MEASURING LIMITS OF ARBITRAGE IN FIXED‐INCOME MARKETS

An emerging literature relies on an index of limits of arbitrage in fixed‐income markets. We analyze the benefits of an index that is model‐free, robust, and intuitive. This new index strengthens the evidence that limits of arbitrage proxy for risks priced in the cross‐section of returns. Trading simulations show that the new index improves identification of limits of arbitrage because it bypasses a noisy estimation step. Relative value indices in the United States, United Kingdom, Japan, Germany, Italy, France, Switzerland, and Canada exhibit strong commonality and high correlations with local volatility and funding conditions. The indices are updated regularly and available publicly.     

A Study of the Attitude toward Convergent Products: A Focus on the Consumer Perception of Functionalities

The convergent product is an increasingly important phenomenon in the marketplace. The convergent product allows the developer to include more and more diverse functionalities into their products, which can satisfy a broad range of consumer needs. However, failures of convergent products arouse the need to understand its functionalities, and the optimal combination of functionalities and their relationships to attitude and purchase intention. In addition, because convergent product has the potential to offer more diverse functionality, we consider if this will have impacts on instrumental and emotional needs fulfillment and attitude and purchase intention. Additionally, consumer innovativeness was examined to ascertain if there were differences among consumers on their classification of the functionalities, or if it will moderate functional diversity, needs fulfillment, and product attitude. Using the Kano model, this study examined the nature of these relationships by examining the functionalities of a smartphone. Overall, our results show that the convergent products that include functionalities from two of the three categories of the Kano model, must‐have and attractive, were rated more positively. Consumer innovativeness differences were found. Consumers with high innovativeness considered must‐have and one‐dimensional functionalities the most important, and consumers with low innovativeness considered all three important, although one‐dimensional functionalities were considered significantly less important. Although increasing functional diversity positively raises product attitude and purchase intention, it tends to raise emotional needs fulfillment only once instrumental needs have been met, especially for respondents showing low innovativeness. The findings should arouse interest about factors that should not be overlooked when developing new convergent products.     

DIFFERENTIAL RISK‐TAKING IMPLICATIONS OF PERFORMANCE INCENTIVES FROM STOCK AND STOCK OPTION HOLDINGS

We study the risk‐taking implications of managerial pay‐for‐performance incentives (delta) arising from stock and stock options separately in the United States between 1992 and 2017. The current literature assumes that each unit of delta has an equal incentive effect on firm performance. Instead, we show that the risk‐reducing effect of performance incentives is more pronounced for executives whose delta comes mostly from stock holdings relative to option holdings. Accordingly, we propose a new measure that takes into account the magnitude of delta from option holdings relative to delta from stock holdings (source ratio). Our results show that risk taking increases as this ratio increases.     

Offshoring Professional Services: Institutions and Professional Control

We examine the reasons why one might expect it to be more difficult to offshore professional work than manufacturing work in a globalized world. We then provide data on the variations in a specific case — the offshoring of diagnostic radiology from the USA, UK and Singapore. We show that existing theories on the ‘offshorability’ of jobs have not captured how national institutions and occupational regulations continue to define professional work. We then review the question of supply from India's perspective and report that both macro‐institutional and organizational contexts make it complicated for Indian doctors to supply much of this service.     

On indeterminacy and growth under progressive taxation and productive government spending

We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth in a one‐sector representative‐agent model of endogenous growth with progressive taxation of income and productive flow of public spending. We analytically show that, if the demand‐side effect of government purchases is weaker, the economy exhibits an indeterminate balanced‐growth equilibrium and belief‐driven growth fluctuations when the tax schedule is sufficiently progressive or regressive. If the supply‐side effect of public expenditures is weaker, indeterminacy and sunspots arise under progressive income taxation. In sharp contrast to traditional Keynesian‐type stabilization policies, our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents’ self‐fulfilling expectations.     

Breaking Collusion in Auctions through Speculation: An Experiment on CO2 Emission Permit Markets

The European Emission Trading Scheme (EU‐ETS) has chosen to adopt an auctioning procedure to initially allocate CO₂ emission permits. Free allocation of permits will become an exception for the third phase (2013–2020) and most firms will have to buy all their permits on the market or via auctions. The ability of bidders to collude is a key concern about the design of the auction format. To counter collusion, the auction can be open to bidders without compliance obligations (speculators). This paper aims at studying experimentally speculation as a collusion‐breaking device in two different auction mechanisms: the uniform‐price sealed‐bid auction and the ascending clock auction. Our results suggest that a uniform sealed‐bid auction open to speculators should be chosen from a revenue maximization point of view. In this mechanism, compliance agents adopt an aggressive strategy toward speculators. This strategy significantly increases the seller's revenue, compared to the more collusive clock auction. In the latter, on the contrary, bidders accommodate speculators, letting them buy permits in the auction and buying their necessary permits on the secondary market. However, as opening the auction to speculators deteriorates efficiency, the regulator faces a trade‐off between these two objectives.