A COMPARISON BETWEEN ACTUAL DISTRIBUTIONS OF ANNUAL AND LIFETIME INCOME: SWEDEN 1951–89

This paper uses register data on tax assessed income from 1951 to 1989 for a representative sample of Swedish men in order to compare the distributions of annual income and "lifetime" income. It is found that the dispersion of lifetime income is around 35 to 40 percent lower than typical cross-sections of annual income. It is income up to around 30 years of age that mainly explains this discrepancy in the magnitude of dispersions. From the age of 30 until 65 years the correlations between annual and lifetime income are quite high and the dispersion of annual income is not very much higher than the dispersion of lifetime income. An analysis of the evolution of income mobility shows that there is a slight tendency to rising mobility over time. This finding implies that the common approach to study the development of income distribution by using only annual income can be misleading.     

The pernicious effects of contaminated data in risk management

Banks hold capital to guard against unexpected surges in losses and long freezes in financial markets. The minimum level of capital is set by banking regulators as a function of the banks’ own estimates of their risk exposures. As a result, a great challenge for both banks and regulators is to validate internal risk models. We show that a large fraction of US and international banks uses contaminated data when testing their models. In particular, most banks validate their market risk model using profit-and-loss (P/L) data that include fees and commissions and intraday trading revenues. This practice is inconsistent with the definition of the employed market risk measure. Using both bank data and simulations, we find that data contamination has dramatic implications for model validation and can lead to the acceptance of misspecified risk models. Moreover, our estimates suggest that the use of contaminated data can significantly reduce (market-risk induced) regulatory capital.     

Good Cop–Bad Cop: Trust,Control, and the Lure of Integration

Based on a longitudinal case study of four interorganizational product development collaborations, this paper identifies a lure to cross‐functional integration that has hereto been neglected. In particular, findings suggest that when the buyer firm separates the Research and Development (R&D) Department from the Procurement Department, the two departments play a good cop–bad cop strategy toward the supplier. Thereby, they are able to foster a high level of goodwill trust between R&D personnel of the collaborating firms, while procurement personnel maintain a high level of formal control. Using an intricate sample design with polar cases, the study shows that cross‐functional integration of the two departments hampers interorganizational goodwill trust at the benefit of formal control. The findings offer a way forward for managers seeking to reap the benefits of collaboration, while limiting their exposure to the associated risks.     

Life Insurance Liabilities at Market Value: An Analysis of Insolvency Risk, Bonus Policy, and Regulatory Intervention Rules in a Barrier Option Framework

This article takes a contingent claim approach to the market valuation of equity and liabilities in life insurance companies. A model is presented that explicitly takes into account the following: (i) the holders of life insurance contracts (LICs) have the first claim on the company's assets, whereas equity holders have limited liability; (ii) interest rate guarantees are common elements of LICs; and (iii) LICs according to the so‐called contribution principle are entitled to receive a fair share of any investment surplus. Furthermore, a regulatory mechanism in the form of an intervention rule is built into the model. This mechanism is shown to significantly reduce the insolvency risk of the issued contracts, and it implies that the various claims on the company's assets become more exotic and obtain barrier option properties. Closed valuation formulas are nevertheless derived. Finally, some representative numerical examples illustrate how the model can be used to establish the set of initially fair contracts and to determine the market values of contracts after their inception.     

Free or central banking? Liquidity and financial deepening in Sweden, 1834-1913

During Sweden’s nineteenth-century modernization, Enskilda banks contributed to economic expansion and integration by providing generally accepted means of payment beyond what would have been possible for the central bank, the Riksbank. The Riksbank was constrained by specie-convertibility requirements for Sweden’s currency. Contrary to previous arguments, however, the Enskilda banks did not operate according to free banking theory. The Enskilda banks held Riksbank notes instead of specie as base-money reserves. This arrangement led to a higher supply of formal liquidity than what would have been the case with either a free banking system or a pure deposit-based commercial banking system. The consequence for Sweden was a rapid rate of monetization and financial deepening.     

Constitutionalism and credibility in reforming economies1

There has been relatively little investigation of the effect of constitutional transformations on the economic transition in post‐communist countries. We develop a simple signalling model in which constitutionalism – a commitment to limit political power and provide judicial defence of basic rights – reinforces the credibility of pro‐market candidates’ electoral promises and boosts public support for economic reforms. These findings are tested using opinion poll data on public support for reform in Central and Eastern Europe, and in the former Soviet Union, in the 1990s. In a two‐stage procedure we show that public support for market reforms is higher in countries where incumbents have taken deliberate steps to increase political accountability and judicial independence. Public support also spurs actual economic reform.     

Estimates of a labour supply function using alternative measures of hours of work

Depending on data source, estimates of hours of work give widely different results both as to level and change. In this paper three alternative measures of hours worked are used to estimate a simple labour supply function to investigate if the estimated wage rate and income effects are data dependent as well. The measures used include those from time-use surveys and those from regular surveys. The latter are based on the responses to a question about normal weekly hours of market work. The results suggest that the estimates of the wage rate effects become much smaller when measures of normal hours are used compared to data collected for a well-defined time period close to the date of interview, such as time-use data. The income effects appear less sensitive to the choice of data.