Selected Economic Analysis at the Antitrust Division: The Year in Review

Of the many activitiesof the Antitrust Division of theU.S. Department of Justice, we havesummarized some that raise interestingeconomic issues. We describe recentimprovements in the methodology to beused in ``coordinated effects' analysisof mergers. We also discuss four casesbrought by the DOJ that raise issues ofmarket definition, the influence ofcommon partial ownership of competitors,and the effects of fringe suppliers inconstraining collusion by large firms.     

Research Methods for Examining Independence Issues: Experimental and Economics-of-Auditing Approaches

Recent corporate failures in Australia and overseas have led many to question both the perceived and actual independence of auditors. We believe that it is unlikely that there is a general lack of independence among auditors or, at the other extreme, that there have been no breaches of independence. We suggest the need for research on factors that affect lack of actual independence. Research is also required on what factors affect independence as perceived by users of accounting reports. This paper outlines the research methods issues in the design of such studies.     

The Year in Review: Economics at the Antitrust Division, 2005–2006

This paper covers the activities of the Economic Analysis Group (EAG) of the Antitrust Division, U.S. Department of Justice, during 2005–2006. It describes the economic analysis undertaken by EAG in several important investigations, appellate matters, and other activities as an advocate for competition.The views contained herein are solely those of the authors and do not necessarily represent those of the U.S. Department of Justice.     

Bank Lending to Native American Applicants: An Investigation of Mortgage Flows and Government Guarantee Programs on Native American Lands

We investigate the efficacy of government guarantee programs for mortgage loans made on tribal lands by comparing lending outcomes for White applicants and Native Americans (NAs) living on- and off reservation lands. Simultaneous equations models with the loan-to-income ratio endogenous indicate both on- and off-reservation NA applicants experience higher conditional denial rates compared with otherwise similar White applicants. NAs living on-reservation are equally as likely to be approved for mortgage loans as off-reservation NAs. On-reservation applicants self-select lower loan-to-income ratios, and are held to a higher standard for this credit variable, likely because lower housing values and other economic variables challenge on-reservation applicants. Our findings suggest lack of financial resources, lack of applicant education about and experience with the mortgage process, low creditworthiness, and lender reluctance to confront burdensome bureaucracy limit on-reservation guarantee program success.     

中国金融控股集团发展：分业还是混业？

中国的金融控股集团可界定为跨业经营,再加上金融企业资产的弱专用性,因此现有金融管理体制下存在金融控股集团发展的空间。但本文分析认为金融控股集团的经营前景不能确定,应积极、审慎地发展。     

Globalisation and the environment: the long-term effects of technology on the international division of labour and energy demand

This paper examines the effect of the structural changes arising from the globalisation of production and innovation and from technological changes on the environment. Drawing on theories of international production from international business and innovation, we assess the impact of long-term technological change and changes in international production on the international division of labour and energy demand. We select two industrial sectors with different technological characteristics (the textile, clothing and footwear sector and the chemical sector). We examine the effects of the globalisation of production and of technological change on these two sectors on the level of industrial production and resource intensity in different regions and countries over the last 30 years. We speculate on the impact of globalisation of production and innovation in future pervasive technologies—information technology, biotechnology and nano-technology. The implications of these developments on industrial greenhouse gases emissions are assessed.     

Replicating portfolio approach to capital calculation

The replicating portfolio (RP) approach to the calculation of capital for life insurance portfolios is an industry standard. The RP is obtained from projecting the terminal loss of discounted asset–liability cash flows on a set of factors generated by a family of financial instruments that can be efficiently simulated. We provide the mathematical foundations and a novel dynamic and path-dependent RP approach for real-world and risk-neutral sampling. We show that our RP approach yields asymptotically consistent capital estimators if the chaotic representation property holds. We illustrate the tractability of the RP approach by three numerical examples.     

An expansion in the model space in the context of utility maximization

In the framework of an incomplete financial market where the stock price dynamics are modeled by a continuous semimartingale (not necessarily Markovian), an explicit second-order expansion formula for the power investor’s value function—seen as a function of the underlying market price of risk process—is provided. This allows us to provide first-order approximations of the optimal primal and dual controls. Two specific calibrated numerical examples illustrating the accuracy of the method are also given.     

A risk-neutral equilibrium leading to uncertain volatility pricing

We study the formation of derivative prices in an equilibrium between risk-neutral agents with heterogeneous beliefs about the dynamics of the underlying. Under the condition that short-selling is limited, we prove the existence of a unique equilibrium price and show that it incorporates the speculative value of possibly reselling the derivative. This value typically leads to a bubble; that is, the price exceeds the autonomous valuation of any given agent. Mathematically, the equilibrium price operator is of the same nonlinear form that is obtained in single-agent settings with worst-case aversion against model uncertainty. Thus, our equilibrium leads to a novel interpretation of this price.