Introduction to “Economic and Financial Governance in the European Union after a decade of Economic and Political Crises.”

ABSTRACT

This paper offers the Introduction to the Special Issue “Economic and Financial Governance in the European Union after a decade of Economic and Political Crises.” We introduce the five papers. We distill three important lessons they offer for EU integration.     

Random coefficient regression and the long-run phillips curve for the U.S.

This research suggests that a random coefficient regression model is well-suited for analyzing long-run versus short-run movements in wages and unemployment and is an improvement over some empirical techniques typically used.     

A note on the independence of irrelevant alternatives in probabilistic choice models

The purpose of this note is to show that there is no necessary relationship between the independence of irrelevant alternatives (IIA) property and stochastic independence of the errors in probabilistic choice models.     

An equilibrium analysis of information aggregation and fluctuations in markets with discrete decisions

This paper shows how the interaction between decentralized information gathering and discreteness of investment decisions at the individual level can generate random fluctuations in aggregate investment that involve occasionally large allocation errors. This interaction is illustrated in a model in which private information is costly to acquire and prices reveal information. The unique rational expectations equilibrium outcome of the model is shown to always be noisy and characterized by investment levels which may be high simply because uninformed investors are buying under the impression that the high price is a signal of good investment opportunities.     

Analysis of the effects of settlement of interfirm lawsuits

This study examines the effects of news on settlement of interfirm lawsuits. We hypothesize that the defendant firms suffer damaged reputation as news on the interfirm lawsuit remains in the ‘public eye’, as such ending the litigation process through settlement is good news for the defendant firms. Thus, the stock market will react positively to the defendants when news of a settlement is announced. On the other hand, settlements end the free publicity that the plaintiffs enjoy. In addition the plaintiffs settle for less money than they initially seek. Thus, the implication of a reduced cash flow expectations that the announcement of settlements brings to the plaintiffs will cancel out the positive reputation effect. Therefore, there will be no significant stock market reaction to the plaintiffs when a settlement is announced. Furthermore, the stock market will show no significant reaction to the defendants who have been the subject of more than one lawsuit in a relatively short period of time prior to a settlement because their reputation is too severely damaged to be remedied through removal of their name from the limelight. The results of our analysis support the hypotheses and offer some insight for strategy development. Copyright © 2006 John Wiley & Sons, Ltd.     

The Exchange Rate and its Fundamentals in a Complex World

We develop a nonlinear exchange rate model with heterogeneous agents. Some agents adopt a “fundamentalist” forecasting rule, while others use a “chartist” forecasting rule. We show that the model is capable of explaining the empirical puzzles relating to exchange rate movements. In particular, the model explains the “exchange rate determination” and PPP puzzles, the excess volatility, and fat tails in exchange rate returns.     

Toward a Phylogenetic Reconstruction of Organizational Life

Synopsis Classification is an important activity that facilitates theory development in many academic disciplines. Scholars in fields such as organizational science, management science and economics and have long recognized that classification offers an approach for ordering and understanding the diversity of organizational taxa (groups of one or more similar organizational entities). However, even the most prominent organizational classifications have limited utility, as they tend to be shaped by a specific research bias, inadequate units of analysis and a standard neoclassical economic view that does not naturally accommodate the disequilibrium dynamics of modern competition. The result is a relatively large number of individual and unconnected organizational classifications, which tend to ignore the processes of change responsible for organizational diversity. Collectively they fail to provide any sort of universal system for ordering, compiling and presenting knowledge on organizational diversity. This paper has two purposes. First, it reviews the general status of the major theoretical approaches to biological and organizational classification and compares the methods and resulting classifications derived from each approach. Definitions of key terms and a discussion on the three principal schools of biological classification (evolutionary systematics, phenetics and cladistics) are included in this review. Second, this paper aims to encourage critical thinking and debate about the use of the cladistic classification approach for inferring and representing the historical relationships underpinning organizational diversity. This involves examining the feasibility of applying the logic of common ancestry to populations of organizations. Consequently, this paper is exploratory and preparatory in style, with illustrations and assertions concerning the study and classification of organizational diversity.     

Voluntary development of environmental management systems: motivations and regulatory implications

Encouraging firms to develop voluntarily more comprehensive environmental management systems (EMSs) is touted as a policy tool to augment mandatory environmental regulations. Using a unique dataset of environmental management practices of Japanese manufacturers and controlling for self-selection bias in survey responses, we find that proxies for regulatory pressures and consumer pressures are the most important factors that motivate firms toward more comprehensive EMSs. Despite the oft-claimed “voluntary” nature of EMS development, our results show that the government may have a role to play in both directly and indirectly affecting EMS development by firms.