Voting on meritocracy

This paper considers a setting where a resource such as education budget is to be distributed among agents. The latter differ in their ability to make use of the resource, and the issue is that of determining the allocation rule whereby the individual shares of the resource (may) depend on their relative efforts of obtaining it. The paper's focus is on endogenous determination, through voting, of the degree of meritocracy in the resource allocation system, which determines the marginal productivity of one's effort. It is found that a meritocratic system is expected to be supported by highly productive individuals and opposed by those with low productivity. When the decision making becomes less elitist and involves broader participation of population groups the support for meritocracy decreases.     

The dynamics of inter-firm networks in the course of the industry life cycle: the role of appropriability

This paper examines the dynamics of inter-firm networks and introduces a conceptual framework for explaining why inter-firm networks change over time. The framework is based on the idea that patterns of inter-firm linkages are linked to the life cycle development of an industry. Special emphasis is placed on the role of appropriabiliy, i.e. a firm's ability to capture the profits generated by its innovations. The (trans)formation of inter-firm networks in three industries is examined and used to illustrate the relevance of the framwork. One important inference from our study is that public policy makers and manageers should take into account the phase of industry development before implementing policies to create and/or change inter-firm networks.     

Should trees have managerial standing? Toward stakeholder status for non-human nature

Most definitions of the concept of stakeholder include only human entities. This paper advances the argument that the non-human natural environment can be integrated into the stakeholder management concept. This argument includes the observations that the natural environment is finally becoming recognized as a vital component of the business environment, that the stakeholder concept is more than a human political/economic one, and that non-human nature currently is not adequately represented by other stakeholder groups. In addition, this paper asserts that any of several stakeholder management processes can readily include the natural environment as one or more stakeholders of organizations. Finally, the point is made that this integration would provide a more holistic, value-oriented, focused and strategic approach to stakeholder management, potentially benefitting both nature and organizations.Mark Starik is an Assistant Professor of Strategic Management and Public Policy at The George Washington University. His research and writing on environmental management topics include articles, chapters, and presentations on Global Strategic Environmental Management, Environmental Entrepreneurship, and Environmental Stakeholders of the U.S. Energy Sector. In addition, he is active in the advancement of environmental programs in both the Academy of Management and the George Washington University.     

Stores

Summary There is scope and incentive for stores to endogenously arise in an exchange economy when agents possess different levels of bargaining power and coalition formation is costly. In the absence of stores, agents face a trading lottery where the expected outcome for an individual agent depends upon his relative bargaining strength. By setting appropriate, preannounced prices, a store can profitably offer relatively weak bargainers trading opportunities which they prefer to the trading lottery. While relatively weak bargainers are attracted to the store, relatively strong bargainers prefer the trading lottery to the store. Thus, the simultaneous existence of barter and mediated trade is explained.The work reported here was conceived while both authors were visiting the University of Southern California. We thank Martine Quinzii and two anonymous referees for helpful comments.     

Finance, Politics, and the Accounting for Stock Options

The politics of option accounting crosses party lines, reflecting both the interests of the affected constituencies and the desire for power over standard setting. House Bill HR-3574, which mandates an assumption of zero stock price volatility, runs counter to the recently passed Financial Accounting Standards Board (FASB) rule requiring fair-value expensing of stock options. For any option issued at or out of the money, where strike prices are normally set, expense recognition is zero under this bill's mandated assumption.
Besides excessive use of stock options, the lack of a "final peace" in the option accounting war appears to have encouraged another questionable corporate practice. This article examines a sample of "six-and-one restructurings," exchanges of options in which expensing of re-priced (deep out-of-the-money) options can be avoided if employees wait at least six months and one day before receiving new options. The authors found that market-adjusted stock prices tend to decrease during the six-month period before the strike price is reset. This result provides one more reason why companies should be required to use fair-value option pricing models to expense options.     

An Isomorphism Between Asset Pricing Models With and Without Linear Habit Formation

We show an isomorphism between optimal portfolio selection orcompetitive equilibrium models with utilities incorporatinglinear habit formation, and corresponding models without habitformation. The isomorphism can be used to mechanically transformknown solutions not involving habit formation to correspondingsolutions with habit formation. For example, the Constantinides(1990) and Ingersoll (1992) solutions are mechanically obtainedfrom the familiar Merton solutions for the additive utilitycase, without recourse to a Bellman equation or first-orderconditions. More generally, recent solutions to portfolio selectionproblems with recursive utility and a stochastic investmentopportunity set are readily transformed to novel solutions ofcorresponding problems with utility that combines recursivitywith habit formation. The methodology also applies in the contextof Hindy–Huang–Kreps (1992) preferences, where ourisomorphism shows that the solution obtained by Hindy and Huang(1993) can be mechanically transformed to Dybvig's (1995) solutionto the optimal consumption-investment problem with consumptionratcheting.     

Contagion or Competition: Going Concern Audit Opinions for Real Estate Firms

We examine whether intra–industry information transfers from going–concern audit opinion announcements create contagion or competitive stock price reactions for other real estate firms operating in the same line of business. Using returns from publicly-traded land subdivision/development firms and Real Estate Investment Trusts, we find modest evidence supporting a competitive effect among rival firms as a result of another real estate firm announcing the receipt of a Going Concern Opinion (GCO) from its independent auditors.     

Feedback loops, fair value accounting and correlated investments

This paper presents and tests a model of the price dynamics that arise when investors fail to recognize the redundancy of unrealized gains and losses (“UGLs”) that are correlated with the firm’s past returns. Consistent with the predictions of our model, our experiment shows that a firm’s prices and earnings become highly volatile when correlated investment is large and correlated UGLs are made salient by comprehensive income reporting. The results suggest that including correlated UGLs in performance numbers could induce violations of weak-form efficiency that exacerbate volatility in share prices and earnings.