United States current account deficits: A stochastic optimal control analysis

The “Pessimists” and the “Optimists” disagree whether the US external deficits and the associated buildup of US net foreign liabilities are problems that require urgent attention. A warning signal should be that the debt ratio deviates significantly from the optimal ratio. The optimal debt ratio or debt burden should take into account the vulnerability of consumption to shocks from the productivity of capital, the interest rate and exchange rate. The optimal debt ratio is derived from inter-temporal optimization using Dynamic Programming, because the shocks are unpredictable, and it is essential to have a feedback control mechanism. The optimal ratio depends upon the risk adjusted net return and risk aversion both at home and abroad. On the basis of alternative estimates, we conclude that the Pessimists’ fears are justified on the basis of trends. The trend of the actual debt ratio is higher than that of the optimal ratio. The Optimists are correct that the current debt ratio is not a menace, because the current level of the debt ratio is not above the corresponding level of the optimum ratio.     

The Determinants of Successful Micro-IPOs: An Analysis of Issues Made under the Small Corporate Offering Registration (SCOR) Procedure

In this article we extend the existing IPO literature to the case of micro-IPOs by analyzing a sample of Small Corporate Offering Registration (SCOR) documents from the U.S. state of Washington. Through theory, we identified variables that should impact the probability of success or failure in a SCOR offering and then empirically tested them. Empirical support was found for the relevance of (1) marketing mechanisms and expenses; (2) ownership and governance factors; (3) business life cycle stages; and (4) signaling factors consistent with our theoretical predictions.     

The crisis,Fed, Quants and stochastic optimal control

The Dodd–Frank (D–F) Financial Reform Bill authorizes the Federal Reserve to monitor the financial services marketplace to identify potential threats to the stability of the US financial system. Alan Greenspan's retrospective indicates what he has learned from the crisis. He argues that the crisis, the housing price bubble, was unpredictable and unavoidable. Greenspan now focuses on desirable capital requirements, or leverage, for banks and financial intermediaries. I explain why the Fed's and Greenspan's views stem from a lack of the appropriate tools of analysis of what is an excessive debt or leverage. The Quants who devised the highly leveraged financial derivatives ignored systemic risk.My theme is that the application of stochastic optimal control (SOC) is an effective approach to implement what the D–F bill is authorizing. I explain: first, what is the optimal capital requirement/leverage that balances expected return against risk. Second, what is a theoretically derived early warning signal of a crisis. Third, I derive an excess debt ratio, equal to the difference between the actual and optimal ratios. The probability of a debt crisis is directly related to the excess debt ratio. The excess debt ratio starting from 2004–05 indicated that a crisis was most likely. The Fed should use this SOC analysis in implementing the Dodd–Frank bill.     

Bilateral M&A activity from the Global South

This paper studies the factors associated with outbound bilateral mergers and acquisitions (M&A) activity by firms located in emerging economies. We document recent trends in emerging market M&A flows, which have risen dramatically over the past decade, and explore the factors that may have contributed to this rise. We find distinct patterns for M&A deals according to whether the acquisition targets are in other emerging economies or advanced countries, and that these differences can be attributed to differing theoretical motivations behind foreign direct investment. We also consider the implications of our model for future M&A originating in the Global South, in light of the global financial crisis of 2008.     

Performance,Representation and the Economics of Border Control in Uzbekistan

This article explores the contradictions and intersections between the performative and economic aspects of state boundary control. From 1999 onwards, Uzbekistan's formal trade with its neighbours declined dramatically, whilst cross-border smuggling mushroomed. This article examines these developments, using both an economic analysis, and a theoretical approach to the study of international boundaries derived from political geography, anthropology and ‘borders theory’. Methodologically, it employs trade-flow analysis, discourse study and ethnography to construct an account of how an apparently economically counterproductive policy has symbolic and performative value to the state. The changes in trade patterns were largely due to the unilateral introduction of a new and highly disruptive border and customs control policy, which dramatically increased transportation costs, precipitating a growth in smuggling in which some state officials themselves colluded. Economically, whilst this policy would thus appear harmful to the state, the article suggests that border control policies also had a theatrical function related to the performance of national identity and the perpetuation of the incumbent regime. It concludes with policy recommendations addressed to both Central Asian states and international donors.     

Towards Unrestricted Public Use Business Microdata: The Synthetic Longitudinal Business Database

In most countries, national statistical agencies do not release establishment‐level business microdata, because doing so represents too large a risk to establishments’ confidentiality. One approach with the potential for overcoming these risks is to release synthetic data; that is, the released establishment data are simulated from statistical models designed to mimic the distributions of the underlying real microdata. In this article, we describe an application of this strategy to create a public use file for the Longitudinal Business Database, an annual economic census of establishments in the United States comprising more than 20 million records dating back to 1976. The U.S. Bureau of the Census and the Internal Revenue Service recently approved the release of these synthetic microdata for public use, making the synthetic Longitudinal Business Database the first‐ever business microdata set publicly released in the United States. We describe how we created the synthetic data, evaluated analytical validity, and assessed disclosure risk.     

The public management of risk: Separating ex ante and ex post monitors

When a firm undertakes risky activities, the conflict between social and private incentives to implement safety care requires public intervention which can take the form of both monetary incentives and also ex ante or ex post monitoring, i.e., before or after an accident occurs. We delineate the optimal scope of monitoring depending on whether public monitors are benevolent or corruptible. We show that separating the ex ante and the ex post monitors increases the likelihood of ex post investigation, helps prevent capture and improves welfare.