DESIGNING A MARKET STRUCTURE WHEN FIRMS COMPETE FOR THE RIGHT TO SERVE THE MARKET*

In many industries, a regulator designs an auction to select ex‐ante the firms that compete ex‐post on the product market. This paper considers the optimal market structure when firms incur sunk costs before entering the market and when the government is not able to regulate firms in the market. We prove that a free entry equilibrium results in an excessive entry when the entry costs are private information. Then, we consider an auction mechanism selecting the firms allowed to serve the market and show that the optimal number of licences results in the socially optimal market structure. When all the potential candidates are actual bidders, the optimal number of firms in the market increases with the number of candidates and decreases with the social cost of public funds. When the market size is small, as the net profit in the market decreases with the number of selected firms, entry is endogenous. As increasing competition in the market reduces competition for the market, the optimal structure is more concentrated than in the previous case.     

Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting Quality*

We explore how firms’ operations in Offshore Financial Centers (OFCs) through subsidiaries or affiliates affect the quality of financial reporting. Using a unique and large sample of firms that have headquarters in the 15 countries with the strictest legal regimes and have subsidiaries or affiliates in OFCs, we find that such firms exhibit lower financial reporting quality than comparable firms without OFC operations. We also find that as OFC characteristics become more prevalent, firms are more likely to engage in both accrual‐based and real earnings management. More importantly, after disentangling OFC characteristics into the opportunity for tax avoidance, regulation arbitrage and secrecy policies, we find that beyond tax avoidance, regulation arbitrage and the secrecy policies of OFCs significantly affect financial reporting quality. The causal effect of OFC operations is supported by the analysis of financial reporting quality when firms set up OFC operations. Our findings are robust to various additional tests addressing potential endogeneity issues. We conclude that the assessment of a firm's institutional environment must encompass the registration status of its subsidiaries or affiliates as well as its own.     

Productivity Gains and Spillovers from Offshoring

Offshoring is generally believed to be productivity enhancing and this belief is underpinned by economic theory. This paper estimates the impact of materials and business services offshoring on productivity in Belgium over the period 1995–2004. It contributes to the literature: (i) by examining this issue separately for manufacturing and market services industries and (ii) by investigating the possibility of forward and backward spillovers from offshoring, i.e. that productivity gains from offshoring feed through to upstream and downstream industries. Results show that materials offshoring has no effect on productivity, while business services offshoring leads to productivity gains in manufacturing. Furthermore, there is no evidence of either forward or backward spillovers from offshoring.     

Demutualization and customer protection at self‐regulatory financial exchanges

In the past decade, many of the world's largest financial exchanges have demutualized, i.e., converted from mutual, not‐for‐profit organizations to publicly‐traded, for‐profit firms. In most cases, these exchanges have substantial responsibilities with respect to enforcing various “trade practice” regulations that protect investors from dishonest agents. We examine how the incentives to enforce such rules change as an exchange demutualizes. In contrast to oft‐stated concerns, we find that, in many circumstances, an exchange that maximizes shareholder (rather than member) income has a greater incentive to aggressively enforce these types of regulations. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:126–164, 2011