West African Insurgencies in Agrarian Perspective: Côte d’Ivoire and Sierra Leone Compared

This paper examines agrarian issues in civil wars in Côte d’Ivoire and Sierra Leone. Attention is paid to two different ways in which lineage society evolved during the colonial and post‐colonial periods. The motivations of fighters are related to these different trajectories of agrarian social change. In Côte d’Ivoire youth militia fought to uphold a lineage‐based social order, but in Sierra Leone a comparable group of young fighters sought to overturn it. Large migrant populations on a forest frontier are an important factor in Côte d’Ivoire, while in Sierra Leone significance attaches to an excluded agrarian underclass. Not all African conflicts are ethnic conflicts; autochthony is shown to be a factor in one conflict and class in the other. Approaches to post‐war reconstruction based on undifferentiated notions of community should be resisted.     

DYNAMIC INCENTIVE CONTRACTS WITH UNCORRELATED PRIVATE INFORMATION AND HISTORY-DEPENDENT OUTCOMES*

In previous papers on dynamic incentive contracts, the dynamic structure of the principal-agent relationship arises exclusively from the ability of the principal to learn about the hidden information over time. In this paper we deal with a different source of dynamics, which is considered standard in all areas of economics other than the information literature: we study situations where current opportunities depend on past and current actions, notwithstanding any information conveyed by the actions. Standard examples include investment, "Learning by doing", and R&D. In order to focus on this neglected source of dynamics, we restrict our attention to situations involving asymmetric information in each period, but without any intertemporal informational correlation, so that no dynamic effect arises directly from informational asymmetrie. This makes comparisons with static results both easier and more interesting.     

Strategic Debt Service

When firms experience financial distress, equity holders may act strategically, forcing concessions from debtholders and paying less than the originally-contracted interest payments. This article incorporates strategic debt service in a standard, continuous time asset pricing model, developing simple closed-form expressions for debt and equity values. We find that strategic debt service can account for a substantial proportion of the premium on risky corporate debt. We analyze the efficiency implications of strategic debt service, showing that it can eliminate both direct bankruptcy costs and agency costs of debt.     

Portfolio Choice over the Life-Cycle when the Stock and Labor Markets Are Cointegrated

We study portfolio choice when labor income and dividends are cointegrated. Economically plausible calibrations suggest young investors should take substantial short positions in the stock market. Because of cointegration the young agent's human capital effectively becomes “stock‐like.” However, for older agents with shorter times‐to‐retirement, cointegration does not have sufficient time to act, and thus their human capital becomes more “bond‐like.” Together, these effects create hump‐shaped life‐cycle portfolio holdings, consistent with empirical observation. These results hold even when asset return predictability is accounted for.     

How Integrated are Credit and Equity Markets? Evidence from Index Options

We study the extent to which credit index (CDX) options are priced consistent with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a structural credit-risk model with stochastic volatility and jumps using new results for pricing compound options via multivariate affine transform analysis. The model captures many aspects of the joint dynamics of CDX and SPX options. However, it cannot reconcile the relative levels of option prices, suggesting that credit and equity markets are not fully integrated. A strategy of selling CDX volatility yields significantly higher excess returns than selling SPX volatility.