Trade Unions in an Open Economy: A General Equilibrium Analysis*

This paper derives a general equilibrium demand-for-labour schedule within the Heckscher-Ohlin-Samuelson model of a large open economy, and then introduces an economy-wide labour union that maximizes its utility subject to this demand schedule, thereby determining the real wage and hence total employment A parametric shift's comparative-static effects on the equilibrium levels of unemployment and welfare are analyzed within this fully unionized economy.     

Managerial Ability, Compensation, and the Closed-End Fund Discount

This paper shows that the existence of managerial ability, combined with the labor contract prevalent in the industry, implies that the closed‐end fund discount should exhibit many of the primary features documented in the literature. We evaluate the model's ability to match the quantitative features of the data, and find that it does well, although there is some observed behavior that remains to be explained.     

Exchange Rates and Cash Flows in Differentiated Product Industries: A Simulation Approach

How do exchange rate changes impact firms' cash flows? We extend a simulation method developed in industrial organization to answer this question. We use prices, quantities, and product characteristics for differentiated products, coupled with a discrete choice framework and an assumption of price competition, to estimate marginal costs for all producers. Using a Monte Carlo approach we generate counterfactual prices and profits for different levels of exchange rates. We illustrate the method using the market for bottled water. Our results stress that even in a relatively simple market such as this one, different brands face very different exchange rate risks.     

AFTER THE FALL: AN EX POST CHARACTERIZATION OF HOUSING PRICE DECLINES ACROSS METROPOLITAN AREAS

Housing prices have plummeted across the United States. This article examines differences in the magnitude of housing price decreases across metropolitan areas. A small number of housing market variables observable before the fall are capable of explaining over 70% of the considerable variation in price declines. An additional non‐parametric analysis suggests that exceeding particular thresholds for some of the key predictors is associated with much larger price drops. These findings are consistent with historical price patterns, which raises questions about the validity of mortgage pricing policy and risk diversification norms in the United States. The analysis points to a set of stylized facts concerning the housing price bubble that need to be explained and suggests fruitful hypotheses for understanding the dramatic housing price declines. (JEL R31, R21, R11, G21)     

A review of: “REAL OPTIONS: MANAGERIAL FLEXIBILITY AND STRATEGY IN RESOURCE ALLOCATION ” BY LENOS TRIGEORGIS The MIT Press,ISBN: 0-262-20102-X., xiii + 427 pp. List: $52.95.

One of the more controversial aspects of a public utility rate case is the determination of the cost of equity component of the allowed return. In practice, the Capital Asset Pricing Model, CAPM, and the Discounted Cash Flow Model, DCF, are used for this purpose. The difficulties in using the CAPM have been documented elsewhere. This note examines the DCF model.

The DCF implicitly assumes that earnings and dividends are growing at a constant rate. When dividend changes are in discrete jumps, the underlying assumptions of the DCF model have been violated. This note derives a DCF model for dividend changes that occur in discrete jumps.     

The Impact of Venture Capital Monitoring

We show that venture capitalists' (VCs) on‐site involvement with their portfolio companies leads to an increase in both innovation and the likelihood of a successful exit. We rule out selection effects by exploiting an exogenous source of variation in VC involvement: the introduction of new airline routes that reduce VCs' travel times to their existing portfolio companies. We confirm the importance of this channel by conducting a large‐scale survey of VCs, of whom almost 90% indicate that direct flights increase their interaction with their portfolio companies and management, and help them better understand companies' activities.     

The Potential Secondary Effects of Consumer Legislation: A Conceptual Framework

In recent years, numerous pieces of consumer-oriented legislation have been passed at both the federal and state levels. Although such laws are usually assumed to have a beneficial impact on consumers, situations may occur when either (a) the law fails to accomplish its primary objectives because of poor design and implementation, weak enforcement, and/or illegal action on the part of business firms that allow them to circum vent the law, or (b) the law leads to unforeseen strategy change by business firms that tend to minimize or nullify the expected benefits of the legislation. These unforeseen reactions or secondary effects frequently serve to weaken the law's potential benefit for the consumer. This paper focuses on the secondary effects problem by examining the kinds of strategy changes that business firms might make in response to consumer legislation and the factors affecting these changes. An analytical framework is developed for evaluating the potential costs to the consumer of these secondary effects and comparing these costs with the expected benefits to be derived from consumer protection laws.