A theory of global strategic alliances: The case of the global auto industry

The theory articulated in this paper suggests that the desire to reduce demand and competitive uncertainty are two separate, important motives for alliance formation. Taking this as a starting point, we predict the configuration of horizontal alliances that we might expect to observe within an industry when firms experience these uncertainties to different degrees. An empirical test of this theory using data from the global auto industry yields results consistent with the view (1) that alliances are a device for reducing both the uncertainties that arise from unpredictable demand conditions and those that arise from competitive interdependence, and (2) that variation of demand uncertainty and competitive uncertainty across firms explains differentials in both the intensity and structure of their horizontal alliance activity.     

Testing for abnormal security-price performance under conditions of event-period uncertainty

This paper examines an event study test procedure based on cumulative average residuals (CARs) and a boundary-crossing probability for Brownian motion. The boundary-crossing test procedure is designed to detect abnormal security-price performance under conditions of event-period uncertainty. Simulations with daily security-return data show that the boundary-crossing test is well specified under the null hypothesis and has good power properties under the alternative hypothesis of abnormal security-price performance distributed over an event period of uncertain length.     

Seven Ways to Deal with a Financial Crisis: Cross‐Country Experience and Policy Implications1

This article presents a taxonomy of financial restructuring strategies that have been used by national policy makers to manage financial crises in the past. The goals of financial restructuring are to preserve or, if necessary, restore the debtor‐creditor relationships on which the economy depends for efficient allocation of capital, and to do so at minimal cost. Costs include not only the direct costs to taxpayers of financial assistance, but also—and likely more important—the indirect costs to the economy that stem from misallocations of capital and incentive problems resulting from the restructuring. Countries typically apply a combination of tools, including decentralized, market‐based mechanisms as well as government‐managed programs. Market‐based strategies generally aim to strengthen the capital base of financial institutions and borrowers using some mix of debt forgiveness and capital infusions. Government‐led restructuring strategies include the establishment of entities to which non‐performing loans are transferred as well as government‐assisted sales of domestic financial institutions, often to foreign entrants. Market‐based mechanisms can provide low‐cost ways of resolving the coordination problems faced by countries in the wake of massive debtor and creditor insolvency, particularly when those mechanisms are effective in achieving the desirable objective of selectivity—that is, devoting taxpayer resources only to those borrowers and banks that, with temporary assistance, will be capable of sustaining themselves in the future. But limiting their range of application mainly to developed economies, such market‐based mechanisms also depend on an efficient judicial system, a credible supervisory framework and authority with sufficient enforcement capacity, and lack of corruption in implementation. Although government‐managed programs may not seem to depend as heavily on well‐functioning legal and regulatory institutions, such approaches—especially the transfer of assets to government‐owned asset management companies—also rely to some extent on such institutions. Asset management companies are less likely to achieve their goal of resolving the overhang of debt at reasonable cost when legal and political institutions are weak and ownership of domestic creditors and debtors is highly concentrated. Especially in such cases, complexity and failure to consider incentive problems when designing specific rules governing financial assistance can aggravate moral hazard problems, unnecessarily raising the costs of resolution. Resolution mechanisms tend to be most successful when—like across‐the‐board debt forgiveness programs implemented through redenominations of debt—they are simple in design and afford quick resolution of outstanding debts, offering little discretion to governments while providing incentives for the private sector to work down the remaining debt overhang.     

Optimal search auctions

We study the design of profit maximizing single unit auctions under the assumption that the seller needs to incur costs to contact prospective bidders and inform them about the auction. With independent bidders’ types and possibly interdependent valuations, the seller's problem can be reduced to a search problem in which the surplus is measured in terms of virtual utilities minus search costs. Compared to the socially efficient mechanism, the optimal mechanism features fewer participants, longer search conditional on the same set of participants, and inefficient sequence of entry.     

Toward ‘Wisely Managed’ Capitalism: Post-Keynesian Institutionalism and the Creative State

Post-Keynesian Institutionalism (PKI), a synthesis of post Keynesian and institutional economics, emerged in the USA as a strand of evolutionary economics in the early 1980s and has attracted increasing attention in recent years. This article examines milestones in the development of PKI, devoting particular attention to the tradition’s conception of the role of the state. The first section identifies antecedents to PKI in the writings of John R. Commons and John Maynard Keynes. The second describes how PKI emerged against the backdrop of increasing dissatisfaction with neoclassical Keynesianism in the era of stagflation. The third summarizes the subsequent contributions of Hyman P. Minsky, whose work was a model of PKI in the 1980s and 1990s. The final two sections outline PKI’s contemporary characteristics and identify elements of an agenda for future research. PKI has always been about achieving a more humane form of capitalism, which requires the state to play a creative role in shaping economic life.

Brexit: How Will UK Agriculture Fare?

There is little doubt that Brexit would have significant implications for UK agriculture, a sector with strong trade links to the EU and strong reliance on CAP income support. This article reports preliminary results from employing a Computable General Equilibrium Model, a Partial Equilibrium Model and Farm Level Models to explore selected trade and domestic policy scenarios post‐Brexit. These allow for the estimation of changes in producer prices, production and farm incomes against a baseline scenario of continued EU membership. Under a Free Trade Agreement with the EU, agricultural impacts are relatively modest. By contrast, unilateral removal of import tariffs has significant negative impacts on prices, production and incomes. Adoption of the EU's WTO tariff schedule for all imports favours net importers (e.g. dairy) and harms net exporters (e.g. sheep). Given the strong dependence of most UK farms on direct payments, their removal worsens negative impacts of new trade arrangements and offsets positive impacts. Impacts vary across different types and sizes of farm, but also regionally. However, the period of adjustment to new trade and domestic policy conditions may prove very challenging for a large number of farm businesses.     

Statement of the Financial Economists Roundtable: Bank Capital as a Substitute for Prudential Regulation

The Financial CHOICE Act recently passed by the House proposes to create an “off‐ramp” that would allow banks to escape burdensome prudential regulation if the ratio of their equity capital to their total assets is 10% or more. The Financial Economists Roundtable supports this idea as a means of reducing regulatory costs, but believes some additional safeguards are needed. A capital ratio of 10% may not be high enough to discourage banks from excessive risk taking. A solution is to have two capital requirements for banks choosing the off‐ramp: one absolute (as proposed in the act) and one risk‐based. The FER believes that many banks will prefer this regime to the current burdensome prudential regulation, especially if regulators simplify the setting of risk weights and make them more rule‐based. Regulators setting minimum capital requirements should consider not only a bank’s stand‐alone risk, but also the systemic risk posed by banks, as well as the tendency of accounting measures of income and assets to overstate the economic value of banks’ equity capital. The Financial Choice Act would also eliminate useful elements of ongoing supervision and regulation, not all of which can be addressed by higher capital alone. Furthermore, to facilitate regulatory learning about risks, off‐ramped banks should continue to report the data that regulators use for stress tests, even if they are no longer subjected to the discipline of stress tests. Finally, the act is viewed as too permissive in its treatment of off‐ramped banks that get into trouble. To prevent gaming of regulation, FERC recommends that off‐ramped banks that subsequently fall below the minimum requirements should be required to raise new capital immediately.