The Structure and Incentive Effects of Corporate Tax Liabilities

This paper describes situations in which tax liabilities assume the form of a negative position in a call option. This structure motivates an examination of the investment decisions of taxed corporations in the presence of risk. It is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger. These effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders, and under alternative assumptions about the tax code, and about the timing of investment and financing decisions.     

Manufacturing Industry and the Balance of Payments Adjustment: The United Kingdom Case

The thesis of this essay is that it is unlikely that economic growth in the UK during the rest of the 1990s will be balance-of-payments constrained in any significant sense. Our conclusion is that manufacturing industry does not and will not play a unique role in Britain's economic future. These propositions are not to be confused with two distinct and related ones. The first is that the fact that the balance of payments need not be seen as a constraint does not rule out the possibility of other problems associated with the balance of payments such as we have seen in the recent past. Secondly, the fact that manufacturing industry is not in any sense a unique part of economic activity in no way lessens its importance as a major and significant sector. This paper is in no sense a critique of manufacturing industry.     

BCCI: LESSONS FOR INTERNATIONAL BANK SUPERVISION

This paper analyzes the BCCI collapse in light of the ongoing efforts of the Basle Committee on Banking Supervision to ensure that "no foreign banking establishment escapes adequate supervision." It reviews the development of the Basle Committee's Concordat and analyzes ways of improving international bank supervision.     

The Valuation of American Options with Stochastic Interest Rates: A Generalization of the Geske—Johnson Technique

The Geske–Johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of American-style contingent claims. Here, we generalize their approach to a stochastic interest rate economy. The method is implemented using options exercisable on one of a finite number of dates. We illustrate how the value of an American-style option increases with interest rate volatility. The magnitude of this effect depends on the extent to which the option is in the money, the volatilities of the underlying asset and the interest rates, as well as the correlation between them.     

Corporate Financial Policy and the Theory of Financial Intermediation

This paper examines the optimal structure of financial contracts in an economy subject to two forms of moral hazard. Multiple information problems are shown to generate a role for multiple classes of financial claimants. We then show that economic efficiency is enhanced if the financial structure of the economy consists of both direct and intermediated financial contract markets. Consequently, our results demonstrate a motivation for the complementarity between capital markets and depository financial institutions.     

PRODUCT IMPROVEMENT AND TECHNOLOGICAL TYING IN A WINNER‐TAKE‐ALL MARKET*

In a winner‐take‐all duopoly for systems in which firms invest to improve their products, a vertically integrated monopoly supplier of an essential system component may have an incentive to advantage itself by technological tying. If the vertically integrated firm is prevented from technologically tying, there is an equilibrium in which the more efficient firm invests and serves the entire market. However, another equilibrium may exist in which the less efficient firm wins the market. Technological tying enables a vertically integrated firm to foreclose its rival. The welfare implications of technological tying are ambiguous and depend on equilibrium selection.     

An Individual‐Level Study of Contract Ratification Support

This study uses constructs developed from theoretical models of both unit‐level ratification studies and individual‐level studies of strike support to predict individual employee ratification voting behavior and contract satisfaction. Surveys were given to union members before and after ratification voting. The results suggest that constructs assessing economic factors, employment relations, union relations, and the importance of contract information from the union all influence ratification support. While the bargaining issues are important in explaining ratification support, factors beyond the bargaining issues, such as employer and union loyalty and providing information about the contract, are related to ratification support.