Is mark-to-market accounting destabilizing? Analysis and implications for policy

Fundamental economic principles provide a rationale for requiring financial institutions to use mark-to-market, or fair value, accounting for financial reporting. The recent turmoil in financial markets, however, has raised questions about whether fair value accounting is exacerbating the problems. In this paper, we review the history and practice of fair value accounting, and summarize the literature on the channels through which it can adversely affect the real economy. We propose a new model to study the interaction of accounting rules with regulatory capital requirements, and show that even when market prices always reflect fundamental values, the interaction of fair value accounting rules and a simple capital requirement can create inefficiencies that are absent when capital is measured by adjusted book value. These distortions can be avoided, however, by redefining capital requirements to be procyclical rather than by abandoning fair value accounting and the other benefits that it provides.     

Estimating the effect of a gasoline tax on carbon emissions

Recently the proposal has been made to raise gasoline taxes in the United States to curb carbon emissions. The existing literature on the sensitivity of gasoline consumption to changes in price may not be appropriate for evaluating the effectiveness of such a tax. First, most of these studies fail to address the endogeneity of gasoline prices. Second, the responsiveness of gasoline consumption to a change in tax may differ from the responsiveness of consumption to an average change in price. We address these challenges using a variety of methods including traditional single‐equation regression models, estimated by least squares or instrumental variables methods, and structural vector autoregressions. Our preferred approach exploits the historical variation in US federal and state gasoline taxes. Our most credible estimates imply that a 10‐cent per gallon increase in the gasoline tax would reduce carbon emissions from vehicles in the United States by about 1.5%. Copyright © 2010 John Wiley & Sons, Ltd.     

When do Dynamic Capabilities Lead to Competitive Advantage? The Importance of Strategic Fit

Recent studies suggest the relationship between dynamic capabilities and competitive advantage may be jointly affected by organizational and environmental factors. We enrich this nascent perspective by developing a configurational theoretical framework – underpinned by the mechanism of strategic fit – wherein dynamic capabilities lead to a competitive advantage when they support a strategic orientation appropriate for the levels of dynamism and munificence in the environment. Results of a fuzzy‐set Qualitative Comparative Analysis using primary data show that dynamic capabilities lead to a competitive advantage in dynamic, munificent environments by enabling the combination of differentiation and low‐cost orientations. In stable, non‐munificent environments, dynamic capabilities are effective in support of a low‐cost orientation. The central insight of this study is that the relationship between dynamic capabilities and competitive advantage is contingent upon the strategic fit between organizational and environmental factors, contributing to a more rigorous and configurational dynamic capabilities view.     

Two-way cable television trial — a preliminary report

The Spartanburg two-way cable project of the Rand Corporation consists of a series of experiments to determine the benefits of interactive cable for the delivery of public services. The work is supported by the Research Applied to National Needs (RANN) programme of the National Science Foundation. Like the other projects funded in the NSF cable research programme, the Spartanburg project is intended to provide data on the costs and benefits of cable television systems that can be used both to receive and send signals from a home, agency, or business.     

Empirical credit cycles and capital buffer formation

We model 1927–1997 US business failure rates using an unobserved components time series model. Clear evidence is found of cyclical behavior in default rates. We also detect significant longer term movements in default rates and default correlations. In a multi-year backtest experiment we show that accommodation of default rate dynamics has important consequences for credit risk capitalization requirements. Static or myopic variants of credit portfolio models miss significant periods of credit risk accumulation. Empirically congruent dynamic models by contrast provide more timely warning signals of credit risk build-up. In this way they may mitigate some of the pro-cyclicality concerns.     

Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk

Using cross-sectional data from the SCF and Tax Model, we show that entrepreneurial income risk has a significant influence on portfolio choice and asset prices. We find that households with high and variable business income hold less wealth in stocks than other similarly wealthy households, although they constitute a significant fraction of the stockholding population. Similarly for nonentrepreneurs, holding stock in the firm where one works reduces the portfolio share of other common stocks. Finally, we show that adding proprietary income to a linear asset pricing model improves its performance over a similar model that includes only wage income.     

The illusion of managerial control

The design and implementation of organizational control systems based on a cybernetic model stand in need of revision. The revision is required by increasing numbers of reports of system ineffectiveness and, in some cases, failure. The paper suggests that a major reason for current difficulties resides in the “illusion of control” implied by theory and implemented in practice. An alternative definition of organizational control based in the concept of “multirationality” is proposed.     

Market concentration and the likelihood of financial crises

According to theory, market concentration affects the likelihood of a financial crisis in different ways. The “concentration-stability” and the “concentration-fragility” hypotheses suggest opposing effects operating through specific channels. Using data of 160 countries for the period 1970–2009, this paper empirically tests these indirect effects of financial market structure. We set up a simultaneous system in order to jointly estimate financial stability and the relevant channel variables as endogenous variables. Our findings provide support for the assumption of channel effects in general and both the concentration-stability and the concentration-fragility hypothesis in particular. The effects are found to vary between high and low income countries.     

An options-based approach to evaluating the risk of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac assume a significant amount of interest and prepayment risk and all of the credit risk for about half of the $8 trillion U.S. residential mortgage market. Their hybrid government-private status, and the perception that they are too big to fail, make them a potentially large, but largely unaccounted for, risk to the federal government. Measuring the size and risk of this liability is technically difficult, but important for the debate over the appropriate regulation of these institutions. Here we take an options pricing approach to evaluating these costs and risks. Under the base case assumptions, the estimated value of the guarantees is $7.9 billion over 10 years, with a combined .5 percent value at risk of $122 billion. We evaluate the sensitivity of these estimates to various modeling assumptions, and also to the regulatory regime, including forbearance policies and capital requirements. The analysis highlights the benefits, but also the challenges, of taking an options-based approach to evaluating the value of federal credit guarantees.