Wealth Effects, Incentives, and Productivity

Comparative static effects of varying the wealth level of a risk-averse agent in a moral hazard setting with limited liability constraints are investigated. There are two principal opposing effects of increasing wealth: the incentive effect, which allows stronger punishments for poor performance, thereby encouraging higher effort; and the preference effect, which reduces the agent's effort incentives owing to income effects in the demand for leisure. It is shown that optimal effort levels are initially constant, subsequently increasing and eventually decreasing in wealth. Hence agents with intermediate wealth levels are the most productive.     

MARKET SEGMENTATION AND INTERNATIONAL ASSET PRICES: EVIDENCE FROM THE LISTING OF WORLD EQUITY BENCHMARK SHARES

This article provides an empirical analysis of the announcement effect of the listing of the seventeen World Equity Benchmark Shares (WEBS) on the returns of the corresponding market index returns and closed‐end country fund premiums. I find that the announcement of the listing of the WEBS resulted in a positive market price reaction for the market indexes. Furthermore, there was a significant decline in premiums for closed‐end country funds. The findings are consistent with models of international asset pricing under market segmentation and they illustrate that the listing of internationally tradable securities is an effective mechanism for integrating international capital markets. JEL classification: G14, G15     

SELF-DECOMPOSABILITY AND OPTION PRICING

The risk-neutral process is modeled by a four parameter self-similar process of independent increments with a self-decomposable law for its unit time distribution. Six different processes in this general class are theoretically formulated and empirically investigated. We show that all six models are capable of adequately synthesizing European option prices across the spectrum of strikes and maturities at a point of time. Considerations of parameter stability over time suggest a preference for two of these models. Currently, there are several option pricing models with 6–10 free parameters that deliver a comparable level of performance in synthesizing option prices. The dimension reduction attained here should prove useful in studying the variation over time of option prices.     

The Effects of Prior Spending on Future Spending Decisions: The Role of Acquisition Liabilities and Payments

Research in mental accounting shows that prior spending influences a consumer's decision to make a new spending decision (Heath and Soll 1996, Soman 2001). In particular, greater spending in a particular category reduces the likelihood of further spending in that category. In the present research, we decompose spending into two distinct episodes—the acquisition liability episode during which a purchase is made accompanied by a commitment to pay (e.g., using a credit card) and the payment episode during which the consumer's wealth actually gets depleted (e.g., paying the credit card bill). Using a controlled laboratory experiment and real world data from a group of consumers, we replicate earlier findings that prior spending influences a pending spending decision, but also show that the location of both the acquisition liability episode and the payment episode play a role. Our results contribute to an understanding of the dynamic mental accounting of acquisition liability and actual outflows.     

Globalization and the anti‐globalization lobby: A deficit of thoughtfulness and clairvoyance

As the current wave of globalization strengthened, so did the fury of the anti‐globalization lobby against it. The author believes that the members of this lobby failed to take a thoughtful and balanced perspective of the on‐going integration of the global economy. Indubitably, globalization has its winners and losers. The author establishes that if the members of this group take a good look at the two sides of the coin in an objective and unprejudiced manner, they are sure to see the folly of their ways. Evidence is available to show that on balance, globalization has had enormous beneficial effect and has improved the plight of the poor in the global economy.     

Demand for World Bank lending

This paper attempts to quantify the relevance of crisis lending in IBRD and IDA lending commitments. It finds that IBRD and IDA lending commitments are positively related to an increase in debt service payments and inversely related to the level of reserves of the borrowing country. These two variables explain a large part of the variation in IBRD and IDA lending commitments – adjustment lending as well as project lending – not only since the Asian crisis, but also during tranquil times over the last two decades. This finding implies that bridging the financing gap has been an important factor affecting developing countries’ decision to seek financial help from the Bank. While borrowing for servicing debt during a crisis is consistent with the World Bank's goal of poverty reduction and assisting countries without access to financial markets, such borrowing during tranquil times may conflict with these goals.     

South Asia's Integration with the Rest of Asia: a survey

While there can be unforeseen difficulties, developments of the recent past point to the gradual integration of South Asia with the dynamic economies of East and Southeast Asia. Two modes of integration have been taking place: the expansion of existing subregional free trade agreements and ASEAN's initiatives as a bridge between the regional groups of Asian economies. While the present endeavours of these economies are resulting in a shallow form of integration—which may not suddenly turn towards deep integration—onward movement along the same path is certainly possible.     

GLOBALISATION AND AN EMERGING GLOBAL MIDDLE CLASS

Globalisation has expanded the size of the global middle class. This expansion will change consumption patterns and shift the balance of spending power to middle-income economies. Rapid growth rates of the middle class in China and India have played a decisive role in creating the middle-income bulge. By 2030 the global middle class has been projected to grow to two billion. It is of note that a large middle class was also created during the first era of globalisation.     

VALUING AND ACCOUNTING FOR LOAN GUARANTEES

To achieve certain policy objectives, governments frequentlyprovide private borrowers with loan guarantees that cover someor all of the risk that the borrower will be unable to repaythe loan. Such guarantees are extremely valuable, and theirvalue increases with the riskiness of the underlying asset orcredit, the size of the investment, and the duration of theloan. The flip side of a guarantee's value to a lender is itscost to the government. Such a cost is not explicit but is realnevertheless. When providing guarantees, governments thereforemust establish accounting, valuation, and risk-sharing mechanisms.This article describes methods of valuing guarantees; reportsestimates of the value of guarantees in different settings;and summarizes new methods of accounting designed to anticipatelosses, create reserves, and channel funds through transparentaccounts to ensure that the costs of guarantees are evidentto government decisionmakers.