Corporate Bond Market Transaction Costs and Transparency

Using a complete record of U.S. over‐the‐counter (OTC) secondary trades in corporate bonds, we estimate average transaction costs as a function of trade size for each bond that traded more than nine times between January 2003 and January 2005. We find that transaction costs decrease significantly with trade size. Highly rated bonds, recently issued bonds, and bonds close to maturity have lower transaction costs than do other bonds. Costs are lower for bonds with transparent trade prices, and they drop when the TRACE system starts to publicly disseminate their prices. The results suggest that public traders benefit significantly from price transparency.     

HAS SOUTH AFRICA LIBERALISED ITS TRADE?

This paper uses new tariff data to re‐evaluate the extent to which South Africa has liberalised its trade from the late 1980s. The paper finds that significant progress has been made in simplifying South Africa's tariff structure and reducing tariff protection, but further progress can be made in removing tariff peaks, reducing tariff dispersion, and lowering the anti‐export bias arising from protection. Further, although protection has fallen, the decline has been no faster than in other lower‐middle‐income economies. The paper also finds that estimates of the level of nominal and effective protection, and their rate of change, are sensitive to the choice of tariff measure (collection duties or scheduled tariff rates) and Input‐Output or Supply‐Use table, but that the sectoral structure of protection is largely unaffected.     

Unraveling Home and Host Country Effects: An Investigation of the HR Policies of an American Multinational in Four European Countries

This article argues that the institutional "home" and "host" country effects on employment policy and practice in multinational corporations (MNCs) need to be analyzed within a framework which takes more account both of the multiple levels of embeddedness experienced by the MNC, and processes of negotiation at different levels within the firm. Using in-depth case study analysis of the human resource (HR) structure and industrial relations and pay policies of a large U.S.-owned MNC in the IT sector, across Germany, Ireland, Spain, and the United Kingdom, the article attempts to move towards such a framework.     

The Interaction of Legal and Social Norm Enforcement

Although legal sanctions are often nondeterrent, we frequently observe compliance with “mild laws.” A possible explanation is that the incentives to comply are shaped not only by legal, but also by social sanctions. This paper employs a novel experimental approach to study the link between legal and social norm enforcement. We analyze whether the two institutions are complements or substitutes. Our results show that legal sanctions partially crowd out social norm enforcement. Mild laws nevertheless give scope for a potentially large, positive welfare effect, as a higher level of compliance is achieved at lower social enforcement costs.     

Factor Endowments,Democracy, and Trade Policy Divergence

We develop a stochastic model of electoral competition in order to study the economic and political determinants of trade policy. We model a small open economy with two tradable goods, each of which is produced using a sector‐specific factor (e.g., land and capital) and another factor that is mobile between these tradable sectors (labor); one nontradable good, which is also produced using a specific factor (skilled labor), and an elected government with the mandate to tax trade flows. The tax revenue is used to provide local public goods that increase the economic agents’ utility. We use this general equilibrium model to explicitly derive the ideal policies of the different socioeconomic groups in society (landlords, industrialists, labor, and skilled workers). We then use those ideal policies to model the individual probabilistic voting behavior of the members of each of these socioeconomic groups. We use this model to shed light on how differences in the comparative advantages of countries explain trade policy divergence between countries as well as trade policy instability within countries. We regard trade policy instability to mean that, in equilibrium, political parties diverge in terms of the political platforms they adopt. We show that in natural resource (land)–abundant economies with very little capital, or in economies that specializes in the production of manufactures, parties tend to converge to the same policy platform, and trade policy is likely to be stable and relatively close to free trade. In contrast, in a natural resource–abundant economy with an important domestic industry that competes with the imports, parties tend to diverge, and trade policy is likely to be more protectionist and unstable.     

Dynamic Contracting with Intermediation: Operational,Governance, and Financial Engineering

Private equity funds intermediate investment and affect portfolio firm performance by actively engaging in operational, governance, and financial engineering. We study this type of intermediation in a dynamic agency model in which an active intermediary raises funds from outside investors and invests in a firm run by an agent. Optimal contracting addresses moral hazard at the intermediary and firm levels. The intermediary's incentives to affect firm performance are strongest after poor performance, while the agent's incentives are strongest after good performance. We also show how financial engineering, that is, financial contracting with outside investors, interacts with operational and governance engineering.