‘Regular’ choice and the weak axiom of stochastic revealed preference

We explore the relation between two ‘rationality conditions’ for stochastic choice behavior: regularity and the weak axiom of stochastic revealed preference (WASRP). We show that WASRP implies regularity, but the converse is not true. We identify a restriction on the domain of the stochastic choice function, which suffices for regularity to imply WASRP. When the universal set of alternatives is finite, this restriction is also necessary for regularity to imply WASRP. Furthermore, we identify necessary and sufficient domain restrictions for regularity to imply WASRP, when the universal set of alternatives is finite and stochastic choice functions are all degenerate. Results in the traditional, deterministic, framework regarding the relation between Chernoff’s condition and the weak axiom of revealed preference follow as special cases. Thus, general conditions are established, under which regularity can substitute for WASRP as the axiomatic foundation for a theory of choice behavior.     

DETERMINANTS OF SCHOOL ENROLMENT AND EDUCATION ATTAINMENT: EMPIRICAL EVIDENCE FROM KENYA1

This paper investigates the determinants of demand for schooling in Kenya. Probit and ordered probit methods are used to model enrolment and attainment respectively. The results show that child characteristics, parental education and other household characteristics, quality and cost of schooling are important determinants of demand for education services in Kenya. The results further show that girls would be more affected by policy changes than boys. The findings call for targeting in efforts to boost and sustain demand for schooling in Kenya. The study recommends immediate policy interventions focusing on improving quality of education and poverty alleviation.     

Einzelbesprechungen

Ohne Zusammenfassung     

Evolution of networks—an experimental analysis

It is the main aim of our paper to study network formation in experimental setups in discrete and continuous time. Our design is inspired by the theoretical model on network formation by Bala and Goyal (Econometrica, 68(5): 1181–1229, 2000) as well as the experiments by Callander and Plott (J. Public Econ., 89: 1469–1495, 2005) and Falk and Kosfeld (IEW Working Paper, University of Zürich, Zürich, Switzerland, No. 146, 2003). In particular, we analyze the role of star-shaped networks which are strict Nash-equilibria of the corresponding network formation game. Our experimental results show that strict Nash networks prove to be a good indicator for predicting network formation, particularly in continuous time. In explaining our results, it turns out that, among others, the complexity in coordinating on stars, the inequity aversion against unequal payoff distribution in the network, and the groups’ degrees of activity are the most important determinants for the formation of strict Nash networks.      

Competition and Competition Policy: Implications of Hong Kong's Reversion to China

The paper explores how Hong Kong's new status as China's Special Administrative Region (SAR) may affect the competitiveness of the industries and the relative position of companies owned by non-Hong Kong investors. The conclusion is that mainland Chinese firms will play an increasingly more important role in Hong Kong's economy and British firms will lose their dominance further. This does not, however, indicate a return to unequal competition in favor of firms from the sovereign country, but the beginning of a period of greater competition by all firms in Hong Kong, whether they be local or non-local. There is a risk that governmental and semi‐governmental corporations of the SAR and other Chinese governments may use their official and semi-official status to tilt the playing field in their favor, but appropriate competition law can address this concern.     

Analysts' Earnings Forecasts and the Value Relevance of 20-F Reconciliations from non-U.S. to U.S. GAAP

This study extends existing research into the value relevance of reconciliations to U.S. GAAP by examining the role of analysts' earnings forecasts in explaining potential market reactions to the earnings reconciliation. One possible reason why the evidence on the value relevance of the earnings reconciliation is weak is that earnings are forecast by analysts. Their forecasts may pre-empt some of the information content of the earnings reconciliation disclosures. Our findings indicate that analysts' forecasts are value relevant and that they play a pre-emptive role for some firms. For others, however, the earnings reconciliation has information content that is not pre-empted by analysts' forecasts.     

The Effect of Audit Quality on Earnings Management*

This study examines the relation between audit quality and earnings management. Consistent with prior research, we treat audit quality as a dichotomous variable and assume that Big Six auditors are of higher quality than non-Big Six auditors. Earnings management is captured by discretionary accruals that are estimated using a cross-sectional version of the Jones 1991 model. Prior literature suggests that auditors are more likely to object to management's accounting choices that increase earnings (as opposed to decrease earnings) and that auditors are more likely to be sued when they are associated with financial statements that overstate earnings (as compared to understate earnings). Therefore, we hypothesize that clients of non-Big Six auditors report discretionary accruals that increase income relatively more than the discretionary accruals reported by clients of Big Six auditors. This hypothesis is supported by evidence from a sample of 10,379 Big Six and 2,179 non-Big Six firm years. Specifically, clients of non-Big Six auditors report discretionary accruals that are, on average, 1.5-2.1 percent of total assets higher than the discretionary accruals reported by clients of Big Six auditors. Also, consistent with earnings management, we find that the mean and median of the absolute value of discretionary accruals are greater for firms with non-Big Six auditors. This result also indicates that lower audit quality is associated with more “accounting flexibility”.