What the Pension Benefit Guaranty Corporation can learn from the Federal Savings and Loan Insurance Corporation

This article attempts to draw attention to some important lessons that the Pension Benefit Guaranty Corporation (PBGC) can learn from the experience of the Federal Savings and Loan Insurance Corporation (FSLIC). FSLIC was the government agency that insured deposits at savings and loan associations until it was replaced in 1989, leaving a massive deficit to be financed by taxpayers. Like FSLIC, the PBGC is a government agency that guarantees a form of private corporate debt. As guarantor of the pension benefits promised by private plan sponsors, the PBGC bears the risk of a shortfall between the value of insured benefits and the assets securing those benefits. There has been a significant change in the attitude and behavior of senior public officials and legislators as a result of the S&L debacle. Directors of the PBGC and the Secretaries of Labor to whom they report have pointed out the weaknesses of some of the pension funds that the PBGC insures and have pursued an active legislative agenda designed to reduce the PBGC's vulnerability to those weaknesses. Those efforts have resulted in a series of laws and amendments to laws that have significantly improved the U.S. pension guarantee system. But the magnitude of the PBGC's exposure to shortfall risk depends on three factors: (1) the financial strength of plan sponsors, (2) the degree of underfunding of insured benefits, and (3) the mismatch between the market-risk exposure of insured benefits (a form of long-term corporate debt) and the market-risk exposure of the assets securing that debt. Only the first two of these have been addressed by past legislative reforms. The third factor appears not to be well understood. It is apparently a widespread belief among policymakers that a well-diversified pension portfolio of equity securities provides an effective long-run hedge against liabilities of defined-benefit pension plans, so that there is no mismatch problem. This belief is mistaken. Equities are not a hedge against fixed-income liabilities even in the long run. Thus, even if the PBGC achieves the goal of full funding at one point in time, the mismatch between the market-risk exposure of the pension benefits that it insures and the pension assets backing them creates the potential for large shortfall losses in the future as the economy and capital market rates change in unpredictable ways. Therein lies an uncomfortable parallel with the S&L debacle.     

Money stock revisions and unanticipated money growth

An important ‘empirical regularity’ is the strong positive effect of money shocks on output and employment. One strand of business cycle theory relates this finding to temporary confusions between absolute and relative price changes. These models predict positive output effects of unperceived monetary movements, but the quantitative importance of unperceived shifts in nominal aggregates is subject to question. Another strand of theory, based on long-term nominal contracts and analogous price-setting institutions, generates output effects from unanticipated, but not necessarily contemporaneously unperceived, money shocks. However, the real effects of unpredicted, but contemporaneously understood, monetary changes are not obviously consistent with efficient institutional arrangements. The present paper provides some empirical evidence on the two types of theories by analyzing the output effects associated with revisions in the money stock data, where the revisions are interpreted as components of unperceived monetary movements. The revisions turn out to have no significant explanatory power for output. Previous findings that innovations from an estimated money growth equation have a significant output effect remain intact when the revisions are included as separate explanatory variables. Overall, the study provides a small amount of evidence against the special role of unperceived, as opposed to unanticipated, money movements as a determinant of business fluctuations.     

Delayed agreements and nonexpected utility

The unexplained occurrence of inefficient delays in reaching agreement is known in the economics literature as the “Hicks paradox.” This paper describes a strategic situation in which players may play a simultaneous move game either before or after a move of Nature. The structure is such that if the players were expected utility maximizers, they would be indifferent over the order of play. However, if at least one of the players is a nonexpected utility maximizer, for example, if player one has preferences over lotteries which exhibit betweenness and fanning out, such a player may strictly prefer to wait before playing the game. If both players exhibit fanning out and betweenness, then there exist games in which both prefer to delay agreement.     

Contributing beyond the call of duty: examining the role of culture in fostering citizenship behavior and success in project-based work

Shifting goals, priorities and evolving customer demands require an exceptional effort, beyond the call of duty, on the part of employees to increase the likelihood for successful implementation of technologically driven projects. Our model posits that citizenship behavior, which captures individuals' behavior that goes above and beyond prescribed roles, effects project success and is influenced by the culture that exists in the project. We provide support for the model utilizing 222 participants in 71 product development, IT implementation and engineering projects, originating in firms from various industries in the United States using structural equation modeling. Owing to the constraints typically facing project managers, in terms of personnel availability and control over rewards, our findings suggest that project culture can be used by managers as an alternative lever to trigger employees' citizenship behavior, which in turn drives success. We provide valuable implications for individuals assigned to lead projects, who are concerned with aligning project culture with citizenship behavior, as part of their planning activities.     

Decentralized allocation of resources among many producers

We reconsider the question of allocating resources in large teams using decentralized procedures. Our assumption on the distribution of procedures is that it approximates a given undelying distribution in producers space; thus we relax prior approaches which utilize replicas or iid samplings. We examine when solving the allocation problem for the underlying distribution yields an appropriate solution to the specific sample. We then show how market- like mechanisms may be used to get a decentralized decision process which is asymptotically optimal.     

For the last time: stock options are an expense

Should stock options be recorded as an expense on a company's income statement and balance sheet, or should they remain where they are, relegated to footnotes? The extraordinary boom in share prices during the Internet bubble made critics of option expensing look like spoilsports. But since the crash, the debate has returned with a vengeance. And no wonder: The authors believe the case for expensing options is overwhelming. In this article, Nobel Iaureate Robert Merton, one of the inventors of the Black-Scholes option-pricing model; his coauthor on the classic textbook Finance, Zvi Bodie; and Robert Kaplan, creator of the Balanced Scorecard, examine and dismiss the principal claims put forward by those who continue to oppose options expensing. They demonstrate that stock-option grants do indeed have real cash-flow implications that need to be reported. They show that effective ways certainly exist to quantify those implications. They detail the distortions that relegating stock-option accounting to footnotes creates. And they show why reporting option costs should in no way hamper young companies in their efforts to provide incentives. Options are indeed a powerful incentive, the authors agree, and failing to record a transaction that creates such powerful effects is economically indefensible. Worse, it encourages companies to favor options over alternative incentive systems. It is not the proper role of accounting standards, the authors argue, to distort executive and employee compensation by subsidizing one particular form of compensation and no other. Companies should choose compensation methods according to their economic benefits--not the way they are reported.