Withholding investments in energy only markets: can contracts make a difference?

Although there are mechanisms to control market power in the spot market, withholding investments can still increase profits and hamper adequate capacity expansion. We examine the effect on investment of one suggested approach to reducing market power, contracting longer term. We construct a stylized model of an energy-only market where two firms, each specializing in one technology, invest in a first stage, contract part of their production in the second stage and sell the rest in the spot market in the third stage. We compare this model to one of an energy-only market having two stages, investment and a spot market. We find cases where the contracts change neither capacity nor peak prices, where the foreclosing effect of one player blocking the other from contracts markets increases investments and reduces prices, and where the opportunity to foreclose the market can incentivize one firm to lower its investment and increase its pricing power to the detriment of consumers. The model relies on the simplest possible assumptions of imperfect competition (subgame perfect equilibria with Cournot agents). We illustrate the different outcomes in a numerical example with two load steps (peak and off-peak) where we change one parameter, the height of the off-peak time segment. We find cases with increased and decreased capacity as well as no change in capacity. Since there is no general characterization of the consequences of contracts in this simple example, there can be no characterization in more complicated models that contain the market structures included here, and regulators or competition authorities cannot rely on contracts to induce sufficient capacity expansion by reducing market power. One other market mechanism that has been proposed to induce investment, a capacity auction with predetermined capacity requirements, is a potential alternative to limit market power that deserves further exploration to determine the extent to which it can provide an adequate incentive to invest in the presence of market power.     

A vector-autoregression analysis of credit and liquidity factor dynamics in US LIBOR and Euribor swap markets

We use a vector autoregressive approach to investigate the determinants of US Dollar LIBOR and Euribor swap spread variation during the 2007–2009 crisis in global credit and money markets. Using market-quoted yield and spread data from the highly liquid credit default swap (CDS) and overnight index swap (OIS) markets, we provide compelling empirical evidence that liquidity risk factor shocks have been the dominant drivers of the variation in swap spreads over this period. Our findings provide an explanation for the temporal differences that liquidity shocks have on swap spreads and provide a contemporary perspective on the dynamical interplay between credit-default and liquidity risk-factors in these markets. As all our risk-factor proxies are traded in liquid derivatives markets, our findings have implications for proprietary hedge fund traders hedging an exposure to swap-spread risk, for bank treasurers managing their liquidity requirements and for central bankers seeking to better understand the response of markets to their macroeconomic policy implementation and liquidity management actions. Indeed our markets-based analysis suggests that the European Central Bank (ECB) has underperformed relative to the Federal Reserve in terms of the differing levels of market confidence placed in its macroeconomic policy actions and remedial liquidity interventions during the period.     

Time price differentials in the rent‐to‐own industry: implications for empowering vulnerable consumers

Rent‐to‐own enterprises represent a lucrative and rapidly growing industry. They are of particular concern to social service agencies, policy makers and consumers because they target a vulnerable, economically disadvantaged segment of the population. This article presents an investigation of a major player in the industry in one US state that fell under scrutiny by the courts because of a question of whether it is a retail enterprise covered by truth in lending legislation. Findings indicate that the average time price differentials charged by the largest retailer in this state exceed by more than three times the regulated 30% cap on interest rates. Rent‐to‐own is an example where regulation must be put into place so consumers can make more informed decisions. Such regulation, however, must be accompanied by financial literacy education that will further empower vulnerable consumers in the marketplace.     

Reverse mentoring at work: Fostering cross‐generational learning and developing millennial leaders

Reverse mentoring is an innovative way to encourage learning and facilitate cross‐generational relationships. It involves the pairing of a younger, junior employee acting as mentor to share expertise with an older, senior colleague as mentee. The purpose is knowledge sharing, with the mentee focused on learning from the mentor's updated subject or technological expertise and generational perspective. In addition, there is an emphasis on the leadership development of the mentors. Reverse mentoring is situated in the mentoring literature as an alternative form of mentoring, with unique characteristics and support functions exchanged that distinguish it from other developmental relationships. A model is developed that focuses on key variables to consider and how reverse mentoring may benefit individuals and organizations. Generational differences are also presented, and the ways in which reverse mentoring capitalizes on millennial capabilities and preferences are highlighted throughout. Finally, theoretical and practical contributions are discussed, including essential components for creating a reverse mentoring program. © 2012 Wiley Periodicals, Inc.     

A possible adverse effect of needing to issue new equity in the future

This research develops a model of how a need to issue new equity in the future can have an adverse affect on a stock's current price, value, and beta. In particular, if the market error in pricing a stock is positively correlated with the return on the market portfolio of all assets, losses from having to issue equity in the future at a distressed price will result in the stock having a higher beta and a lower current market value. To avoid this situation, corporations are motivated to hold greater financial slack.