Ripoffs,Lemons, and Reputation Formation in Agency Relationships: A Laboratory Market Study

This paper examines the effect of the moral hazard problem in an agency relationship where the principal cannot observe the level of service provided by the agent. Using data from laboratory markets, we demonstrate that the presence of moral hazard leads to shirking by agents. However, this “lemons” phenomenon occurs only about one-half of the time. While there is evidence of reputation effects in these markets, seemingly reputable agents are often able to use opportunities for false advertising to their advantage and “ripoff” principals.     

A Probit Analysis of Aboriginal Employment Prospects in New South Wales*

Using data from the 1986–87Survey of Working Age Aborigines in New South Wales, this paper presents the results of a probit analysis to determine the characteristics which differentiate employed Aborigines from Aborigines not in employment The results of the probit analysis show the importance of the acquisition of human capital to the employment success of Aborigines, at least in New South Wales. Increments in level of education, previous participation in formal labour market programs, and previous employment experience all have significant, positive impacts on the likelihood of individual Aborigines being in employment     

Federal Balance and Economic Stability*

The paper examines the concepts of and the conditions for vertical and horizontal fiscal balance in a federal system, with special reference to intergovernmental grants arrangements and the effects of open-ended settlements on the stability of the system. The notions of vertical balance, horizontal balance and open-endedness are then applied to other aspects of economic policy, in particular the formulation of budgetary policy by a single government and the settlement of wage claims. It is suggested that economic instability in Australia during recent years has been associated with two forms of horizontal imbalance, resulting from institutional factors which have encouraged open-endedness in the process of determining budget priorities on the one hand and open-endedness in wage bargaining on the other.     

The Association of Forecast Error with Other Risk Measures

The forecasting errors of security analysts based on a sample of 100 New York Stock Exchange companies are developed for 1967–72. The forecast errors are related to two risk measures, (I) the coefficient of variation of earnings about linear trend and (2) the market beta. A high level of association is revealed between the ranking of companies based upon forecast error and coefficient of variation. A lower degree of association exists between forecast error and the market betas by company.
Partant d'un échantillon de 100 compagnies new yorkaises cotées à la Bourse, les analystes financiers mettent en valeur les écarts de prévision au cours de la période 1967–72. Les écarts de prévision sont liés à deux mesures de risque: (I) d'une part au coefficient de variation des bénéfices suivant une tendance linéaire, et (2) d'autre part au bêta du marchbé. On décéle une forte corrélation entre le rang des sociétès établi d'après les Ccarts de prévision et le coefficient de variation des bénéfices. II existe par contre une faible corrélation entre ces erreurs de prévision et les bêtas du marché.
Die Vorhersagefehler von Aktienanalytikern werden von einer Stichprobe von 100 an der New Yorker Börse notierten Gesellschaften für die Periode 1967–72 abgeleitet. Die Vorhersagefehler werden wiederum in Beziehung zu zwei Risikoindizien gebracht, (I) zu dem Ertragsvariationskoefiient um einen Linearen Trend und (2) zum Marktbetafaktor. Eine hohe Assoziation zwischen einer Rangordnung von Gesellschaften nach Vorhersagefehlern und Variationskoeffizienten wird gezeigt. Zwischen den Vorhersagefehlern und Marktbetafaktoren besteht eine Assoziation niedrigeren Grades.     

Externality Policy Reform: A General Equilibrium Analysis

We characterize Pareto‐improving and equilibrium‐preserving policy reforms in a second‐best (Diamond/Mirrlees) world with a consumption externality. A counterintuitive finding is that, starting from an initial equilibrium with no direct quantity control on the externality, it is possible that all Pareto‐improving and equilibrium‐preserving directions of change require an increase in a negative externality. We provide intuition for these results by establishing a nexus between Guesnerie's approach to designing (tax) policy reforms and the standard Kuhn–Tucker technique for identifying the manifold of feasible Pareto‐optimal states, given the instruments available to the policy maker.     

Microstructure Noise, Realized Variance, and Optimal Sampling

A recent and extensive literature has pioneered the summing of squared observed intra-daily returns, "realized variance", to estimate the daily integrated variance of financial asset prices, a traditional object of economic interest. We show that, in the presence of market microstructure noise, realized variance does not identify the daily integrated variance of the frictionless equilibrium price. However, we demonstrate that the noise-induced bias at very high sampling frequencies can be appropriately traded off with the variance reduction obtained by high-frequency sampling and derive a mean-squared-error (MSE) optimal sampling theory for the purpose of integrated variance estimation. We show how our theory naturally leads to an identification procedure, which allows us to recover the moments of the unobserved noise; this procedure may be useful in other applications. Finally, using the profits obtained by option traders on the basis of alternative variance forecasts as our economic metric, we find that explicit optimization of realized variance's finite sample MSE properties results in accurate forecasts and considerable economic gains.     

COINTEGRATION OF STOCK MARKETS BETWEEN NEW ZEALAND, AUSTRALIA AND THE G7 ECONOMIES: SEARCHING FOR CO-MOVEMENT UNDER STRUCTURAL CHANGE

This paper examines whether the New Zealand equity market is integrated with the equity markets of Australia and the G7 economies by applying both the Johansen (1988 ) and Gregory and Hansen (1996 ) approaches to cointegration. The Johansen (1988 ) test suggests that there is no long-run relationship between the New Zealand stock market and any of the other stock markets considered in the study. The Gregory and Hansen (1996 ) test finds that the New Zealand and United States stock market is cointegrated, but the New Zealand stock market is not cointegrated with the other stock markets in the study. This suggests that in order to avoid some of the risk through international portfolio diversification there is potential for investors to purchase shares in the New Zealand market and either the Australian market or most of the world's leading equity markets.