Contract Choice: Efficiency and Fairness in Revenue‐Sharing Contracts

We present a simple principal–agent experiment in which the principals are allowed to choose between a revenue‐sharing, a bonus, and a trust contract, to offer to an agent. Our findings suggest that a large majority of experimental subjects choose the revenue‐sharing contract. This choice turns out to be not only the most efficient but also, at the same time, fair. Overall, the distribution of earnings is only mildly skewed towards the principal. We conclude that, under revenue‐sharing contracts, concerns for fairness can be closely associated with the use of monetary incentives.     

Assessing the Vulnerability to Price Spikes in Agricultural Commodity Markets

We examine empirically the predictability of conditions associated with a higher probability of a price spike in agricultural commodity markets. We find that the forward spread is the most significant indicator of probable price jumps in maize, wheat and soybeans futures markets, a result which is in line with the ‘Theory of Storage’. We additionally show that some option-implied variables add significant predictive power when added to the more standard information variable set. Overall, the estimated probabilities of large price increases from our probit models exhibit significant correlations with historical sudden market upheavals in agricultural markets.     

The Relationship between Investment and Asset Life

Optimal investment in an asset and its optimal life are shown to be interrelated through operating cash flows and depreciation allowance, as well as book and salvage values upon termination; thus they are determined simultaneously. Asset life and investment are positively (negatively) related if delaying abandonment increases (reduces) the benefit of marginal investment. If investment and asset life are positively related, increased debt financing or allowable depreciation positively impact on them; otherwise, the impact is ambiguous in sign. Further, investment in a zero salvage value asset and its holding period increase with depreciation or leverage when (1) its cash flows form an annuity or (2) the firm employing it is tax-exempt.     

Institutional arrangements of outgrower sugarcane production in Southern Africa

ABSTRACT

Management models are needed that empower local communities to produce biofuel feedstock in a manner that drives rural development. Much can be learnt through the accumulated experiences of sugarcane outgrower schemes in southern Africa. Early schemes provided limited empowerment, but protected outgrowers from the risks of volatile sugar value chains. In later schemes, processing plants were responsible for all operations and simply paid dividends to participating farmers. More recent schemes offer full ownership, which comes with greater rewards and empowerment, but also exposure to risks. The underlying institutional structures of outgrower schemes largely dictate their performance, and thus the factors that affect their viability or collapse. To understand the different institutional arrangements of sugarcane outgrower schemes we undertake a comparative analysis of 13 schemes in southern Africa employing a political economy framework that uses the three key questions: ‘who owns what’, ‘who does what’, and ‘who gets what’.     

The Impact of Unrealized Fair Value Adjustments on Dividend Policy

We examine the impact of unrealized fair value adjustments on dividend policy. Dividend payouts should include only persistent income [Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings and taxes. American Economic Review, 46(2), 97–113]. In our institutional setting, however, regulators recommend the non-distribution of any income from fair value adjustments, which suggests that they interpret them as transitory. We empirically demonstrate that fair value adjustments on investment property are persistent, while those on financial securities are transitory. We further show that only fair value adjustments from investment properties are distributed. We argue that managers perceive the persistence of the two fair value components correctly, and by doing so, they distribute income consistent with the Lintner framework rather than on regulatory recommendations. Finally, by focusing on managerial optimism, debt contracting, and insider ownership, we demonstrate the conditions under which firms choose to deviate from regulator recommendations and to distribute fair value profits.     

On the Real Effect of Financial Pressure: Evidence From Firm‐Level Employment During the Euro‐Area Crisis

Using a large panel of mainly unquoted euro‐area firms over the period 2003–2011, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the euro area‐crisis (2010–2011), especially for firms in the periphery compared to their counterparts in non‐periphery European economies. When we introduce firm‐level heterogeneity, we show that financial pressure appears to be both statistically and quantitatively more important for bank‐dependent, small and privately held firms operating in periphery economies during the crisis.     

INFLATION TARGETING AND THE STATIONARITY OF INFLATION: NEW RESULTS FROM AN ESTAR UNIT ROOT TEST

In this paper, we examine the time series properties of inflation in seven countries that have adopted inflation targeting. Unlike previous studies, we utilize a non‐linear mean reverting adjustment mechanism for inflation and we discover that, although deviations of inflation from the target can exhibit a region of non‐stationary behaviour, overall they are stationary indicating successful targeting implementation.     

The Political Economy of IMF Conditionality: A Common Agency Model

The paper models the relationship between an aid‐providing international financial institution (IFI) and an aid‐receiving government whose economic policy choices are influenced by a domestic interest group. Two assistance schemes are evaluated: conditional aid in which the IFI makes assistance contingent on less‐ distorting economic policies and unconditional aid which is provided without such conditions. Conditional aid is shown to raise welfare of the receiving country and the world as a whole relative to unconditional aid. The paper also examines how conditional and unconditional aid schemes are influenced by the IFI's opportunity cost of providing assistance and the receiving government's political dependence on a domestic interest group.     

Should monetary policy respond to asset price misalignments?

This paper analyses the relationship between monetary policy and asset prices using a structural rational expectations open economy model that allows for the effect of asset prices and exchange rates on aggregate demand. We assume that asset prices and exchange rates follow a partial adjustment mechanism whereas they are positively affected by past changes, thus allowing for ‘momentum trading’, while at the same time we allow for reversion towards fundamentals. We then conduct stochastic simulations using two alternative monetary policy rules, inflation-forecast targeting and the standard Taylor rule. The results indicate that, under both rules, interest rate setting that takes into account asset price misalignments leads to lower overall macroeconomic volatility, as measured by the postulated loss function of the central bank.