The law and economics of self-dealing

We present a new measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. Assembled with the help of Lex Mundi law firms, the index is calculated for 72 countries based on legal rules prevailing in 2003, and focuses on private enforcement mechanisms, such as disclosure, approval, and litigation, that govern a specific self-dealing transaction. This theoretically grounded index predicts a variety of stock market outcomes, and generally works better than the previously introduced index of anti-director rights.     

Assessing the maintenance of savings sufficiency over the first decade of retirement

The goal of securing adequate resources in retirement dominates the ongoing debate regarding social security reforms designed to accommodate the demographic transformation and to provide minimum income security to retired workers. Policy proposals concerned with the implication of future public sector costs emphasize greater individual responsibility for meeting retirement resource goals. Proposals seeking minimum living standards imply expansion of public fiscal liabilities. We contribute to this discussion by examining the extent to which a cohort of US retirees were able to meet resource adequacy standards at the time of retirement, and to maintain initial levels of resources over the first decade of retirement. We compare annuitized wealth, including social security and pension wealth, to two adequacy standards—a household’s preretirement earnings (reflecting the goal of maintaining preretirement consumption) and the US poverty threshold (reflecting the goal of meeting minimum consumption standards). We analyze the relationship of individual characteristics to changes in resource adequacy over time, and identify the characteristics of those who gain and lose resources over the first decade of retirement. Finally, we simulate the effects on adequacy and public sector benefit costs of four social insurance policy proposals. This research was partially supported by a grant from the Social Security Administration. Additional support was provided by the Institute for Research on Poverty, the Graduate School and the Center for Demography and Ecology all at the University of Wisconsin-Madison. Conclusions represent those of the authors alone and not of the funding agencies.     

Experimental Evidence on Portfolio Size and Diversification: Human Biases in Naïve Security Selection and Portfolio Construction

We conduct an experiment in which individuals select securities to reproduce the well‐known relationship between portfolio risk and the number of securities. The standard result occurs on average but not for most individuals, many of whom effectively de‐diversify as they add seemingly random securities. Moreover, only slightly better results are achieved using a random number generator. This finding challenges the belief that only a small number of securities are required for diversification and shows that it is applicable only to a large sample. The implications are important given that many individual investors hold very few stocks in their portfolios.     

ESTIMATING DIRECTIONAL MIGRATION FLOWS FROM AGE-SPECIFIC NET MIGRATION DATA

This paper focuses on a method for indirectly inferring migration flows in the absence of migration data, using two successive counts of birthplace-specific population stocks . Such stocks have been used in the past to infer patterns of mortality and indeed of net migration. But a workable method for using such population stocks to indirectly estimate directional migration flows still eludes us. Widely observed regularities in the age patterns of outmigration indicate that age-specific propensities of migration are correlated, and this characteristic suggests an estimation method that directs attention to the age-specific relative propensities of two or more flows exhibited in the historically preceding time intervals, and then uses those past measures of relative propensities to disaggregate residually estimated net migration flows into the underlying contributions of inmigration and outmigration. A detailed demonstration of the method, applied to US data, is set out in this paper.     

Hedging, Familiarity and Portfolio Choice

We exploit the restrictions of intertemporal portfolio choicein the presence of nonfinancial income risk to test hedgingusing the information contained in the actual portfolio of theinvestor. We use a unique data set of Swedish investors withinformation broken down at the investor level and into variouscomponents of investor wealth, income, and demographic characteristics.Portfolio holdings are identified at the stock level. We showthat investors do not hedge but invest in stocks closely relatedto their nonfinancial income. We explain this with familiarity,that is, the tendency to concentrate holdings in stocks to whichthe investor is geographically or professionally close or thathe has held for a long period. We show that familiarity is nota behavioral bias, but is information driven. Familiarity-basedinvestment allows investors to earn higher returns than theywould have otherwise earned if they had hedged.     

The Limits of Arbitrage

Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them.     

Middlemen*

This article provides an equilibrium model of intermediation based on search theory. Intermediaries, like retailers, buy goods from producers and sell them to consumers. The number of intermediaries is endogenously determined by free entry. The size and composition of their inventories is also endogenous. Larger inventories make it more likely that a random customer will find something he likes, but are more costly to store. The distribution of prices is characterized. Conditions are given under which there are too many or too few intermediaries, and under which intermediaries are too big or too small, from an efficiency perspective.     

Sorting equilibrium in a multi-jurisdiction model

This paper analyzes a general model of an economy with heterogeneous individuals choosing among two jurisdictions, such as towns or political parties. Each jurisdiction is described by its constitution, where a constitution is defined as a mapping from all possible population partitions into the (possibly multidimensional) policy space. This study is the first to establish sufficient conditions for existence of sorting equilibria in a two-jurisdiction model for a policy space of an arbitrary dimension.     

Valuation and Control in Venture Finance

This paper presents the model of a relationship between a venture capitalist and an entrepreneur engaged in the formation of a new firm. I assume that the entrepreneur derives private nonpecuniary benefits from having some control over the firm. I show that to separate the entrepreneur's value of control from the firm's expected payoff, the venture capitalist demands disproportionately highercontrol rights than the size of his equity investment. The entrepreneur is compensated for a greater loss of control through better terms of financing, ability to extract higher rents from asymmetric information, and improved risk sharing.