Open economy and financial burden of corruption: theory and application to Asia

We discuss why corruption remains high and show that corruption contributes to the Banking distress and to the rapid transmission across international stock and currency markets. Undeveloped ‘derivative securities’ markets make the risk from stress-induced volatility difficult to manage. Vinod’s (1999) closed economy model is extended to indicate the asymmetry of ‘home bias’ and the effect of corruption on the value at risk (VaR). Our theory predicts that capital flight controls will be many, foreign direct investment (FDI) will be low and cost of capital will be high in corrupt developing countries, which is supported by Asian data. We include some policy recommendations regarding financial institutions and markets.     

A note on incentive incompatibility under franchising

This note provides a formal demonstration of the incentive incompatibility problem that exists in franchisor — franchisee relationships. It is shown that incentive incompatibility exists with respect to both price and quality. Several contractual mechanisms designed to mitigate the incompatibility problem are examined.     

Pricing Options on an Asset with Bernoulli Jump-Diffusion Returns

The price movements of certain assets can be modeled by stochastic processes that combine continuous diffusion with discrete jumps. This paper compares values of options on assets with no jumps, jumps of fixed size, and jumps drawn from a lognormal distribution. It is shown that not only the magnitude but also the direction of the mispricing of the Black-Scholes model relative to jump models can vary with the distribution family of the jump component. This paper also discusses a methodology for the numerical valuation, via a backward induction algorithm, of American options on a jump-diffusion asset whose early exercise may be profitable. These cannot, in general, be accurately priced using analytic models. The procedure has the further advantage of being easily adaptable to nonanalytic, empirical distributions of period returns and to nonstationarity in the underlying diffusion process.     

Current Issues in the Analysis of Commercial Real Estate

This paper identifies and discusses a number of current issues regarding our understanding of commercial real estate markets. These issues include: 1) accurate estimation of the quantity and location of our nation's commercial space; 2) an understanding of the linkage between the space and capital markets for commercial real estate; 3) identification of the macroeconomic factors that affect the rate of return on commercial property and whether local market factors also affect the rate of return; 4) problems associated with measuring the return characteristics of equity investments in commercial property (including measures of the diversification benefits and inflation-hedging abilities of this asset class); 5) a better understanding of rental markets, including good measures of changes in effective rents over time; and 6) examination of the rationale for ownership of commercial space by corporate users. This paper reviews recent research related to these questions and suggests future research that should prove to be fruitful.     

The 1986 U.K. Insolvency and Company Directors' Disqualification Acts: An evaluation of their impacts upon small firm financing decisions

This paper examines the potential impact of the 1986 U.K. Insolvency and Company Directors' Disqualification Acts on small firm financing decisions. With the aid of a simplified Black and Scholes (1973) option model of financing decisions, the paper illustrates how the 1986 legislation reduces the incentives for owner-managers to gamble with creditor claims, particularly in situations of financial distress, by making them personally liable for unmet claims and/or by disqualifying them from holding office for a fixed period. For instance, example 3 in the paper shows the conflict that could result from the owner-manager reducing his/her opening equity position and it further argues how the legislation should act to alleviate the situation. It remains, however, an empirical question as to whether this reduction in creditors' exposure to the risk of uncompensated wealth transfers will ultimately result in a significantly greater number of company liquidations and disqualifications, particularly during a prolonged economic downturn, or an improved/less costly supply of finance to small firms.     

Action Teams That Work

A growing awareness of workplace hazards and identification of airborne contaminants, coupled with a changing safety and health regulatory environment, created an unexpected demand for new and innovative respirators in the early 1980s. 3M's Occupational Health and Environmental Safety Division broke new ground by taking the team concept further than ever before in the company. The division's Action Teams successfully designed, built and introduced products in less than half the time it would have taken previously. Robert Hershock, Charles Cowman and Douglas Peters describe how 3M learned important lessons about team selection, training, performance and motivation, the importance of project sponsors, and the role of middle management.