers are made to interact with different contexts, thus eliciting different outcomes. These conclusions give rise to two suggestions. More attention should be paid to context in research, which is already occurring. More fundamentally, researchers should recognize their active, performative role when interacting with consumers as research subjects, on the one hand, and with policy-makers and other social actors as research utilizers, on the other.     

Owners and managers: The venture 100 vs the fortune 500

A steady supply of entrepreneurs who will build the growth firms of the future has always been seen as fundamental to the economic health of a country. However, as companies have grown to the point where many have balance sheets larger than many countries, the role of the Top Management Team in managing these corporate giants has also received more prominence. Unfortunately, research into the two groups of current entreprenurs and large corporation managers has been both sparse, and has followed different, though parallel, paths. This research examines their backgrounds and asks the question whether the basic assumption that they are, in fact, different is correct—who are the high flying entrepreneurs, and are they any different from successful corporate leaders?Data was drawn from three sources. A questionnaire was sent to the 167 founders listed in the July 1984 edition of Venture Magazine as the “Venture 100”—“the nation's top entrepreneurs who run the companies they founded in the past ten years”. Sixty-seven useable replies were received from 40% of the founders and 52% of the companies. Comparative data was extracted from the “Korn Ferry's International Executive Profile: A Survey of Corporate Leaders” which surveyed five senior executives from each of the Fortune 500 companies. A response rate of 47% was received from a survey of 3640 executives. Further comparative analysis was extracted from the characteristics of senior executives of all firms in five selected industries (Dairy, Mobile Homes, Tires, Footwear, and Machine Tools) as listed in Duns Reference Book of Corporate Management 1983/1984. Data was collected on personal characteristics (age, family background, and education), previous employment experience, managerial style, and work patterns.The null hypothesis of there being no significant difference between high flying entreprenurs and their counterparts in the largest U.S. corporations was not sustained. Whereas certain characteristics showed similar patterning—previous employment experience, managerial success traits—the remaining variables demonstrated significant differences. The entrepreneurs were younger, better educated, had more international experience, and worked harder than their corporate colleagues. If replicated elsewhere, the results of this study have particuloar implications for the type of educational and employment experience necessary to affect the supply of the entrepreneurs of the future.     

Minimum wage regulation and economic growth

This paper investigates the long-run growth implications of minimum wage regulation (MWR) enforced nationally using a familiar aggregate growth model. The paper shows that MWR, if it is effective, always lowers the rate of growth, and that the minimum wage floor, if it is sufficiently high, causes the economy to decay all the way toward the origin. The effects of a “wage-mark-up” policy, a variation of MWR, are also examined.     

The dynamics of exchange rate regimes: Fixes, floats, and flips

The impermanence of fixed exchange rates has become a stylized fact in international finance. The combination of the “mirage” view that pegs do not really peg with the “fear of floating” view that floats do not really float generates the conclusion that exchange rate regimes are, in practice, unimportant for the behavior of the exchange rate. This is consistent with evidence on the irrelevance of exchange rate regimes for general macroeconomic performance. Recent studies, however, show that the exchange rate regime matters. This can be understood by considering the dynamics of exchange rate regimes. We demonstrate that the “mirage” view is somewhat misleading and incomplete. Pegs frequently break, but many do last. Also, there is a high degree of flipping, that is, the re-formation of pegs that have broken. Thus, a fixed exchange rate today is a good predictor that one will exist in the future. We also investigate the quantitative effect of fixed exchange rates. While the “fear of floating” view suggests little actual difference in fixed and floating rates with respect to exchange rate volatility, we show that fixed exchange rates exhibit considerably greater bilateral exchange rate stability than flexible rates, both today and in the future.     

The changing consumer in the UK

For the UK, the 1980's was Margaret Thatcher's decade; the 1990's may be the decade of Europe. Thatcher's policies and her philosophy still have an impact on social and economic life. An examination is made of demographic changes, economic development, changes in consumption, changes in social attitude and changes in marketing channels that are taking place.Wealth has become more evenly spread throughout society although the bottom is worse off. The UK consumer is becoming more cosmopolitan with increased preference being shown for food and drink from mainland Europe. Another shift is towards increased amounts of both time and money being spent on leisure and in the rapid adoption of new classes of consumer good. There is evidence of the “greening” of the economy but individuals only seem willing to take individual action to “green” their lifestyle for a financial incentive.     

A note on closet-indexing

Actively managed equity mutual funds with returns that are highly correlated with popular stock market indices like the S&P 500 often are accused of “closet-indexing”. We ask whether a trading strategy that shorts these funds and buys “true” index funds makes money for investors. Using a sample of high-R² growth-and-income funds from the CRSP survivor bias free mutual fund file, we document that the Sharpe ratio of this trading strategy and the market Sharpe ratio are statistically indistinguishable in the 1991–2000 sample period. The result is consistent with the view that widespread closet-indexing does not exist in the mutual fund industry.     

Of bears, bumble-bees, and spiders: the role of expatriates in controlling foreign subsidiaries

This article investigates the role of expatriate managers in multinational companies. We discuss three key organizational functions of expatriation: position filling, management development, and organization development. In the last function, organization development, international transfers are used as an informal coordination and control strategy through socialization and the building of informal communication networks. The article explores this role of international transfers in greater detail, but also discusses a more formal way in which expatriates can control subsidiaries. The following metaphors for these different control functions of expatriation are introduced: “bear” (formal direct control), “bumble-bee” (socialization), and “spider” (informal communication). A large-scale mail survey offers empirical evidence for the bear, bumble-bee and spider roles and shows under which circumstances they are most effective. Being aware of the different control functions of expatriation and the circumstances under which they are most effective can help managers to use expatriate assignments as a more strategic tool.     

Pricing practices and firms' market power in international cellular markets, an empirical study

Previous studies on international marketing have typically asked the question: “how is the demand characterized across countries?” Such analysis is then used to provide guidelines for firms to enter new markets and/or to allocate marketing resources across countries. To provide such normative guidelines, however, one also needs to analyze the supply-side of the problem, i.e., ask: “what is the likely market power that firms will be able to command in different countries?” Building on the New Empirical Industrial Organization (NEIO) framework, recent research in marketing provides marketers with a variety of models to explore competitive interactions among firms in the context of a single market. The goal of this paper is to extend this literature to a multimarket/multinational context to help international marketers assess the likely market power they face when entering new countries. We illustrate the proposed method on the mobile telecommunications industry, using price and quantity data from 10 countries around the world, estimating firms' market power as a function of a number of country characteristics.The results indicate that, while the simple presence of competition diminishes firms' market power, it does not lead to perfect competition. Interestingly, a higher number of competitors in a country does not seem to have significant incremental effect on market power. In contrast, the country's commitment to a severe antitrust policy has a significant negative effect, while the monopolist's lead-time before competition is allowed has a significant positive effect on market power. These findings, together with a change in price elasticities as a result of competition, suggest that market power in different countries may originate from two sources: (i) collusive pricing among cellular operators and (ii) consumers' switching costs across service providers. For international marketers, the findings imply that the attractiveness of wealthier countries (with usually faster diffusion rates and larger market potential) may be mitigated by higher levels of competition (as a result of developed antitrust regulation and more consumer exposure to competitive marketing practices). From a policy point of view, it suggests that (in contrast to the conventional wisdom) simple deregulation may not be enough to reduce prices to competitive levels. In addition, a severe antitrust policy is crucial to achieve this goal.     

Going public: The impact of insiders' holdings on the price of initial public offerings

Many entrepreneurs dream of seeing their company's securities trading in the public marketplace. Although going public has many benefits for a firm's founders and insiders, the process is often confusing and intimidating. One of the questions that investment bankers are asked frequently by insiders is, “What determines the price of a stock in the initial public offering?” This article presents empirical evidence that the stock price in an initial public offering (IPO) is directly related to the percentage of the firm's equity retained by the insiders. In other words, the offering price is relatively high when it appears that the insiders are not “bailing out” when the firm goes public.This research investigates equity ownership structure as a determinant of the pricing of IPOs. The hypothesis to be tested is: IPOs with higher (lower) insider holdings at the time of the offering are priced higher (lower) as a result of lower (higher) required rates of return. Support for the hypothesis is based on agency theory, which postulates that additional risk is created when there is a perceived separation of ownership and control.There are several implications of this research. First, a greater appreciation of the sophistication of the IPO market with regard to the actions of the insiders should be gained. Second, the reader's knowledge of the activity and relative pricing of IPOs during the 1978–1985 time period should be enhanced. Third, insiders should realize that actions regarding their relative equity holdings at the time of the offering have an impact on the price of the offering. Finally, the reader should recognize that even in “hot markets” the actions of insiders at the time of an initial public offering regarding the sale of equity are monitored by the market.     

Profiles in executive education: George Odiorne

This is the fourth in a series on executive education “gurus” of the 20th century. The first three installments, profiled by Harper W. Moulton, featured Harry Levinson (Jan–Feb '95), Ken Andrews (Sept–Oct '95), and Philip Sadler (Jul–Aug '96).     

Corporate governance and firm performance in Russia: an empirical study

Using the agency and institutional perspectives, this study advances several hypotheses about the board structure–firm performance relationship within Russia. We tested these hypotheses using survey data. Despite a relatively small sample size, predictions from both theoretical perspectives were supported. Specifically, we found a negative relationship between “informal” CEO duality and firm performance. This finding is noteworthy given the 1996 Russian Federal law which prohibits the CEO from also serving as board chair. Also, we found that the more vigorously the firm pursues a retrenchment strategy, the more negative the relationship between proportion of inside directors and firm performance. Overall, these findings suggest that effective corporate governance may be essential to firm performance in Russia.     

Corruption and Companies: The Use of Facilitating Payments

Making use of facilitating payments is a very widespread form of corruption. These consist of small payments or gifts made to a person – generally a public official or an employee of a private company – to obtain a favour, such as expediting an administrative process; obtaining a permit, licence or service; or avoiding an abuse of power. Unlike the worst forms of corruption, facilitating payments do not usually involve an outright injustice on the part of the payer as they are entitled to what they request. This may be why public opinion tends to condone such payments; often they are assumed to be unavoidable and are excused on the grounds of low wages and lack of professionalism among public officials and disorganisation in government offices. Many companies that take the fight against “grand” corruption very seriously are inclined to overlook these “petty” transgressions, which are seen as the grease that makes the wheels of the bureaucratic machine turn more smoothly. Despite this, facilitating payments have a pernicious effect on the working of public and private administrations: all too often they are the slippery slope to more serious forms of corruption; they impose additional costs on companies and citizens; and in the long run they sap the ethical foundations of organisations. Although many articles on corruption mention facilitating payments, there have been no systematic studies from a company’s point of view. This article thus focuses on facilitating payments from the point of view of the company that makes the payment, either as the active partner (when it is the company that takes the initiative) or as the passive partner (when the official or employee is the instigator).     

International projects'' changing patterns: Sales engineers'' changing roles

Dealing with international projects, a reflexion on recent changes of international environment as well as client expectations suggests to emphasize the importance of two additional types of business relationships which tend to complete the “traditional” big international bi-/multi-laterally supported projects scheme: — (a) big international “self-supporting” projects requiring partnership with client or, even, direct provider's involvement (if not investment), — (b) big multi-national clients developing a huge range of projects of all size worldwide, with a more or less developed need of integration of sourcing.The key issue for the providers lies, in fact, in the organisation of relationships with existing and potential clients in those two developing types of complex international operations. Hence, it suggests to re-define the company contacts systems with the client and, above all, the role and profile of the sales engineers, traditionally in charge of these responsabilities.The purpose of this article is to evaluate the environmental changes as well as their impact on international project features and to make a first attempt to evaluate the consequences of these changes on coordinators'/managers' profiles.     

Product specialization in international trade: A further investigation

In an influential paper, Schott [Schott. Peter K. (2004). “Across-product versus within-product specialization in international trade.” Quarterly Journal of Economics, 119 (2): 647–678] makes two empirical observations about U.S. imports. (1) The United States is increasingly sourcing the same product (however narrowly defined) from both developed and developing countries. That is, ‘across-product specialization’ has been decreasing. (2) The unit values of these multiple-sourced products are positively and significantly correlated with the capital and skill abundance of exporters and with the capital–labor ratios used by exporters. That is, endowments-driven ‘within-product specialization’ has been increasing. We show that both these observations extend to the imports of Brazil, India and Japan. However, our main finding is that observation (1) is largely driven by two factors. First, China is the dominant low-wage exporter of multiple-sourced products. Second, the most developed countries remain the primary exporters of multiple-sourced products. The U.S. case is the most extreme of our four importers: When China is deleted from the U.S. import data there is no trend in across-product specialization and rich exporters are increasing their trade share of multiple-sourced products. Since deleting China has no theoretical justification, these results must be viewed not as a contradiction of Schott's work but as a way of deepening our understanding of his empirical results.