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.     

Learning from Other Economies: The Unique Institutional and Policy Experiments Down Under

This paper argues that detailed studies of particular economies, such as Bob Gregory's work on Australia, are relevant to all of economics. The paper builds on the concept of a model species from biology to develop the notion of a model economy – one whose experiences illuminate fundamental economic issues; examines the criterion for an economy to serve as a model economy; and describes three areas – labour relations and the awards system of wage-setting, marketising public services and growth through immigration and natural resources – where Australian experience provides insights into economic behaviour and the operation of markets broadly.     

The Accountability of Municipal Corporations

The popular view that market forces controlled the development of financial reporting practices among nineteenth-century British companies has recently been shown, by Parker (1990), to be an oversimplification. Large companies engaged in the provision of public utilities, transportation and financial services were the subject of close regulation, though not necessarily or only for the purpose of shareholder protection. The nineteenth century also saw the creation of municipal corporations, and their development is marked by a further variation in the process of accounting change. A regulatory structure, including requirements for accountability, was established when the modern municipal corporation was created in 1834, and this broad framework remained in force without major amendment until 1930. The accounting practices employed by municipal corporations underwent fundamental change, however, to accommodate major alterations in the nature of their activities. The process of 'voluntary' change in response to market pressure received reinforcement from recommendations made by the highly active local-authority-oriented professional accounting body.     

Housing as a Tool of Economic Development since 1929

Housing policy in the developing world has usually been shaped by social and political considerations, yet housing can also be used to promote economic development. From the 1930s to the 1950s, it was increasingly deployed for this purpose by the agencies of colonial powers, including Britain and France; by the United States in Puerto Rico; and by the US Agency for International Development and the Inter‐American Development Bank in Latin America. By the mid‐1960s, the UN and affiliated agencies, notably the International Labour Office, had a keen and broad appreciation of its significance for economic policy. This understanding was temporarily swamped by rising social concerns and then sidelined when the World Bank began to support sites‐and‐services schemes in the 1970s. It reasserted itself in the 1980s in the form of ‘market enabling’ strategies which, however, too often became an excuse for inaction. This history underlines the importance of paying attention to the potential role of housing as a tool of economic development. Dans le monde en développement, la configuration de la politique du logement tient généralement à des aspects sociaux et politiques, alors que le logement peut aussi servir à promouvoir l’expansion économique. Des années 1930 à 1950, c’est dans ce but qu’elle a été mise en ?uvre par les organes des puissances coloniales, dont la Grande‐Bretagne et la France, par les États‐Unis à Puerto Rico, ainsi que par l’agence de développement international des États‐Unis (USAID) et la Banque interaméricaine de développement en Amérique latine. Au milieu des années 1960, l’ONU et ses agences, notamment le Bureau International du Travail, ont émis un avis général tranché quant à son importance en politique économique. Cette idée a été temporairement submergée par l’apparition de problèmes sociaux, puis mise sur la touche lorsque la Banque mondiale a soutenu les projets Sites et services dans les années 1970. Elle s’est réimplantée dans les années 1980 sous la forme de stratégies de stimulation de marché qui, toutefois, ont trop souvent servi d’excuse au manque d’action. Cet historique souligne l’intérêt à accorder au rôle potentiel du logement en tant qu’outil de développement économique.     

UNEMPLOYMENT AND RESERVATION WAGES IN WORKING-CLASS CAPE TOWN

Are the unemployed in South Africa ‘pricing themselves out of the labour market;’? This paper explores this proposition through an analysis of reservation wages in Cape Town's working class district of Khayelitsha/Mitchell's Plain. It argues that reservation wages are not out of line with predicted wages. This, in turn, suggests that unemployment in the area is not attributable to job seekers having unrealistically high reservation wages.     

'It Takes Two Hands to Clap': How Gaddi Shepherds in the Indian Himalayas Negotiate Access to Grazing

This article examines the effects of state intervention on the workings of informal institutions that coordinate the communal use and management of natural resources. Specifically it focuses on the case of the nomadic Gaddi shepherds and official attempts to regulate their access to grazing pastures in the Indian Himalayas. It is often predicted that the increased presence of the modern state critically undermines locally appropriate and community-based resource management arrangements. Drawing on the work of Pauline Peters and Francis Cleaver, I identify key instances of socially embedded 'common' management institutions and explain the evolution of these arrangements through dynamic interactions between individuals, communities and the agents of the state. Through describing the 'living space' of Gaddi shepherds across the annual cycle of nomadic migration with their flocks I explore the ways in which they have been able to creatively reinterpret external interventions, and suggest how contemporary arrangements for accessing pasture at different moments of the annual cycle involve complex combinations of the formal and the informal, the 'traditional' and the 'modern'.     

Resource Allocation Auctions within Firms

There is growing interest in the use of markets within firms. Proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed. In contrast to the use of markets in the broader economy, the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating, privately informed agents. In this paper, we study the optimal design of managerial incentives when resources are allocated by an internal auction market, as well as the efficiency of the resulting resource allocations. We show that the internal auction market can achieve first‐best resource allocations and decisions, but only at an excessive cost in compensation payments. We then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second‐best outcome as determined using a direct revelation mechanism. The advantage of the auction is that it is easier to implement than the direct revelation mechanism. When the internal auction mechanism is unable to achieve second‐best, we characterize the factors that determine the magnitude of the shortfall. Overall, our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms.     

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.